TIDMJAC
RNS Number : 3638P
Close Fund Mngmt Portfolios II PCC
30 September 2011
Close Fund Management Portfolios II PCC Limited (the
"Company")
ANNOUNCEMENT OF ANNUAL RESULTS
The directors announce the statement of results for the year
ended 30 June 2011 as follows:-
ABOUT THE COMPANY
Close Fund Management Portfolios II PCC Limited is a
closed-ended investment company incorporated as a protected cell
company in Guernsey on 8 December 2005 in accordance with the
provisions of The Companies (Guernsey) Law 1994 to 1996, as amended
and The Protected Cell Companies Ordinance, 1997. The Company is
currently established with one cell known as the Japanese
Accelerated Return Fund II cell (the "Cell") which has a residual
life to January 2012 (the "Redemption Date").
The Company's non-cellular assets comprise two Management Shares
of GBP1 each fully paid which are owned by the Company's
Administrator.
INVESTMENT OBJECTIVE AND POLICY
About the Cell
The Cell was established as a cell of the Company on 23 December
2005 when 42.5 million Redeemable Participating Preference Shares
("Cell Shares") of the Cell were issued at GBP1.00 each (the "Issue
Price") and admitted to listing on the Official List of the United
Kingdom Listing Authority and to trading on the London Stock
Exchange. A further 4.2 million Cell Shares were issued at GBP1.105
each on 31 January 2007. The Cell Shares will be redeemed on or
around January 2012 (the "Redemption Date").
Investment Objective and Policy of the Cell
The investment objective of the Cell is to provide shareholders
with a geared capped exposure to the performance of the Nikkei 225
Index (the "Index").
If shareholders hold their Cell Shares to the Redemption Date,
and the End Value of the Index is higher than the Start Value, the
Cell Shares are designed to pay to shareholders, on the Redemption
Date, the redemption proceeds which represents a return equal to
five times the percentage increase in the Index capped at 80 per
cent. of the Issue Price, subject always to counterparty
default.
The redemption proceeds are intended to comprise:
(a) a Capital Amount of 100 pence per Cell Share; and
(b) a Growth Amount per Cell Share equal to five times any
increase in the End Value of the Index relative to its Start Value
of 15,957.57, such percentage being applied to the Issue Price of
GBP1.00 per Cell Share, rounded down to the next whole pence and
subject to the maximum increase of 80 per cent of the Issue
Price.
If shareholders hold their Cell Shares until the Redemption Date
and the End Value is lower than the Start Value, the Cell Shares
are designed to repay the Issue Price of 100 pence per Cell Share
on the Redemption Date provided that the value of the Index had not
fallen below 7,978.79 being 50 per cent. of the Start Value at
close of business on any Index Business Day between the Start Date
of 21 December 2005 and the End Date of 21 December 2011 (both
dates inclusive), subject always to counterparty default.
If shareholders hold their Cell Shares until the Redemption Date
and if the value of the Index has fallen below 7,978.79, being 50
per cent. of the Start Value, at close of business on any Index
Business Day between the Start Date and the End Date (an "Index
Barrier Breach") and the End Value is not at least equal to the
Start Value, investors are intended to be repaid on the Redemption
Date the Issue Price as reduced by the same percentage by which the
End Value is less than the Start Value, subject always to
counterparty default.
As announced on 24 October 2008, the official closing level of
the Index on that date was 7,649.08, being 52 per cent. lower than
its Start Value, so an Index Barrier Breach had occurred.
In accordance with the Company's investment policy for the Cell,
the net proceeds derived by the issue of Cell Shares and the sale
of a Put Option were invested in a portfolio of Debt Securities
containing embedded derivatives related to the Index at prices
relative to the value of the Index on 21 December 2005 of 15,957.57
(the "Debt Securities).
As published in each of the annual and half-yearly financial
reports of the Company and as announced on 8 October 2008, the
Company for the account of the Cell currently holds seven Debt
Securities, including one issued by Glitnir Banki HF ("Glitnir")
and one issued by Kaupthing Bank HF ("Kaupthing"). These two debt
securities have a nominal value of GBP7,100,000 each and in
aggregate account for approximately 30 per cent. of the total
nominal value of the Cell's Debt Securities.
Shareholders should be aware that it is likely that Glitnir and
Kaupthing may not pay the Company for the account of the Cell 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 for the account of the Cell
receives nothing from either institution at the maturity of the
relevant debt security. In these circumstances, the Cell's assets
will be reduced by approximately 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 Cell 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 4,852 at close of business on the End
Date, the redemption proceeds of the Cell Shares would be zero. The
redemption proceeds entitlement per Cell Share will not be known
until the closing value of the 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 per Cell Share may not be known for some time
after the Redemption Date.
Your attention is drawn to the Schedule of Investments of this
report, which shows the assets held by the Company for the account
of the Cell, and note 13 (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.
Board Proposal for the Redemption of Cell Shares in January
2012
Your Board has given consideration as to how the redemption
entitlement of such shares can be resolved in light of the
expectation that no monetary proceeds will be received in respect
of the Glitnir and Kaupthing debt securities before the Cell's
Redemption Date.
Your Board has considered a variety of options and, after due
consideration, have concluded that the best and most preferential
for shareholders is to create a Trust (to be known as the JARF 2012
Defaulting Notes Trust) into which the Company will transfer both
legal and beneficial ownership of the two Icelandic defaulting debt
securities. Shareholders will continue to have an interest in those
debt securities held within the Trust pro-rata to their holding of
Cell Shares in the Company as at the Redemption Date in January
2012.
To facilitate this arrangement your Board will issue a Circular
to all shareholders in October 2011 explaining the precise proposed
arrangement and providing shareholders with an opportunity to vote
on the proposals at a convened General Meeting. At that time, the
Company will also satisfy its annual obligations by tabling this
Annual Financial Report ("Report") and will propose to shareholders
any other business ordinarily dealt with at a Company's General
Meeting held under section 199 of The Companies (Guernsey) Law,
2008, as amended.
Accordingly, this Report neither contains nor is accompanied by
a Notice of Meeting convening a General Meeting as such notice will
be contained within the Circular due to be sent to all shareholders
in October 2011.
CHAIRMAN'S STATEMENT FOR THE YEAR ENDED 30 JUNE 2011
In order to fulfil the investment objective for the Cell, the
Company for the account of the Cell holds seven Debt Securities,
including one issued by Glitnir Banki hf ("Glitnir") and one issued
by Kaupthing Bank hf ("Kaupthing"). These debt securities have a
nominal value of GBP7,100,000 each and in aggregate account for
approximately 30 per cent. of the total nominal value of the Cell's
Debt Securities. In the event of a default by an issuer of a debt
security purchased by the Company on behalf of the Cell, the Cell
will rank as an unsecured creditor in respect of sums due from the
issuer of such debt security. In such event, the Cell 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
will be borne by the Cell and returns to Shareholders would be
significantly adversely affected.
