TIDMLWDB
RNS Number : 9932X
Law Debenture Corp PLC
28 February 2017
ANNUAL FINANCIAL REPORT
year ended 31 December 2016 (audited)
This is the Annual Financial Report of The Law Debenture
Corporation p.l.c. as required to be published under DTR 4 of the
UKLA Listing Rules.
The directors recommend a final dividend of 11.50p per share
making a total for the year of 16.70p. Subject to the approval of
shareholders, the final dividend will be paid on 20 April 2017 to
holders on the register on the record date of 17 March 2017. The
annual financial report has been prepared in accordance with
International Financial Reporting Standards (IFRS).
The financial information set out in this Annual Financial
Report does not constitute the Corporation's statutory accounts for
2015 or 2016. Statutory accounts for the years ended 31 December
2015 and 31 December 2016 have been reported on by the Independent
Auditor. The Independent Auditor's Reports on the Annual Report and
Financial Statements for 2015 and 2016 were unqualified, did not
draw attention to any matters by way of emphasis, and did not
contain a statement under 498(2) or 498(3) of the Companies Act
2006.
Statutory accounts for the year ended 31 December 2015 have been
filed with the Registrar of Companies. The statutory accounts for
the year ended 31 December 2016 will be delivered to the Registrar
in due course.
The financial information in this Annual Financial Report has
been prepared using the recognition and measurement principles of
International Accounting Standards, International Financial
Reporting Standards and Interpretations adopted for use in the
European Union (collectively Adopted IFRSs). The accounting
policies adopted in this Annual Financial Report have been
consistently applied to all the years presented and are consistent
with the policies used in the preparation of the statutory accounts
for the year ended 31 December 2016. The principal accounting
policies adopted are unchanged from those used in the preparation
of the statutory accounts for the year ended 31 December 2015.
Group income statement
for the year ended 31 December
2016 2015
Revenue Capital Total Revenue Capital Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
UK dividends 16,468 - 16,468 14,813 - 14,813
UK special
dividends 831 - 831 1,643 - 1,643
Overseas
dividends 3,021 - 3,021 2,355 - 2,355
Overseas
special
dividends 157 - 157 194 - 194
20,477 - 20,477 19,005 - 19,005
Interest
income 303 - 303 125 - 125
Independent
fiduciary
services
fees 30,735 - 30,735 30,384 - 30,384
Other income 225 - 225 196 - 196
----------- ---------- ----------- ----------- ----------- -----------
Total income 51,740 - 51,740 49,710 - 49,710
Net gain/(loss)
on investments
held at
fair value
through
profit or
loss - 105,437 105,437 - (20,210) (20,210)
----------- ---------- -----------
Total income
and capital
gains/(losses) 51,740 105,437 157,177 49,710 (20,210) 29,500
Cost of
sales (3,565) - (3,565) (3,461) - (3,461)
Administrative
expenses (20,776) (9) (20,785) (20,411) (410) (20,821)
Provision
for onerous
contracts (3,031) - (3,031) - - -
----------- ---------- ----------- ----------- ----------- -----------
Operating
profit 24,368 105,428 129,796 25,838 (20,620) 5,218
Finance
costs
Interest
payable (5,542) - (5,542) (3,632) - (3,632)
Profit before
taxation 18,826 105,428 124,254 22,206 (20,620) 1,586
Taxation 17 - 17 (847) - (847)
Profit for
the year 18,843 105,428 124,271 21,359 (20,620) 739
----------- ---------- ----------- ----------- ----------- -----------
Return per
ordinary
share (pence) 15.96 89.30 105.26 18.10 (17.47) 0.63
Diluted
return per
ordinary
share (pence) 15.96 89.30 105.26 18.10 (17.47) 0.63
Statement of comprehensive income
for the year ended 31 December
Revenue Capital Total Revenue Capital Total
2016 2016 2016 2015 2015 2015
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Profit for the year 18,843 105,428 124,271 21,359 (20,620) 739
--------------------------------- --------- --------- --------- -------- ---------- -------
Foreign exchange on translation
of foreign operations - 1,247 1,247 - 290 290
Pension actuarial gains/(losses) (2,200) - (2,200) 1,200 - 1,200
Taxation on pension 417 - 417 (240) - (240)
--------------------------------- --------- --------- --------- -------- ---------- -------
Other comprehensive income
for the year (1,783) 1,247 (536) 960 290 1,250
--------------------------------- --------- --------- --------- -------- ---------- -------
Total comprehensive income
for the year 17,060 106,675 123,735 22,319 (20,330) 1,989
--------------------------------- --------- --------- --------- -------- ---------- -------
Financial summary
Financial summary
31 December 31 December
2016 2015
Pence Pence
------------------------ ----------- -----------
Share price 530.00 498.00
NAV per share at fair
value(1) 598.48 524.54
Revenue return per
share
- Investment trust 10.88 11.01
- Independent fiduciary
services 7.68 7.09
- Group charges(2) (2.60) -
Group revenue return
per share 15.96 18.10
Capital return/(loss)
per share 89.30 (17.47)
Dividends per share 16.70 16.20
------------------------ ----------- -----------
2016 2015
% %
------------------- ---- ----
Ongoing charges(3) 0.45 0.46
Gearing(3) 8 12
1 Calculated in accordance with AIC methodology based on NAV
including fair value of IFS businesses
and long term borrowings.
2 See segmental analysis
3 Source AIC.
Ongoing charges are based on the costs of the investment trust
and include the Henderson management
fee of 0.30% of the NAV of the investment trust. There is no
performance related element to the fee.
Performance
1 year 3 years 5 years 10 years
% % % %
---------------------------- ------ ------- ------- --------
NAV total return(1) 16.9 19.8 79.2 125.7
FTSE Actuaries All-Share
Index total return(1) 16.8 19.3 61.8 71.8
Share price total return(1) 10.1 10.2 86.5 117.8
Change in Retail Price
index(1) 1.9 4.8 10.9 31.0
Investment trusts (Global)
(1) NAV total return 21.0 41.4 98.9 119.3
Investment trusts (All
conventional companies)(1)
(NAV total return) 18.6 34.3 85.4 111.1
---------------------------- ------ ------- ------- --------
2016 2015 2014 2013 2012
By year % % % % %
------------------------- ---- ----- ---- ---- ----
Share price total
return(1) 10.1 (3.0) 3.1 28.3 32.0
NAV total return(2) 16.9 (0.3) 2.8 29.4 15.6
FTSE Actuaries All-Share
Index total return 16.8 1.0 1.2 20.8 12.3
------------------------- ---- ----- ---- ---- ----
(1) Source AIC.
(2) Calculated in accordance with AIC methodology based on NAV
including fair value of IFS businesses and long term
borrowings.
NAV- Fair value of independent fiduciary services
businesses and long term borrowings
NAV per share
31 December 31 December
2016 2015
pence pence
----------------------- ------------------- --------------
NAV per share
per financial
statements 560.73 472.14
------------------------ ------------------- --------------
Fair value adjustment
for independent
fiduciary services 62.37 61.27
------------------------ ------------------- --------------
Debt fair value
adjustment (24.62) (8.87)
------------------------ ------------------- --------------
NAV per share
at fair value 598.48 524.54
------------------------ ------------------- --------------
Background
Our consolidated financial statements are presented, in order to
comply with International Financial Reporting Standards ('IFRS'),
with the value of the investment portfolio expressed at fair value
which is broadly a rational and unbiased estimate of the potential
market value, taking into account acquisition/replacement/disposal
costs.
Since 31 December 2015, we have published a fair value NAV that
includes the fair value of the IFS businesses and long term
borrowings.
The calculation of the IFS valuation and methodology used to
derive it are included in the annual report. However, in accordance
with financial reporting standards, the valuation itself is not
reflected in the financial statements.
In determining a basis for the fair valuation of the IFS
businesses the directors have taken external professional advice.
However, it should be noted that fair valuation guidelines require
that the IFS businesses are fair valued on a stand-alone basis and
this does not reflect the full value to the group and its
shareholders. In particular, the value of group tax relief from the
investment trust to the IFS businesses, which significantly reduces
the tax charge, is excluded from the fair value of IFS businesses.
In 2016 this reduced the tax charge by GBP1,446,000, although this
will not continue at this level in the future.
In order to assist investors, The Law Debenture Corporation
p.l.c. (the 'Corporation') restated its historic NAV last year to
include the fair value of the IFS businesses for the last ten
years. This information is provided in the annual report within the
10 year record, performance and 10 year performance .
The IFS is represented by the wholly owned subsidiaries of the
Corporation, with the exception of Law Debenture Finance p.l.c. The
fair valuation is used in preparing performance data for the group.
The fair value is determined using unobservable inputs (including
the group's own data), which represent Level 3 inputs. The
directors' estimate of fair value uses the guidelines and
methodologies on valuation published by the International Private
Equity and Venture Capital Association.
