TIDMCEAF
RNS Number : 2862T
Close European Accelerated Fund Ltd
24 September 2010
CLOSE EUROPEAN ACCELERATED FUND LIMITED
PRELIMINARY ANNOUNCEMENT OF ANNUAL RESULTS
The directors announce the statement of results for the year ended 30 June 2010
as follows:-
ABOUT THE COMPANY
Close European Accelerated Fund Limited (the "Company") is a Guernsey
incorporated, closed-ended investment company. With the exception of two
Management Shares issued for administrative reasons, the Company's issued share
capital comprises 39,550,000 Participating Shares (the "Shares") the performance
of which is designed to provide investors with a geared capped exposure to the
performance of the Dow Jones EuroStoxx 50 Index (the "Index").
Pursuant to the initial placing and offer for subscription, 36,000,000 Shares
were issued at a price of 100p each on 27 July 2005. A further 3,550,000 Shares
were issued at a price of 107.5p each on 21 September 2006. All 39,550,000
Shares in issue rank pari passu, have been admitted to the Official List of the
United Kingdom Listing Authority and admitted to trading on the London Stock
Exchange. The Company has an unlimited life but the Shares will be redeemed on
or around 29 July 2011 (the "Redemption Date").
Investment Objective and Policy
The investment objective of the Company is to provide shareholders on the
Redemption Date with a payment per Share which will comprise a capital amount
of 100p per Share and a growth amount per Share equal to five times any
percentage increase in the value of the Index (the "End Value") as at 26 July
2011 (the "End Date") relative to its value (the "Start Value") as at 26 July
2005 (the "Start Date"), such amount being expressed in pence and rounded down
to the next half pence, subject to a maximum increase of 67.5 per cent of the
issue price of 100 pence per Share.
If the End Value is lower than the Start Value, the Shares are designed to repay
the full initial subscription amount of 100p per Share on the Redemption Date
provided that the value of the Index has not fallen below 50 per cent of the
Start Value at close of business on any Index business day between the Start
Date and the End Date (both dates inclusive) (an "index barrier breach").
If shareholders hold their Shares until the Redemption Date, and an Index
Barrier Breach has occurred and the End Value is not at least equal to the Start
Value, the Shares are designed to repay the Issue Price as reduced by the same
percentage by which the End Value is less than the Start Value.
In accordance with the Company's investment policy, the net proceeds derived by
the Company from the issue of Shares and the sale of a Put Option have been
invested in a portfolio of debt securities (the "Debt Securities") containing
embedded derivatives related to the Index at prices relative to the value of the
Index on 26 July 2005 of 3,302.98. Therefore, if the Dow Jones EuroStoxx 50
Index rises 13.5% or more from its Start Value of 3,302.98 on the Start Date,
which equates to a level of 3,748.88 or higher as at the End Date, the Shares
are designed to return growth of 67.5% on the Redemption Date. The final return
is subject to there being no counterparty default or any unforeseen
circumstances.
As published in all of the annual and half-yearly financial reports of the
Company and as announced on 8 October 2008, the Company currently holds seven
Debt Securities, including one issued by Glitnir Banki HF ("Glitnir") and one
issued by Kaupthing Bunadarbanki HF ("Kaupthing"). These two debt securities
have a nominal value of GBP6,000,000 each and in aggregate account for
approximately 30 per cent of the total nominal value of the Company's Debt
Securities.
The Winding-Up Boards of Glitnir and Kaupthing asked all parties claiming debts
of any sort or other rights to submit claims by 26 November 2009 and 30 December
2009 respectively. Consequently, the Company submitted claim forms to each of
Glitnir and Kaupthing, claiming GBP10,050,000 in respect of each one of these
Debt Securities, such amounts being equal to the maximum amount due under the
relevant Debt Securities of GBP1.675 per GBP1 nominal.
The amount claimed should not be considered a forecast of the amount which will
be due from Glitnir and Kaupthing on the maturity of the relevant Debt
Securities, which may not be the amount currently claimed, nor is it a
reflection of the net asset value per Share.
Shareholders should be aware that it is likely that Glitnir and Kaupthing may
not pay the Company the full amounts claimed. Whilst recovery rates from
issuers that default vary, and in this case are currently unknown, the worst
case scenario would see the Company receive nothing from either institution at
the maturity of the relevant Debt Security. In these circumstances, the
Company's assets will be reduced by 30 per cent and so accelerate asset erosion
under the Put Option or reduce the redemption proceeds due to shareholders on
the redemption of their Shares accordingly.
In the event of both Glitnir and Kaupthing defaulting and having a zero recovery
rate and there being no insolvency of any other issuer of debt securities held
by the Company or any other event of default or any unforeseen circumstances, if
the Index were to fall to a level of approximately 1,002 at close of business on
the End Date, the redemption entitlement proceeds of the Shares would be zero.
The redemption proceeds per Share per the Company's investment objective will
not be known until after the end of the life of the Shares when the closing
value of the Dow Jones EuroStoxx 50 Index on the End Date is known. The timing
and amount of the recovery (if any) from the Glitnir and Kaupthing debt
securities is currently uncertain. Therefore the redemption proceeds may not be
known for some time after the Redemption Date.
Any claims which are paid may be paid before or after the end of the life of the
Shares and in the case of early payment it may not be possible to reinvest the
proceeds in debt securities which replicate the investment characteristics of
the original Debt Securities. Any claims which are paid may be paid in
currencies other than Sterling and/or in forms other than cash. Any payments
received by the Company may therefore be subject to currency fluctuations and/or
other market movements.
Your attention is drawn to the Schedule of Investments on at the bottom of this
announcement, which show the assets held by the Company, and note 12 (b) to the
financial statements, which refers to the credit risk of the issuers of these
assets as at the end of the reporting period and as at the date of this report.
In the event of a default by an issuer of a Debt Security purchased by the
Company, the Company would rank as an unsecured creditor in respect of sums due
from the issuer of such debt security. In such event, the Company may (in
respect of that debt security) receive a lesser amount (if anything) and at a
different time than the proceeds anticipated at the maturity of the relevant
debt security. Any losses would be borne by the Company and returns to
Shareholders would be significantly adversely affected.
chairman's statement for the year ended 30 june 2010
In order to fulfil its investment objective, the Company purchased seven Debt
Securities, including one issued by Glitnir and one issued by Kaupthing. These
two Debt Securities have a nominal value of GBP6million each and in aggregate
account for approximately 30 per cent of the total nominal value of the
Company's Debt Securities. In the event of a default by an issuer of a Debt
Security purchased by the Company, the Company will rank as an unsecured
creditor in respect of sums due from the issuer of such Debt Security. In such
event, the Company may (in respect of that Debt Security) receive a lesser
amount of money than the amount due pursuant to the terms of the Debt Security,
may actually receive the money at a different time than would otherwise have
been the case and the amount received may be zero. Any losses would be borne by
the Company and returns to Shareholders would be significantly adversely
affected.
The Winding-Up Boards for Glitnir and Kaupthing asked all parties claiming debts
of any sort or other rights to submit claims by 26 November 2009 and 30 December
2009 respectively. Consequently the Company submitted claim forms to each of
Glitnir and Kaupthing claiming GBP10,050,000 in respect of each one of these
Debt Securities, such amounts being equal to the maximum Final Capital
Entitlement of GBP1.675 per GBP1 nominal.
The amount claimed should not be considered a forecast of the amount which will
be due from Glitnir and Kaupthing on the maturity of the relevant Debt
Securities, nor is it reflected in the net asset value per Share of the Company.
Shareholders should be aware that it is likely that Glitnir and Kaupthing may
not pay the Company the full amounts claimed. Whilst recovery rates from issuers
that default may vary, and in this case are currently unknown, the worst case
scenario would see the Company receive nothing from either institution at the
maturity of the relevant debt securities. Any claims which are paid may be paid
before or after the end of the life of the Company and in the case of early
payment it may not be possible to reinvest the proceeds in debt securities which
replicate the investment characteristics of the original Debt Securities. Any
claims which are paid may be paid in currencies other than Sterling and/or in
forms other than cash. Any payments received by the Company may therefore be
subject to currency fluctuations and/or other market movements.
In the previous accounting period and in the interim financial statements, the
directors exercised their judgement in the best interests of both shareholders
and creditors to value the Glitnir and Kaupthing debt securities at GBPnil.
Based on new market data and recent announcements by both Glitnir and Kaupthing,
it is now the directors' opinion that these debt securities have a value, for
accounting purposes. For this purpose the Directors have adopted the figures
provided by Future Valuation Consultants.
If the Dow Jones EuroStoxx 50 Index (the "Index") has closed down more than 50
per cent from its Start Value (i.e. below 1,651.49) on any Index Business Day
between the Start Date and the End Date then an Index Barrier Breach will have
occurred. In these circumstances, the amount which the Company will be required
to pay following the Index Barrier Breach will reduce its assets by an amount
which reflects the decline, if any, in the Index between the Start Date and the
End Date.
The official closing level of the Dow Jones EuroStoxx 50 Index as at 30 June
2010 was 2,573.32. If the Index closed at this level on the End Date and an
Index Barrier Breach has not occurred, the Final Capital Entitlement would be
100 pence subject to there being no counterparty default or any unforeseen
circumstances, and in the event of both Glitnir and Kaupthing defaulting and
having a zero recovery rate and there being no insolvency of any other issuer of
Debt Securities held by the Company or any other event of default or any
unforeseen circumstances, the Final Capital Entitlement would be approximately
69.5 pence, and if the Index were to fall by approximately a further 61 per cent
to a level of approximately 1,002 as at the End Date, the Final Capital
Entitlement of the Shares would be zero.
The table below illustrates how the redemption proceeds of the Shares might vary
for different ending levels of the Dow Jones EuroStoxx 50 Index (1) subject to
there being no counterparty default or any unforeseen circumstances, and (2) on
the assumption of zero recovery in the event of default of the Debt Securities
issued by Glitnir and Kaupthing and there being no insolvency of any other
issuer of Debt Securities held by the Company or any other event of default or
any unforeseen circumstances.