The Winding-Up Board of Glitnir and the Winding-up Committee of
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 on behalf of the Cell
submitted claims to each of Glitnir and Kaupthing for GBP12,780,000
in respect of each one of these debt securities, such amounts being
equal to the maximum redemption proceeds of GBP1.80 per GBP1
nominal. The Winding-Up Committee of Kaupthing has written to the
Company for the account of the Cell to advise it accepts ISK
1,356,668,000 (equivalent to approximately GBP7.4 million as at 30
June 2011) of the claim. The Winding-Up Board of Glitnir has
written to the Company for the account of the Cell to advise it
accepts ISK 1,301,990,264 (equivalent to approximately GBP7.1
million as at 30 June 2011) of the claim.
Shareholders should be aware that it is likely that Kaupthing or
Glitnir may not pay the Company on account of the Cell the full ISK
1,356,668,000 or ISK 1,301,990,264 respectively or, indeed,
anything at all. Whilst recovery rates from issuers that default
vary, and in this case are currently unknown, the worst case
scenario would see the Cell receive nothing from either institution
at the maturity of the relevant debt securities.
The amounts claimed or accepted should not be considered
forecasts of the amounts which will be due from Kaupthing or
Glitnir on the maturity of the relevant debt securities, nor are
they a reflection of the net asset value per Cell Share. The
redemption proceeds per Cell Share per the Company's investment
objective for the Cell will not be known until after the end of the
life of the Cell when the closing value of the Index on the End
Date is known and may not be the amounts claimed or accepted.
Any claims which are paid may be paid before or after the end of
the life of the Cell 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 on account of the Cell may therefore be
subject to currency fluctuations and/or other market movements.
As the Index has closed down more than 50 per cent. from its
Start Value (i.e. below 7,978.79) on an Index Business Day between
the Start Date and the End Date, an Index Barrier Breach has
occurred. In these circumstances, the amount which the Company for
the account of the Cell will be required to pay J.P. Morgan
Securities Limited (the "Put Option Counterparty"), on behalf of
the Cell 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 Index as at 30 June 2011 was
9,816.09. If the Index closed at this level on the End Date, the
Final Capital Entitlement would be approximately 61 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
31 pence, and if the Index were to fall by approximately a further
51 per cent. to a level of approximately 4,852 as at the End Date,
the Final Capital Entitlement of the Shares would be zero.
The tables below illustrate how the Final Capital Entitlement of
the Shares might vary for different ending levels of the 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.
Final Nikkei 225 Final Capital Final Capital
Index* Entitlement (1) Entitlement (2)
per Cell Share per Cell Share
0 0 0
500 3 0
1,000 6 0
1,500 9 0
2,000 12 0
2,500 15 0
3,000 18 0
3,500 21 0
4,000 25 0
4,500 28 0
5,000 31 0
5,500 34 4
6,000 37 7
6,500 40 10
7,000 43 13
7,500 46 16
8,000 50 19
8,500 53 22
9,000 56 25
9,500 59 29
9,816.09** 61 31
10,000 62 32
10,500 65 35
11,000 68 38
11,500 72 41
12,000 75 44
12,500 78 47
13,000 81 51
13,500 84 54
14,000 87 57
14,500 90 60
15,000 93 63
15,500 97 66
16,000 101 70
16,500 116 81
17,000 132 92
17,500 148 103
18,000 163 114
18,500 179 125
19,000 180 125
* As at 21 December 2011
** Official closing level of the Nikkei 225 Index as at 30 June
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 Final
Capital Entitlement set out in this table is an example only and
not a forecast of actual payments and is 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 of this
Annual Report which shows the assets held by the Company and note
13(b) to the financial statements, which refers to the credit risk
of the issuers of these assets as at the year end and as at the
date of this report.
The Company currently holds seven Debt Securities, the issuers
of which, as at the date of this report, have credit ratings
ranging from Aa3 to Ba3 by Moody's Investor Services ("Moodys") and
from A+ to BB by Standard and Poor's ("S&P") rating agency.
Neither Glitnir nor Kaupthing is rated by Moodys or S&P.
Of particular interest, the Company, on behalf of the Cell,
holds a debt security issued by Irish Life & Permanent
("IL&P") with a nominal value of GBP7.1m and a fair value, as
at the reporting date, of GBP6,363,301. This represented 36.12 per
cent. of the value of the Company's net assets as at the reporting
date.
Shareholders will be aware of the deteriorating situation in
Ireland which has forced the Irish government to request
contingency funding from the EU/IMF, leading to its sovereign
rating being lowered by S&P to BBB+ and to Ba1 by Moodys. On 31
March 2011, the Central Bank of Ireland published the outcome of
its review of capital and funding requirements for the domestic
Irish banks, including IL&P. The review identified a gross
capital requirement of c.EUR4.0bn for the banking business of
IL&P. IL&P announced that it will increase its capital in
part through the sale of its life and pensions and investment
management businesses. In addition to IL&P's capital raisings,
the group has been advised that as it is of systemic importance to
the Irish economy, the Irish Government will support its further
capital requirements as necessary which will likely be c.EUR2.3bn.
Moody highlighted that the Irish Government has indicated that
burden sharing with senior unsecured debt holders is not part of
this recapitalisation and that the capital increase is a clear
credit positive for the banks. As a result of the above factors, in
particular the sovereign downgrade IL&P has been further
downgraded by S&P to BB and to Ba3 by Moodys.
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
Moodys and S&P respectively. As a result of the rating
agencies' actions the Board considered both the sale and retention
of the IL&P debt security, acting in the best interests of the
Company and its shareholders. On the basis of the prevailing facts,
the Board concluded that it would not be in the best interests of
the Company and its shareholders to sell the IL&P debt
security, but will continue to monitor the situation.
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, global equity markets have
suffered large falls as the European debt crisis has worsened with
fears that a possible Greek default will weaken the capital buffers
of European banks holding Greek debt, potentially leading to
another credit crunch and even the break-up of the Euro. The
Japanese Yen strengthened significantly as global investors looked
for havens away from the Euro and US dollar (which also came under
pressure after its AAA rating was downgraded) leading to the Bank
of Japan to take action to weaken the Yen.
The Index closed at 8616.55 on 13 September 2011, a fall of 12.2
per cent. since the financial year end on 30 June 2011. The Shares,
by comparison, also fell 12.2 per cent. to 25.25 pence over the
same period.
Christopher Hill, Chairman
28 September 2011
MANAGER'S REPORT
Market Review
The Index ended up 4.6 per cent. over the period under review
despite Japan's earthquake, tsunami and nuclear crisis.
In July 2010 the Index traded in a 5 per cent. range, rising as
a weaker yen buoyed the profit outlook for exporters but falling
back when the US Federal Reserve Chairman Ben Bernanke said the US
economic outlook remained "unusually uncertain". After recovering
towards the end of July, the Index fell throughout August due to
the resurfacing of concerns that the global economic recovery was
faltering, including worries about Europe's sovereign debt
issues.