The fair valuation of IFS is based upon the historic earnings
before interest, taxation, depreciation and amortisation
('EBITDA'), an appropriate multiple and the surplus net assets of
the business at their underlying fair value. The multiple applied
in valuing the IFS is from comparable companies sourced from market
data, with appropriate adjustments to reflect the difference
between the comparable companies and the IFS in respect of growth,
margin, size and liquidity.
2016 2015
Fair valuation of IFS GBP000 GBP000
EBITDA at a multiple
of 8.1 (2015:8.4) 80,028 78,397
Surplus net assets 9,908 12,082
89,936 90,479
---------------------- -------- --------
An increase or decrease of 1 in the multiple would give rise to
a GBP9.9 million change in the fair valuation of the IFS. The
adjustment to NAV to reflect the IFS fair value is an increase of
62.37p per share (2015: 61.27p).
Long term borrowings
The methodology of fair valuing all long term borrowings is to
benchmark the group debt against A rated UK corporate bond
yields.
Chairman's statement and review of 2016
Performance
Our net asset value total return for the year to 31 December
2016 was up 16.9%, compared to a total return of 16.8% for the FTSE
Actuaries All-Share Index. Revenue return per share was 18.56p
(excluding group charges of 2.60p), an increase of 2.5% over the
previous year, as a result of a 1.2% decrease in the investment
trust and a 8.3% increase in independent fiduciary services.
Dividend
The board is recommending a final dividend of 11.5p per ordinary
share (2015: 11.0p), which together with the interim dividend of
5.2p (2015: 5.2p) gives a total dividend of 16.7p (2015:
16.2p).
The Corporation's policy continues to be to seek growth in both
capital and income. We attach considerable importance to the
dividend, which we aim to increase steadily and which does not
inhibit the flexibility of our investment strategy. Our basis for
reporting earnings is more conservative than that of many
investment trusts, in that all of our expenses, including interest
costs, are charged fully to the revenue account. Notwithstanding
this prudent approach to reporting, our dividend has been increased
annually for at least 25 years save for three occasions (the ending
of the dot.com boom and the aftermath of the 2007/2008 financial
crisis) when it was maintained. We are proud of that record.
Investment trust
2016 was an extraordinary year in the markets. There was a
sell-off in January and February, largely driven by concerns about
events in China, but also reflecting some concerns about prospects
for global growth generally and political uncertainty. Long term
gilt yields declined to all-time lows creating conditions that many
market observers had never seen before. Central bank interventions,
including in China, stabilised markets so that, at the mid-year
point, despite all the turbulence, our share price was more or less
back to where it had been at the start of the year.
The second half of the year was heavily influenced by the UK
electorate's decision on Brexit and the consequent (and
significant) depreciation in sterling. Markets climbed towards
record highs, led by a dramatic surge in share price performance
from companies with large overseas earnings denominated in dollars.
Performance was more sluggish from UK companies that are reliant on
domestic, sterling denominated revenues.
James Henderson describes these matters in more detail in his
report. Our performance relative to other global investment trusts
has been relatively subdued, largely because of our comparative
underweighting in dollar denominated companies.
The investment manager continues to focus on companies that are
growing businesses over the long-term and he remains optimistic
about the prospects for some sectors, such as manufacturing, that
have been out of fashion recently. He intends to continue holding a
relatively long list of stocks to provide diversification both by
geography and sector and as a means of cushioning the negative
effects of poor performance of any individual stock.
Looking forward, with the prospect for some inflation in the UK,
it remains an extremely difficult market to call. The recent highs
experienced by the FTSE indices suggest general confidence in
equities, which mirrors Law Debenture's long-term belief. However,
the highly changeable political landscape within Europe and the US
will do nothing to lessen uncertainty.
Independent fiduciary services
The performance of the IFS businesses in 2016 was broadly
unchanged.
Our new chief executive, Michael Adams, joined in August 2016,
replacing Caroline Banszky who retired having successfully led the
businesses since 2002. He has formulated a strategy to grow the IFS
businesses and has made encouraging progress, including the opening
of a Law Debenture office in Dublin in early 2017. Not only should
this provide opportunities for growth, but in the medium to
long-term, it will ensure that Law Debenture has an established
capability in the EU post-Brexit.
Towards the end of the year, we completed the sale of
substantially all of our US corporate trust business. While our US
trust activities have always generated reasonable revenues, the
associated regulatory cost of business in the US - where since 2013
we have had to maintain regulatory capital of US$50m - has been
unwelcome and the decision was reached that this capital could more
usefully be employed elsewhere. Subject to wind-down and
termination of a small number of trusts that we have retained, it
is anticipated that the regulatory capital requirement will be
removed within two years. Meanwhile, our corporate services
offering in the US has been retained and should continue to
grow.
Pension arrangements
In 2016, the employer of the London based staff took the
difficult decision, following appropriate consultation, to close
the defined benefit pension scheme to future accruals, effective 31
December 2016. Affected employees will instead have contributions
paid to a defined contribution scheme, which has been in place for
some years, running parallel to the final salary scheme.
Over the last decade, the costs to employers of final salary
schemes have grown significantly and most schemes, including Law
Debenture's, have a funding deficit. A robust deficit reduction
plan has been, and will continue to be, in place but the closure of
the scheme to future accruals will at least cap the deficit and
enable more certain financial planning going forward. This will
bring some benefit for shareholders, although the board
acknowledges that affected staff have lost a benefit that was
highly valued.
Tax deductibility of corporate interest expense
A final decision was announced in January 2017 that, with effect
from 1 April 2017, HMRC will cap the amount of UK tax relief that
is available for distribution within a group to the higher of 30%
of taxable earnings before interest and depreciation and GBP2
million net UK interest expense per year.
Law Debenture generates tax relief at the investment trust level
arising from the long term debt interest and excess costs. The
unutilised reliefs can be transferred to the IFS businesses, thus
reducing their tax liabilities. The new rules limiting the amount
of unutilised relief that can be passed down in this way will have
an effect on the IFS businesses, increasing their tax charge in
aggregate by c.GBP600,000 per annum (GBP450,000 in 2017), which
reduces the profits available for distribution to the investment
trust by that amount.
While this is unwelcome, it is not material to the success of
the group as a whole and we will continue to obtain the benefit
available from being able to pass down at least GBP2m of interest
relief, together with the administration costs of running the
investment trust.
Outlook
The investment manager's review and management review refer to
the year ahead. We seem to be entering a period where political
developments, most notably those associated with the UK's decision
to leave the EU, are likely to be more important to the economic
environment than has been the case for some years. We expect that
Law Debenture will adapt quickly to changes as they arise and, as
we have done throughout the group's long history, to find ways to
capitalise on opportunities that will enhance shareholder
value.
Annual general meeting
The annual general meeting will be held at the Brewers Hall,
Aldermanbury Square, London, EC2V 7HR on 11 April 2017 and I look
forward to seeing as many as possible of you there.
Christopher Smith
Investment manager's review
Review
Despite some large market swings, overall 2016 was a strong year
for equity returns, particularly if those equities were held in a
currency other than sterling or if the underlying business derives
significant dollar denominated revenues. The fall in the pound came
about as the result of the referendum in the UK. The decision to
leave the EU led to a cut in interest rates and increased investor
uncertainty over the outlook for the UK economy. This resulted in
global investors selling sterling. Therefore, although the UK
market made a good advance, it lagged other major markets in
sterling terms.
The strength of equities was driven by the continued growth of
the global economy. A notable feature was the recovery in raw
material prices, with oil doubling from its low.
Biggest rises by value
Value
appreciation
--- ------------------ --------------
1 Royal Dutch Shell GBP8.6m
--- ------------------ --------------
2. Anglo American GBP7.1m
--- ------------------ --------------
3. Rio Tinto GBP6.2m
--- ------------------ --------------
4. Applied Materials GBP6.0m
--- ------------------ --------------
5. Glencore GBP5.9m
--- ------------------ --------------
Biggest falls by value
Value
depreciation
--- --------------------------- --------------
1. Cape GBP2.2m
--- --------------------------- --------------
2. Senior GBP2.0m
--- --------------------------- --------------
3. International Consolidated GBP2.0m
Airlines
--- --------------------------- --------------
4. Interserve GBP1.9m
--- --------------------------- --------------
5 St Modwen Properties GBP1.5m
--- --------------------------- --------------
Portfolio activity and investment background
Overall, the performance of the portfolio was good and we
outperformed the benchmark index and were in line with the average
performance in the AIC Global sector. Nevertheless, relative to
other funds in the Global sector, we were in the lower quartile for
performance over the year. The main reason for that was our
weighting in the UK, which we describe in more detail below.
