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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Axiom European Financial Debt Fund Limited | LSE:AXI | London | Ordinary Share | GG00BTC2K735 | ORD NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 85.50 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
TIDMAXI
RNS Number : 8770Z
Axiom European Financial Debt Fd Ld
20 March 2017
20 March 2017
Hot Features
Premium
Axiom European Financial Debt Fund Limited
Annual Financial Report
for the period from 7 October 2015 (date of incorporation)
to 31 December 2016
A copy of the Company's Annual Report and Financial
Statements for the period from 7 October 2015 (date
of incorporation) to 31 December 2016 will shortly
be available to view and download from the Company's
website, www.axiom-ai.com. Neither the contents
of the Company's website nor the contents of any
website accessible from hyperlinks on the Company's
website (or any other website) is incorporated
into or forms part of this announcement.
Enquiries to:
Elysium Fund Management Liberum Capital MHP Communications
Limited Limited 6 Agar Street
PO Box 650 Level 12 London
1(st) Floor Ropemaker Place WC2N 4HN
Royal Chambers 25 Ropemaker Street
St Julian's Avenue London Rachel Cohen
St Peter Port EC2Y 9LY Reg Hoare
Guernsey Giles Robinson
GY1 3JX Richard Bootle Ollie Hoare
Henry Freeman
axiom@elysiumfundman.com Tel: +44 20 3128
Tel: +44 1481 Tel: +44 20 3100 8100
810 100 2232
www.axiom-ai.com
The following text is extracted from the Annual
Report and Financial Statements of the Company
for the period ended 31 December 2016:
Strategic Report
Highlights
31 December
2016
Net assets GBP58,010,000
Net asset value ("NAV") per Ordinary
Share 95.21p
Share price at 31 December 2016 92.50p
Discount to NAV (2.85)%
Profit for the period GBP1,339,000
Dividend per share declared in respect
of the period [1] 6.00p
Total return per Ordinary Share (based
on NAV) [2] +1.59%
Total return per Ordinary Share (based
on share price) [2] (3.15)%
Ordinary Shares in issue 60,930,764
[1] Only 4.35p of the 6.00p per Ordinary Share dividends
declared out of the profits for the period ended
31 December 2016 had been deducted from the
31 December 2016 NAV as the dividend of 1.65p
per Ordinary Share announced on 18 January 2017,
payable to shareholders on record at 3 February
2017, and which was paid on 24 February 2017,
had not been provided for in these financial
statements at 31 December 2016 as, in accordance
with IFRS, it was not deemed to be a liability
of the Company at that date.
[2] Total return per Ordinary Share has been calculated
by comparing the NAV or share price, as applicable,
at launch with the NAV or share price, as applicable,
plus dividends paid, at the period end.
Overview and Investment Strategy
General information
Axiom European Financial Debt Fund Limited (the
"Company") was incorporated as an authorised closed-ended
investment company, under the Companies (Guernsey)
Law, 2008 (the "Law") on 7 October 2015 with registered
number 61003. Its Ordinary Shares were admitted
to trading on the Specialist Fund Segment ("SFS")
(formerly the Specialist Fund Market) of the London
Stock Exchange on 5 November 2015 ("Admission").
Investment objective
The investment objective of the Company is to provide
Shareholders with an attractive return, while limiting
downside risk, through investment in the following
financial institution investment instruments:
* Regulatory capital instruments, being financial
instruments issued by a European financial
institution which constitute regulatory capital for
the purposes of Basel I, Basel II or Basel III or
Solvency I or Solvency II;
* Other financial institution investment instruments,
being financial instruments issued by a European
financial institution, including without limitation
senior debt, which do not constitute regulatory
capital instruments; and
* Derivative instruments, being CDOs, securitisations
or derivatives, whether funded or unfunded, linked or
referenced to regulatory capital instruments or other
financial institution investment instruments.
Investment policy
The Company will seek to invest in a diversified
portfolio of financial institution investment instruments.
The Company will focus primarily on investing in
the secondary market although instruments may also
be subscribed in the primary market where the Investment
Manager, Axiom Alternative Investments SARL ("Axiom"),
identifies attractive opportunities.
The Company will invest its assets with the aim
of spreading investment risk.
For a more detailed description of the investment
policy, please see the Company's Prospectus, which
is available on the Company's website (http://www.axiom-ai.com/img/Axiom-Final-Prospectus.pdf).
Chairman's Statement
Welcome to our first audited financial statements
which cover the period from the incorporation of
the Company to 31 December 2016. The Company effectively
commenced operations on 5 November 2015 when it
was admitted to trading on the SFS. Net of launch
expenses, the Company started with a Net Asset
Value ("NAV") per share of 98.00p and ended with
a NAV per share of 95.21p, having paid dividends
of 4.35p and with the balance of the first year's
dividend paid after the year end on 24 February
2017. The initial placing of shares in November
2015 raised gross proceeds of GBP50.74 million.