In September 2010 the Index recovered from its August fall,
buoyed in the middle of the month after the Bank of Japan
intervened in the currency markets for the first time in six years,
to stem the appreciation of the yen which had been hurting Japan's
exporters. The end of September and October was a more stable
period for the Index as rises were tempered by concern that the
effects of Japan's currency-taming intervention may fade. During
this period global equity markets were buoyed by positive global
economic data and speculation of additional quantitative easing by
the US Federal Reserve, however at the same time Europe's worsening
sovereign debt crisis weighed on equity markets tempering any
rises.
The Index rose steadily over the last two months of 2010 and
first two of 2011 amid speculation that the US Federal Reserve
would succeed in stoking growth in the world's biggest economy,
hence benefiting Japan's exporters. In December the Index rose
above 10,000 index points for the first time during the period
under review, and reached a high for the period at 10,857.53
towards the end of February.
In mid-March, Japan was struck by a devastating earthquake and
tsunami and following this was the nuclear crisis as a nuclear
power plant was severely affected by the natural disasters. The
Index fell over 16 per cent., to its low of the period, in the two
business days following the tsunami, as the extent of the damage
was unknown. After an initial recovery, the Index remained flat
over the last three months of the period as investors were
concerned about the effectiveness of an economic recovery and
rebuilding, combined with ongoing issues regarding the nuclear
power plant's crisis.
Market Outlook
In addition to the three main issues which have affected Japan's
equity market over the last few years, namely: the global economic
recovery, the Yen's strength and deflation, the outlook for Japan
will undoubtedly now also be determined by how the country recovers
from the earthquake, tsunami and nuclear disasters in 2011.
In July 2011, the Bank of Japan kept monetary policy on hold and
gave a brighter assessment of the country's economic outlook. It
highlighted that the economy appeared to be picking up, encouraged
by increasing signs that the recovery from the devastating March
earthquake was broadening.
However the central bank also highlighted that the Japanese
economy remained under pressure, with the global economy being the
key driver of Japan's growth once supply constraints eased. It
reiterated any weakening in US and European economies, affected by
continuing adjustments in the US and the European sovereign debt
crisis, remained significant risks for Japan.
MANAGEMENT REPORT FOR THE YEAR ENDED 30 JUNE 2011
Detailed in the section entitled "Investment Objective and
Policy", the Chairman's Statement, the Manager's Report 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 and the Cell as shown in the
financial statements and a description of the principal risks and
uncertainties facing the Company and the Cell.
There were no material related party transactions which took
place in the financial year other than those disclosed in the
report of directors and at note 14 to the financial statements.
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 Chairman's Statement and 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 and interest rate risk
are set out at note 13 to the financial statements.
As highlighted in the section entitled "Investment Objective and
Policy of the Cell", the Chairman's Statement and notes 1(i), 5 and
13(d) to the financial statements, during a previous accounting
period, the issuers of two of the Debt Securities held by the
Company for the account of the Cell, being Glitnir and Kaupthing,
suffered severe financial difficulties. As such, the values of the
debt instruments issued by Glitnir and Kaupthing cannot be
ascertained with any degree of certainty. 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.
The Company, on behalf of the Cell, holds a debt security issued
by Irish Life & Permanent ("IL&P"). As detailed in the
Chairman's statement due to several factors IL&P has been
further downgraded by S&P to BB and to Ba3 by Moodys.
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
Moodys and S&P respectively. As a result of the rating
agencies' actions the Board considered both the sale and retention
of the IL&P debt security, acting in the best interests of the
Company and its shareholders. On the basis of the prevailing facts,
the Board concluded that it would not be in the best interests of
the Company and its shareholders to sell the IL&P debt
security, but will continue to monitor the situation.
As disclosed in the section entitled "Investment Objective and
Policy", the notes to the financial statements and the schedule of
investments, the Company on account of the Cell has sold a Put
option to the Put Option Counterparty. The performance of the Put
option is linked to the performance of the Index. At an Index value
of 15,957.57 or above at the close of business on 21 December 2011,
the Put Option will be worth GBPNil at maturity
As noted within this report and announced on 24 October 2008 an
Index Barrier Breach has occurred, therefore if the Index is still
below 15,957.57 at 21 December 2011, the Put Option will be worth a
percentage of the notional value, being GBP46,700,000, equivalent
to the percentage fall in the level of the Index over the
calculation period.
The Company's 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 21 December 2011.
Such liability under the Put option will be calculated based on the
level of the Index as at 21 December 2011. As the liability under
the Put option cannot be quantified and does not crystallise until
21 December 2011, the directors do not consider that such 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 Index as at
21 December 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 of the Cell" and note 13(c) to the financial statements,
upon the issue of Shares in December 2005 the Company created a
cash reserve (the "Expense Provision") in the amount of 2.10 per
cent. of the amount raised by the issue of such shares (the
"Initial Gross Proceeds") plus GBP500,000, 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 Cell. Upon
the issue of additional Shares in January 2007, an additional 1.75
per cent. 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.
As the Cell Shares are due for redemption in January 2012, being
less than twelve months from the date of this report, in accordance
with International Financial Reporting Standards the financial
statements cannot be prepared on a going concern basis. These
financial statements have therefore been prepared on a break up
basis. This does not imply that the Cell is insolvent, nor does it
imply that returns to Cell shareholders on the Redemption Date will
be impaired. Your attention is drawn to the section headed "Board
Proposal for the Redemption of Shares in January 2012".
Responsibility Statement
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. 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.
b. confirmation that there were no related party transactions
that have materially affected the financial position or the
performance of the Company during the financial year.
Christopher Hill John Le Prevost
Director Director
28 September 2011
INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF CLOSE FUND
MANAGEMENTS PORTFOLIOS II PCC LIMITED
We have audited the financial statements of Close Fund
Management Portfolios II PCC Limited for the year ended 30 June
2011 which comprise the Statement of Comprehensive Income, the
Statement of Financial Position, the Statement of Changes in net
asset Attributable to cell Shareholders, the Statement of Cash
Flows and the related notes 1 to 15 The financial reporting
framework that has been applied in their preparation is applicable
law and International Financial Reporting Standards (IFRSs) as
adopted by the European Union.
This report is made solely to the company's members, as a body,
in accordance with Section 262 of the Companies (Guernsey) Law,
2008. 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
As explained more fully in the Directors' Responsibilities
Statement the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true
and fair view. Our responsibility is to audit and express an
opinion on the financial statements in accordance with applicable
law and International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board's
Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free from
material misstatement, whether caused by fraud or error. This
includes an assessment of: whether the accounting policies are
appropriate to the company's circumstances and have been
consistently applied and adequately disclosed; the reasonableness
of significant accounting estimates made by the directors; and the
overall presentation of the financial statements. In addition, we
read all the financial and non-financial information in the Annual
Financial Report to identify material inconsistencies with the
audited financial statements. If we become aware of any apparent
material misstatements or inconsistencies we consider the
implications for our report.
Opinion on financial statements
In our opinion the financial statements:
" Give a true and fair view of the state of the company's
affairs as at 30 June 2011 and of its profit for the year then
ended;
" Have been properly prepared in accordance with IFRSs as
adopted by the European Union; and
" Have been prepared in accordance with the requirements of the
Companies (Guernsey) Law, 2008.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies (Guernsey) Law, 2008 we are required to
report to you if, in our opinion:
" Proper accounting records have not been kept; or
" The financial statements are not in agreement with the
accounting records; or
" We have not received all the information and explanations we
require for our audit.