+------------+------------+------------+------------+------------+
| | If Dow Jones EuroStoxx | If Dow Jones EuroStoxx |
| | 50 | 50 |
+------------+-------------------------+-------------------------+
| | Index never closed | Index closed below |
| | below 1,651.49+ | 1,651.49+ |
+------------+-------------------------+-------------------------+
| Final | Redemption | Redemption | Redemption | Redemption |
| EuroStoxx | | | | |
+------------+------------+------------+------------+------------+
| 50 Index* | Proceeds | Proceeds | Proceeds | Proceeds |
| | (1) | (2) | (1) | (2) |
+------------+------------+------------+------------+------------+
| 0 | | | 0.0 | 0.0 |
+------------+------------+------------+------------+------------+
| 100 | | | 3.0 | 0.0 |
+------------+------------+------------+------------+------------+
| 200 | | | 6.0 | 0.0 |
+------------+------------+------------+------------+------------+
| 300 | | | 9.0 | 0.0 |
+------------+------------+------------+------------+------------+
| 400 | | | 12.0 | 0.0 |
+------------+------------+------------+------------+------------+
| 500 | | | 15.0 | 0.0 |
+------------+------------+------------+------------+------------+
| 600 | | | 18.0 | 0.0 |
+------------+------------+------------+------------+------------+
| 700 | | | 21.0 | 0.0 |
+------------+------------+------------+------------+------------+
| 800 | | | 24.0 | 0.0 |
+------------+------------+------------+------------+------------+
| 900 | | | 27.0 | 0.0 |
+------------+------------+------------+------------+------------+
| 1,000 | | | 30.0 | 0.0 |
+------------+------------+------------+------------+------------+
| 1,100 | | | 33.0 | 2.5 |
+------------+------------+------------+------------+------------+
| 1,200 | | | 36.0 | 5.5 |
+------------+------------+------------+------------+------------+
| 1,300 | | | 39.0 | 9.0 |
+------------+------------+------------+------------+------------+
| 1,400 | | | 42.0 | 12.0 |
+------------+------------+------------+------------+------------+
| 1,500 | | | 45.0 | 15.0 |
+------------+------------+------------+------------+------------+
| 1,600 | | | 48.0 | 18.0 |
+------------+------------+------------+------------+------------+
| 1,700 | 100.0 | 69.5 | 51.0 | 21.0 |
+------------+------------+------------+------------+------------+
| 1,800 | 100.0 | 69.5 | 54.0 | 24.0 |
+------------+------------+------------+------------+------------+
| 1,900 | 100.0 | 69.5 | 57.5 | 27.0 |
+------------+------------+------------+------------+------------+
| 2,000 | 100.0 | 69.5 | 60.5 | 30.0 |
+------------+------------+------------+------------+------------+
| 2,100 | 100.0 | 69.5 | 63.5 | 33.0 |
+------------+------------+------------+------------+------------+
| 2,200 | 100.0 | 69.5 | 66.5 | 36.0 |
+------------+------------+------------+------------+------------+
| 2,300 | 100.0 | 69.5 | 69.5 | 39.0 |
+------------+------------+------------+------------+------------+
| 2,400 | 100.0 | 69.5 | 72.5 | 42.0 |
+------------+------------+------------+------------+------------+
| 2,500 | 100.0 | 69.5 | 75.5 | 45.0 |
+------------+------------+------------+------------+------------+
| 2,573.32** | 100.0 | 69.5 | 77.5 | 47.5 |
+------------+------------+------------+------------+------------+
| 2,600 | 100.0 | 69.5 | 78.5 | 48.0 |
+------------+------------+------------+------------+------------+
| 2,700 | 100.0 | 69.5 | 81.5 | 51.0 |
+------------+------------+------------+------------+------------+
| 2,800 | 100.0 | 69.5 | 84.5 | 54.0 |
+------------+------------+------------+------------+------------+
| 2,900 | 100.0 | 69.5 | 87.5 | 57.0 |
+------------+------------+------------+------------+------------+
| 3,000 | 100.0 | 69.5 | 90.5 | 60.0 |
+------------+------------+------------+------------+------------+
| 3,100 | 100.0 | 69.5 | 93.5 | 63.5 |
+------------+------------+------------+------------+------------+
| 3,200 | 100.0 | 69.5 | 96.5 | 66.5 |
+------------+------------+------------+------------+------------+
| 3,300 | 100.0 | 69.5 | 99.5 | 69.5 |
+------------+------------+------------+------------+------------+
| 3,400 | 114.5 | 79.5 | 114.5 | 79.5 |
+------------+------------+------------+------------+------------+
| 3,500 | 129.5 | 90.0 | 129.5 | 90.0 |
+------------+------------+------------+------------+------------+
| 3,600 | 144.5 | 100.5 | 144.5 | 100.5 |
+------------+------------+------------+------------+------------+
| 3,700 | 160.0 | 111.5 | 160.0 | 111.5 |
+------------+------------+------------+------------+------------+
| 3,800 | 167.5 | 116.5 | 167.5 | 116.5 |
+------------+------------+------------+------------+------------+
| 3,900 | 167.5 | 116.5 | 167.5 | 116.5 |
+------------+------------+------------+------------+------------+
* As at 26 July 2011
** Official closing level of the DJ EuroStoxx 50 Index as at 30 June 2010
+ On any day from 26 July 2005 to 26 July 2011
(1) Subject to there being no counterparty default or any unforeseen
circumstances
(2) The table contemplates default and zero recovery in respect of the Debt
Securities issued by Glitnir and Kaupthing. The redemption proceeds set out in
this table are an example only and not a forecast of actual payments and are
subject to there being no insolvency of any other issuer of Debt Securities held
by the Company or any other event of default or any unforeseen circumstances.
The attention of shareholders is drawn to the section headed "Risk Factors" in
the Prospectus.
Given the well documented problems which have affected various financial
institutions around the world and the need for government bail-outs it is worth
commenting on the assets held by the Company. Your attention is drawn to the
Schedule of Investments on at the bottom of this announcement, which shows the
assets held by the Company, and note 12b, which refers to the credit risk of the
issuers of those assets as at the year end and as at the date of this report.
The Company currently holds seven Debt Securities, five of the issuers of which,
as at the date of this report, have investment grade credit ratings ranging from
Aa2 to Aa3 by Moody's Investor Services ("Moody's") and from AA to A- by
Standard and Poor's rating agency ("S&P"). Neither Glitnir nor Kaupthing are
rated by Moody's or S&P.
The Company holds a debt security issued by the Portuguese state-owned bank,
Caixa Geral De Depostos S.A. ("Caixa"), with a nominal value of GBP6million. On
27 April 2010 Standard & Poor's lowered its long- and short-term counterparty
credit ratings on 100% state-owned Caixa to A- from A+ with a negative outlook.
The downgrade reflects the effect of S&P's downgrade of the Portuguese sovereign
long-term rating to A- from A+ also with a negative outlook. Moody's Investors
Service rates Caixa's senior unsecured debt as A1 as at the date of this report.
The Board monitors credit risk and will consider further action if the credit
rating of an issuer falls below A3 or A- as ranked by Moody's and Standard and
Poor's respectively.
In the event of a default by an issuer of a Debt Security purchased by the
Company, the Company would rank as an unsecured creditor in respect of sums due
from the issuer of such Debt Security. In such event, the Company may (in
respect of that Debt Security) receive a lesser amount (if any) and at a
different time than the proceeds anticipated at the maturity of the Debt
Security. Any losses would be borne by the Company and returns to shareholders
would be significantly adversely affected.
Since the financial year end, equity markets have staged a modest recovery from
the falls, sparked by concerns over the size and risk of a default of European
sovereign debt and the pace of the global rally, seen towards the end of the
financial year end. This rally has, however, been punctuated by rapid falls as
confidence in the strength of the economic recovery has at times wavered.
The Dow Jones EuroStoxx 50 closed at 2752.77 on 22 September 2010, a rise of
7.0% since the financial year end on 30 June 2010. I am pleased to report the
Company's shares, by comparison, rose 14.6% to 63 pence over the same period as
the discount to the potential redemption proceeds based on the Index closing at
this level on the End Date narrowed.
As it is most likely that any recovery in respect of the Glitnir and Kaupthing
debt securities will take place after the Redemption Date the Board is
considering the options to preserve shareholders' interests in these securities
after that date. Further information will be made available in due course.
Charles Tracy
24 September 2010
manager's report for the year ended 30 june 2010
Market Review
Over the period under review the Dow Jones EuroStoxx 50 Index ("the Index") rose
7.1% due to the continuing global economic recovery from the credit crisis.
Despite this rise markets remained volatile amid uncertainty regarding the
strength of the recovery.
Over the first month of the period, the Index fell to its lowest closing of the
period, 2,281.47. This fall was on concern that quarterly earnings reports
would show that the global recession was far from over hence failing to justify
the market rally which had occurred from March to May 2009.
However following the low, European shares climbed over 13% in just 2 weeks, due
to some positive company forecasts which suggested that the worst of the
earnings slump may have been over. The Index subsequently traded broadly
upwards over the next few months as fears about the global recession receded.
The Index then range traded between 2,700 and 3,000 from September through to
the end of 2009.
In January the Dow Jones EuroStoxx 50 Index climbed above 3,000 to reach its
highest closing of the period, 3,017.85. However this rise did not last, as by
February the index had fallen around 13% on a global equity markets sell-off
amid concern that China would take further steps to cool its economy thus
jeopardizing the global recovery. In addition the Greek debt crisis was growing
at this time, despite promises from the Greek government to put its house in
order through an austerity package including tax rises and public sector pay
freezes.
Markets rebounded to reach over 3,000 in mid April following temporary relief
that Greece had managed to put together some austerity measures and the news
that the European Union was developing a rescue plan for Greece. However the
downgrading of Spain's credit rating raised concerns about the contagion of the
sovereign debt problem so the Index tumbled to below 2,500 in May. Markets
remained volatile in June such that following a rise of over 200 Index points
the Index fell back to end the period at 2,573.32.
The European Central Bank ("ECB") held rates at 1.00% throughout the period.
Just before the start of the period, on 7 May 2009, the European Central Bank
unanimously agreed on a 60 billion Euro plan to purchase euro-denominated
covered bonds issued in the euro area, following other central banks which were
already buying bonds, effectively printing money to reflate their economies in a
policy known as quantitative easing. In addition to the Greek bailout from the
ECB, the sovereign debt crisis has put pressure on the ECB to take further
action as the Euro weakened.
Market Outlook
There are a number of downside risks which could bear down on equity markets
over the coming months, however some market participants believe that the recent
falls mean that markets have already priced in these risks, and that if the
risks don't materialise, equity markets could be set for a recovery.
The Greek debt crisis has been the latest factor with the potential to derail
the European economic recovery. The sovereign debt crisis has already spread
significantly, and further contagion could cause additional destabilisation in
the PIIGS' (Portugal, Italy, Ireland, Greece, and Spain) debt markets. The
future performance of equity markets is likely to be affected by this,
particularly if support for these countries is required from other less
debt-ridden Eurozone members. In addition, equity markets are likely to be
affected by how these countries are able to enact austerity measures to reduce
their debt. If the strikes and protests against these measures, as already seen
in Greece and Spain, spread and escalate this could also put downward pressures
on the DJ EuroStoxx 50 Index. Furthermore equity markets may well be affected
by similar austerity measures in other less debt-ridden countries such as
Germany, where cuts to government spending threaten to hinder the already weak
economic recovery.
Finally, European equity markets are likely to react to new economic data on the
strength of the economy in China and the US. As such markets could be set for a
volatile period as they react to these announcements.
management report for the year ended 30 june 2010
Detailed in the section entitled "Investment Objective and Policy", in the
Manager's Report, the Chairman's Statement and in the notes to the financial
statements are a description of important events that have occurred during the
financial year, their impact on the performance of the Company as shown in the
financial statements and a description of the principal risks and uncertainties
facing the Company.
There were no material related party transactions which took place in the
financial year other than those disclosed in note 13.
Going Concern
The performance of the investments held by the Company over the reporting period
and the outlook for the future are described in the Manager's Report. The
Company's financial position, its cash flows and liquidity position are set out
in the financial statements and the Company's financial risk management
objectives and policies, details of its financial instruments and its exposures
to market price risk, credit risk, liquidity risk, portfolio construction risk,
interest rate risk and currency risk are set out at note 12 to the financial
statements.
As highlighted in the section entitled "Investment Objective and Policy", the
Manager's Report and notes 1(k), 5 and 12(d) to the financial statements, during
the previous accounting period, the issuers of two of the Debt Securities, being
Glitnir and Kaupthing suffered severe financial difficulties and were placed
into receivership. The Company has submitted claim forms to each of Glitnir and
Kaupthing, claiming GBP10,050,000 in respect of each one of these Debt
Securities, such amounts being equal to the maximum redemption proceeds of
GBP1.675 per GBP1 nominal. Although at the time of writing the
situation remains unclear, the Manager and Board of directors consider it likely
that Glitnir and Kaupthing may not meet their obligations in full and in the
worst case scenario may pay nothing at all. Any claims which are paid may be
paid before or after the end of the life of the Company and in the case of early
payment it may not be possible to reinvest the proceeds in Debt Securities which
replicate the investment characteristics of the original Debt Securities.