The Company's capital base was expanded by two
additional secondary placings to raise gross proceeds
of GBP3.55 million on 4 March 2016 and a further
GBP6.03 million on 4 October 2016. At the end of
the period, the Company had 60.93 million shares
in issue with a total NAV of GBP58.01 million.
The early months of the Company's life were especially
challenging as our Investment Manager, Axiom Alternative
Investments SARL ("Axiom") explains in its report.
A combination of ever-tightening capital requirements
from regulators and slowing growth raising concerns
over the future outlook for credit quality to name
but two factors, led to brutal mark-downs across
the market in general through January and February
2016. The Company could not be immune from the
wider market malaise with its NAV per share bottoming
out at 86.39p on 12 February 2016 before recovering
steadily through the remainder of the year.
The Company's total NAV return of +1.59% for the
period, while below our 7-year target return of
10% p.a., should therefore be seen in the context
of circumstances and in that light, is a creditable
result. To some extent, Axiom were able to avoid
the worst by lightening exposures into the downswing
and becoming more fully-invested as it played out,
exploiting the natural advantages of the Company's
closed-ended structure by opportunistically increasing
exposures at market lows when, in contrast, open-ended
funds are often at their most vulnerable to being
forced sellers to meet investor redemptions. This
is especially the case where the instruments held
in the portfolio are relatively illiquid at the
best of times.
2017 starts under a different environment. Geopolitical
risks still lie ahead, but the banking sector appears
stronger with better prospects of profitability,
under easier and clearer regulations. Regulators
appear to have taken on board the lessons of early
2016 to give the sector clarity on the future stability
of capital requirements. Issuers continue to recycle
their old liabilities into the newly eligible format.
The Company is well-positioned to capitalise on
the opportunities that the sector has to offer
in this transition. The investment manager has
developed over the years a deep set of skills in
understanding regulations, analysing bank fundamentals
and in selecting the right instruments. In a highly-specialised
sector such as regulatory capital instruments,
Axiom's skills will be all the more important.
At the Annual General Meeting a minor change is
proposed to the investment policy to broaden the
definition of European Financial Institutions to
include instruments that are issued by (i) financial
institutions in the EEA (i.e. including countries
other than the UK and the members of the EU, as
per the Company's current investment mandate) and
Switzerland and (ii) entities which are not financial
institutions but which are subsidiaries of such
institutions.
The portfolio as at 28 February 2017 had a weighted
average yield to call of 12.74%, comfortably in
excess of what is required to meet the Company's
long term target return of 10% p.a. net of operating
expenses. The Board therefore looks forward to
2017 and beyond with confidence.
William Scott
Chairman
17 March 2017
Investment Manager's Report
Axiom European Financial Debt Fund Limited ("AEFD")
was launched on 5 November 2015; following a successful
listing on the Specialist Fund Segment of the LSE
raising gross proceeds of GBP50.74 million. Additional
gross proceeds of GBP3.55 million were raised in
a secondary placing on 4 March 2016 and a further
GBP6.03 million was raised on 4 October 2016.
1- Market developments
November 2015 stood as a relatively benign environment.
After a strong reporting season showing more capital
build-up and asset quality improvements, the banking
sector had received clean bills of health both
by the European Single Supervisor with its 2015
Asset Quality Review and the UK Prudential Regulation
Authority with its stress tests.
December 2015 saw the start of market volatility
when banks were notified of new capital requirements
under the Supervisory Review and Evaluation Process
("SREP"). Italian banks were the first under scrutiny,
in particular those with high Non-Performing Loan
("NPL") ratios. The focus moved quickly to companies
with large balance sheets in core EU countries,
such as BNP Paribas, and investor confidence took
a further hit with the decision by the Bank of
Portugal on 29 December 2015 to re-transfer senior
bonds back to Banco Espirito Santo.
With this challenging regulatory backdrop, January
and February 2016 proved to be a perfect storm
for bank valuations as investors expressed further
caution in the wake of low oil prices, Chinese
economic slowdown, potential US rate hikes and
EU uncertainty from the UK's pending referendum.
Despite strong capital updates from banks like
Crédit Agricole, the earnings season showed
how banks struggled to maintain revenues and how
costs, whether operational, conduct-related or
regulatory, ultimately dragged down the profitability
outlook. In addition to NPLs, investors added negative
interest rates to the list of concerns for the
sector. Investor sentiment was hit further when
very negative headlines were reported about Deutsche
Bank and the risks of its business model.
The segment that suffered the most was the Additional
Tier 1 ("AT1") market which fell to an all-time
low on
11 February 2016. This new format of hybrids was
impacted by the combination of disappointing updates
in their results from banks including Société
Générale and Royal Bank of Scotland,
and an increasing awareness of investors towards
the regulatory risk attached to the coupon payments.