Ernst & Young LLP
Guernsey, Channel Islands
30 September 2011
Notes:
1. The maintenance and integrity of the Close Asset Management
Limited web site on which information concerning the Company can be
found, is the responsibility of that company's directors; the work
carried out by the auditors does not involve consideration of these
matters and, accordingly, the auditors accept no responsibility for
any changes that may have occurred to the financial statements
since they were initially presented on the web site.
2. Legislation in Guernsey governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
STATEMENT OF COMPREHENSIVE INCOME for the year ended 30 June
2011
Year to Year to
30 Jun 2011 30 Jun 2010
Company Company
and Cell and Cell
Notes GBP GBP
Net movement in unrealised appreciation
on
investments 5 1,251,920 1,177,318
Unrealised appreciation on value
of
Put Option (187,137) (1,862,315)
Operating expenses 2 (423,637) (426,611)
------------ ------------
Increase / (decrease) in net assets
attributable to
holders of Cell Shares 641,146 (1,111,608)
Other Comprehensive Income - -
------------ ------------
Total Comprehensive Income 641,146 (1,111,608)
Pence Pence
Earnings / (Loss) per Cell Share
for the year 4 1.37 (2.38)
In arriving at the results for the financial year, all amounts
above relate to continuing operations.
There are no recognised gains or losses for the year other than
those disclosed above.
Reconciliation of earnings / (loss) per Cell Share for
investment purposes to earnings / (loss) per Cell Share per the
financial statements:
Pence Pence
Earnings / (loss) per Cell Share for
investment purposes 2.28 (1.47)
Adjustment to include expenses on an
accruals basis (0.92) (0.92)
Earnings / (loss) per Cell Share per
the financial statements 1.37 (2.38)
In accordance with International Financial Reporting Standards
("IFRS"), expenses are attributed to the period to which they
relate. The adjustment to expenses to reflect the application of
this accruals basis decreases the earnings per Cell Share of the
Cell by 0.92 pence.
The earnings per Cell Share for investment purposes represents
the earnings per Cell Share attributable to Shareholders in
accordance with the Prospectus, which recognises all expenses of
the Cell up to and including the date that the redemption proceeds
become payable and is determined by reference to an initial launch
price of 100 pence per Cell Share.
STATEMENT OF FINANCIAL
30 Jun 2011 30 Jun 2010
Company Company
and Cell and Cell
Notes GBP GBP
NON-CURRENT ASSETS
Unquoted financial assets designated
as at fair
value through profit or loss 5 - 34,053,399
------------ ------------
CURRENT ASSETS
Unquoted financial assets designated
as at fair
value through profit or loss 5 35,305,319 -
Receivables 6 87,402 247,672
Cash and cash equivalents 294,678 556,313
------------ ------------
35,687,399 803,985
------------ ------------
CURRENT LIABILITIES
Derivative financial instruments 9 18,049,061 -
Payables - due within one year 7 19,390 17,658
------------ ------------
18,068,451 17,658
------------ ------------
NET CURRENT ASSETS 17,618,948 786,327
------------ ------------
TOTAL ASSETS LESS CURRENT LIABILITIES 17,618,948 34,839,726
Derivative financial instruments 9 - 17,861,924
NET ASSETS ATTRIBUTABLE TO
------------ ------------
SHAREHOLDERS 17,618,948 16,977,802
------------ ------------
CELL SHARES IN ISSUE 46,700,000 46,700,000
Pence Pence
NAV PER CELL SHARE 37.72 36.35
Reconciliation of NAV per Cell Share for investment purposes to
NAV per Cell Share per the financial statements:
Pence Pence
NAV per Cell Share for investment purposes 36.95 34.67
Adjustment to include expenses on an
accruals basis 0.77 1.68
NAV per Cell Share per the financial
statements 37.72 36.35
In accordance with IFRS, expenses are attributable to the period
to which they relate. The adjustment to expenses to reflect the
application of this accruals basis increases the NAV per Cell Share
by 0.77 pence.
The NAV per Cell Share for investment purposes represents the
NAV per Cell Share attributable to Shareholders in accordance with
the Prospectus which recognises all expenses of the Cell up to and
including the date that the redemption proceeds become payable.
These financial statements were approved by the Board of
Directors and authorised for issue on 28 September 2011 and are
signed on its behalf by:
Christopher Hill Peter Hanna
Director Director
STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO CELL
SHAREHOLDERS for the year ended 30 June 2011.
Share Accumulated
Share Capital Premium Losses Total
GBP GBP
Balance as at 1 July
2010 4,672 47,136,330 (30,163,200) 16,977,802
Net gain for the
year - - 641,146 641,146
-------------- ----------- ------------- -----------
Balance as at 30
June 2011 4,672 47,136,330 (29,522,054) 17,618,948
-------------- ----------- ------------- -----------
Share Accumulated
Share Capital Premium Losses Total
GBP GBP
Balance as at 1
July 2009 4,672 47,136,330 (29,051,592) 18,089,410
Net loss for the
year - - (1,111,608) (1,111,608)
-------------- ----------- ------------- ------------
Balance as at 30
June 2010 4,672 47,136,330 (30,163,200) 16,977,802
-------------- ----------- ------------- ------------
STATEMENT OF CASH FLOWS
Year to Year to
30 Jun 2011 30 Jun 2010
Company Company
and Cell and Cell
GBP GBP
Operating activities
Increase / (decrease) in net assets
attributable to holders of Cell
Shares 641,146 (1,111,608)
Unrealised appreciation on investments (1,251,920) (1,177,318)
Unrealised appreciation on value
of Put Option 187,137 1,862,315
Amortisation of Cell Share issue
costs 162,029 162,029
Interest received (1,659) (1,272)
Increase / (decrease) in payables 1,732 (2,455)
Increase in receivables (1,759) (209)
------------ ------------
Net cash outflow from operating
activities (263,294) (268,518)
------------ ------------
Investing activities
Interest received 1,659 1,272
------------ ------------
Net cash inflow from investing activities 1,659 1,272
------------ ------------
Decrease in cash and cash equivalents (261,635) (267,246)
Cash and cash equivalents at beginning
of year 556,313 823,559
------------ ------------
Cash and cash equivalents at end
of year 294,678 556,313
------------ ------------
NOTES TO THE FINANCIAL STATEMENTS as at 30 June 2011
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 a historical cost basis except for the measurement at
fair value of financial instruments.
Break up basis of accounting
As the Company's Participating Shares are due to be redeemed
within twelve months, on or around 11 January 2012, the financial
statements have been prepared on a break up basis. The directors do
not anticipate costs of liquidation to be material. Such costs will
be borne out of the Expenses Provision described in note 7 and 8 to
the financial statements.
The preparation of financial statements in accordance with the
break up basis requires that assets are reduced to their
recoverable amounts and that provisions are made for future losses.