In the latter part of 2015, we built up a position in the large
miners Anglo American, Glencore and Rio Tinto. These shares were
trading substantially below their asset values but we believed they
had been oversold and that the strong management in the companies
would quickly deal with the issues facing the sector to deliver a
recovery. This proved to be an accurate call and 2016 saw a strong
upturn in the fortunes of these companies. They took action
including selling their poorer assets, closing underperforming
mines, having capital raisings and initiating modest production
cuts. As a result of these actions, coupled with continued global
growth and economic stimulation measures taken by the Chinese
authorities, raw material prices recovered from very low levels and
share prices rose quite steeply. We benefited from this and during
the summer months, decided to reduce the exposure, selling entirely
the holdings in Glencore and Anglo American. Our purchases were
well timed but the sales were not as the prices of raw material
kept going up - for instance, coking coal prices doubled in a six
week period - thus propelling the share prices substantially higher
still in the fourth quarter of the year. The holdings in the sector
were further reduced into this strength. The stimulus that
contributed to rises in raw material prices may however be stirring
inflationary pressures, so the authorities may have to intervene
again in the future and weakening raw material prices may return.
Therefore, we will continue reducing further into share price
strength.
The US was the best performing region in 2016, delivering a
total return in excess of 50%. Energy and manufacturing stocks
performed well, particularly towards the end of the year when
markets began to anticipate the upside that might materialise from
Trump initiatives to reduce regulation and stimulate economic
growth. This has led to some very high valuations and as a result,
we have reduced Applied Materials and Cummins while building up a
holding in General Motors.
During the year, we re-configured our exposures in Japan and the
Far East. Exposures to Henderson Japanese and Far Eastern OEICs
were sold and replaced with a new holding in Schroder Japan Growth
Investment Trust, which was bought on a reasonable discount, and
increases in our holdings in Scottish Oriental Smaller Companies
and Templeton Emerging Markets, the latter having performed
particularly strongly since being added to the portfolio in 2015.
However, Better Capital, the investment company that is involved
with corporate turnarounds, severely disappointed as some of the
underlying holdings experienced continued poor operational results.
The company responded to pressure and is now returning capital to
its shareholders.
The rise of populism, illustrated by the Brexit vote in the UK
and Donald Trump winning the US Presidential race, has suddenly
thrust politics into the forefront of investors' thinking. After
the Brexit vote, we reduced equity exposure in the UK, as
uncertainty about the economic outlook became a greater concern.
Share prices have recovered from the initial falls after the vote,
but sterling's weakness has increased the prospect for inflation to
rise during 2017. It is possible that inflation will rise faster
than wages, which will put downward pressure on consumption - the
consumer having been a significant factor in better than expected
growth figures in the second half of 2016 - with the UK retail
sector possibly suffering as a result. The portfolio has very
little exposure to this sector. On the other hand, if wages rise
faster than inflation, this might suggest that inflation is
becoming more embedded in the economy. It may become necessary for
interest rates to rise from current historic lows. While this would
help savers, the adjustment to higher rates will be painful for
consumers and consequently for some parts of the economy.
Although there are concerns about the UK, the case for equity
investment remains strong. The board and the managers continue to
believe in the long term benefit of investing in equities and of
the investment trust structure. The UK market has a higher dividend
yield than other major markets and around 70% of the profits of UK
companies are derived from overseas. These profits in sterling
terms have received a large boost from the fall in the pound, as
have the dividends received from UK stocks that pay their dividends
in Euros or US dollars. Higher dividend yield and higher dividend
growth than other markets drives our belief that the portfolio
should hold a substantial weighting in UK stocks, despite the
concerns described above.
Corporate governance
As an active manager, our preference is to engage with
management and boards to resolve issues of concern rather than to
vote against shareholder meeting proposals. In our experience this
approach is more likely to be effective in influencing company
behaviour. However, where we believe proposals are not in
shareholder interests or where engagement proves unsuccessful, we
will vote against. Proposals we voted against during 2016 included
remuneration related proposals at BP, Weir Group and Babcock
International. All three companies received very significant levels
of shareholder opposition, and have subsequently made changes to
their remuneration policies.
We also engaged with management and non-executives of companies
on a wide range of other issues. Meetings of note (and key issues
covered) included GlaxoSmithKline (management succession,
remuneration and business ethics), Carnival (health & safety,
reporting), BHP Billiton (health & safety, climate change),
HSBC (succession planning, corporate culture, business conduct) and
Royal Dutch Shell (remuneration, climate change).
Outlook
The portfolio is made up of companies that have management teams
that will adapt their businesses to prevailing economic
circumstances. Macroeconomic factors are not the fundamental
determinant for stocks that we choose to hold but rather management
quality and excellence of product. That said, increasing
inflationary pressures, as well as concerns over real GDP growth,
means that the equity valuations need to be reasonable. When they
are relatively high, profits need to be taken and the money
recycled into better value opportunities. The focus will remain on
stocks and valuations. During periods of political and economic
volatility, investment opportunities will emerge to buy stocks on
long term attractive valuations.
James Henderson
Henderson Global Investors Limited
Management review - independent fiduciary services
Introduction
This is my first management review since I joined Law Debenture,
following the retirement of Caroline Banszky in August 2016.
Prior to joining, I spent much of my career in professional
services. I was generally aware of the attributes and reputation of
Law Debenture, but in the short time that I have been here, I have
found out exactly how excellent our services - and our people -
actually are, and also in what high regard they are held by our
clients.
My mission is to ensure that we become more proactive as an
organisation in promoting and capitalising on our capabilities. I
recognise that there is fierce competition in most of the markets
where we operate and that there is downward pressure on pricing,
but we have a good story to tell and I want us to be more vocal in
telling it than we have been historically.
I have begun to implement a strategy in conjunction with the
business heads that will initially focus on growing each of our
existing businesses organically. This will involve some level of
refreshment and investment and inevitably, there will be a lead
time before the new investments translate to bottom line growth.
However, beyond the short term, I expect to deliver growth and
improved profitability across all of our businesses.
As you will read below, already in 2017 we have extended our
operations into Dublin and set up a brand new office, to both take
advantage of the opportunities in Ireland and help mitigate any
difficulties that may be encountered as the UK negotiates its exit
from the European Union.
As well as organic growth, if an appropriate acquisition
opportunity comes along - one that could significantly enhance
shareholder value and expand the range or extent of our service
offering to clients in a controlled way - it will be given very
careful consideration in conjunction with the board.
Results
Independent fiduciary services profit before tax increased by
2.8% from GBP9.2 million to GBP9.5 million. Revenue return per
share increased by 8.3% from 7.09p to 7.68p.
Independent fiduciary services businesses ("IFS")
Law Debenture is a leading provider of independent third party
professional services, including corporate trusts (including
trustee and escrow banking), pension trusts, corporate services,
agent for service of process, whistleblowing services and
governance services to client boards and pension funds. The
businesses are monitored and overseen by a board comprising the
heads of the relevant business areas and two non-executive,
independent directors.
Review of 2016
I was honoured and proud to be appointed Law Debenture's chief
executive and am grateful to my predecessor, Caroline Banszky, both
for the briefings she gave me during our handover and the care that
she took of the business over her many years at the helm. Law
Debenture enjoys an unparalleled reputation for quality, longevity,
consistency and innovation in the markets where we operate and I
aim to enhance that reputation and increase profitability, in turn
enhancing shareholder value.
IFS profits in 2016 continued the trend of the three previous
years in being broadly flat. While the turbulence in equity markets
at the beginning of the year made little difference to our new
business flow, the Brexit vote certainly did, at least for a short
while. A number of projects and financings went on hold while
counterparties paused as the vote approached, then took stock
immediately afterwards to work out what Brexit might actually mean.
Markets returned to normal activity levels quite quickly and
although a small number of transactions were abandoned, most were
reactivated shortly after the vote and went on to complete
successfully. The last few months of the year were thus quite
positive. Market share remained satisfactory across all business
areas.
Corporate trusts, including trustee and escrow banking
Corporate trusts had a solid year overall in terms of revenues
and new transaction volumes, continuing to operate successfully
across a broad spectrum of activities. Some of the appointments we
secured during the year are set out below.
We were appointed trustee of a new MTN Programme for National
Grid Gas, as well as on further large debt issues by the Bank of
England, BP and BT. Repeat issuance by existing clients including
Affordable Housing (guaranteed by the UK Government), Northumbrian
Water and Ladbrokes whilst, as a new development in funding, we
were appointed on two large convertible bonds by Vodafone.
In the high yield bond market, levels of activity reflected the
continuing retrenchment of bank credit for medium sized companies,
with a number of such issues being placed with a single investor.
The private placement market continues to grow in other areas also,
with many UK companies now raising finance direct from one or just
a few investors.