Regulatory authorities tried to alleviate investor
concerns themselves. Mrs Nouy, Chair of the Supervisory
Board at the ECB, reiterated that banks could count
on capital requirements staying at current levels
as the regulatory requirements have reached "steady
state". At the end of February, in a remarkable
initiative of disclosure and transparency, the
ECB published a booklet detailing its approach
towards go-to capital ratios and organised a Q&A
session with analysts, where it suggested a change
to the legislation, in particular Article 141 that
defines the restrictions on Maximum Distributable
Amounts under the new Capital Requirements Directive.
The market reaction was subdued with AT1 valuations
gaining back only half of what they had lost, while
UK banks were dragged down by the launch of the
UK's EU Leave and Remain campaigns following Prime
Minister Cameron's revised EU deal.
In March 2016 financial institutions saw a number
of positive developments. In the Netherlands, Delta
Lloyd's EUR 650 million rights issue was approved.
In the UK, Old Mutual confirmed the break-up of
the group. In Italy, Popolare and Milano finally
agreed on their merger after lengthy negotiations
with the ECB and Vicenza started its equity raise.
At the instrument level, issuers launched opportunistic
tenders (Barclays, Standard Chartered, Crédit
Agricole), called at their first call date (BNP
Paribas), and re-opened the primary market for
AT1s (UBS).
The real support came on 10 March 2016 from Mario
Draghi himself when he spontaneously referred to
a note from the ECB, in his closing comments of
a press conference. This note, prepared for the
Banking Union in discussion with the European Parliament,
recommends a favourable treatment of AT1s relative
to dividends and bonuses, alongside a split of
capital demands between requirement (mandatory)
and guidance (non-binding).
In April and May 2016, the Q1 results season was
mixed as weaker revenues were offset by lower loan
losses and further capital strengthening. However,
the sentiment towards the banking sector improved
as oil prices rebounded above US$50 per barrel,
Brexit risks receded in polls, and Italy launched
Atlante, its sector-wide fund set up for smaller
bank recapitalisations and securitisation of NPLs,
with EUR 4.25 billion in private sector capital.
On the back of this, five new AT1 deals printed
(Rabobank, BBVA, Bankinter, HSBC, Erste Bank) and,
in a surprisingly coordinated manner, Global Systemically
Important Banks announced a series of calls (Santander
UK, Barclays, UBS, RBS, HSBC) and tenders (Unicredit).
Finally, in reaction to the regulatory pressure
on NPLs, Banco Popular announced a surprise EUR
2.5 billion capital raise.
The month of June 2016 saw investors polarised
on political risk: in the UK, with the polls driving
an ever increasing uncertainty closer to the Brexit
vote date, in Spain where the new round of elections
failed to deliver a majority, and in Italy investors
looked towards the Italian constitutional referendum
in October 2016. At the end of the month bank valuations
across the UK and EU dropped sharply on the back
of British voters choosing to leave the EU. Notwithstanding
these risks, bank fundamentals saw significant
improvements with successful capital raises of
Banco Popolare and Veneto Banca and more liability
management exercises from Lloyds, Novo Banco and
Pfandbriefbank
July 2016 saw a prompt recovery in bank valuations,
driven by expectations of central bank moves towards
further monetary easing, combined with GBP weakness.
Investors got comfort from the stabilisation of
the British political crisis with a new Prime Minister
and a foreign policy downplaying the economic impact
of the implementation of Brexit.
It was to Italy that financials investors returned
their focus once again. Factors that weighed on
Italian investors included the upcoming constitutional
referendum in October, continued pressure from
European authorities on NPLs and, last but not
least, the stress test results expected at the
end of the month. Monte dei Paschi performed badly,
once more, and as a result had to execute a precautionary
recapitalisation alongside a transformational disposal
of its NPL stock, leaving its subordinated creditors
under threat of burden sharing as required by the
EU rules.
It wasn't all bad news from Italian financials
as Unicredit started its strategic overhaul: new
CEO Mustier had settled in, stakes in Pekao and
Fineco had been sold and a EUR 5 billion capital
injection was being discussed.
Finally, some much awaited clarification was provided
by the Single Supervisor on AT1s. Capital requirements
for 2017 will soften through the back-loading of
the Capital Conservation Buffer hence providing
significant room for AT1 coupons.
August 2016 proved to be the least volatile month
of the year as bank subordinated debt valuations
remained range bound and the Subfin index hovered
around 200bp.
Investors quickly moved on after the EBA stress
tests did not produce anything new that regulators
and banks did not know before. The earnings season
proved fairly benign given the low rate environment:
bank results disclosed a slowdown of revenues as
well as provisions, contributing to lower NPL ratios
and slightly higher CET1 ratios.
The real support came from authorities. Firstly,
monetary policy measures as the Bank of England
("BoE") responded to the Brexit uncertainty with
a rate cut, a new Term Funding Scheme and the expansion
of the asset purchase scheme. Secondly, forbearance
from supervisors moving from Italy towards Portugal,
where the Banco de Portugal delayed the introduction
of the systemic risk buffer, the resolution fund
got authorised to spread the losses related to
the Novo Banco recapitalisation and Caixa Geral
capital plan got approved by the European Commission
("EC"). Lastly, and more importantly, regulation,
as the European Parliament considered ways to prioritise
coupons on hybrid instruments for the upcoming
draft of CRD5/CRR2.