Any claims which are paid may be paid in currencies other than Sterling and/or
in forms other than cash. Any payments received by the Company may therefore be
subject to currency fluctuations and/or other market movements.
As disclosed in the section entitled "Investment Objective and Policy", the
notes to the financial statements and the Schedule of Investments at the back of
this announcement, the Company has sold a Put Option to the Put Option
Counterparty. The performance of the Put Option is linked to the performance of
the Dow Jones EuroStoxx 50 Index. At an Index value of 3,302.98 or above at the
close of business on 26 July 2011, or if the Index has never closed below
1,651.49 during the calculation period from 26 July 2005 to 26 July 2011 (an
"Index Barrier Breach"), the Put Option will be worth GBPNil at maturity. If
the Index has closed below 1,651.49 over the calculation period and the Index is
still below 3,302.98 at 26 July 2011, the Put Option will be worth a percentage
of the notional value, being GBP39,550,000, equivalent to the percentage fall in
the level of the Index over the calculation period. As at the accounting
reference date and as at the date of this report no Index Barrier Breach had
occurred.
The Company's contingent liability to the Put Option Counterparty under the Put
Option sold to the Put Option Counterparty will not crystallise until the Put
Option's scheduled maturity date of 28 July 2011. Such contingent liability
under the Put Option will be calculated based on the level of the Dow Jones
EuroStoxx 50 Index as at 26 July 2011. As the contingent liability under the
Put Option cannot be quantified and does not crystallise until 26 July 2011, the
directors do not consider that such contingent liability renders the Company
insolvent at this time. Only in the event that the value of the Put Option
based on the level of the Dow Jones EuroStoxx 50 Index as at 26 July 2011
exceeds the value of the Company's assets on that date might the Company be
rendered insolvent.
As disclosed in the section entitled "Investment Objective and Policy" and note
12(c) to the financial statements, upon the issue of Shares in July 2005 the
Company created a cash reserve (the "Expense Provision") in the amount of 2.10%
of the amount raised by the issue of such shares (the "Initial Gross Proceeds")
plus GBP440,000, such amount being estimated in the opinion of the directors
upon the advice of the Administrator to be sufficient to meet the operating
expenses reasonably expected to be incurred over the life of the Fund. Upon the
issue of additional Shares in September 2006, an additional 2.10% of the
proceeds of that issue of additional Shares was set aside to cover the increase
in the Manager's fee which resulted from that issue of additional Shares, all
other expenses being either fixed for the life of the Shares or deemed unlikely
to increase materially as a result of this issue of additional Shares.
After making enquiries, the directors have a reasonable expectation that the
Company has adequate resources to continue in operational existence for the
foreseeable future. Accordingly, they continue to adopt the going concern basis
in preparing this annual financial report.
The Board of directors jointly and severally confirm that, to the best of their
knowledge:
(a) the financial statements, prepared in accordance with International
Financial Reporting Standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company; and
(b) This Management Report includes or incorporates by reference a fair
review of the development and performance of the business and the position of
the Company, together with a description of the principal risks and
uncertainties that it faces.
Charles Tracy Peter Niven
Director Director
24 September 2010
independent auditor's report to the shareholders of close european accelerated
fund limited
We have audited the financial statements of Close European Accelerated Fund
Limited for the year ended 30 June 2010, which comprise the Statement of
Comprehensive Income, Statement of Financial Position, Statement of Cash Flows,
Statement of Changes in Net Assets Attributable to Shareholders and the related
notes 1 to 13. These financial statements have been prepared under the
accounting policies set out therein.
This report is made solely to the Company's members, as a body, in accordance
with Section 262 of The Companies (Guernsey) Law, 2008, as amended. Our audit
work has been undertaken so that we might state to the Company's members those
matters we are required to state to them in an auditor's report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company's members as a
body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
The directors' responsibilities for preparing the Annual Report and the
financial statements in accordance with applicable law and International
Financial Reporting Standards are set out in Directors' Responsibilities in
Respect of the Financial Statements.
Our responsibility is to audit the financial statements in accordance with
relevant legal and regulatory requirements and International Standards on
Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements give a true
and fair view and are properly prepared in accordance with The Companies
(Guernsey) Law, 2008, as amended. We also report to you if, in our opinion, the
Report of the Directors is not consistent with the financial statements, if the
Company has not kept proper accounting records or if we have not received all
the information and explanations we require for our audit.
We read other information contained in the Annual Report and consider whether it
is consistent with the audited financial statements. The other information
comprises only the Report of the Directors including the Corporate Governance
Statement, the Chairman's Statement, the Management Report and the Manager's
Report. We are not required to
consider whether the board's statements on internal control cover all risks and
controls, or form an opinion on the effectiveness of the Company's corporate
governance procedures or its risk and control procedures. We consider the
implications for our report if we become aware of any apparent misstatements or
material inconsistencies with the financial statements. Our responsibilities do
not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing
(UK and Ireland) issued by the Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the amounts and
disclosures in the financial statements. It also includes an assessment of the
significant estimates and judgments made by the directors in the preparation of
the financial statements, and of whether the accounting policies are appropriate
to the Company's circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Opinion
In our opinion the financial statements:
· give a true and fair view, in accordance with International Financial
Reporting Standards, of the state of the Company's affairs as at 30 June 2010
and of its gain for the year then ended; and
· have been properly prepared in accordance with The Companies (Guernsey) Law,
2008, as amended.
Roy Alan Angliss FCA
Saffery Champness GAT
Chartered Accountants
Guernsey
24 September 2010
statement of COMPREHENSIVE INCOME for the year ended 30 june 2010
+-------------------------------------+-------+-----------+----------+--------------+
| |Notes | Year to | | Year to |
| | | 30 Jun | | 30 Jun |
| | | 2010 | | 2009 |
| | | GBP | | GBP |
+-------------------------------------+-------+-----------+----------+--------------+
| | | | | |
+-------------------------------------+-------+-----------+----------+--------------+
| Net movement in unrealised | | | | |
| appreciation / | | | | |
+-------------------------------------+-------+-----------+----------+--------------+
| (depreciation) on investments | 5 | 3,333,519 | | (16,319,302) |
+-------------------------------------+-------+-----------+----------+--------------+
| | | | | |
+-------------------------------------+-------+-----------+----------+--------------+
| Net movement in unrealised | | | | |
| depreciation / | | | | |
+-------------------------------------+-------+-----------+----------+--------------+
| (appreciation) on value of Put | | 3,396,167 | | (6,153,249) |
| Option | | | | |
+-------------------------------------+-------+-----------+----------+--------------+
| | | | | |
+-------------------------------------+-------+-----------+----------+--------------+
| Operating expenses | 2 | (393,164) | | (361,648) |
+-------------------------------------+-------+-----------+----------+--------------+
| | | | | |
+-------------------------------------+-------+-----------+----------+--------------+
| Net gain / (loss) for the year | | 6,336,522 | | (361,648) |
| attributable to shareholders | | | | |
+-------------------------------------+-------+-----------+----------+--------------+
| | | | | |
+-------------------------------------+-------+-----------+----------+--------------+
| | | | | |
+-------------------------------------+-------+-----------+----------+--------------+
| | | Pence | | Pence |
+-------------------------------------+-------+-----------+----------+--------------+
| Earnings / (loss) per Share for the | 4 | 16.02 | | (57.73) |
| year | | | | |
+-------------------------------------+-------+-----------+----------+--------------+
In arriving at the results for the financial year, all amounts above relate to
continuing operations.
There is no other comprehensive income in the year.
Reconciliation of earnings / (loss) per Share for investment purposes to
earnings / (loss) per Share per the financial statements:
+-------------------------------------------+---------+----------+----------+
| | Pence | | Pence |
+-------------------------------------------+---------+----------+----------+
| Earnings / (loss) per Share for | 17.01 | | (56.82) |
| investment purposes | | | |
+-------------------------------------------+---------+----------+----------+
| Adjustment to include expenses on an | (0.99) | | (0.91) |
| accruals basis | | | |
+-------------------------------------------+---------+----------+----------+
| Earnings / (loss) per Share per the | 16.02 | | (57.73) |
| financial statements | | | |
+-------------------------------------------+---------+----------+----------+
In accordance with International Financial Reporting Standards ("IFRS"),
expenses should be attributed to the period to which they relate. The
adjustment to expenses to reflect the application of this accruals basis reduces
the earnings per Share of the Company by 0.99 pence.
The earnings per Share for investment purposes represents the earnings per Share
attributable to Shareholders in accordance with the Prospectus, which recognises
all expenses of the Company up to and including the date that the redemption
proceeds become payable.
statement OF FINANCIAL POSITION as at 30 june 2010
+-------------------------------------+-------+------------+----------+------------+
| |Notes | 30 Jun | | 30 Jun |
| | | 2010 | | 2009 |
| | | GBP | | GBP |
+-------------------------------------+-------+------------+----------+------------+
| NON-CURRENT ASSETS | | | | |
+-------------------------------------+-------+------------+----------+------------+
| | | | | |
+-------------------------------------+-------+------------+----------+------------+
| Unquoted financial assets | | | | |
| designated as at fair value | | | | |
+-------------------------------------+-------+------------+----------+------------+
| through profit or loss | 5 | 30,372,072 | | 27,038,553 |
+-------------------------------------+-------+------------+----------+------------+
| | | | | |
+-------------------------------------+-------+------------+----------+------------+
| CURRENT ASSETS | | | | |
+-------------------------------------+-------+------------+----------+------------+
| | | | | |
+-------------------------------------+-------+------------+----------+------------+
| Receivables | 6 | 165,957 | | 318,001 |
+-------------------------------------+-------+------------+----------+------------+
| Cash and cash equivalents | | 373,942 | | 616,104 |
+-------------------------------------+-------+------------+----------+------------+
| | | | | |
+-------------------------------------+-------+------------+----------+------------+
| | | 539,899 | | 934,105 |
+-------------------------------------+-------+------------+----------+------------+
| | | | | |
+-------------------------------------+-------+------------+----------+------------+
| CURRENT LIABILITIES | | | | |
+-------------------------------------+-------+------------+----------+------------+
| | | | | |
+-------------------------------------+-------+------------+----------+------------+
| Payables - due within one year | 7 | 16,335 | | 17,377 |
+-------------------------------------+-------+------------+----------+------------+
| | | | | |
+-------------------------------------+-------+------------+----------+------------+
| NET CURRENT ASSETS | | 523,564 | | 916,728 |
+-------------------------------------+-------+------------+----------+------------+
| | | | | |
+-------------------------------------+-------+------------+----------+------------+
| TOTAL ASSETS LESS CURRENT | | 30,895,636 | | 27,955,281 |
| LIABILITIES | | | | |
| (excluding net assets attributable | | | | |
| to shareholders) | | | | |
+-------------------------------------+-------+------------+----------+------------+
| | | | | |
+-------------------------------------+-------+------------+----------+------------+
| Payables - due after one year | | | | |
| (excluding net assets | | | | |
+-------------------------------------+-------+------------+----------+------------+
| attributable to Shareholders) | 8 | 5,766,837 | | 9,163,004 |
+-------------------------------------+-------+------------+----------+------------+
| | | | | |
+-------------------------------------+-------+------------+----------+------------+
| NET ASSETS ATTRIBUTABLE TO | | 25,128,799 | | 18,792,277 |
| SHAREHOLDERS | | | | |
+-------------------------------------+-------+------------+----------+------------+
| | | | | |
+-------------------------------------+-------+------------+----------+------------+
| SHARES IN ISSUE | | 39,550,000 | | 39,550,000 |
+-------------------------------------+-------+------------+----------+------------+
| | | | | |
+-------------------------------------+-------+------------+----------+------------+
| | | Pence | | Pence |
+-------------------------------------+-------+------------+----------+------------+
| NAV PER SHARE | | 63.54 | | 47.52 |
+-------------------------------------+-------+------------+----------+------------+
Reconciliation of NAV per Share for investment purposes to NAV per Share per the
financial statements:
+-------------------------------------------+---------+----------+----------+
| | Pence | | Pence |
+-------------------------------------------+---------+----------+----------+
| NAV per Share for investment purposes | 62.21 | | 45.19 |
+-------------------------------------------+---------+----------+----------+
| Adjustment to include expenses on an | 1.33 | | 2.33 |
| accruals basis | | | |
+-------------------------------------------+---------+----------+----------+
| NAV per Share per the financial | 63.54 | | 47.52 |
| statements | | | |
+-------------------------------------------+---------+----------+----------+
In accordance with IFRS, expenses should be attributed to the period to which
they relate. The adjustment to expenses to reflect the application of this
accruals basis increases the NAV per Share of the Company by 1.33 pence.