Islamic finance remained an active area for us and included
appointments as delegate on further sukuk bonds by Islamic
Development Bank, a sukuk programme for its affiliate ICD and a
sukuk financing on behalf of the Government of Pakistan.
Security trustee appointments reflected a variety of underlying
commercial objectives ranging from bank funding - including an
acquisition by Italian chemicals group IGM RFE and a mix of long
term bank, EIB and institutional funding for the development for a
port in the UK - to project financings. We continue to work in this
arena with International Finance Corporation (part of the World
Bank) around the world and in 2016, acted as security trustee and
facility agent on an African copper mine project, with IFC as a
lender. We were also appointed as bond and security trustee for the
proposed Hinkley Point nuclear power project in the UK.
Our recognised independence as an impartial third party
continues to enable us also to secure many escrow agent
appointments thereby serving to diversify our income base
further.
In the last twelve months, our experienced trust management team
has continued to deal with a steady stream of post-issuance work,
including a number of debt restructurings, modification requests,
corporate reorganisations and defaults. This work is a material
source of income for the business.
Pension trusts and governance services
Our pension trusteeship service had a good year, benefitting
from the greater focus in government and the media on the quality
of governance for pension schemes in the UK. The requirement to
understand the increasingly complex issues that confront lay
trustees has resulted in a growing demand for our services,
especially as chair of trustees.
We continued to grow and develop our team with four new
directors joining the department - bringing new skills, experience
and long term commitment to serving our clients.
Our sole trusteeship services, where we act as the sole trustee
of final salary schemes and deliver one-stop governance cost
effectively, continue to evolve and attract new clients. We have
confirmed our position at the forefront of developing best practice
for independent governance committees for providers of workplace
personal pensions. We are finding increased demand for scheme
secretarial and effective implementation oversight services, as
appreciation grows of the positive impact of a close collaboration
with the trustee chairman on project management and costs of
delivery. We continue to develop our team in response to this
demand.
Corporate services
The corporate services business (provision of corporate
directors, company secretary, accounting and administration of
special purpose vehicles, facility agency) performed adequately.
The structured finance market is not as busy as we would prefer but
in other markets, we won new customers through our company
secretarial, facility agency, M&A and corporate governance
offerings. Notable was the demand for our services from
participants in the alternative energy and recycling markets.
Our long established and highly regarded service of process
business had another solid year.
Safecall
Our external whistleblowing service had another successful year,
with an encouraging number of new appointments. The demand for our
services remains strong, both in the UK and across Europe, as more
and more organisations recognise the value of an external
whistleblowing service. The introduction of the modern slavery act
was helpful, as organisations reviewed their policies to ensure
that robust procedures (including a reliable external
whistleblowing service) are in place for individuals to report
wrongdoing, not only within their own company but within companies
in the supply chain. Notable appointments during the year included
Marks & Spencer, Boehringer Ingelheim, Computacenter and
Keller.
Overseas
United States
When we opened an office in New York in 2002, we hoped to win
primarily trustee work, involving both US and European elements.
Instead, it became clear that the stronger market demand was for an
independent trustee to take "successor" roles in bankruptcy
(Chapter 11) situations. These roles required us to have
significant capital of US$50 million. Over time, the number of
these roles has diminished and the opportunities to win
conventional trust work have been more limited than we would
prefer. The cost-benefit of the regulatory capital requirement
became marginal. Simultaneously, we have built up other business,
mainly in the corporate services and process agent sector and these
business lines continue to deliver profits, but are not dependent
on the retention of the capital commitment. Consequently, we
decided to exit the trust business, while retaining our profitable
other businesses. The US corporate trust business is now in
run-off. In December, substantially all the business was
transferred, with the majority of the staff being made redundant.
In difficult circumstances, all the staff continued to behave in a
professional manner and their contribution is very much
appreciated. It is expected that the small number of trusts we have
had to retain may take up to two years to unwind and a provision
has been made for the expected net costs of this.
Hong Kong
Hong Kong's trade and its financial sector have been affected
adversely to a certain extent by Brexit because of the close
economic relationship with the EU and the UK. Coupled with the
continuing economic downturn in Hong Kong and an uncertain global
outlook, levels of new business generally remained modest in 2016.
More positively, recurring income from existing clients remained
solid, and it is possible that the weakened confidence at present
might increase demand for other of our independent third party
services, such as escrows.
Channel Islands
There was continued transaction activity on existing
appointments during 2016, which contributed to good returns. There
were some transaction terminations, but these were offset by new
appointments and further growth in the number of service of process
appointments.
Republic of Ireland
I am pleased to announce that we have recently opened a new
office in Dublin, from where we will provide a wide range of
services including corporate trust and agency, corporate services
and service of process. Dublin has long been a significant
financial services sector and while it suffered badly in the
aftermath of the financial crisis, it has begun to bounce back. I
feel that the time is right to establish a presence there and we
have recruited an experienced locally based managing director,
Ronan Reilly, to establish and run the business, with additional
local hires to follow.
Outlook
Competition in our market place is fierce and there seems to be
a constant downward pressure on our fees. However, by focusing on
our strengths - namely the quality of our service, our people, our
reputation and our clients - and combining that with an increase in
promoting our whole range of businesses, I feel that we can retain
our existing business and win more than our current share of new
business in these difficult times.
I expect in 2017 our core businesses to deliver similar returns
to those seen in the recent past. It will be a year of
consolidation and investment, ahead of growth in later years.
I would like to thank our staff around the world for their work
during 2016 and I look forward to working with them in the years to
come as we look to build up our businesses globally.
Michael Adams
Statement of financial position
as at 31 December
2016 2015
---------------------------------- -------- -----------
GBP000 GBP000
---------------------------------- -------- -----------
Assets
Non current assets
Goodwill 1,968 2,256
Property, plant and equipment 161 206
Other intangible assets 70 16
Investments held at fair
value through profit or
loss 696,080 621,613
Deferred tax assets 1,312 824
---------------------------------- -------- -----------
Total non current assets 699,591 624,915
---------------------------------- -------- -----------
Current assets
Trade and other receivables 6,680 7,073
Other accrued income and
prepaid expenses 4,603 4,888
Cash and cash equivalents 94,804 60,301
---------------------------------- -------- -----------
Total current assets 106,087 72,262
---------------------------------- -------- -----------
Total assets 805,678 697,177
---------------------------------- -------- -----------
Current liabilities
Trade and other payables 13,346 13,816
Corporation tax payable - 506
Other taxation including
social security 444 686
Deferred income 3,826 3,934
Derivative financial instruments 2,029 725
---------------------------------- -------- -----------
Total current liabilities 19,645 19,667
---------------------------------- -------- -----------
Non current liabilities
and deferred income
Long term borrowings 114,024 113,980
Retirement benefit obligations 2,300 1,400
Deferred income 4,318 4,810
Provision for onerous contracts 3,106 -
---------------------------------- -------- -----------
Total non current liabilities 123,748 120,190
---------------------------------- -------- -----------
Total net assets 662,285 557,320
---------------------------------- -------- -----------
Equity
Called up share capital 5,917 5,916
Share premium 8,722 8,667
Own shares (1,197) (1,493)
Capital redemption 8 8
Translation reserve 2,156 909
Capital reserves 609,077 503,649
Retained earnings 37,602 39,664
Total equity 662,285 557,320
---------------------------------- -------- -----------
Statement of cash flows
for the year ended 31 December
Operating activities 2016 2015
GBP000 GBP000
Operating profit before interest
payable and taxation 129,796 5,218
(Gains)/losses on investments (105,428) 20,620
Foreign exchange (68) (43)
Depreciation of property, plant
and equipment 112 94
Amortisation of intangible
assets 20 30
Provision for impairment of 418 -
goodwill
Decrease in receivables 678 209
Increase in payables 1,763 1,105
Transfer (from) capital reserves (157) (385)
Normal pension contributions
in excess of cost (1,300) (650)
Cash generated from operating
activities 25,834 26,198
Taxation (560) (803)
Operating cash flow 25,274 25,395
------------------------------------- ---------- ---------
Investing activities
Acquisition of property, plant
and equipment (53) (168)
Expenditure on intangible assets (75) -
Purchase of investments (91,494) (96,541)
Sale of investments 122,248 55,595
Cash flow from investing activities 30,626 (41,114)