The Directors have considered whether there is any indication that
the recoverable amount of the Company's assets is lower than the
amount recorded as fair value at 30 June 2011. Although the value
of the Company's put option has increased (and hence net assets
have reduced) due to post year end market movements as described in
note 15, they have concluded that post balance sheet changes in
value reflect fair value changes and do not indicate a reduction in
the recoverable amount at 30 June 2011 and, accordingly, that no
adjustment is required to the carrying amount of the Company's
assets or increase in the Company's liabilities at fair value
through profit or loss. In addition the Directors have considered
whether any provision is required for future losses. The Company
will continue to incur expenses up to the date of redemption of the
Shares. However, the anticipated excess of redemption value over
the fair value at 30 June 2011 of the Company's investments, other
than those issued by Icelandic and Irish entities, is expected to
exceed the Company's estimated future expenses and, accordingly,
the Directors do not consider that a provision for future losses is
required.
Changes in accounting policy and disclosures:
The following Standards or Interpretations have been adopted in
the current year. Their adoption has not had any impact on the
amounts reported in these financial statements and is not expected
to have any impact on future financial periods:
IFRS 8 Operating Segments (amendments)
IAS 1 Presentation of Financial Statements (amendments)
IAS 7 Statement of Cash Flows (amendments)
The following Standards or Interpretations have been issued by
the IASB but not yet adopted by the Company:
IFRS 7 Financial Instruments: Disclosures effective for annual
periods beginning on or after 1 July 2011.
IFRS 9Financial Instruments: Classification and Measurement
effective for annual periods beginning on or after 1 January
2013.
IFRS 13 Fair Value 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.
(b) 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.
(c) Expenses
All expenses are accounted for on an accruals basis.
(d) Debt issue costs
The debt issue costs incurred amounted to GBP956,250 on the
initial share issue and a further GBP13,333 on the share issue on
31 January 2007. Because the Company's Cell Shares are redeemable
on or around 11 January 2012, 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.
(e) Interest Income
Interest income is accounted for on an accruals basis.
(f) 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.
(g) Investments
All investments and derivative financial instruments are
classified as "at fair value through profit or loss" so that all
assets and liabilities will be measured on consistent bases.
Investments are initially recognised at fair value, 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 held for the account of
the Cell are based on valuations provided to the Company by Future
Value Consultants Limited (the "Calculation Agent"). 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 Calculation
Agent used a variety of methods and make 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 (both own and counterparty), volatilities
and correlations require the Calculation Agent to make estimates.
Changes in assumptions about these factors could affect the
reported fair value of financial instruments.
During the year ended 30 June 2009, 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
Calculation Agent used pricing information about comparable and
publicly available debt securities issued by Glitnir and Kaupthing
in order to estimate the effect of credit on the valuation of the
relevant Debt Securities.
Different assumptions regarding those factors mentioned above,
combined with different valuation techniques and models used, would
lead to different valuations of the financial instruments by
different parties.
The investments will be derecognised at their maturity date,
being 11 January 2012. Accordingly, the investments have been
reclassified as current assets as at 30 June 2011. Gains and losses
on the sale or maturity of investments will be taken to the
Statement of Comprehensive Income.
(h) Put Option
The Put Option was initially recognised at the fair value of the
consideration received on the date of sale, and included within
Creditors 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 expiry
on 21 December 2011, and therefore in the year to 30 June 2011, it
has been included in current liabilities.
(i) 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 year are outlined below:
Fair value of derivative financial instruments
The Company for the account of the Cell has invested in a
portfolio of Debt Securities containing embedded derivatives
related to the Index. As the investments are not traded in an
active market, the fair value, based on valuations provided by the
Calculation Agent, was determined by using valuation techniques.
The Calculation Agent used a variety of methods and made
assumptions that were based on market conditions existing at the
reporting date.
During the year ended 30 June 2009, the issuers of two of the
Debt Securities held by the Company for the account of the Cell,
being Glitnir and Kaupthing, suffered severe financial
difficulties.
On 8 October 2008 the government of Iceland announced that "the
Icelandic Financial Supervisory Authority, Fjarmalaeftirlitio (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, the 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 for the account of the Cell 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,
MTN 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. The directors have exercised their judgement in the best
interests of both shareholders and creditors to value these
investments using the valuations provided by the Calculation
Agent.
(j) Segmental reporting
In the opinion of the directors the Company is engaged in a
single segment of business, being invested business.
2 OPERATING EXPENSES
Year to Year to
30 Jun 2011 30 Jun 2010
Company Company
and Cell and Cell
GBP GBP
Amortisation of debt issue costs 162,029 162,029
Investment management fees (1) 164,993 164,993
Administration fees 23,000 23,000
Directors' remuneration 15,000 15,000
Registration fees 6,910 6,949
Directors' & Officers' Insurance 5,442 7,688
Audit fees 10,500 9,697
Annual fees 28,173 25,381
Other operating expenses 9,249 13,146
------------ ------------
425,296 427,883
Less: Interest earned on expense
provision bank
account (1,659) (1,272)
------------ ------------
423,637 426,611
------------ ------------
(1) The Manager is entitled to receive a fee from the Company at
an annual rate of 0.35 per cent of the Initial Gross Proceeds.
3 DIRECTORS' REMUNERATION
The Prospectus provides that the directors shall be remunerated
for their services at such rate as the directors shall determine
provided that the aggregate amount of such fees shall not exceed
GBP50,000 per annum (or such sum as the Company in general meeting
shall from time to time determine). The directors are currently
paid a fee of GBP5,000 each per annum. (2010: GBP5,000 each per
annum).
4 EARNINGS PER SHARE
The earnings per Cell Share is based on the net gain for the
year of GBP641,146 (2010: loss GBP1,111,608) and on 46,700,000
Shares (2010: 46,700,000 Shares), being the weighted average number
of Cell Shares in issue during the year.
5 INVESTMENTS
UNQUOTED FINANCIAL ASSETS DESIGNATED
AT Company Company
FAIR VALUE THROUGH PROFIT OR LOSS and Cell and Cell
30 Jun 2011 30 Jun 2010
GBP GBP
Portfolio cost 46,946,960 46,946,960
------------- -------------
Unrealised depreciation on valuation
brought forward (12,893,561) (14,070,879)
Unrealised appreciation on valuation
for the year 1,251,920 1,177,318
------------- -------------
Unrealised depreciation on valuation
carried forward (11,641,641) (12,893,561)
------------- -------------
Closing valuation 35,305,319 34,053,399
------------- -------------
Valuations of investments are based on valuations provided by
the Calculation Agent. The provided valuations are 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 spreads, foreign exchange and forward
foreign exchange rates, Index levels and the implied volatilities
of Nikkei options.
To comply with the definition of fair value as defined by IFRS,
the Calculation Agent was engaged to provide valuations of the
Cell's investments, taking account of the current counterparty
credit risk of the issuers of the debt securities held by the
company for the account of the Cell.