The NAV per Share for investment purposes represents the NAV per Share
attributable to Shareholders in accordance with the Prospectus, which recognises
all expenses of the Company up to and including the date that the redemption
proceeds become payable.
The financial statements were approved and authorised for issue by the Board of
directors on 24 September 2010 and are signed on its behalf by:
Charles Tracy Peter Niven
Director Director
statement of cash flows for the year ended 30 june 2010
+-------------------------------------------+-------------+----------+--------------+
| | Year to | | Year to |
| | 30 Jun | | 30 Jun |
| | 2010 | | 2009 |
| | GBP | | GBP |
+-------------------------------------------+-------------+----------+--------------+
| Operating activities | | | |
+-------------------------------------------+-------------+----------+--------------+
| | | | |
+-------------------------------------------+-------------+----------+--------------+
| Net gain / (loss) for the year | 6,336,522 | | (22,834,199) |
| attributable to shareholders | | | |
+-------------------------------------------+-------------+----------+--------------+
| Less: Unrealised (appreciation) / | (3,333,519) | | 16,319,302 |
| depreciation on investments | | | |
+-------------------------------------------+-------------+----------+--------------+
| Less: Unrealised (depreciation) / | | | |
| appreciation on value of Put | | | |
+-------------------------------------------+-------------+----------+--------------+
| Option | (3,396,167) | | 6,153,249 |
+-------------------------------------------+-------------+----------+--------------+
| Less: Interest received | (883) | | (20,054) |
+-------------------------------------------+-------------+----------+--------------+
| Less: Decrease in accrued expenses | (1,042) | | (10,198) |
+-------------------------------------------+-------------+----------+--------------+
| Add: Decrease in prepayments and accrued | 152,044 | | 151,449 |
| income | | | |
+-------------------------------------------+-------------+----------+--------------+
| | | | |
+-------------------------------------------+-------------+----------+--------------+
| Net cash outflow from operating | (243,045) | | (240,451) |
| activities | | | |
+-------------------------------------------+-------------+----------+--------------+
| | | | |
+-------------------------------------------+-------------+----------+--------------+
| Investing activities | | | |
+-------------------------------------------+-------------+----------+--------------+
| | | | |
+-------------------------------------------+-------------+----------+--------------+
| Interest received | 883 | | 20,054 |
+-------------------------------------------+-------------+----------+--------------+
| | | | |
+-------------------------------------------+-------------+----------+--------------+
| Net cash inflow from investing activities | 883 | | 20,054 |
+-------------------------------------------+-------------+----------+--------------+
| | | | |
+-------------------------------------------+-------------+----------+--------------+
| Cash and cash equivalents at beginning of | 616,104 | | 836,501 |
| year | | | |
+-------------------------------------------+-------------+----------+--------------+
| | | | |
+-------------------------------------------+-------------+----------+--------------+
| Decrease in cash and cash equivalents | (242,162) | | (220,397) |
+-------------------------------------------+-------------+----------+--------------+
| | | | |
+-------------------------------------------+-------------+----------+--------------+
| Cash and cash equivalents at end of year | 373,942 | | 616,104 |
+-------------------------------------------+-------------+----------+--------------+
statement of changes in net assets attributable to Shareholders for the year
ended 30 june 2010
+--------------------------+---------+----------+------------+----------+--------------+----------+------------+
| | Share | | Share | | Accumulated | | Total |
| | Capital | | Premium | | Losses | | |
+--------------------------+---------+----------+------------+----------+--------------+----------+------------+
| | GBP | | GBP | | GBP | | GBP |
+--------------------------+---------+----------+------------+----------+--------------+----------+------------+
| | | | | | | | |
+--------------------------+---------+----------+------------+----------+--------------+----------+------------+
| Balance as at 1 July | 3,957 | | 39,812,295 | | (21,023,975) | | 18,792,277 |
| 2009 | | | | | | | |
+--------------------------+---------+----------+------------+----------+--------------+----------+------------+
| | | | | | | | |
+--------------------------+---------+----------+------------+----------+--------------+----------+------------+
| Net gain for the year | | | | | | | |
| attributable to | - | | - | | 6,336,522 | | 6,336,522 |
| shareholders | | | | | | | |
+--------------------------+---------+----------+------------+----------+--------------+----------+------------+
| | | | | | | | |
+--------------------------+---------+----------+------------+----------+--------------+----------+------------+
| Balance as at 30 June | 3,957 | | 39,812,295 | | (14,687,453) | | 25,128,799 |
| 2010 | | | | | | | |
+--------------------------+---------+----------+------------+----------+--------------+----------+------------+
+--------------------------+---------+----------+------------+----------+--------------+----------+--------------+
| | Share | | Share | | Accumulated | | Total |
| | Capital | | Premium | | Losses | | |
+--------------------------+---------+----------+------------+----------+--------------+----------+--------------+
| | GBP | | GBP | | GBP | | GBP |
+--------------------------+---------+----------+------------+----------+--------------+----------+--------------+
| | | | | | | | |
+--------------------------+---------+----------+------------+----------+--------------+----------+--------------+
| Balance as at 1 July | 3,957 | | 39,812,295 | | 1,810,224 | | 41,626,476 |
| 2008 | | | | | | | |
+--------------------------+---------+----------+------------+----------+--------------+----------+--------------+
| | | | | | | | |
+--------------------------+---------+----------+------------+----------+--------------+----------+--------------+
| Net loss for the year | | | | | | | |
| attributable to | - | | - | | (22,834,199) | | (22,834,199) |
| shareholders | | | | | | | |
+--------------------------+---------+----------+------------+----------+--------------+----------+--------------+
| | | | | | | | |
+--------------------------+---------+----------+------------+----------+--------------+----------+--------------+
| Balance as at 30 June | 3,957 | | 39,812,295 | | (21,023,975) | | 18,792,277 |
| 2009 | | | | | | | |
+--------------------------+---------+----------+------------+----------+--------------+----------+--------------+
notes to the financial statements for the year ended 30 june 2010
1 ACCOUNTING POLICIES
(a) Basis of Preparation
The financial statements have been prepared in accordance with IFRS which
comprise standards and interpretations approved by the International Accounting
Standards Board ("IASB") and International Financial Reporting Interpretations
Committee ("IFRIC") and applicable Guernsey law. The financial statements have
been prepared on an historical cost basis except for the measurement at fair
value of financial instruments.
Changes in accounting policy and disclosures:
The accounting policies adopted are consistent with those of the previous
financial year except as follows:
- IFRS 8 Operating Segments
- IAS 1 (Revised 2007) Presentation of Financial Statements
- Amendments to IFRS 7 Financial Instruments: Disclosures - Improving
Disclosures about Financial Instruments
The principal effect of these changes is as follows:
IFRS 8 Operating Segments
This standard is effective for accounting periods beginning on or after 1
January 2009. It requires disclosure of information about the Company's
operating segments and replaced the requirement to determine primary (business)
and secondary (geographical) reporting segments of the Company. For management
purposes, the Company is organised into one business unit. The Company
determined that this operating segment was the same as the business segment
previously identified under IAS 14 Segment Reporting.
IAS 1 (Revised 2007) Presentation of Financial Statements
The standard replaces IAS 1 Presentation of Financial Statements (revised in
2003) as amended in 2005. The revised IAS 1 Presentation of Financial
Statements was issued in September 2007 and is effective for accounting periods
beginning on or after 1 January 2009.
The standard introduces the Statement of Comprehensive Income. It presents all
items of income and expense recognition in profit or loss, together with all
other items of recognised income and expense, either in one single statement, or
in two linked statements. The Company chose to present one single Statement of
Comprehensive Income.
Amendments to IFRS 7 Financial Instruments: Disclosures - Improving Disclosures
about Financial Instruments. Amendments to IFRS 7 were issued by the IASB in
March 2009, effective for annual periods beginning on or after 1 January 2009.
The amendments to IFRS 7 require fair value to be disclosed by the source of
inputs; using a three-level hierarchy:
Quoted prices (unadjusted) in active markets for identical assets or liabilities
(Level 1);
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);
Inputs for the asset or liability that are not based on observable market data
(unobservable inputs) Level 3.
In addition, the amendments revise the specified minimum liquidity risk
disclosures including: the contractual maturity of non-derivative and derivative
financial liabilities, and a description of how this is managed. In the first
year of application, comparative information is not required.
The following Standards or Interpretations that are expected to affect the
Company have been issued but not yet adopted by the Company as shown below.
Other Standards or Interpretations issued by the IASB and the IFRIC are not
expected to affect the Company.
IAS 24 (revised November 2009) Related Party Disclosures effective for annual
periods beginning on or after 1 January 2011.
IAS 39 Financial Instruments Recognition and Measurement effective for annual
periods beginning on or after 1 January 2010.
IFRS 9 Financial Instruments - Classification and Measurement effective for
annual periods beginning on or after 1 January 2013.
The directors have considered the above and are of the opinion that the above
Standards and Interpretations are not expected to have an impact on the
Company's financial statements except for the presentation of additional
disclosures and changes to the presentation of components of the financial
statements. These items will be applied in the first financial period for which
they are required.
(a) Taxation
The Company has been granted exemption under the Income Tax (Exempt Bodies)
(Guernsey) Ordinance, 1989 from Guernsey Income Tax, and is charged an annual
fee of GBP600.
(b) Expenses
All expenses are accounted for on an accruals basis.
(c) Debt Issue Costs
The debt issue costs incurred amounted to GBP810,000 on the initial share issue
and a further GBP79,609 on the share issue on 21 September 2006. Because the
Company's participating shares are redeemable on or around 29 July 2011, they
are required to be classified as debt instruments under IAS 32. Consequently,
issue costs are required to be amortised over the life of the instrument.
(d) Interest Income
Interest income is accounted for on an accruals basis.
(e) Cash and Cash Equivalents
Cash at bank and short term deposits which are held to maturity are carried at
cost. Cash and cash equivalents are defined as call deposits, short term
deposits and highly liquid investments readily convertible to known amounts of
cash and subject to insignificant risk of changes in value. For the purposes of
the Statement of Cash Flows, cash and cash equivalents consist of cash and
deposits at bank.