------------------------------------- ---------- ---------
Financing activities
Derivative financial instrument (4,775) -
Interest paid (5,542) (3,632)
Dividends paid (19,122) (19,118)
Long term borrowings - 74,477
Proceeds of increase in share
capital 56 45
Purchase of own shares 296 193
Net cash flow from financing
activities (29,087) 51,965
------------------------------------- ---------- ---------
Net increase in cash and cash
equivalents 26,813 36,246
------------------------------------- ---------- ---------
Cash and cash equivalents at
beginning of period 60,301 23,773
Foreign exchange gains on cash
and cash equivalents 7,690 282
Cash and cash equivalents at
end of period 94,804 60,301
------------------------------------- ---------- ---------
Statement of changes in equity
Share Share Own Capital Translation Capital Retained
capital premium shares redemption reserve reserves earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ---------
Equity
1 January
2015 5,916 8,622 (1,686) 8 619 524,269 36,463 574,211
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ---------
Profit - - - - - (20,620) 21,359 739
Foreign
exchange - - - - 290 - - 290
Actuarial
gain on
pension
scheme
(net of
tax) - - - - - - 960 960
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ---------
Total comprehensive
income - - - - 290 (20,620) 22,319 1,989
Issue of
shares - 45 - - - - - 45
Dividend
relating
to 2014 - - - - - - (12,979) (12,979)
Dividend
relating
to 2015 - - - - - - (6,139) (6,139)
Movement
in own
shares - - 193 - - - - 193
Total equity
31 December
2015 5,916 8,667 (1,493) 8 909 503,649 39,664 557,320
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ---------
Equity
1 January
2016 5,916 8,667 (1,493) 8 909 503,649 39,664 557,320
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ---------
Profit - - - - - 105,428 18,843 124,271
Foreign
exchange - - - - 1,247 - - 1,247
Actuarial
(loss)
on pension
scheme
(net of
tax) - - - - - - (1,783) (1,783)
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ---------
Total comprehensive
income - - - - 1,247 105,428 17,060 123,735
Issue of
shares 1 55 - - - - - 56
Dividend
relating
to 2015 - - - - - - (12,983) (12,983)
Dividend
relating
to 2016 - - - - - - (6,139) (6,139)
Movement
in own
shares - - 296 - - - - 296
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ---------
Total equity
31 December
2016 5,917 8,722 (1,197) 8 2,156 609,077 37,602 662,285
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ---------
Segmental analysis
Independent Group
Investment fiduciary charges Total
trust services
2016 2015 2016 2015 2016 2015 2016 2015
---------------- --------------- ------------- ---------------- ------------- ------------- ------------ --------------- -------------
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Revenue
Segment income 20,477 19,005 30,735 30,384 - - 51,212 49,389
Other income 74 25 151 171 - - 225 196
Cost of sales - - (3,565) (3,461) - - (3,565) (3,461)
Administration
costs (2,739) (2,926) (17,573) (17,485) (464) - (20,776) (20,411)
Provision
for onerous
contracts (3,031) - (3,031) -
---------------- --------------- ------------- ---------------- ------------- ------------- ------------ --------------- -------------
17,812 16,104 9,748 9,609 (3,495) - 24,065 25,713
Interest (net) (4,964) (3,117) (275) (390) - - (5,239) (3,507)
---------------- --------------- ------------- ---------------- ------------- ------------- ------------ --------------- -------------
Return,
including
profit on
ordinary
activities
before
taxation 12,848 12,987 9,473 9,219 (3,495) - 18,826 22,206
Taxation - - (405) (847) 422 - 17 (847)
---------------- --------------- ------------- ---------------- ------------- ------------- ------------ --------------- -------------
Return,
including
profit
attributable
to
shareholders 12,848 12,987 9,068 8,372 (3,073) - 18,843 21,359
---------------- --------------- ------------- ---------------- ------------- ------------- ------------ --------------- -------------
Revenue return
per ordinary
share 10.88 11.01 7.68 7.09 (2.60) - 15.96 18.10
---------------- --------------- ------------- ---------------- ------------- ------------- ------------ --------------- -------------
Assets 743,248 640,223 62,052 56,954 378 - 805,678 697,177
-
Liabilities (97,230) (101,063) (43,057) (38,794) (3,106) - (143,393) (139,857)
---------------- --------------- ------------- ---------------- ------------- ------------- ------------ --------------- -------------
Total net
assets 646,018 539,160 18,995 18,160 (2,728) - 662,285 557,320
---------------- --------------- ------------- ---------------- ------------- ------------- ------------ --------------- -------------
.
The capital element of the income statement
is wholly attributable to the investment trust;
Group charges have been included as a separate
element for the first time this year, to reflect
the result of matters relating to group actions.
2016
Group charges before taxation during the GBP000
year comprised the following
-------------------------------------------------------------------------------------------------------------- ---------------
Closure of the US trust business
Staff termination and legal costs incurred (437)
Provision for onerous contracts (3,031)
-------------------------------------------------------------------------------------------------------------- ---------------
(3,468)
Impairment of goodwill in Delaware Corporate
Services Inc. (418)
Past service credit on closure of defined
benefit pension scheme net of costs of
closure 391
-------------------------------------------------------------------------------------------------------------- ---------------
(3,495)
-------------------------------------------------------------------------------------------------------------- ---------------
Provision for onerous contracts
Group 2016 2015
GBP000 GBP000
At 1 January - -
Provision made in year 3,031 -
Foreign exchange 75 -
----------------------- -------- --------
At 31 December 3,106 -
----------------------- -------- --------
In December 2016 the group completed the disposal of
substantially all of its US corporate trust business for a
consideration of $1. This resulted in no book loss to the group,
however costs totalling GBP437,000 in respect of staff termination
costs and legal costs were incurred as a result of the transaction.
The disposal was the completion of the first part of a strategy to
exit the US corporate trust business, so as to release the $50
million of capital required by the business. The contracts
remaining at 31 December 2016 do not generate sufficient income to
cover the costs of running and financing of the remaining business
up to the eventual date of its closure. The provision for onerous
costs represents the expected net future costs up to the date of
disposal or completion of the remaining contracts. The provision
comprises financing costs of GBP2,262,000 and net running costs
(including the cost of closure) of $1,043,000.
Portfolio changes in geographical distribution
Valuation Appreciation Valuation
31 December Costs Sales GBP000 31 December
2015 Purchases of acquisition proceeds 2016
GBP000 GBP000 GBP000 GBP000 GBP000
--------------- ------------ ----------- ---------------- ---------- ------------ ------------
United Kingdom 449,215 63,276 (263) (76,995) 57,477 492,710
North America 58,484 9,319 (11) (12,441) 29,624 84,975
Europe 40,086 7,975 (48) (1,056) 8,287 55,244
Japan 24,569 5,731 (31) (17,389) 1,486 14,366
Other Pacific 39,668 3,191 (17) (14,367) 6,665 35,140
Other 9,591 2,002 (3) - 2,055 13,645
--------------- ------------ ----------- ---------------- ---------- ------------ ------------
621,613 91,494 (373) (122,248) 105,594 696,080
--------------- ------------ ----------- ---------------- ---------- ------------ ------------
Investment trust - objectives, investment strategy, business
model
Our objective for the investment trust is to achieve long term
capital growth in real terms and steadily increasing income. The
aim is to achieve a higher rate of total return than the FTSE
Actuaries All-Share Index through investing in a portfolio
diversified both geographically and by industry.
Law Debenture shares are intended for private investors in the
UK ('retail investors'), professionally advised private clients and
institutional investors. By investing in an investment trust,
shareholders typically accept the risk of exposure to equities but
hope that the pooled nature of an investment trust portfolio will
give some protection from the volatility in share price movements
that can sometimes affect individual equities.
Our investment strategy (which did not change in 2016) is as
follows:
The Corporation carries on its business as a global investment
trust.
The Corporation's portfolio will typically contain between 70
and 150 listed investments. The portfolio is diversified both by
industrial sector and geographic location of investments in order
to spread investment risk.
There is no obligation to hold shares in any particular type of
company, industry or geographical location. The IFS businesses do
not form part of the investment portfolio and are outwith this
strategy.
Whilst performance is measured against local and UK indices, the
composition of these indices does not influence the construction of
the portfolio. As a consequence, it is expected that the
Corporation's investment portfolio and performance will from time
to time deviate from the comparator indices.
The Corporation's assets are invested internationally and
without regard to the composition of indices. There are some
guidelines, set by the board, on maximum or minimum stakes in
particular regions and all stakes are monitored in detail by the
board at each board meeting in order to ensure that sufficient
diversification is maintained.
Liquidity and long-term borrowings are managed with the aim of
improving returns to shareholders. The policy on gearing is to
adopt a level of gearing that balances risk with the objective of
increasing the return to shareholders, in pursuit of its investment
objective. Investments may be held in, inter alia, equity shares,
collective investment products including open ended investment
companies ('OEICs'), fixed interest securities, interests in
limited liability partnerships, cash and liquid assets. Derivatives
may be used but only with the prior authorisation of the board.
Investment in such instruments for trading purposes is proscribed.