As detailed in notes 1(g) and 1(i) to the financial statements,
the values of the debt instruments issued by Glitnir and Kaupthing
cannot be ascertained in the same way as the other investments held
by the Company for the account of the Cell. Therefore the directors
have exercised their judgement in the best interests of both
shareholders and creditors to value these investments using the
valuations provided by the Calculation Agent based on limited
market price information on instruments judged by the Calculation
Agent to be reasonably comparable.
The performance of the financial assets is based on the closing
level of the Index on 21 December 2011. If the Index closes above
15,957.57 the instruments are designed to give a return of five
times the performance up to a maximum return of 80 per cent of the
capital.
Valuation data provided by the Calculation Agent to the Company
in connection with the Cell is provided for indicative
informational purposes only and does not represent an offer to buy
or sell the debt securities by the Calculation Agent 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 Calculation Agent
considers in its judgement reasonable, but an alternative
Calculation Agent might arrive at a different valuation for the
same investments.
IFRS 7 requires the fair value of investments to be disclosed by
the source of inputs using a three-level hierarchy as detailed
below:
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)
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 investment
as at the reporting date:
Investments 30 Jun 2011 30 Jun 2010
Market Value Market Value
GBP GBP
Level 2 31,521,792 31,123,175
Level 3 3,783,527 2,930,224
------------- -------------
Total 35,305,319 34,053,399
------------- -------------
There have been no transfers between Level 2 and Level 3 of the
fair value hierarchy during the year under review.
The following table shows a reconciliation of all the movements
in the fair value of financial instruments categorised within Level
3 between the beginning and the end of the reporting year.
30 Jun 2011 30 Jun 2010
Level 3 GBP GBP
Opening balance at beginning of
year 2,930,224 1,863,338
Total gains and losses recognised
in
- Statement of Comprehensive Income 853,303 1,066,886
------------ ------------
Closing balance at 30 June 2011 3,783,527 2,930,224
------------ ------------
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
Company Company
and Cell and Cell
30 Jun 2011 30 Jun 2010
GBP GBP
Prepayments & accrued income 87,402 247,672
------------ ------------
87,402 247,672
------------ ------------
7 PAYABLES (amounts falling due within one year)
Company Company
and Cell and Cell
30 Jun 2011 30 Jun 2010
GBP GBP
Accrued administration fees 1,890 1,890
Accrued registration fees 545 532
Accrued audit fees 10,500 10,450
Other accrued expenses 6,455 4,786
Expense provision 275,288 285,575
Less: Prepaid expense provision
(see Note 8) (275,288) (280,987)
------------ ------------
19,390 17,658
------------ ------------
8 PAYABLES (amounts falling due after one year)
Company Company
and Cell and Cell
30 Jun 2011 30 Jun 2010
GBP GBP
Expense provision - 252,938
Less: Prepaid expense provision - (252,938)
------------- ------------
- (252,938)
----------------------------------------------- ------------
The prepaid expense provision represents monies set aside to
meet the on-going, annual and redemption expenses of the Cell, 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.
9 DERIVATIVE FINANCIAL INSTRUMENTS
Company Company
and Cell and Cell
30 Jun 2011 30 Jun 2010
GBP GBP
Consideration received on sale of
Put Option 5,022,440 5,022,440
Fair value adjustment 13,026,621 12,839,484
------------ ------------
18,049,061 17,861,924
------------ ------------
The performance of the Put Option is linked to the performance
of the Index.
On 24 October 2008 the value of the Index closed at 7,649.08,
representing an Index Barrier Breach. In these circumstances if, at
the close of business on 21 December 2011, the Index value is still
below 15,957.57, the Put option will be worth a percentage of the
notional value, being GBP46,700,000, equivalent to the percentage
fall in the level of the Index over the calculation period, so that
the amount which the Company for the account of the Cell will be
required to pay on behalf of the Cell under the Put Option will
reduce its terminal asset value by an amount which reflects the
decline in the Index value between the Start and the End Date.
If, at the close of business on 21 December 2011, the Index
value is 15,957.57 or above, the Put Option will be worth GBPnil at
maturity.
The Put Option is not exercisable until the maturity date of 11
January 2012.
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 the Cell for
payment of any monies owed upon maturity or termination of the Put
Option contract.
The original proceeds from the sale of the Put Option were
GBP5,022,440.
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 investment
as at the reporting date:
Put Option 30 Jun 2011 30 Jun 2010
GBP GBP
Level 2 (18,049,061) (17,861,924)
------------- -------------
There have been no transfers between Level 2 and Level 3 of the
fair value hierarchy during the period under review.
10 SHARE CAPITAL
Authorised Shares GBP
Management Shares of GBP1.00 each 100 100
Unclassified Shares of 0.01p each 100,000,000 10,000
-------
10,100
-------
Issued Company Company
and Cell and Cell
30 Jun 2011 30 Jun 2010
Cell Shares - fully paid 46,700,000 46,700,000
Management Shares - unpaid 2 2
------------ ------------
Number of shares in issue 46,700,002 46,700,002
------------ ------------
Company Company
Issued Share Capital and Cell and Cell
30 Jun 2011 30 Jun 2010
GBP GBP
Cell Shares - fully paid 4,670 4,670
Management Shares - unpaid 2 2
------------ ------------
4,672 4,672
------------ ------------
The issues of Cell Shares took place as follows:
Number Price per Amount
Date of issue of Shares Share Pence Received GBP
23 December 2005 42,500,000 100.00 42,500,000
31 January 2007 4,200,000 110.50 4,641,000
The redemption proceeds for the Cell Shares on a winding-up are
detailed on within this report.
Cell Shares are redeemable on or around 21 December 2011. The
Company is closed-ended and therefore shareholders have no right to
request the Company to repurchase their Cell Shares or to redeem
them prior to the redemption date. If the Cell is wound up prior to
the redemption date, shareholders will be entitled to the net asset
value of the Cell Shares on the winding up date. No dividends will
be paid on the Cell Shares.
Management Shares represent an interest in the non-cellular
assets of the Company and, as such, do not form part of the Cell,
nor have any interest in the Cell. Given the immateriality of the
non-cellular assets (GBP2) to the net assets of the Cell, they have
been included in net assets attributable to Cell Shareholders.
11 SHARE PREMIUM
Company Company
and Cell and Cell
30 Jun 2011 30 Jun 2010
GBP GBP
Share premium 47,136,330 47,136,330
============ ============
12 FINANCIAL INSTRUMENTS
The Company's main financial instruments comprise:
(a) Cash and cash equivalents that arise directly from each
Cell's operations;
(b) Debt Securities whose performance is based on the
performance of the Index. Details of the investments referred to
above are shown in the Schedule of Investments, and;
(c) The Company has for account of the Cell also sold a Put
Option, whose performance is based on the Index. Details of the
option contract are shown in Note 9.
13 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 for account of the Cell 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 for the account of Cell is
shown in the Schedule of Investments.
Details of the Company's Investment Objective and Policy for the
Cell are given within this report.
Price sensitivity
The following details the Cell's sensitivity to a 10 per cent
increase and decrease in the final market prices of its constituent
financial assets and liabilities.