(f) Investments
All investments and derivative financial instruments are classified as "at fair
value through profit or loss". Investments are initially recognised at cost,
being the fair value of the consideration given, excluding transaction costs
associated with the investment. After initial recognition, investments are
measured at fair value, with unrealised gains and losses on investments
recognised in the Statement of Comprehensive Income. Fair value is the amount
for which the financial instruments could be exchanged, or a liability settled,
between knowledgeable willing parties in an arms length transaction. Fair value
also reflects the credit quality of the issuers of the financial instruments.
Valuations of the Company's investments are based on valuations provided to the
Company by Future Value Consultants Limited (the "Valuer"). These valuations
are intended to be an indication of the fair value of those investments,
including an issuer's credit risk designed to reflect the best estimation of the
price at which they could be sold, even though there is no guarantee that a
willing buyer might be found if the Company chose to sell the relevant
investment.
The indicative fair values of the investments are based on an approximation of
the market level of the investments. As the investments are not traded in an
active market, the indicative fair value was determined by using valuation
techniques. The Valuer used a variety of methods and made assumptions that were
based on market conditions existing at the reporting date.
Valuation techniques used may include the use of comparable recent arm's length
transactions (where available), discounted cash flow analysis, option pricing
models and other valuation techniques commonly used by market participants.
Models use observable data, to the extent practicable. However, areas such as
credit risk, volatilities and correlations require the Valuer to make estimates.
Changes in assumptions about these factors could affect the reported fair value
of financial instruments.
During the previous financial year two of the issuers of the Company's Debt
Securities, Glitnir and Kaupthing, suffered severe financial difficulties and
were placed into receivership.
Therefore for the purposes of valuation these investments had no Credit Default
Swap spreads at the reporting date. As a result, the Valuer used pricing
information about comparable and publicly available Debt Securities issued by
Glitnir and Kaupthing in order to estimate the effect of credit risk on the
valuation of the relevant Debt Securities.
In the previous accounting period and in the interim financial statements, the
directors exercised their judgement in the best interests of both shareholders
and creditors to value these investments at GBPnil. Based on new market data and
recent announcements by both Glitnir and Kaupthing, it is now the directors'
opinion that the values ascribed to these two debt securities by the Valuer
comply with the definition of fair value as defined by IFRS and are therefore
more appropriate.
Different assumptions regarding these factors, combined with different valuation
techniques and models used, could lead to different valuations of the financial
instruments produced by different parties. As at the reporting date, valuation
data provided by J.P. Morgan Securities Limited, for the Debt Securities only,
was GBP1,980,757 (2009: GBP580,731) lower than that provided by the Valuer. It
should be noted however, that a value has been ascribed by the Valuer to the
debt instruments issued by Islandsbanki and Kaupthing, but these debt securities
have not been valued by J.P.Morgan Securities Limited.
The investments will be derecognised on their redemption date. Gains and losses
on the sale of investments will be taken to the Statement of Comprehensive
Income
(g) Put Option
The Put Option was initially recognised at the fair value of the consideration
received on the date of sale, and included within payables falling due after
more than one year. After initial recognition, the Put Option is measured at
fair value with unrealised gains and losses being recognised in the Statement of
Comprehensive Income. The Put Option will be derecognised at maturity on 26
July 2011.
(h) Trade Date Accounting
All "regular way" purchases and sales of financial assets are recognised on the
"trade date", i.e. the date that the entity commits to purchase or sell the
asset. Regular way purchases or sales are purchases or sales of financial
assets that require delivery of the asset within the timeframe generally
established by regulation or convention in the market place.
(j) Critical Accounting Estimates and Judgements
Management make critical accounting estimates and judgements concerning the
future. The resulting accounting estimates will, by definition, seldom equal
the related actual results. The estimates and assumptions that have a
significant risk of causing a material adjustment to the carrying amounts of
assets and liabilities within the financial period are outlined below:
Fair value of derivative financial instruments
The Company has invested in a portfolio of Debt Securities containing embedded
derivatives related to the Dow Jones EuroStoxx 50 Index. As the investments are
not traded in an active market, the fair value, based on valuations provided by
the Valuer, was determined by using valuation techniques. The Valuer used a
variety of methods and made assumptions that were based on market conditions
existing at the reporting date.
During the previous period, the issuers of two of the Debt Securities held by
the Company, being Glitnir and Kaupthing, suffered severe financial
difficulties.
On 8 October 2008 the government of Iceland announced that "the Icelandic
Financial Services Authority, Fjármálaeftirlitiõ (FME) had decided to take over
the powers invested in Glitnir's shareholders meeting and Glitnir's Board of
directors". The FME has appointed a receivership committee which has assumed
the role of the Board of directors. By law, the action of appointing a
receivership committee does not have the effect of creating a default under any
loan documents.
On 9 October 2008, Icelandic FME announced it had taken control of Kaupthing
under powers granted by the Icelandic Parliament and appointed a receivership
committee.
The Debt Securities issued by Glitnir and Kaupthing held by the Company are
senior unsecured debt. This means that they fall behind the Icelandic
government, liquidators and any secured creditors in terms of repaying capital,
but before or pari passu with all other creditors. In the event of default,
Debt Security holders would likely get back some money at the "recovery rate"
but in a worst case scenario may receive nothing at all. In practice the
recovery rate is likely to be above zero, but it is not possible to assign a
recovery rate to the notes at this point in time.
(k) Segmental Reporting
In the opinion of the directors the Company is engaged in a single segment of
business, being investment business in the United Kingdom.
(l) Going Concern
After making enquiries, the directors have a reasonable expectation that the
Company has adequate resources to continue in operational existence for the
foreseeable future. The directors believe the Company is well placed to manage
its business risks successfully despite the current economic climate.
Accordingly, the directors have adopted the going concern basis in preparing the
financial information.
+----+--------------------------------------+---------+----------+----------+
| 2 | OPERATING EXPENSES | | | |
| | | | | |
+----+--------------------------------------+---------+----------+----------+
| | | Year to | | Year to |
| | | 30 Jun | | 30 Jun |
| | | 2010 | | 2009 |
| | | GBP | | GBP |
+----+--------------------------------------+---------+----------+----------+
| | | | | |
+----+--------------------------------------+---------+----------+----------+
| | Amortisation of debt issue costs | 151,364 | | 151,364 |
+----+--------------------------------------+---------+----------+----------+
| | Investment management fees (1) | 139,357 | | 139,165 |
+----+--------------------------------------+---------+----------+----------+
| | Administration fees | 22,000 | | 21,970 |
+----+--------------------------------------+---------+----------+----------+
| | Directors' remuneration | 15,014 | | 15,000 |
+----+--------------------------------------+---------+----------+----------+
| | Registration fees | 8,040 | | 8,564 |
+----+--------------------------------------+---------+----------+----------+
| | Directors' & Officers' Insurance | 7,884 | | 7,832 |
+----+--------------------------------------+---------+----------+----------+
| | Audit fees | 8,500 | | 8,000 |
+----+--------------------------------------+---------+----------+----------+
| | Annual fees | 29,303 | | 22,253 |
+----+--------------------------------------+---------+----------+----------+
| | Other operating expenses | 12,585 | | 7,554 |
+----+--------------------------------------+---------+----------+----------+
| | | | | |
+----+--------------------------------------+---------+----------+----------+
| | | 394,047 | | 381,702 |
+----+--------------------------------------+---------+----------+----------+
| | | | | |
+----+--------------------------------------+---------+----------+----------+
| | Less: Interest earned on expense | (883) | | (20,054) |
| | provision bank account | | | |
+----+--------------------------------------+---------+----------+----------+
| | | | | |
+----+--------------------------------------+---------+----------+----------+
| | | 393,164 | | 361,648 |
+----+--------------------------------------+---------+----------+----------+
(1) The Manager is entitled to receive a fee from the Company at an annual rate
of 0.35% of the Initial Gross Proceeds.
3 DIRECTORS' REMUNERATION
The Prospectus provides that each director will be paid a fee of GBP5,000 per
annum by the Company. This remuneration will remain fixed over the life of the
Company.
4 EARNINGS PER SHARE
The earnings per Share is based on the net gain for the year of GBP6,336,522
(2009: loss GBP22,834,199) and on 39,550,000 shares (2009: 39,550,000 shares),
being the weighted average number of Shares in issue during the year.
+----+------------------------------------+--------------+----------+--------------+
| 5 | INVESTMENTS |
+----+-----------------------------------------------------------------------------+
| | | | | |
+----+------------------------------------+--------------+----------+--------------+
| | | 30 Jun | | 30 Jun |
| | | 2010 | | 2009 |
| | | GBP | | GBP |
+----+------------------------------------+--------------+----------+--------------+
| | UNQUOTED FINANCIAL ASSETS | | | |
| | DESIGNATED AT FAIR VALUE THROUGH | | | |
| | PROFIT OR LOSS | | | |
+----+------------------------------------+--------------+----------+--------------+
| | | | | |
+----+------------------------------------+--------------+----------+--------------+
| | Portfolio cost | 39,889,380 | | 39,889,380 |
+----+------------------------------------+--------------+----------+--------------+
| | | (12,850,827) | | 3,468,475 |
| | Unrealised (depreciation) / | | | |
| | appreciation on valuation brought | | | |
| | forward | | | |
+----+------------------------------------+--------------+----------+--------------+
| | | 3,333,519 | | (16,319,302) |
| | Unrealised appreciation / | | | |
| | (depreciation) on valuation for | | | |
| | the year | | | |
+----+------------------------------------+--------------+----------+--------------+
| | | | | |
+----+------------------------------------+--------------+----------+--------------+
| | Unrealised depreciation on | (9,517,308) | | (12,850,827) |
| | valuation carried forward | | | |
+----+------------------------------------+--------------+----------+--------------+
| | | | | |
+----+------------------------------------+--------------+----------+--------------+
| | Closing valuation | 30,372,072 | | 27,038,553 |
+----+------------------------------------+--------------+----------+--------------+
Valuations of investments are based on valuations provided by the Valuer. The
provided valuations were derived from proprietary models based upon
well-recognised financial principles and reasonable estimates about relevant
future market conditions using suitable inputs derived from market data such as
interest rates, credit default swap spread, foreign exchange and forward foreign
exchange rates, Dow Jones EuroStoxx 50 Index levels and the implied volatilities
of EuroStoxx options.
To comply with the definition of fair value as defined by IFRS, the Valuer was
engaged to provide valuations of the investments, taking account of the current
counterparty credit risk of the issuers of the Debt Securities held by the
Company.
As detailed in notes 1(g) and 1(j) to the financial statements and in respect of
Glitnir and Kaupthing in this reporting period the directors have used the
valuations provided by the Valuer based on limited market price information on
instruments judged by the Valuer to be reasonably comparable. In the previous
accounting period and in the interim financial statements, the directors
exercised their judgement in the best interests of both shareholders and
creditors to value these two investments at GBPnil which valuations differed
from the valuations provided by the Valuer.
The performance of the financial assets is based on the closing level of the Dow
Jones EuroStoxx 50 Index on 29 July 2011. If the Dow Jones EuroStoxx 50 Index
closes above 3,302.98 the instruments are designed to give a return of five
times the performance up a maximum return of 67.5% of the capital.
Valuation data provided by the Valuer to the Company is provided for
informational purposes only and does not represent an offer to buy or sell the
Debt Securities by the Valuer or any other party.