Against this favourable backdrop, UBS, Standard
Chartered, RBS and Barclays issued new AT1 in US$
with order books reaching more than 20 billion.
In parallel, three series of preference shares
got called: one of US$750 million at Barclays,
and two totalling US$1.53 billion at RBS.
Last but not least, Erste Bank in Austria called
three legacy instruments at par, including one
trading around EUR 55.00 before the announcement.
September 2016 saw a reversal in bank subordinated
debt valuations as the SubFin index widened from
187bp on 7 September to end the month at 223bp.
After the concerns towards banks' equity valuations
voiced in July, Mr Draghi did not give any hint
that his Zero Interest Rate Policy would slow its
erosion of banks' profitability anytime soon. The
Bank of Japan's policy of yield curve control announced
on 21 September sent a glimmer of hope, quickly
overridden by the headlines on Deutsche Bank. The
German bank came under pressure after it confirmed
that the US Department of Justice proposed US$14
billion to settle on US RMBS while its litigation
reserves stood at EUR 5.5 billion in June. The
impact on the available distributions for hybrids
could be significant. However, with EUR 215 billion
of liquid assets, full access to central bank liquidity,
the bank steered clear from any bail-in, state
injection or resolution.
In Italy, Monte dei Paschi's CEO stepped down and
the capital raise was delayed to 2017. The expected
Liability Management Exercise was confirmed as
voluntary, with a timing likely before or around
the referendum vote. UniCredit also postponed its
capital raise to next year, allowing more time
to sell Pekao, Fineco and Pioneer. In Austria,
Raiffeisen postponed the announcement of its merger
to October.
On the regulatory front, we witnessed further forbearance,
as the Bank of Italy aligned the phasing in of
buffers with other European countries, conceding
a 1.25% capital relief for Italian banks. In Basel,
European countries insisted that the proposed changes
to RWAs must be scaled back. EC Vice President
Dombrovskis stood firm by declaring: "At a time
when we are focused on supporting investment, we
want to avoid changes which would lead to a significant
increase in the overall capital requirements shouldered
by Europe's banking sector". In parallel, banks
started receiving draft letters from the Single
Supervisor on their future SREP capital requirements.
Primary activity in new AT1 issuance was limited
to SocGen, Jyske Bank and Clydesdale. Barclays
tendered GBP1.7 billion of legacy instruments 10pt
above the secondary levels and Lloyds called a
legacy Tier 1.
October 2016 saw a strong performance as the subordinated
financial index tightened 20bp, while interest
rates in GBP, EUR and US$ moved back to pre-Brexit
levels.
The ECB not only acknowledged that low rates eroded
bank profitability and hindered the transmission
of its monetary policy, but it also started discussing
a possible tapering of its quantitative easing
programme. In the UK, the BoE took note of the
strong economic data and higher inflation while
the Fed was increasingly expected to hike post
US elections.
Investors took comfort in the Q3 results that showed
the resilience of bank revenues, both net interest
income and fees, alongside an improvement of asset
quality and a strengthening of capital. Pressure
on Deutsche Bank alleviated as its liquidity normalised
and Q3 proved to be a strong quarter for all investment
banks. Raiffeisen announced its long-awaited merger.
UniCredit progressed on its asset sales with a
reduction of its stake in Fineco, a NPL transaction
and the selection of potential bidders for Pioneer.
Finally, Monte dei Paschi finalised the details
of its capital raising plan, while considering
a new offer from a group of investors coordinated
by Mr Passera. The insurance sector saw some M&A
activity with NN making an unsolicited bid to acquire
Delta Lloyd.
Regulations also provided some support as SREP
capital requirements got revised lower, confirming
the trend towards more supervisory forbearance.
The EC, France and Germany altogether pushed back
further against the latest proposals by Basel,
such as risk weight floors and other nominal measures
penalising European banks.
Primary activity in new AT1 issuance was limited
to DNB in Norway launching a new US$750 million
6.5% AT1.
In November 2016 rates continued their increase,
driven by the unexpected outcome of the US election
and the resulting expectations towards Trumpflation.
In subordinated financials, cash valuations followed
the sell-off in rates but saw a contained widening
of credit spreads: SubFin widened from 235bp to
245bp.
The Q3 earning season continued with more banks
posting resilient revenues, higher fee income,
and lower loan losses supporting capital build.
However, some disappointed like NordLB on shipping
provisions and Banco Popular on the spin-off of
its real-assets. Monte dei Paschi launched its
ambitious capital plan combining a tender offer
on subordinated debt, an equity raise and a transforming
NPL securitisation. UniCredit guided towards a
capital raise that could reach EUR13 billion.
Regulations reached some important milestones:
the BoE released its MREL policy covering a new
class of loss-absorbing liabilities, the EC released
the final draft of the new CRD5/CRR2 and the Basel
Committee met in Chile to finalise an agreement
on the last tweaks to Basel IV.