It is permissible to hedge against currency movements on both
capital and income account, subject again to prior authorisation of
the board. Stock lending, trading in suspended shares and short
positions are not permitted. No more than 15% of gross assets will
be invested in other UK listed investment trusts. The Corporation's
investment activities are subject to the following limitations and
restrictions:
-- No investment may be made which raises the aggregate value of
the largest 20 holdings, excluding investments in collective
investment vehicles that give exposure to the Japan, Asia/Pacific
or emerging market regions, to more than 40% of the Corporation's
portfolio, including gilts and cash. The value of a new acquisition
in any one company may not exceed 5% of total portfolio value
(including cash) at the time the investment is made. Further
additions shall not cause a single holding to exceed 5%, and board
approval must be sought to retain a holding, should its value
increase above the 5% limit.
-- The Corporation applies a ceiling on effective gearing of
50%. While effective gearing will be employed in a typical range of
10% net cash to 20% gearing, the board retains the ability to
reduce equity exposure so that net cash is above 10% if deemed
appropriate.
-- The Corporation may not make investments in respect of which
there is unlimited liability.
Our business model is designed to position the Corporation to
best advantage in the investment trust sector.
We aim to deliver the investment trust's objective by skilled
implementation of the investment strategy, complemented by
maintaining and operating our IFS businesses profitably and safely,
while keeping them distinct from the portfolio. The operational
independence of the IFS means that they can act flexibly and
commercially. They provide a regular flow of dividend income to the
Corporation. This helps the board to smooth out equity dividend
peaks and troughs, means that the investment manager doesn't have
to be constrained by choosing stocks just for yield and is an
important element in delivering the objective of steadily
increasing income for shareholders, fully covered by current
revenues. In turn, some of the tax relief at the investment trust
level arising from our debenture interest and excess costs, which
would otherwise be unutilised, can be transferred to the IFS.
Fee structure, ongoing charges and investment management
agreement
Our portfolio of investments is managed under delegation by
James Henderson of Henderson Global Investors Limited ('Henderson')
under a contract terminable by either side on six months' notice.
On a fully discretionary basis, Henderson is responsible for
implementing the Corporation's investment strategy and fees are
charged at 0.30% of the value of the net assets of the group
(excluding the net assets of the IFS), calculated on the basis
adopted in the audited financial statements. Underlying management
fees of 0.75% on the Corporation's holdings in Henderson Japanese
and Pacific OEICs were fully rebated although those holdings were
sold in 2016. This means that the Corporation continues to maintain
one of the most competitive fee structures in the investment trust
sector and this, combined with the good performance of Henderson
over the years as our investment manager, has led the board to
conclude that the continuing appointment of Henderson as the
Corporation's investment manager remains in the best interests of
shareholders. The board recognises that performance in recent
times, for reasons explained elsewhere, has lagged compared with
other investment trusts with a higher overseas weighting. Equity
investment needs to be seen over the longer term, however, and here
Henderson has delivered over many years.
Investment trusts are required to publish their ongoing charges.
This is the cost of operating the trust and includes the investment
management fee, depositary and custody fees, investment performance
data, accounting, company secretary and back office administration.
Law Debenture's latest published level of ongoing charges is one of
the lowest in the marketplace at 0.45%. No performance fees are
paid to the investment manager.
Capital structure - simple and mainstream
Law Debenture's capital structure is transparent. We have only
one class of share - ordinary shares - and each share has the same
rights as every other share.
The Corporation conducts its affairs so that its ordinary shares
are capable of being recommended by independent financial advisors
to ordinary retail investors in accordance with relevant FCA rules.
Our ordinary shares are, we consider, mainstream investment
products because they are shares in an investment trust. The
Corporation intends to continue conducting its affairs for the
foreseeable future so that the ordinary shares can continue to be
categorised as mainstream.
Transparency
In order to assist shareholders in understanding the nature of
the underlying investments they are buying into when investing in
Law Debenture shares, we publish our entire portfolio twice a year
- in the annual report and half yearly report - with regular
monthly updates on the composition of the top ten holdings in the
portfolio
Gearing
Investment trusts have the benefit of being able to 'gear' their
portfolios according to market conditions. This means that they can
raise debt (either short or long term) to generate funds for
further investment - i.e. to increase the size of the portfolio -
or they can sell assets from within the portfolio to reduce debt
and even be "negatively geared" - i.e. selling assets to hold cash
so that less than 100% of the trust's assets are invested in
equities.
The Corporation has two debentures (long dated sterling
denominated financing). At 31 December 2016, our gearing was
8%.
The weighted average interest payable on the Corporation's
structural borrowings is 4.589%. There has been no change in the
Corporation's gearing policy, with effective gearing typically
employed in a range of 10% net cash to 20% gearing.
Viability statement
The Corporation is required to publish a longer-term statement
about its viability as part of its compliance with the Code and the
UKLA listing rules.
The directors believe that a forward looking period of three
years is appropriate. The directors assess the Corporation's future
prospects by keeping under close review its current and projected
financial position, threats/risks to the delivery over the longer
term of the investment strategy objectives and the group business
model and a macroeconomic overview based on a reasonable time
horizon. A three year time period also takes into account the
nature of the markets in which the IFS businesses operate, where
fluctuations in revenue can occur year-on-year for reasons beyond
Law Debenture's control.
The directors confirm that they have a reasonable expectation
that the Corporation will continue to implement its investment
strategy and business model and to operate and be able to meet its
liabilities as they fall due for the next three financial years.
There are no current plans to amend the investment policy, which
has delivered good capital and dividend returns for shareholders
over many years. The strategy for the IFS businesses remains to
continue to grow them profitably and safely.
The main qualification to this viability statement is that the
investment manager is appointed on a fully discretionary basis, so
while stocks are picked by the manager within the guidelines in the
investment strategy, the board does not dictate what individual
stocks are bought or sold. Portfolio over or under performance is
only properly measurable over the medium and longer term. Short
term fluctuations will not necessarily result in a change of
strategy, but might in extreme circumstances pose a risk to
viability.
This risk is accepted within the board's risk appetite.
Key performance indicators ('KPI')
The KPIs used to measure the progress and performance of the
group are:
-- net asset value total return per share (combining the capital
and income returns of the group) and how this compares, over
various time intervals, with relevant indices;
-- the discount/premium in share price to NAV; and
-- the cost of running the portfolio as a percentage of its
value.
Since the objective of the investment trust is measurable solely
in financial terms, the directors do not consider that it is
appropriate to adopt non-financial KPIs. The financial measures
adopted as KPIs are part of our financial reporting obligations and
no Alternative Performance Measures as defined under ESMA
guidelines have been adopted.
Top 20 equity holdings by value
2016 2016 2015 2015
----- ------------------ ---------- --------------------- ---------------- ------------------
Value % of % of
----- ------------------ ---------- --------------------- ---------------- ------------------
Rank Company GBP000 portfolio portfolio Rank
----- ------------------ ---------- --------------------- ---------------- ------------------
1 Royal Dutch Shell 25,883 3.72 1.86 5
----- ------------------ ---------- --------------------- ---------------- ------------------
2 HSBC 17,309 2.49 2.03 3
----- ------------------ ---------- --------------------- ---------------- ------------------
3 Rio Tinto 16,559 2.38 1.67 9
----- ------------------ ---------- --------------------- ---------------- ------------------
4 BP 16,304 2.34 1.99 4
----- ------------------ ---------- --------------------- ---------------- ------------------
5 GKN 14,934 2.15 2.24 1
----- ------------------ ---------- --------------------- ---------------- ------------------
6 Prudential 11,913 1.71 1.32 17
----- ------------------ ---------- --------------------- ---------------- ------------------
7 GlaxoSmithKline 11,704 1.68 1.66 10
----- ------------------ ---------- --------------------- ---------------- ------------------
8 Hill & Smith 11,201 1.61 1.58 13
----- ------------------ ---------- --------------------- ---------------- ------------------
9 Senior 11,160 1.60 2.12 2
----- ------------------ ---------- --------------------- ---------------- ------------------
10 Relx 10,838 1.56 1.44 16
----- ------------------ ---------- --------------------- ---------------- ------------------
11 Johnson Service 10,751 1.54 1.21 23
----- ------------------ ---------- --------------------- ---------------- ------------------
12 BAE Systems 10,602 1.52 1.45 15
----- ------------------ ---------- --------------------- ---------------- ------------------
13 Spectris 10,409 1.50 1.01 30
----- ------------------ ---------- --------------------- ---------------- ------------------
14 Rolls Royce 10,354 1.49 1.30 18
----- ------------------ ---------- --------------------- ---------------- ------------------
15 Microsoft (USA) 10,057 1.44 1.20 24
----- ------------------ ---------- --------------------- ---------------- ------------------
16 Smith (DS) 9,836 1.41 1.76 8
----- ------------------ ---------- --------------------- ---------------- ------------------
17 IP Group 9,733 1.40 1.80 7
----- ------------------ ---------- --------------------- ---------------- ------------------
18 Hiscox 9,542 1.37 1.60 12
----- ------------------ ---------- --------------------- ---------------- ------------------
19 Interserve 9,091 1.31 0.84 41
----- ------------------ ---------- --------------------- ---------------- ------------------
20 Marshalls 8,863 1.27 1.63 11
----- ------------------ ---------- --------------------- ---------------- ------------------
35.49
----- ------------------ ---------- --------------------- ---------------- ------------------
Other significant holdings by value
2016 2016 2015
---------------------------- --------------- ---------------- ----------------
Value % of % of
---------------------------- --------------- ---------------- ----------------
Company GBP000 portfolio portfolio
---------------------------- --------------- ---------------- ----------------
Baillie Gifford Pacific* 14,449 2.08 1.97
---------------------------- --------------- ---------------- ----------------
Stewart Investors Asia
Pacific* 14,045 2.02 1.89
---------------------------- --------------- ---------------- ----------------
Templeton Emerging Markets
Investment Trust 9,074 1.30 1.00
---------------------------- --------------- ---------------- ----------------
5.40
---------------------------- --------------- ---------------- ----------------
*Open ended investment companies.