The valuations provided are an indication of market levels and do not imply that
they can be sold at that valuation price. They are based on assumptions and
data the Valuer considers in its judgement reasonable, but an alternative valuer
might arrive at different valuations for the same investments.
The investments held by the Company have been classified as Level 2, except for
the two investments in notes issued by Glitnir and Kaupthing, which have been
classified as Level 3. This is in accordance with the fair value hierarchy.
Details of the value of each classification are listed in the table below.
Values are based on the market value of the investments at the reporting date:
+----+------------------------------------+----------+----------+------------+
| | Investments | Market | | Market |
| | | Value | | Value |
+----+------------------------------------+----------+----------+------------+
| | | % | | GBP |
+----+------------------------------------+----------+----------+------------+
| | | | | |
+----+------------------------------------+----------+----------+------------+
| | Level 2 | 91 | | 27,784,705 |
+----+------------------------------------+----------+----------+------------+
| | Level 3 | 9 | | 2,587,367 |
+----+------------------------------------+----------+----------+------------+
| | | | | |
+----+------------------------------------+----------+----------+------------+
| | Total | 100 | | 30,372,072 |
+----+------------------------------------+----------+----------+------------+
There have been no transfers between Level 2 and Level 3 of the fair value
hierarchy during the period under review.
The following table shows a reconciliation of all the movements in the fair
value of the financial instruments categorised within Level 3 between the
beginning and the end of the reporting period.
+----+------------------------------------+------------+----------+-----------+
| | | Unquoted | | TOTAL |
| | | financial | | |
| | | assets | | |
| | | designated | | |
| | | as at fair | | |
| | | value | | |
| | | through | | |
| | | the profit | | |
| | | or loss | | |
+----+------------------------------------+------------+----------+-----------+
| | Level 3 | GBP | | GBP |
+----+------------------------------------+------------+----------+-----------+
| | | | | |
+----+------------------------------------+------------+----------+-----------+
| | Opening balance at 1 July 2009 | - | | - |
+----+------------------------------------+------------+----------+-----------+
| | | | | |
+----+------------------------------------+------------+----------+-----------+
| | Total gains and losses recognised | 2,587,367 | | 2,587,367 |
| | in | | | |
| | Statement of Comprehensive Income | | | |
+----+------------------------------------+------------+----------+-----------+
| | | | | |
+----+------------------------------------+------------+----------+-----------+
| | Closing balance as at 30 June 2010 | 2,587,367 | | 2,587,367 |
+----+------------------------------------+------------+----------+-----------+
Unrealised gains and losses on investments are recognised in the Statement of
Comprehensive Income. There have been no sales, purchases or realised gains on
the investments during the year under review.
+----+-------------------------------------+----------+----------+----------+---------------+
| 6 | RECEIVABLES |
+----+--------------------------------------------------------------------------------------+
| | | | | |
+----+-------------------------------------+----------+---------------------+---------------+
| | | 30 Jun | | 30 Jun 2009 |
| | | 2010 | | GBP |
| | | GBP | | |
+----+-------------------------------------+----------+---------------------+---------------+
| | |
+----+--------------------------------------------------------------------------------------+
| | Prepayments | 165,957 | | 318,001 |
+----+-------------------------------------+----------+----------+--------------------------+
| | | | | |
+----+-------------------------------------+----------+----------+--------------------------+
| | | 165,957 | | 318,001 |
+----+-------------------------------------+----------+----------+--------------------------+
| | | | | | |
+----+-------------------------------------+----------+----------+----------+---------------+
+----+------------------------------------+-----------+----------+-----------+
| 7 | PAYABLES (amounts falling due within one year) |
+----+-----------------------------------------------------------------------+
| | | | | |
+----+------------------------------------+-----------+----------+-----------+
| | | 30 Jun | | 30 Jun |
| | | 2010 | | 2009 |
| | | GBP | | GBP |
+----+------------------------------------+-----------+----------+-----------+
| | |
+----+-----------------------------------------------------------------------+
| | Accrued administration fees | 1,808 | | 1,808 |
+----+------------------------------------+-----------+----------+-----------+
| | Accrued registration fees | 604 | | 458 |
+----+------------------------------------+-----------+----------+-----------+
| | Accrued audit fees | 8,500 | | 8,000 |
+----+------------------------------------+-----------+----------+-----------+
| | Other accrued expenses | 5,423 | | 7,111 |
+----+------------------------------------+-----------+----------+-----------+
| | Expense provision | 242,417 | | 242,377 |
+----+------------------------------------+-----------+----------+-----------+
| | Less: Prepaid expense provision | (242,417) | | (242,377) |
| | (see Note 8) | | | |
+----+------------------------------------+-----------+----------+-----------+
| | | | | |
+----+------------------------------------+-----------+----------+-----------+
| | | 16,335 | | 17,377 |
+----+------------------------------------+-----------+----------+-----------+
+----+-------------------------------------+-----------+----------+----------+---------------+
| 8 | PAYABLES (amounts falling due after one year) |
+----+---------------------------------------------------------------------------------------+
| | | | | |
+----+-------------------------------------+-----------+---------------------+---------------+
| | | 30 Jun | | 30 Jun 2009 |
| | | 2010 | | GBP |
| | | GBP | | |
+----+-------------------------------------+-----------+---------------------+---------------+
| | |
+----+---------------------------------------------------------------------------------------+
| | Expense provision | 115,190 | | 356,350 |
+----+-------------------------------------+-----------+----------+--------------------------+
| | Less: Prepaid expense provision | (115,190) | | (356,350) |
+----+-------------------------------------+-----------+----------+--------------------------+
| | | | | |
+----+-------------------------------------+-----------+----------+--------------------------+
| | | - | | - |
+----+-------------------------------------+-----------+----------+--------------------------+
| | | | | |
+----+-------------------------------------+-----------+----------+--------------------------+
| | | | | | |
+----+-------------------------------------+-----------+----------+----------+---------------+
The prepaid expense provision represents monies set aside to meet the on-going,
annual and redemption expenses of the Company, as set out in the Prospectus.
If, at the Redemption Date, there is any surplus remaining from the expense
provision (together with accrued interest thereon), this surplus will revert to
the Manager. In the event of redemption or repurchase of all of the Shares, or
upon a winding-up of the Company, in each case prior to the Redemption Date, any
balance of the expense provision (together with accrued interest thereon) other
than the investment management fee will also revert to the Manager.
+----+------------------------------------+-----------+----------+-----------+
| | | | | |
+----+------------------------------------+-----------+----------+-----------+
| | FINANCIAL LIABILITIES | | | |
+----+------------------------------------+-----------+----------+-----------+
| | | 30 Jun | | 30 Jun |
| | | 2010 | | 2009 |
| | | GBP | | GBP |
+----+------------------------------------+-----------+----------+-----------+
| | | | | |
+----+------------------------------------+-----------+----------+-----------+
| | Fair value of the Put Option | 5,766,837 | | 9,163,004 |
+----+------------------------------------+-----------+----------+-----------+
| | | | | |
+----+------------------------------------+-----------+----------+-----------+
| | | 5,766,837 | | 9,163,004 |
+----+------------------------------------+-----------+----------+-----------+
The performance of the Put Option is linked to the performance of the Dow Jones
EuroStoxx 50 Index. At an Index value of 3,302.98 or above at the close of
business on 26 July 2011, or if the Index has never closed below 1,651.49 during
the calculation period from 26 July 2005 to 26 July 2011, the Put Option will be
worth GBPNil at maturity. If the Index has closed below 1,651.49 over the
calculation period and the Index is still below 3,302.98 at 26 July 2011, the
Put Option will be worth a percentage of the notional value, being
GBP39,550,000, equivalent to the percentage fall in the level of the Dow Jones
EuroStoxx 50 Index over the calculation period.
The Put Option is not exercisable until the maturity date of 26 July 2011.
The fair value of the Put Option is based on the valuation provided by the
Valuer. There is no active market regarding the Put Option.
J.P. Morgan Chase Bank N.A., in its capacity as the Put Option Counterparty (the
"Put Option Counterparty"), has security over the financial assets held by the
Company for payment of any monies owed upon expiry or termination of the Put
Option contract.
The proceeds from the sale of the Put Option were GBP3,292,880.
The Put Option written by the Company has been classified as Level 2. This is
in accordance with the fair value hierarchy.
Details of the value of each classification are listed in the table below.
Values are based on the market value of the financial instruments at the
reporting date:
+----+----------------------------------+-----------+----------+-------------+
| | Put Option | Market | | Market |
| | | Value | | Value |
+----+----------------------------------+-----------+----------+-------------+
| | | % | | GBP |
+----+----------------------------------+-----------+----------+-------------+
| | | | | |
+----+----------------------------------+-----------+----------+-------------+
| | Level 2 | 100 | | (5,766,837) |
+----+----------------------------------+-----------+----------+-------------+
There have been no transfers between Level 2 and Level 3 of the fair value
hierarchy during the period under review.
+----+----------------------------------+-------------+----------+-----------+
| 9 | SHARE CAPITAL |
+----+-----------------------------------------------------------------------+
| | | | | |
+----+----------------------------------+-------------+----------+-----------+
| | Authorised | SHARES | | GBP |
+----+----------------------------------+-------------+----------+-----------+
| | | | | |
+----+----------------------------------+-------------+----------+-----------+
| | Unclassified Shares of 0.01p | 100,000,000 | | 10,000 |
| | each | | | |
+----+----------------------------------+-------------+----------+-----------+
| | Management Shares of GBP1.00 | 100 | | 100 |
| | each | | | |
+----+----------------------------------+-------------+----------+-----------+
| | | | | |
+----+----------------------------------+-------------+----------+-----------+
| | | | | 10,100 |
+----+----------------------------------+-------------+----------+-----------+
+----+----------------------------------+------------+----------+------------+
| | Issued | 30 Jun | | 30 Jun |
| | | 2010 | | 2009 |
+----+----------------------------------+------------+----------+------------+
| | | | | |
+----+----------------------------------+------------+----------+------------+
| | Participating Shares - fully | 39,550,000 | | 39,550,000 |
| | paid | | | |
+----+----------------------------------+------------+----------+------------+
| | Management Shares - fully paid | 2 | | 2 |
+----+----------------------------------+------------+----------+------------+
| | | | | |
+----+----------------------------------+------------+----------+------------+
| | Number of Shares in issue | 39,550,002 | | 39,550,002 |
+----+----------------------------------+------------+----------+------------+
+----+----------------------------------+-----------+----------+-----------+
| | Issued Share Capital | 30 Jun | | 30 Jun |
| | | 2010 | | 2009 |
| | | GBP | | GBP |
+----+----------------------------------+-----------+----------+-----------+
| | | | | |
+----+----------------------------------+-----------+----------+-----------+
| | Participating Shares - fully | 3,955 | | 3,955 |
| | paid | | | |
+----+----------------------------------+-----------+----------+-----------+
| | Management Shares - fully paid | 2 | | 2 |
+----+----------------------------------+-----------+----------+-----------+
| | | | | |
+----+----------------------------------+-----------+----------+-----------+
| | | 3,957 | | 3,957 |
+----+----------------------------------+-----------+----------+-----------+
+----+--------------------+------------+----------+-----------+----------+------------+
| | The issues of Participating Shares took place as follows: |
+----+--------------------------------------------------------------------------------+
| | | | | |
+----+--------------------------------------------+-----------+----------+------------+
| | Date of issue | Number | | Price per | | Amount |
| | | of Shares | | Share | | Received |
| | | | | Pence | | GBP |
+----+--------------------+------------+----------+-----------+----------+------------+
| | | | | | | |
+----+--------------------+------------+----------+-----------+----------+------------+
| | 27 July 2005 | 36,000,000 | | 100.00 | | 36,000,000 |
+----+--------------------+------------+----------+-----------+----------+------------+
| | 21 September 2006 | 3,550,000 | | 107.50 | | 3,816,250 |
+----+--------------------+------------+----------+-----------+----------+------------+
Shares are redeemable on or around 29 July 2011. The Company is closed-ended
and therefore shareholders have no right to request the Company to repurchase
their Shares or to redeem them prior to the redemption date. If the Company is
wound up prior to the redemption date, shareholders will be entitled to the net
asset value of the Shares on the winding up date. No dividends will be paid on
the Shares.