Politics kept risk premia high ahead of the Italian
referendum on 4 December, even if European policymakers
commented about the bail-in tool not being the
most appropriate for systemic crisis.
Primary markets saw new AT1 issues by Virgin Money,
ING and Danske Bank (in domestic currency) and
a new Tier 2 by BMN in Spain.
Calling activity of legacy instruments continued
with Credit Suisse redeeming a cost-efficient Discount
Perp, while StanChart, Commerzbank and Vivat (in
CHF) skipped their first calls triggering some
opportunities in the universe of short-dated calls.
December 2016 saw a strong rebound of the banking
sector. The Italian referendum led to a negative
result that was widely expected. The announcements
by the Fed (25bp rate hike) and the ECB (reduction
of its asset purchase programme) took bank valuations
higher as the prospect of higher rates boosted
the sector's future profitability.
Regulations produced another tailwind as the ECB
confirmed the capital add-ons for 2017 at a level
200bp lower than those for 2016, and foreign regulators
continued their work towards a pragmatic compromise
around Basel IV.
Financial institutions progressed in their transformation.
UniCredit announced its 2019 strategic plan with
a EUR13 billion rights issue. Deutsche Bank and
Credit Suisse finally settled their litigation
with the US authorities over RMBS on favourable
terms and Delta Lloyd and NN agreed to merge. Even
Banco Popular in Spain got mentioned as a potential
takeover target of banks like BBVA. The only negative
development came from Monte dei Paschi: the market
solution combining a NPL securitisation and LME
together with a capital raise ultimately failed,
leaving the State negotiating a precautionary recapitalisation
with the European authorities.
In primary activity, three new AT1s were issued
by Swedbank, BNP Paribas and UniCredit. Crédit
Agricole and Société Générale
launched the new format of Tier 3 with "non-preferred
senior" instruments eligible to MREL and TLAC.
2- Investment Objective and Strategy
AEFD is a closed-ended fund investing in liabilities
issued by European financial institutions, predominantly
legacy Tier 1s, Tier 2s, and AT1s across five sub-strategies:
* Liquid Relative Value: instruments issued by large
and strong quality institutions, with significant
liquidity. These can be purchased on either primary
or secondary markets.
* Less Liquid Relative Value: instruments issued by
large and strong quality institutions, with limited
liquidity due to past tenders or complex features
(secondary market).
* Restructuring: instruments issued by institutions in
preparation or implementation of a restructuring
process (secondary market).
* Special Situations: instruments issued by entities in
run-off, under a merger process or split between
several entities (secondary market).
* Midcap Origination: instruments issued by small
institutions or small subsidiaries of larger
institutions (primary market).
3- Trade activity and positioning
Deployment
On the day following the listing, AEFD deployed
40% of its capital across the full range of its
strategies (including 22% in the Liquid Relative
Value strategy). This increased to 82%, as of 30
November 2015, deployed across 40 instruments.
Prior to launch, the Investment Manager guided
that it would invest predominantly in the Liquid
Relative Value strategy and re-allocate over a
six-month period into opportunities in the other
strategies. However, given the uncertainty on capital
rules mostly affecting AT1s, the Investment Manager
reduced the portion of Liquid Relative Value instruments
(consisting essentially of AT1s) and kept it high
in the second quarter to benefit from the price
normalisation. See below the chart showing the
ramp-up as realised (dotted lines) vs. intended
(squares).
1(st) 2(nd) 4(th) 6(th)
Month Month Month Month
Liquid Relative
Value 80% 49% 50% 53% 30% 50% 25% 37%
Less Liquid
Relative Value 5% 16% 15% 21% 25% 25% 30% 27%
Restructuring 5% 10% 10% 13% 15% 14% 15% 16%
Special Situations 5% 5% 10% 5% 15% 6% 15% 9%
Midcap Origination 5% 4% 10% 4% 15% 5% 15% 4%
---- ---- ---- ------
Number of
Positions 40 53 66 72
==== ==== ==== =====
Allocation Phase-in Period Target
Strategies portfolio
Source: AEFD Monthly Fact Sheets.
November 2015: ramping up cautiously
The Company continued its ramp-up on less liquid
instruments including fixed-to-fixed Tier 1s (6%
of capital) and two bonds recently issued by Irish
banks (3% of capital). A strong position was also
built on Delta Lloyd old-style Tier 2 bonds (5%)
ahead of its capital increase. This position was
reduced to 3.5% after contributing 0.15p to the
NAV.
December 2015: volatility begins
The Company completed its ramp-up by adding 4%
of UK AT1s and 2% of Italian sub debt, benefiting
from the lower valuations. Still the correction
impacted negatively on positions held in Italian
old style Tier 1s and Tier 2s, which reduced the
NAV by 0.18p. Positions held on insurers gave back
some of their recent gains, negatively impacting
the NAV by 0.3p. In Portugal, the Company took
some marginal exposures in seniors and legacy Tier
1s across three issuers that negatively impacted
the NAV by 0.85p overall.