Portfolio by sector 2016
Oil & gas 9.7%
-------------------- ------
Basic materials 6.7%
-------------------- ------
Industrials 29.5%
-------------------- ------
Consumer goods 7.7%
-------------------- ------
Health care 8.3%
-------------------- ------
Consumer services 7.5%
-------------------- ------
Telecommunications 0.7%
-------------------- ------
Utilities 1.8%
-------------------- ------
Technology 2.7%
-------------------- ------
Financials 25.4%
-------------------- ------
Portfolio by sector 2015
Oil & gas 6.9%
-------------------- ------
Basic materials 6.5%
-------------------- ------
Industrials 26.4%
-------------------- ------
Consumer goods 9.2%
-------------------- ------
Health care 8.7%
-------------------- ------
Consumer services 8.8%
-------------------- ------
Telecommunications 0.7%
-------------------- ------
Utilities 2.1%
-------------------- ------
Technology 2.2%
-------------------- ------
Financials 28.5%
-------------------- ------
Geographical distribution of portfolio 2016
United Kingdom 70.7%
---------------- ---------------------------
North America 12.2%
---------------- ---------------------------
Europe 8.0%
---------------- ---------------------------
Japan 2.1%
---------------- ---------------------------
Other Pacific 5.0%
---------------- ---------------------------
Other 2.0%
---------------- ---------------------------
Geographical distribution of portfolio 2015
United Kingdom 72.2%
---------------- ------
North America 9.4%
---------------- ------
Europe 6.5%
---------------- ------
Japan 4.0%
---------------- ------
Other Pacific 6.4%
---------------- ------
Other 1.5%
---------------- ------
Acquisition of own shares
During the year, the Corporation did not repurchase any of its
shares for cancellation. It intends to seek shareholder approval to
renew its powers to repurchase shares for cancellation up to 14.99%
of the Corporation's issued share capital, if circumstances are
appropriate.
On 16 March 2016, a subsidiary acquired 103,312 of the
Corporation's shares on the open market at 476.99 pence per share
in anticipation of fulfilling awards made under the Deferred Share
Plan.
Significant financial issues relating to the 2016 accounts
No new significant issues arose during the course of the audit.
The accounting treatment adopted following the closure of the
defined benefit pension scheme was examined in detail and found to
be appropriate. As reported in previous years, an area of
consideration continues to be consideration of bad debt
provisions.
Management makes an estimate of a number of bad debt provisions
for non-collection of fees and costs as part of the risk management
and control framework. The audit committee has received reports
from management describing the basis for assumptions used.
Other issues that arose included: the risk that portfolio
investments may not be beneficially owned or correctly valued; and
that revenue is appropriately recognised. The audit committee has
received assurance on these matters from management.
The audit committee is satisfied that the judgements made by
management are reasonable and that appropriate disclosures have
been included in the accounts. Taken in its entirety, the committee
was able to conclude that the financial statements themselves and
the annual report as a whole are fair, balanced and understandable
and provide the necessary information for shareholders to assess
the Corporation and group's position and performance, business
model and strategy. That conclusion was reported to the board.
Total voting rights and share information
The Corporation has an issued share capital at 27 February 2017
of 118,344,399 ordinary shares with voting rights and no
restrictions and no special rights with regard to control of the
Corporation. There are no other classes of share capital and none
of the Corporation's issued shares are held in treasury. Therefore
the total number of voting rights in The Law Debenture Corporation
p.l.c. is 118,344,399.
Borrowings
2016 2015
------------------------------------------------ -------- --------
GBP000 GBP000
------------------------------------------------ -------- --------
Long term borrowings
------------------------------------------------ -------- --------
Long term borrowings are repayable as follows:
------------------------------------------------ -------- --------
In more than five years
------------------------------------------------ -------- --------
Secured
------------------------------------------------ -------- --------
6.125% guaranteed secured bonds 2034 39,525 39,499
------------------------------------------------ -------- --------
3.77% secured senior notes 2045 74,499 74,481
------------------------------------------------ -------- --------
114,024 113,980
------------------------------------------------ -------- --------
The 6.125% bonds were issued by Law Debenture Finance p.l.c. and
guaranteed by the Corporation. The GBP40 million nominal tranche,
which produced proceeds of GBP39.1 million, is constituted by Trust
Deed dated 12 October 1999 and the Corporation's guarantee is
secured by a floating charge on the undertaking and assets of the
Corporation. The bonds are redeemable at nominal amount on 12
October 2034. Interest is payable semi-annually in equal
instalments on 12 April and 12 October in each year.
The 3.77% notes were issued by the Corporation. The GBP75
million nominal tranche, which produced proceeds of GBP74.5
million, is constituted by a note purchase agreement and the notes
are secured by a floating charge which ranked pari passu with the
charge given as part of the 6.125% bond issue. The notes are
redeemable at nominal amount on 25 September 2045. Interest is
payable semi-annually in equal instalments on 25 March and 25
September in each year.
The long term borrowings are stated in the statement of
financial position at book value. Including them at a fair value of
GBP143.1 million at 31 December 2016 (2015: GBP124.4 million) would
have the effect of decreasing the year end NAV by 24.62p (2015:
8.87p). The estimated fair value is based on the redemption yield
of reference gilts plus a margin derived from the spread of A rated
UK corporate bond yields over UK gilt yields (2015: A).
Related party transactions
The related party transactions between the Corporation and its
wholly owned subsidiary undertakings are summarised as follows:
2016 2015
----------------------------------------------------------- ------- -------
GBP000 GBP000
----------------------------------------------------------- ------- -------
Dividends from subsidiaries 7,700 7,725
----------------------------------------------------------- ------- -------
Interest on intercompany balances charged by subsidiaries 2,670 2,676
----------------------------------------------------------- ------- -------
Management charges from subsidiaries 240 420
----------------------------------------------------------- ------- -------
Interest on intercompany balances charged to subsidiaries 480 128
----------------------------------------------------------- ------- -------
Principal risks and uncertainties - investment trust
The principal risks to the Corporation's ability to continue
operations as an investment trust relate to investment activities
generally and include market price risk, foreign currency risk,
liquidity risk, interest rate risk, credit risk, country/region
risk and regulatory risk. The directors have carried out a robust
assessment of these risks, which are explained in more detail
below.
Market risk could arise from sudden fluctuations in world stock
markets. The portfolio deliberately contains a 'long list' of
stocks and is diversified on a geographical and sector basis to
spread risk. In extreme circumstances, as the Corporation's
investments comprise almost entirely of ready realisable, quoted
equities, these could be sold to meet funding requirements. The
Corporation conducts stress tests each month, as part of its
compliance programme, which gives the board a degree of comfort
about the Corporation's ability to withstand any significant market
shock.
Regulatory risk could arise from failure to comply with legal
and regulatory obligations. This could result in suspension of the
Corporation's stock exchange listing and/or regulatory sanction
(including financial penalties). Breach of the Corporation Tax Act
2010 could lead to the Corporation being subject to tax on capital
gains.
The executive team provides regular reports to the board and the
audit committee on the monitoring programmes in place to mitigate
these risks. As its own AIFM, the Corporation is able to monitor
investment positions along with levels of forecast income and
expenditure and the depositary carries out regular checks on the
Corporation's investment activity and accounting as a separate
check.
Operational risk could arise from failure of the Corporation's
accounting systems, the systems of the investment manager, or those
of the custodian, which might result in an inability to provide
accurate reporting and monitoring or a misappropriation of assets.
All relevant providers of these services have comprehensive
business continuity plans which include robust plans for continued
operation of the business in the event of a service disruption or
major disruption. The audit committee considers detailed reports on
the Corporation's risk profile and the internal controls in place
to mitigate such risk, as well as receiving reports by other key
third party providers.