Management shares are not redeemable, do not carry any right to dividends and in
a winding up rank only for a return of the amount of paid up capital after
return of capital on Shares and nominal shares. Given the immateriality of the
management shares to the net assets of the Company, they have been included in
net assets attributable to participating shareholders.
+----+----------------------------------+------------+----------+------------+
| 10 | SHARE PREMIUM |
+----+-----------------------------------------------------------------------+
| | | | | |
+----+----------------------------------+------------+----------+------------+
| | | 30 Jun | | 30 Jun |
| | | 2010 | | 2009 |
| | | GBP | | GBP |
+----+----------------------------------+------------+----------+------------+
| | | | | |
+----+----------------------------------+------------+----------+------------+
| | Opening and closing balance | 39,812,295 | | 39,812,295 |
+----+----------------------------------+------------+----------+------------+
11 FINANCIAL INSTRUMENTS
The Company's main financial instruments comprise:
(a) Cash and cash equivalents that arise directly from the Company's
operations;
(b) Debt securities whose performance is based on the performance of the
Dow Jones EuroStoxx 50 Index. Details of these investments are shown in the
Schedule of Investments at the back of this announcement; and
(c) The Company has also sold a Put Option, whose performance is based on
the Dow Jones EuroStoxx 50 Index. Details of the Put Option contract are shown
in Note 8.
12 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
The main risks arising from the Company's financial instruments are market price
risk, credit risk, liquidity risk, portfolio construction risk, interest rate
risk and currency risk. The Board regularly reviews and agrees policies for
managing each of these risks and these are summarised below:
(a) Market Price Risk
Market price risk arises mainly from uncertainty about future prices of
financial instruments held. It represents the potential loss the Company might
suffer through holding market positions in the face of price movements. The
Manager actively monitors market prices and reports to the Board as to the
appropriateness of the prices used for valuation purposes. A list of
investments held by the Company is shown in the Schedule of Investments on at
the back of this announcement.
Price sensitivity
The following details the Company's sensitivity to a 10% increase and decrease
in the final market prices of its constituent financial assets and liabilities.
The final redemption value of the Shares is determined by reference to the level
of the Dow Jones EuroStoxx 50 Index (the "Index") on 26 July 2011 and at that
date, if the Index stands at 3,748.89 (the "Index Cap Level"), the maximum
redemption entitlement of 167.5 pence per Share will have been reached; any
further increase in the level of the Index will cause no further increase in the
redemption entitlement.
On 30 June 2010 the Index stood at 2,573.32, a fall of 31.36% since the Start
Date.
During the period from the Start Date to 30 June 2010 the Index had not closed
below 1,651.49, being 50% of the Start Value. As the Index would need to
decline by more than 35.82% from its level as at 30 June 2010 for the redemption
entitlement to be less than 100.00 pence per Share and further as the Index
would need to rise by more than 31.36% as at the End Date for the redemption
entitlement due to be more than 100.00 pence per Share, as at 30 June 2010 the
Company had no material sensitivity to either a 10% increase or decrease in the
level of the Index, all provided that no counterparty defaults on its
obligations to the Counterparty.
(b) Credit Risk
Credit risk is the risk that an issuer or counterparty will be unable or
unwilling to meet a commitment that it has entered into with the Company.
At the date of this report and at the reporting date, five of the seven issuers
carried an investment grade credit rating. The following table details the
aggregate investment grade of the debt instruments in the portfolio based on the
valuations of the investments at 30 June 2010 (30 June 2009 for the comparative
period), as rated by Moody's Investor Services Inc ("Moody's"):
+------------------+----------------+----------+----------+
| Rating | 24 Sept 2010* | 30 Jun | 30 Jun |
| | | 2010 | 2009 |
+------------------+----------------+----------+----------+
| | | | |
+------------------+----------------+----------+----------+
| Aaa | 0.00% | 0.00% | 0.00% |
+------------------+----------------+----------+----------+
| Aa | 78.80% | 100.00% | 100.00% |
+------------------+----------------+----------+----------+
| A | 21.20% | 0.00% | 0.00% |
+------------------+----------------+----------+----------+
* Based on the value of the Company's investments at 30 June 2010.
The Board monitors credit risk and will consider further action if the credit
rating of an issuer falls below A- or A3 as ranked by Standard & Poor's and
Moody's respectively.
On 8 October 2008 and 9 October 2008 respectively, the credit ratings of Glitnir
and Kaupthing were downgraded to a speculative grade, so that as at the date of
signing, at the reporting date and in the comparative period those two issuers
were not included in the table.
Credit risk was mitigated at launch by the Company purchasing Debt Securities
from six different issuers. At the time of purchase three of the issuers were
rated by Moody's at grade Aa and the remaining three were rated by Moody's at
grade A. Following the additional issue of Shares in September 2006 the Company
purchased a Debt Security that was rated by Moody's at grade Aa.
The credit risk on cash transactions and transactions involving derivative
financial instruments is mitigated by transacting with counterparties that are
regulated entities subject to prudential supervision, or with high credit
ratings assigned by international credit rating agencies.
The Company's financial assets exposed to credit risk are as follows:
+----+----------------------------------+------------+----------+------------+
| | | 30 Jun | | 30 Jun |
| | | 2010 | | 2009 |
+----+----------------------------------+------------+----------+------------+
| | | GBP | | GBP |
+----+----------------------------------+------------+----------+------------+
| | | | | |
+----+----------------------------------+------------+----------+------------+
| | Unquoted financial assets | 30,372,072 | | 27,038,553 |
| | designated as at fair value | | | |
| | through profit or loss | | | |
+----+----------------------------------+------------+----------+------------+
| | Receivables | 165,957 | | 318,001 |
+----+----------------------------------+------------+----------+------------+
| | Cash and cash equivalents | 373,942 | | 616,104 |
+----+----------------------------------+------------+----------+------------+
| | | | | |
+----+----------------------------------+------------+----------+------------+
| | | 30,911,971 | | 27,972,658 |
+----+----------------------------------+------------+----------+------------+
(c) Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulty in
realising assets or otherwise raising funds to meet financial commitments. The
Company's main financial commitments are its ongoing operating expenses and any
cash settlement due to the Put Option Counterparty on the maturity of the Put
Option, scheduled to occur on 26 July 2011.
Upon the issue of the shares in July 2005 the Company created a cash reserve
(the "Expense Provision") in the amount of 2.10% of the amount raised by the
issue of the Shares (the "Initial Gross Proceeds") plus GBP440,000, such amount
being estimated in the opinion of the directors upon the advice of the
Administrator to be sufficient to meet the operating expenses reasonably
expected to be incurred over the life of the Shares. Upon the issue of
additional Shares in September 2006 an additional 2.10% of the proceeds of that
issue of additional Shares was set aside to cover the increase in the Manager's
fee which resulted from that issue of additional Shares, all other expenses
being either fixed for the life of the Company or deemed unlikely to increase
materially as a result of this issue of additional Shares.
At each quarterly Board meeting and at the end of each financial period the
directors review the Expense Provision against the expected future expenses
(other than the Manager's fee) of the Company. To the extent that the directors
consider that the Expense Provision is less than 150 per cent of the expected
future expenses of the Company (other than the Manager's fee), the directors
may, having first consulted the Manager, at their discretion reduce the amount
of investment management fees payable to the Manager (subject to a maximum
reduction of 50 per cent) in order to re-establish the 150 per cent cover.
If at any time during the life of the Company, notwithstanding the arrangements
summarised above, the Expense Provision is exhausted then, subject to the
relevant excess expenses having been agreed by the Manager, the Manager will
make good such shortfall from its own resources, subject to a maximum in each of
the first five annual financial periods of 0.25 per cent of the Initial Gross
Proceeds and in the last financial period preceding the Redemption Date, of a
maximum amount of GBP100,000. Should these expenses exceed this cap the return
to Shareholders will be adversely impacted. The directors do not anticipate
that the expenses will exceed the Expense Provision.
The Euro Medium Term Notes (the "Debt Securities") purchased by the Company
mature on 28 July 2011 (the "Maturity Date") and are due to be redeemed at their
notional face value plus five times the performance increase between 26 July
2005 and 26 July 2011 in the Dow Jones EuroStoxx 50 Index, capped at an amount
equal to 67.50% of the notional face value, so that the aggregate maturity
proceeds are expected to be between GBP39,550,000 if the EuroStoxx 50 Index
closes on 26 July 2011 at or below its starting value on 26 July 2005 of
3,302.98 and a maximum of GBP66,246,250 if the EuroStoxx closes at or above
3,748.89 on 26 July 2011, all provided that no counterparty defaults on its
obligations to the Company.
Provided that none of the issuers of the Debt Securities defaults on its
obligation to pay the maturity proceeds on the Maturity Date, the minimum
maturity proceeds of GBP39,550,000 due are intended to satisfy the maximum
payment due to be made by the Company to the Put Option Counterparty on the
maturity of the Put Option of GBP39,550,000.
The directors and the Manager monitor the credit ratings of all issuers of the
Debt Securities. In the event of any downgrading in the long-term credit rating
of any issuer below A- or A3, as determined by S&P and/or Moody's respectively,
the Company may in its absolute discretion seek to sell the relevant Debt
Securities to third party purchasers and to reinvest the proceeds in the
purchase of Debt Securities of another issuer such that the new Debt Securities
will replicate as closely as possible the terms and conditions of the original
Debt Securities. The directors will only seek to sell the relevant Debt
Securities if they consider on the advice of the Manager that such would be in
the best interest of the Company and its shareholders. In the event of such
sales, if the purchase of such Debt Securities is not possible, the directors
may reinvest such proceeds as they see fit in investments which, in the opinion
of the directors, as nearly as is practicable, replicate the investment
characteristics of the Debt Securities sold and so that the proceeds are
invested, as nearly as is practicable, in accordance with the Company's stated
investment objective. As at the date of signing, the reporting date and in the
previous period, five of the seven issuers of the Debt Securities carried an
investment grade credit rating. Two of the seven issuers of the Debt Securities
carried a speculative grade credit rating.
No assurance can be given that the Company will be able to sell the Debt
Securities, for the reasons described above or on a winding-up of the Company,
at a favourable price or at all. Even if the Company is able to sell such Debt
Securities, the sale of the Debt Securities may result in a lower return than
would have been the case if the long-term credit rating of the issuer of the
relevant Debt Securities had not been downgraded and the original Debt
Securities had been retained and were redeemed on the maturity date.