The Company invested in legacy Tier 1s less prone
to the increasing market volatility: one step-up
floater issued by Société Générale
offering more than 8% to the call in 2017, and
one old-style UK "Permanent Interest Bearing Shares"
instrument offering more than 13% to its call in
2017.
January 2016: Lightening up into sell-off
While the Company started the month 97% invested,
early in the month it sold some of its most liquid
positions:
* 4% in the 1st week: Société
Générale 6.75 AT1 at 102.71 and LivVic 6.5
2043-23 at 99.00;
* 4% in the 2nd week on Irish banks: Bank of Ireland
AT1 at 103.75 and AIB Tier 2 at 99.25; and
* 3% in the 3rd week: KBC AT1 and Erste Bank Tier 1
(with accrued).
Meanwhile the Company continued the sourcing of
legacy Tier 1s and bought Italian subordinated
bonds at all-time lows benefiting from the market
overreaction to NPL concerns in the sector.
The Company did not hold any instruments issued
by Deutsche Bank.
February 2016: Seeking opportunities into historical
stress
The Company started the month with 6% cash which
was fully deployed over the month. In the first
two weeks, it bought selectively AT1s at historically
low prices: BNP EUR AT1 below 90.00, Santander
EUR AT1 at 82.25, AIB EUR AT1 at 84.50.
Less Liquid Relative Value: the Company bought
Credit Logement legacy Tier 1s, after a 10pt drop,
some legacy Tier 1 issued by PostBank at 11% yield
to call; some high coupon hybrid by Banca Popolare
di Milano; and very short dated Tier 2 by Carige.
Restructuring: it trimmed down senior exposures
to small Popolari banks raising capital in Italy
(Veneto Banco and Vicenza), realising gains from
the entry levels in mid-January.
Towards the end of the month, it reduced its exposure
to UK AT1s before Brexit concerns were priced in,
selling some Coventry Building Society and Nationwide
AT1s.
March 2016: Positioning into the rebound
In the Liquid Relative Value strategy, the Company
bought higher beta AT1s (Unicredit 8, Deutsche
Bank 6) ahead of the ECB press conference and sold
bonds in Old Mutual and Delta Lloyd after their
capital updates. It also added AT1s with dividend
stoppers (CS and new UBS) as defensive plays pending
new legislation around AT1 format.
In the Less Liquid Relative Value strategy, the
Company reduced exposure to Unicredit Cashes in
front of adverse technicals and sourced further
Société Générale step-up floaters
as well as a new RBS fixed-to-fixed US$ Tier 1
position.
The Company also built a small (1%) position on
a BNP Paribas non-step GBP legacy Tier 1 whose
call was just announced (bought at 96.10 and sold
at 100.25).
In the Restructuring strategy, the Company added
slightly more exposure to Monte dei Paschi legacy
non-paying Tier 1s at distressed level (38.00 cash
price).
April 2016: maximising exposure
The Company continued its ramp-up towards the other
less liquid strategies while remaining exposed
to the AT1 segment, ahead of the upcoming change
to coupon rules.
* Liquid Relative Value: the Company sold down its
remaining positions on Old Mutual and Delta Lloyd to
increase its exposure to AT1s. On 12 April 2016, the
Company bought AT1s issued by BNP, Santander, Bank of
Ireland and AIB. It added more AIB AT1s, dismissing
the whistleblower's warning about NPL write-backs,
and new BBVA 8.875 and Rabobank 6.625 at levels that
discounted heavily any extension risk.
* Less Liquid Relative Value: the Company's allocation
in the new Bankinter 8.625 AT1 went under this
sub-strategy given the small outstanding amount (EUR
200 million). It also bought discounted UBS Prefs and
RBS Fixed-to-Fixed instruments ahead of potential
liability management exercises. To fund these
purchases, it sold some of its BFCM CMS position
because of its longer-term catalyst.
* Restructuring: the Company sold its Monte dei Paschi
Tier 2 position at 92.50 (bought at 65.00 in January)
and started trimming down exposures to Popolari di
Vicenza into the launch of its capital increase and
the Atlante announcements. It replaced these
exposures with rare short-dated BCP Tier 2s sourced
at 87.00 from a liquidation auction.
The Company ended the month with 1% cash, with
the capacity to borrow 5% at short notice.
May 2016: when expected calls happened
Liquid Relative Value: the Company took part in
the new Erste Bank AT1 but passed on HSBC for relative
value considerations. Four large AT1 positions
were sold in the final week of the month where
the valuations reached their peaks taking the sub-strategy
down from 45% to 42%.
Less Liquid Relative Value: the Company added on
three fixed-to-fixed instruments and lightened
up on a legacy Tier 1 above par. It benefited strongly
from two calls. The first one on UBS discounted
Prefs saw valuations jumping from 65.00 to 100.00
and the second one on HSBC from 89.00 to 100.40
overnight, contributing 0.56p into the NAV.