The final redemption value of the Cell Shares is determined by
reference to the level of the Index on 21 December 2011 and at that
date, if the Index stands below 15,957.57 (the "Starting Value"),
investors will be repaid on the Redemption Date the Issue Price
reduced by the same percentage by which the End Value is less than
the Start Value.
On 30 June 2011, the Index stood at 9,816.09, a fall of 38.49
per cent since the Start Date.
If market prices as at 30 June 2011, had been 10 per cent higher
(equating to an Index level of 10,797.7), and assuming these values
were to remain unchanged through to the end of the Company's life
with all other variables held constant, the redemption proceeds
would be approximately 67 pence per Share, being approximately 6
pence per Share higher, subject to there being no counterparty
default or any unforeseen circumstances. In the event of both
Glitnir Banki hf and Kaupthing Bank hf defaulting and having a zero
recovery rate and there being no insolvency of any other issue of
Debt Securities held by the Company or any other event of default
or any unforeseen circumstances, the redemption proceeds would be
approximately 37 pence per Share, being approximately 6 pence per
Share higher.
If market prices as at 30 June 2011, had been 10 per cent lower
(equating to an Index level of 8,834.48), and assuming these values
were to remain unchanged through to the end of the Company's life
with all other variables held constant, the redemption proceeds
would be approximately 55 pence per Share, being approximately 6
pence per Share lower, subject to there being no counterparty
default or any unforeseen circumstances. In the event of both
Glitnir Banki hf and Kaupthing Bank hf 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 redemption proceeds would be
approximately 25 pence per Share, being approximately 6 pence per
Share lower.
(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 for the account of the Cell.
The following table details the aggregate ratings of the debt
instruments in the Company's portfolio, based on the valuations of
the investments at 30 June 2011 (30 June 2010 for the comparative
period), as rated by Moody's:
Rating 15 Sep 2011* 30 Jun 2011 30 Jun 2010
Aaa 0.00% 0.00% 0.00%
Aa 71.26% 71.26% 71.86%
A 0.00% 0.00% 19.52%
Ba 18.02% 18.02% 0.00%
Speculative
grade 10.72% 10.72% 8.62%
* Based on the value of the Company's investments at 30 June
2011.
The deteriorating situation in Ireland, as detailed in the
Chairman's Statement, has led to Moody's rating of Irish Life &
Permanent ("IL&P") being downgraded four times since the
previous year end. It should therefore be noted that as at the
reporting date and the date of signing, IL&P no longer carries
an investment grade rating, and is shown in the table above with a
rating of Ba (30 June 2010; A rating)
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
S&P and Moody's respectively.
On 8 October 2008 and 9 October 2008 respectively, the credit
ratings of Glitnir Banki HF and Kaupthing HF (the "Icelandic
Issuers") were downgraded to a speculative grade.
As the value of the debt instruments issued by the Icelandic
Issuers cannot be ascertained, the directors have exercised their
judgement in the best interests of both shareholders and creditors
to value these investments using the valuations provided by the
Calculation Agent.
Credit risk was mitigated at launch by the Company on behalf of
the Cell by purchasing the Debt Securities from seven 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 January
2007 the Company on behalf of the Cell 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 2011 30 Jun 2010
GBP GBP
Unquoted financial assets designated
as at fair
value through profit or loss 35,305,319 34,053,399
Receivables 87,402 247,672
Cash and cash equivalents 294,678 556,313
------------ ------------
35,687,399 34,857,384
------------ ------------
(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 for
the account of the Cell are its ongoing operating expenses and any
cash settlement due to the Put Option Counterparty on the maturity
of the Put Option sold to the Put Option Counterparty, scheduled to
occur on 11 January 2012.
Upon the issue of the Cell Shares in December 2005 the Company
created for the Cell a cash reserve (the "Expense Provision") in
the amount of 2.10 per cent of the amount raised by the issue of
the Cell Shares (the "Initial Gross Proceeds") plus GBP500,000,
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 Cell Shares. Upon the issue of additional Cell Shares in
January 2007, an additional 1.75 per cent of the proceeds of that
issue of additional Cell Shares was set aside to cover the increase
in the Manager's fee which resulted from that issue of additional
Cell Shares, all other expenses being either fixed for the life of
the Cell or deemed unlikely to increase materially as a result of
this issue of additional Cell Shares.
At the 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
Cell. To the extent that the directors consider that the Expense
Provision is less than 150 per cent of the expected future expenses
of the Cell (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 Cell, 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 Debt Securities purchased by the Company for the account of
the Cell mature on 11 January 2012 (the "Maturity Date") and are
due to be redeemed at their notional face value plus five times the
performance increase between 21 December 2005 and 21 December 2011
in the Index, capped at an amount equal to 80 per cent of the
notional face value, so that the aggregate maturity proceeds are
expected to be between GBP46,700,000 if the Index closes on 21
December 2011 at or below its starting value on 21 December 2005 of
15,975.80 and a maximum of GBP84,060,000 if the Index closes at or
above 18,531.90 on 21 December 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 GBP46,700,000 due
are intended to satisfy the maximum payment due to be made by the
Company contracting for and on behalf of the Cell to the Put Option
Counterparty on the maturity of the Put Option of
GBP46,700,000.
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 on behalf of the Cell seek to sell the
relevant Debt Securities to third party purchasers and to reinvest
the proceeds for the account of the Cell 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. If the purchase of such Debt Securities
is not possible, the directors may reinvest such proceeds as they
see fit in investments for the account of the Cell 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 for the
Cell.
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 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
2011 1-3 months 3-12 months Over 1 year Total
Accrued expenses 19,390 - - 19,390
Derivative financial
instruments - 18,049,061 - 18,049,061
----------- ------------ ------------ -----------
Total 19,390 17,639,679 - 18,068,451
----------- ------------ ------------ -----------
As at 30 June
2010 1-3 months 3-12 months Over 1 year Total
Accrued expenses 17,658 - - 17,658
Derivative financial
instruments - - 17,861,924 17,861,924
----------- ------------ ------------ -----------
Total 17,658 - 17,861,924 17,879,582
----------- ------------ ------------ -----------
(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 for the
account of the Cell there is an intended balance between the
aggregated nominal value of the Debt Securities held and the
nominal value of the Put Option and, if one or more of the issuers
of the Debt Securities held were to default, in part or in total,
there will not be a corresponding reduction in the value of the Put
Option.
As disclosed in note 9 above, an Index Barrier Breach occurred
on 24 October 2008. If, at the close of business on 21 December
2011, the Index value is still below 15,957.57, thePut Option will
be worth a percentage of the notional value, being GBP46,700,000,
equivalent to the percentage fall in the level of the Index over
the calculation period.
The amount which the Company for the account of the Cell will be
required to pay on behalf of the Cell under the Put Option will
reduce its terminal asset value by an amount which reflects the
decline in the Index value between the Start Date and the End Date.
In such a scenario, the default by an issuer of any Debt Security
held would cause an acceleration in the reduction of the final
redemption value of a share such that it would fall to zero well
before the index reaches nil.
As disclosed in note 1(i) 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 for the account of the Cell are senior unsecured debt. In
the event of a default by either Glitnir or Kaupthing, Debt
Securities 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.