The table below details the residual contractual maturities of financial
liabilities:
+--------------------------+---------+----------+-----------+----------+-----------+
| As at 30 June 2010 | 1-3 | | Over 1 | | Total |
| | months | | year | | |
+--------------------------+---------+----------+-----------+----------+-----------+
| | GBP | | GBP | | GBP |
+--------------------------+---------+----------+-----------+----------+-----------+
| | | | | | |
+--------------------------+---------+----------+-----------+----------+-----------+
| Accrued expenses | 16,335 | | - | | 16,335 |
+--------------------------+---------+----------+-----------+----------+-----------+
| Derivative financial | - | | 5,766,837 | | 5,766,837 |
| instruments | | | | | |
+--------------------------+---------+----------+-----------+----------+-----------+
| | | | | | |
+--------------------------+---------+----------+-----------+----------+-----------+
| | 16,335 | | 5,766,837 | | 5,783,172 |
+--------------------------+---------+----------+-----------+----------+-----------+
| | | | | | |
+--------------------------+---------+----------+-----------+----------+-----------+
| | | | | | |
+--------------------------+---------+----------+-----------+----------+-----------+
| As at 30 June 2009 | 1-3 | | Over 1 | | Total |
| | months | | year | | |
+--------------------------+---------+----------+-----------+----------+-----------+
| | GBP | | GBP | | GBP |
+--------------------------+---------+----------+-----------+----------+-----------+
| | | | | | |
+--------------------------+---------+----------+-----------+----------+-----------+
| Accrued expenses | 17,377 | | - | | 17,377 |
+--------------------------+---------+----------+-----------+----------+-----------+
| Derivative financial | - | | 9,163,004 | | 9,163,004 |
| instruments | | | | | |
+--------------------------+---------+----------+-----------+----------+-----------+
| | | | | | |
+--------------------------+---------+----------+-----------+----------+-----------+
| | 17,377 | | 9,163,004 | | 9,180,381 |
+--------------------------+---------+----------+-----------+----------+-----------+
(d) Portfolio Construction Risk
Portfolio construction risk arises when the intended balance or resultant effect
of movements in value of assets and liabilities is disturbed because of some
unintended external event.
In the case of the Company's investment portfolio there is an intended balance
between the aggregate nominal value of the debt instruments held and the nominal
value of the Put Option and, if one or more of the debt instrument issuers were
to default, in part or in total, there will not be a corresponding reduction in
the value of the Put Option. Thus, if such an issuer default did occur and
there was an index barrier breach which caused the Put Option to take effect,
the default would cause acceleration in the reduction of the final redemption
value of a Share such that it will fall to zero well before the index reaches
nil.
As disclosed in note 1(j) above, in October 2008, the FME took control of both
Glitnir and Kaupthing and appointed a receivership committee of each.
The Debt Securities issued by Glitnir and Kaupthing held by the Company are
senior unsecured debt. In the event of a default by either Glitnir or
Kaupthing, Debt Security holders would likely get back some money at the
"recovery rate" rather than zero. In practice the recovery rate is likely to be
above zero, but it is not possible to assign a recovery rate to the notes at
this point in time.
Although at the time of writing the situation remains unclear, the Manager and
Board of directors consider it likely that Glitnir and Kaupthing may not pay in
full on their obligations and in the worst case scenario may pay nothing at all.
It should also be noted that the timing and amount of the recovery (if any) from
the Glitnir and Kaupthing debt securities is currently uncertain. Therefore the
redemption proceeds per Share per the Company's investment objective will not be
known for some time after the scheduled end of the life of the Shares
(e) Interest Rate Risk
The Company holds cash on fixed deposit, the return on which is subject to
fluctuations in market interest rates. All fixed deposits mature within three
months.
The weighted average effective interest rate for cash and bank balances as at 30
June 2010 was 0.34% (2009: 2.1%).
None of the other assets or liabilities of the Company attract or incur
interest.
Interest rate sensitivity
Interest rate risk arises from the possibility that changes in interest rates
will affect future cash flows or the fair value of financial instruments.
Except for cash set aside to meet expenses, the Company's assets and liabilities
are expected to be held until the Redemption Date.
If interest rates had been 100 basis points higher and all other variables were
held constant, the Company's net assets attributable for the period ended 30
June 2010 would have been GBP3,739 greater (2009: GBP6,161) due to an increase
in the amount of interest receivable on the bank balances.
If interest rates had been 100 basis points lower and all other variables were
held constant, the Company's net assets attributable for the period ended 30
June 2010 would have been GBP3,739 less (2009: GBP6,161) due to a decrease in
the amount of interest receivable on the bank balances.
The Company's sensitivity to interest rates is lower in 2010 than in 2009
because of a decrease in the amount of cash balances held and the general level
of rates available in the market.
(f) Currency Risk
As both the Shares and the Debt Securities are Sterling-denominated,
Shareholders investing for Sterling returns will not be exposed to direct
currency risk. The value of the underlying securities comprising the Index may
be affected by changes in the economic, political or social environment in
Europe, as well as globally, including changes in exchange rates.
(g)Capital Management
The investment objective of the Company is to provide shareholders, on the
Redemption Date, with a payment which will comprise a capital amount of 100p per
Share and a growth amount per Share equal to five times any percentage increase
in the value of the Index (the "End Value") as at 26 July 2011 (the "End Date")
relative to its value (the "Start Value") as at
26 July 2005 (the "Start Date"), such amount being expressed in pence and
rounded down to the next half pence, subject to a maximum increase of 67.5 per
cent of the issue price of 100 pence per Share.
The Company has an unlimited life but the Shares will be redeemed on or around
29 July 2011. Until then the Company has a fixed capital.
(h) Collateral
Under the terms of a Pledge Agreement dated 2 August 2005 and the amendment
dated 18 September 2006 entered into between the Company and the Put Option
Counterparty, the Company has pledged the Debt Securities, and all rights, title
and interest therein, and any and all proceeds resulting from the sale or
repayment of the Debt Securities as security for the Company's contingent
liability under the Put Option sold to the Put Option Counterparty, further
details of which are shown at Note 8. The collateral is held by a custodian in
a segregated account in Euroclear. Where there is an event of default in
respect of the Company under the Put Option, the Put Option Counterparty will be
entitled to enforce its security over the Debt Securities.
13 RELATED PARTIES
Anson Fund Managers Limited is the Company's Administrator and Secretary, Anson
Registrars Limited is the Company's Registrar, Transfer Agent and Paying Agent
and Anson Administration (UK) Limited is the UK Transfer Agent. John R Le
Prevost is a director of Anson Fund Managers Limited, Anson Registrars Limited
and Anson Administration (UK) Limited. GBP30,040 (2009: GBP30,534) of costs
were incurred by the Company with these related parties during the year, of
which GBP2,412 (2009: GBP2,266) was due to these related parties at 30 June
2010.
schedule of investments as at 30 june 2010
+--------------------------------+-----------+----------+------------+----------+---------+
| | NOMINAL | | VALUATION | | TOTAL |
| | | | | | NET |
+--------------------------------+-----------+----------+------------+----------+---------+
| DEBT SECURITIES PORTFOLIO | HOLDINGS | | GBP | | ASSETS |
| | | | | | % |
+--------------------------------+-----------+----------+------------+----------+---------+
| | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| BNP Paribas 0% EMTN 28 July | 6,000,000 | | 6,116,022 | | 24.34% |
| 2011 | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| Caixa Geral de Depositas 0% | | | | | |
| EMTN 28 July | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| 2011 | 6,000,000 | | 5,891,769 | | 23.45% |
+--------------------------------+-----------+----------+------------+----------+---------+
| | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| Erste Bank 0% EMTN 28 July | 6,000,000 | | 6,080,125 | | 24.20% |
| 2011 | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| Glitnir Banki HF 0% EMTN 28 | 6,000,000 | | 988,606 | | 3.93% |
| July 2011 | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| Kaupthing Bunadarbanki 0% EMTN | 6,000,000 | | 1,598,761 | | 6.36% |
| 28 July 2011 | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| KBC IFIMA 0% EMTN 28 July 2011 | 6,000,000 | | 6,111,936 | | 24.32% |
+--------------------------------+-----------+----------+------------+----------+---------+
| | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| RBS 0% EMTN 28 July 2011 | 3,550,000 | | 3,584,853 | | 14.27% |
+--------------------------------+-----------+----------+------------+----------+---------+
| | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| | | | 30,372,072 | | 120.87% |
+--------------------------------+-----------+----------+------------+----------+---------+
The Company has also sold a Put Option, details of which are shown below.
+-------------------------------+------------+----------+-------------+----------+---------+
| | NOTIONAL | | VALUATION | | |
+-------------------------------+------------+----------+-------------+----------+---------+
| | HOLDING | | GBP | | |
+-------------------------------+------------+----------+-------------+----------+---------+
| | | | | | |
+-------------------------------+------------+----------+-------------+----------+---------+
| JPM EUROSTOXX 50 Put Option | | | | | |
| expiring 28 | | | | | |
+-------------------------------+------------+----------+-------------+----------+---------+
| July 2011 | 39,550,000 | | (5,766,837) | | |
+-------------------------------+------------+----------+-------------+----------+---------+
schedule of investments as at 30 june 2009
+--------------------------------+-----------+----------+------------+----------+---------+
| | NOMINAL | | VALUATION | | TOTAL |
| | | | | | NET |
+--------------------------------+-----------+----------+------------+----------+---------+
| DEBT SECURITIES PORTFOLIO | HOLDINGS | | GBP | | ASSETS |
| | | | | | % |
+--------------------------------+-----------+----------+------------+----------+---------+
| | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| BNP Paribas 0% EMTN 28 July | 6,000,000 | | 6,012,804 | | 32.00% |
| 2011 | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| Caixa Geral de Depositas 0% | | | | | |
| EMTN 28 July | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| 2011 | 6,000,000 | | 5,983,009 | | 31.84% |
+--------------------------------+-----------+----------+------------+----------+---------+
| | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| Erste Bank 0% EMTN 28 July | 6,000,000 | | 5,770,172 | | 30.71% |
| 2011 | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| Glitnir Banki HF 0% EMTN 28 | 6,000,000 | | - | | 0.00% |
| July 2011 | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| Kaupthing Bunadarbanki 0% EMTN | 6,000,000 | | - | | 0.00% |
| 28 July 2011 | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| KBC IFIMA 0% EMTN 28 July 2011 | 6,000,000 | | 5,789,313 | | 30.81% |
+--------------------------------+-----------+----------+------------+----------+---------+
| | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| RBS 0% EMTN 28 July 2011 | 3,550,000 | | 3,483,255 | | 18.54% |
+--------------------------------+-----------+----------+------------+----------+---------+
| | | | | | |
+--------------------------------+-----------+----------+------------+----------+---------+
| | | | 27,038,553 | | 143.88% |
+--------------------------------+-----------+----------+------------+----------+---------+
The Company has also sold a Put Option, details of which are shown below.
+-------------------------------+------------+----------+-------------+----------+---------+
| | NOTIONAL | | VALUATION | | |
+-------------------------------+------------+----------+-------------+----------+---------+
| | HOLDING | | GBP | | |
+-------------------------------+------------+----------+-------------+----------+---------+
| | | | | | |
+-------------------------------+------------+----------+-------------+----------+---------+
| JPM EUROSTOXX 50 Put Option | | | | | |
| expiring 28 | | | | | |
+-------------------------------+------------+----------+-------------+----------+---------+
| July 2011 | 39,550,000 | | (9,163,004) | | |
+-------------------------------+------------+----------+-------------+----------+---------+
A pdf version of the annual financial report will shortly be posted on the
Managers web-site www.closeam.com and a further announcement will be made once
the annual financial report is available to be downloaded.
For further information contact:
Anson Fund Managers Limited
Secretary.
Tel: Guernsey 01481 722260
24 SEPTEMBER 2010
END OF ANNOUNCEMENT
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The company news service from the London Stock Exchange
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