Restructuring: the Company sold its residual position
on Vicenza following the completion of the capital
raise and switched it partly into Veneto Banca.
It bought some Banco Popular legacy Tier 1 early
in the month and later sold its Banco Popular AT1
position on the announcement of the capital raise.
June 2016: preparing for all political outcomes
The Company started the month with 7% cash and
increased the cash position to 13% ahead of the
Brexit vote. Liquid AT1s stood at 36%, stable vs.
end of May, down from 48% at the end of April,
and the portion of UK AT1s was limited to 8.5%.
At the end of the Brexit week, the NAV dropped
by 1.22%.
Activity across sub-strategies was as follows:
* Liquid Relative Value: the Company bought a defensive
position in Tier 2s, in anticipation of a potential
capital increase.
* Less Liquid Relative Value: a position in Banca
Carige Tier 2 matured and two positions, Spanish AT1
and Italian legacy Tier 1, were sold, both above par.
* Special Situations: the Company bought a hybrid
instrument issued by an insurance holding in the
process of splitting its group entities.
* Restructuring: the Company bought two legacy Tier 1s
issued by two banks under stress in Italy and
Germany.
The Company ended the month with 6% cash.
July 2016: moving defensively in the post-Brexit
rally
The Company cut its exposure to the UK by reducing
its positions on Pfandbrief Bank legacy Tier 1s
(at a gain) and Santander UK AT1s, both in the
Liquid Relative Value sub-strategy, and Lloyds
Opco Tier 2s (1% below its entry point) in the
Less Liquid Relative Value. In this strategy, the
Company added some Société Générale
legacy floaters.
In the Restructuring strategy, the Company slightly
increased its exposure to Monte dei Paschi on its
lows, as any exchange offer was likely to remain
voluntary and hence offer value upside. A marginal
exposure to Caixa Geral short dated debt was also
added.
Finally, as AT1 coupon rules drove valuations higher
before the stress test publication, the Company
sold AT1 positions in France and Spain. It also
reduced its exposure to Italian AT1s ahead of the
referendum expected in late October.
August 2016: Austrian issuer calling all its legacy
Tier 1s
The Company participated in the new AT1 issues
to capture primary concessions, all under the Liquid
Relative Value sub-strategy. As three out of the
four new issues were UK issuers, the Company sold
some old AT1s by Lloyds and Barclays, some of which
were bought 6 pts lower shortly after the Brexit
vote.
In the Less Liquid Relative Value strategy, following
the call activity by Barclays and RBS, the Company
sold two fixed-to-fixed bonds by Lloyds and RBS
callable at any time at a price above par and bought
two rare RBS step-up Tier 1s with a call in 2017
at a discount.
The Less Liquid Relative Value strategy also benefited
from holding one of the three Erste Bank instruments
that got called: the fixed-to-fixed 5.25%, bought
at 97.00 in May. The announcement impacted positively
valuations on other discounted legacy instruments:
Barclays +6pt (2% holding), BFCM +8pt (0.5% holding)
and RZB step-up +10pt (2.5% holding).
The Company ended the month with 8% cash, ready
to deploy on new issues, while the political economy
remained uncertain.
September 2016: when Barclays finally tendered
* Liquid Relative Value: the Company took part in the
new AT1 issues, and added the recent StanChart issue.
* Less Liquid Relative Value: the Company held 1.4%
Barclays legacy Tier 2s, purchased at 71.25 at launch
and tendered at 80.00 this month. It increased its
holding in Ethias.
* Restructuring: the Company reduced its exposure to
Deutsche Bank on AT1s and added exposure on Tier 2s
and seniors. It reduced slightly its exposure to
Raiffeisen Tier 1s.
* Special Situations: the Company added a discounted
legacy Tier 1 issued by a German bank.
October 2016: when interest rates start to increase
The rate sell-off helped the Company to deploy
the proceeds from the secondary placement in the
Less Liquid Relative Value and Special Situation
strategies, where it invested essentially on legacy
hybrids issued by OpCos of UK banks with long-dated
calls.
* Liquid Relative Value: the Company took part in the
new DNB AT1 and sold AT1s issued earlier in the year
at a premium, reducing its exposure in AT1s overall
from 42% to 32%. It increased its position on Delta
Lloyd.
* Less Liquid Relative Value: the Company reduced its
position on Ethias Tier 2 following the strong rally.
* Special Situations: the Company increased its
holdings of convertible hybrids ahead of potential
tenders.
* Restructuring: the Company added marginally on Monte
dei Paschi Tier 1s and a discounted Tier 1 issued by
a German Landesbank.
* Midcap origination: the Company took part in a new
Tier 2 issue by a Spanish co-operative group.
The Company closed the month fully invested.
November 2016: regulatory certainty offset by interest
rate moves
In the correction, the Company sold out of positions
whose catalysts had played out (Ethias, Delta Lloyd)
and instruments with low volatility (Fortis Cashes,
Credit Logement) to seize opportunities on instruments
that had repriced lower.