(d) Portfolio Construction Risk
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 Cell Share per the Company's
investment objective for the Cell will not be known for some time
after the scheduled end of the life of the Cell Shares
(e) Interest Rate Risk
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.
The Company for the account of the Cell 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
Company also holds for the account of the Cell medium term notes.
Their valuation from time to time is influenced by inter alia
interest rates, but they are intended to be held to maturity when
their return will be determined purely by reference to the
Index.
The weighted average effective interest rate for cash and bank
balances as at 30 June 2011 was 0.58 per cent (2010: 0.34 per
cent).
None of the other assets or liabilities of the Company attract
or incur interest.
Interest rate sensitivity
If interest rates had been 100 basis points higher and all other
variables were held constant, the Company's net assets attributable
to cell shareholders at 30 June 2011 would have been GBP2,947
greater (2010: GBP5,563) 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
to cell shareholders at 30 June 2011 would have been GBP2,947 less
(2010: GBP5,563) due to a decrease in the amount of interest
receivable on the bank balances.
The Company's sensitivity to interest rates is lower in 2011
than in 2010 because of a decrease in the amount of cash balances
held.
(f) Currency Risk
As both the Cell Shares and the Debt Securities are
Sterling-denominated, Shareholders investing for Sterling returns
will not be exposed to direct currency risk. However the value of
the underlying securities comprising the Index may be affected by
changes in the economic, political or social environment in Japan,
as well as globally, including changes in exchange rates.
(g) Capital management
The investment objective of the Company is to provide
shareholders with a geared capped exposure to the performance of
the Index.
The Cell has a fixed life and a fixed capital and this is not
expected to change during the life of the Cell.
(h) Collateral
Under the terms of a Pledge Agreement dated 11 January 2006
entered into between the Company on behalf of the Cell 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 Put Option sold to the Put
Option Counterparty, further details of which are shown at Note 9.
The Debt Securities are held by a Custodian in a segregated account
in Euroclear. Where there is an event of default by the Company for
and on behalf of the Cell under the Put Option, the Put Option
Counterparty will be entitled to enforce its security over the Debt
Securities.
14 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
and controller of Anson Fund Managers Limited, Anson Registrars
Limited and Anson Administration (UK) Limited. GBP29,910 (2010:
GBP29,949) of costs were incurred by the Company with these related
parties in the period, of which GBP2,435 (2010: GBP2,422) was due
to these related parties as at 30 June 2011.
15 SUBSEQUENT EVENTS
The following table details the valuation and movement of the
Debt Securities and Put Option after the year end.
SCHEDULE OF INVESTMENTS AS AT 30 JUNE 2011
FOR THE CELL Fair Value Fair Value Movement
30 Jun 2011 15 Sep 2011
DEBT SECURITIES PORTFOLIO GBP GBP GBP
Abbey National Treasury Services
plc EMTN
11 January 2012 4,164,925 4,163,460 (1,465)
Glitnir Banki 0% Euro MTN
11 January 2012 1,981,006 1,770,620 (210,386)
HBOS Treasury Services 0%
Euro MTN 11
January 2012 7,039,924 7,034,824 (5,100)
Irish Life & Permanent 0%
Euro MTN 11
January 2012 6,363,301 6,548,340 185,039
Kaupthing HF 0% Euro MTN 11
January
2012 1,802,521 1,841,445 38,924
KBC IFIMA 0% Euro MTN 11 January
2012 7,027,711 7,027,178 (533)
Royal Bank of Scotland 0%
Euro MTN 11
January 2012 6,925,931 6,918,381 (7,550)
------------ ------------ ----------
35,305,319 35,304,248 (1,071)
------------ ------------ ----------
Fair Value Fair Value Movement
30 Jun 2011 15 Sep 2011
GBP GBP GBP
PUT OPTION
JP Morgan Chase Bank Nikkei
Index 225 Option Maturing
21 December 2011 and settling
11 January 2012 (18,049,061) (21,420,595) (3,371,534)
------------- ------------- ------------
FOR THE CELL JARF II JARF II JARF II
NOMINAL VALUATION TOTAL NET
DEBT SECURITIES PORTFOLIO HOLDINGS GBP ASSETS %
Abbey National Treasury Services
plc EMTN
11 January 2012 4,200,000 4,164,925 23.64%
Glitnir Banki 0% Euro MTN
11 January 2012 7,100,000 1,981,006 11.24%
HBOS Treasury Services 0%
Euro MTN 11
January 2012 7,100,000 7,039,924 39.96%
Irish Life & Permanent 0%
Euro MTN 11
January 2012 7,100,000 6,363,301 36.12%
Kaupthing HF 0% Euro MTN 11
January
2012 7,100,000 1,802,521 10.23%
KBC IFIMA 0% Euro MTN 11 January
2012 7,100,000 7,027,711 39.89%
Royal Bank of Scotland 0%
Euro MTN 11
January 2012 7,000,000 6,925,931 39.31%
----------- ----------
35,305,319 200.38%
----------- ----------
The Company has also sold for the Cell a Put Option, details of
which are shown below.
JARF II JARF II
NOTIONAL VALUATION
HOLDING GBP
JP Morgan Chase Bank Nikkei Index
225 Option
Maturing 21 December 2011 and
settling 11
January 2012 46,700,000 (18,049,061)
-------------
FOR THE CELL JARF II JARF II JARF II
NOMINAL VALUATION TOTAL NET
DEBT SECURITIES PORTFOLIO HOLDINGS GBP ASSETS %
Abbey National Treasury Services
plc EMTN
11 January 2012 4,200,000 4,061,035 23.92%
Glitnir Banki 0% Euro MTN
11 January 2012 7,100,000 1,119,608 6.59%
HBOS Treasury Services 0%
Euro MTN 11
January 2012 7,100,000 6,809,676 40.11%
Irish Life & Permanent 0%
Euro MTN 11
January 2012 7,100,000 6,650,418 39.17%
Kaupthing HF 0% Euro MTN 11
January
2012 7,100,000 1,810,616 10.66%
KBC IFIMA 0% Euro MTN 11 January
2012 7,100,000 6,889,734 40.58%
Royal Bank of Scotland 0%
Euro MTN 11
January 2012 7,000,000 6,712,312 39.54%
----------- ----------
34,053,399 200.58%
----------- ----------
The Company has also sold for the Cell a Put Option, details of
which are shown below.
JARF II JARF II
NOTIONAL VALUATION
HOLDING GBP
JP Morgan Chase Bank Nikkei Index
225 Option
Maturing 21 December 2011 46,700,000 (17,861,924)
-------------
A pdf version of the annual financial report will shortly be
posted on the Administrators web-site 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
30 September 2011
END OF ANNOUNCEMENT
E&OE - in transmission
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR SDUFMSFFSEFU
Close Fund Port. Ii Pcc (LSE:JAC)
Historical Stock Chart
From May 2024 to Jun 2024
Close Fund Port. Ii Pcc (LSE:JAC)
Historical Stock Chart
From Jun 2023 to Jun 2024