Gearing risk could arise where the Corporation has borrowed
money for investment purposes. If the value of portfolio
investments falls, any borrowings will magnify the extent of this
loss. All borrowings require the prior approval of the board and
gearing levels are discussed by the board at every meeting. As
stated in the investment strategy, there is a ceiling on effective
gearing of 50%.
Further disclosures about risk are as follows:.
Market risk
Price risk, arising from uncertainty in the future value of
financial instruments. The board maintains strategy guidelines
whereby risk is spread over a range of investments, the number of
holdings normally being between 70 and 150. In addition, the stock
selections and transactions are actively monitored throughout the
year by the investment manager, who reports to the board on a
regular basis to review past performance and develop future
strategy. The investment portfolio is exposed to market price
fluctuation: if the valuation at 31 December 2016 fell or rose by
10%, the impact on the group's total profit or loss for the year
would have been GBP69.6 million (2015: GBP62.2 million).
Corresponding 10% changes in the valuation of the investment
portfolio on the Corporation's total profit or loss for the year
would have been GBP69.6 million (2015: GBP62.1 million).
Foreign currency risk, arising from movements in currency rates
applicable to the group's investment in equities and fixed interest
securities and the net assets of the group's overseas subsidiaries
denominated in currencies other than sterling. The group's
financial assets denominated in currencies other than sterling
were:
2016 2016 2016 2015 2015 2015
----------- ------------ ------------- ---------- ------------ ------------- ----------
Investments Net monetary Total Investments Net monetary Total
Group assets currency assets currency
exposure exposure
----------- ------------ ------------- ---------- ------------ ------------- ----------
GBPm GBPm GBPm GBPm GBPm GBPm
----------- ------------ ------------- ---------- ------------ ------------- ----------
US Dollar 84.2 6.9 91.1 59.7 6.0 65.7
----------- ------------ ------------- ---------- ------------ ------------- ----------
Canadian
Dollar 5.3 - 5.3 2.1 - 2.1
----------- ------------ ------------- ---------- ------------ ------------- ----------
Euro 37.9 0.4 38.3 24.1 0.3 24.4
----------- ------------ ------------- ---------- ------------ ------------- ----------
Danish
Krone 2.4 - 2.4 2.3 - 2.3
----------- ------------ ------------- ---------- ------------ ------------- ----------
Swedish
Krona 1.6 - 1.6 1.5 - 1.5
----------- ------------ ------------- ---------- ------------ ------------- ----------
Swiss
Franc 13.3 - 13.3 12.1 - 12.1
----------- ------------ ------------- ---------- ------------ ------------- ----------
Hong
Kong
Dollar - 0.4 0.4 - 0.3 0.3
----------- ------------ ------------- ---------- ------------ ------------- ----------
Japanese
Yen 7.8 - 7.8 6.9 - 6.9
----------- ------------ ------------- ---------- ------------ ------------- ----------
152.5 7.7 160.2 108.7 6.6 115.3
----------- ------------ ------------- ---------- ------------ ------------- ----------
The group US dollar net monetary assets is that held by the US
operations of GBP42.3 million together with GBP1.0 million held by
non-US operations less the US dollar/sterling currency swap
notional amount of GBP36.4 million ($45 million).
The holdings in the Schroder Japan Growth Fund, Baillie Gifford
Pacific and Stewart Investors Asia Pacific OEICs and Templeton
Emerging Markets Investment Trust and Scottish Oriental Smaller
Companies Trust are denominated in sterling but have underlying
assets in foreign currencies equivalent to GBP50.8 million (2015:
GBP63.6 million). Investments made in the UK and overseas have
underlying assets and income streams in foreign currencies which
cannot be determined and this has not been included in the
sensitivity analysis. If the value of all other currencies at 31
December 2016 rose or fell by 10% against sterling, the impact on
the group's total profit or loss for the year would have been
GBP22.7 million and GBP18.4 million respectively (2015: GBP19.1
million and GBP15.6 million). Corresponding 10% changes in currency
values on the Corporation's total profit or loss for the year would
have been the same. The calculations are based on the investment
portfolio at the respective year end dates and are not
representative of the year as a whole
Interest rate risk, arising from movements in interest rates on
borrowing, deposits and short term investments. The board reviews
the mix of fixed and floating rate exposures and ensures that
gearing levels are appropriate to the current and anticipated
market environment. The group's interest rate profile was:
2016
Sterling HK Dollars US Dollars Euro
--------------- --------- ----------- ----------- -----
GBPm GBPm GBPm GBPm
--------------- --------- ----------- ----------- -----
Floating rate
assets 50.7 0.4 43.3 0.4
---------------- --------- ----------- ----------- -----
2015
Sterling HK Dollars US Dollars Euro
--------------- --------- ----------- ----------- -----
GBPm GBPm GBPm GBPm
--------------- --------- ----------- ----------- -----
Floating rate
assets 23.4 0.3 36.3 0.3
--------------- --------- ----------- ----------- -----
The group holds cash and cash equivalents on short term bank
deposits and money market funds. Interest rates tend to vary with
bank base rates. The investment portfolio is not directly exposed
to interest rate risk.
2016 2015
Sterling Sterling
----------------------------- ---------- ----------
GBPm GBPm
----------------------------- ---------- ----------
Fixed rate liabilities 114.0 114.0
----------------------------- ---------- ----------
Weighted average fixed rate 4.589% 5.320%
----------------------------- ---------- ----------
If interest rates during the year were 1.0% higher the impact on
the group's total profit or loss for the year would have been
GBP620,000 credit (2015: GBP336,000 credit). It is assumed that
interest rates are unlikely to fall below the current level.
Liquidity risk
Arising from any difficulty in realising assets or raising funds
to meet commitments associated with any of the above financial
instruments. To minimise this risk, the board's strategy largely
limits investments to equities and fixed interest securities quoted
in major financial markets. In addition, cash balances are
maintained commensurate with likely future settlements. The
maturity of the group's existing borrowings is set out above.
Credit risk
Arising from the failure of another party to perform according
to the terms of their contract. The group minimises credit risk
through policies which restrict deposits to highly rated financial
institutions and restrict the maximum exposure to any individual
financial institution. The group's maximum exposure to credit risk
arising from financial assets is GBP101.5 million (2015: GBP67.4
million).
Trade and other receivables
Trade and other receivables not impaired but past due by the
following:
2016 2015
------------------------ ------- -------
GBP000 GBP000
------------------------ ------- -------
Between 31 and 60 days 1,713 1,986
------------------------ ------- -------
Between 61 and 90 days 210 380
------------------------ ------- -------
More than 91 days 577 1,777
------------------------ ------- -------
Total 2,500 4,143
------------------------ ------- -------
At 31 December 2016, trade and other receivables which were
impaired and for which there was a bad debt provision totalled
GBP955,000 (2015: GBP1,290,000). All the impaired trade and other
receivables were more than 91 days past due.
Trade and other payables
2016 2015
------------------------------------------------------- -------- ------------
GBP000 GBP000
------------------------------------------------------- -------- ------------
Due in less than one month 12,851 13,353
------------------------------------------------------- -------- ------------
Due in more than one month and less than three months 495 463
------------------------------------------------------- -------- ------------
13,346 13,816
------------------------------------------------------- -------- ------------
Fair value
The directors are of the opinion that the fair value of
financial assets and liabilities of the group are not materially
different to their carrying values, with the exception of the long
term borrowings.
Principal risks and uncertainties - IFS businesses
The principal risks to the business model from the IFS arise
where transactions to which we provide a service come under stress
- say by going into default, or where re-financings or other
transaction amendments are required. Such risks may arise from the
wider economic pressures on some sectors, borrowers and regions. To
mitigate these risks, we work closely with our legal advisers and
where appropriate, financial advisers, both in the set up phase to
ensure that we have as many protections as practicable and on a
continuing basis. The directors, via detailed audit committee
review, monitor these risks closely to ensure that the risks of the
IFS businesses do not impact the investment portfolio.
The single KPI of the IFS is revenue return per share, which is
reported within the financial summary and performance table and the
ten year record
Directors' responsibility statement pursuant to DTR4
The directors confirm to the best of their knowledge:
-- the group financial statements have been prepared in
accordance with IFRSs and Article 4 of the IAS Regulation and give
a true and fair view of the assets, liabilities, financial position
and profit or loss of the group; and
-- the annual report includes a fair review of the development
and performance of the business and the position of the group and
parent company, together with a description of the principal risks
and uncertainties that they face.
Copies of the annual report will be available from the
Corporation's registered office or on its website once published on
9 March 2017.
By order of the board
Law Debenture Corporate Services Limited
Secretary
28 February 2017
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR UBAARBBAUUUR
(END) Dow Jones Newswires
February 28, 2017 02:30 ET (07:30 GMT)
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