* Liquid Relative Value: the Company took part in the
new ING AT1, after having sold three new AT1s at a
gain.
* Less Liquid Relative Value: the Company reduced its
position on short dated Tier 1s, Ethias and Credit
Logement to buy some legacy Tier 1s issued by a
strongly capitalised medium-sized bank at 9% yield.
* Special Situations: the Company reduced exposure to
equity-linked hybrids to increase its holdings of
SPVs following the disqualification under CRD5.
* Restructuring: the Company bought into short dated
AT1s and Tier 2s on the negative sentiment towards
Popular in Spain.
* Midcap Origination: the Company took part in the new
issues by Virgin Money and domestic Danske Bank.
* CDS: the Company added risk on Spanish banks and
bought protection on the Austrian banking sector,
ahead of the presidential election on 4 December.
The Company closed the month with 2% cash, ready
to deploy on opportunities triggered by a No in
the Italian referendum.
December 2016: regulatory forbearance materialises
In the rebound, the Company reduced positions in
AT1s to participate in the new issues, adjusted
its exposure on Italy and short dated callables,
and redeployed risk from cash positions into CDS.
* Liquid Relative Value: the Company took part in the
new Swedbank and BNP AT1s and the new Crédit
Agricole Tier 3, while reducing AT1s in Ireland and
UK, and UniCredit on its announcement.
* Less Liquid Relative Value: the Company reduced
exposure on short dated callable Tier 1s issued by
Deutsche Bank at 98.00 (bought at 94.00).
* Special Situations: the Company increased marginally
its holdings of discount perps.
* Restructuring: the Company sold Popular AT1s into the
takeover rumour and bought Monte dei Paschi seniors.
It also unwound a CDS on Deutsche Bank seniors (sold
at 255, bought back at 199).
* Midcap Origination: the Company reduced recent issues
in UK and Spain.
* CDS: the Company added risk on French and Spanish
banks as well as Dutch and UK OpCos.
Following these new CDS trades, the Company closed
the month with a high cash balance of 11%, ready
to deploy in opportunities in new issues and less
liquid instruments.
4- Portfolio (as at 31 December 2016)
Strategy Allocation (as a % of investments
held)
Liquid Relative
Value 30.8%
Less Liquid Relative
Value 23.8%
Restructuring 11.4%
Special Situations 18.4%
Midcap Origination 4.7%
Cash 11.0%
Denomination (as a % of investments held,
excluding cash)
EUR 46.5%
GBP 24.7%
USD 25.3%
DKK 2.2%
CAD 1.3%
Portfolio Breakdown (as a % of non-cash investments
held, excluding cash)
By rating By subordination
Additional Tier
A 2.8% 1 32.1%
BBB 17.1% Legacy Tier 1 52.1%
BB 54.1% Tier 2 13.0%
B 14.1% Senior 1.7%
CCC and below 6.5% Equity 1.1%
By maturity By country
<1 year 23.9% UK 33.1%
1-3 27.0% France 24.1%
3-5 15.8% Germany 8.1%
5-7 12.3% Spain 7.6%
7-10 13.5% Italy 6.9%
>10 7.5% Denmark 4.8%
Austria 4.6%
Ireland 4.1%
Netherlands 2.3%
Den/US 2.0%
Sweden 1.3%
Portugal 1.0%
Main Positions (top
ten)
Instruments Strategy % of
NAV
Crédit Agricole Liquid Relative
GBP 7.5% Perp-06/2026 Value 3.5%
Lloyds Bank PLC GBP
13% Perp-01/2029 Special Situation 3.0%
Société Générale Less Liquid
USD FRN Perp-04/2017 Relative Value 2.9%
RBS Group PLC EUR 5.5% Less Liquid
Perp-12/2009 Relative Value 2.8%
Saxo Bank EUR 9.75%
Perp-02/2020 Midcap Origination 2.2%
Société Générale Liquid Relative
USD 7.375% Perp-09/2021 Value 2.1%
BNP Paribas USD 6.75% Liquid Relative
Perp-03/2022 Value 2.1%
Groupama EUR 6.375% Liquid Relative
Perp-05/2024 Value 2.1%
Old Mutual PLC GBP 7.875%
2025 Special Situation 1.9%
Sparekassen Sjaelland
DKK 10.835% Perp-10/2018 Midcap Origination 1.9%
5- Company metrics
Share price and GBP Portfolio information
NAV
Share price (mid) 0.9250 Modified duration(+) 2.11
NAV per share Sensitivity
(weekly) 0.9521 to credit(+) 2.85
Dividednds paid
since IPO 0.0435 Positions 86
Shares in issue 60,930,764 Yield to call(+) 12.54%
Market capitalisation 56,360,956.70 Yield to perpetuity(+) 6.67%
Total net assets 58,009,515.92 Net gearing* 96.75%
(Discount) / (2.85)% * (Investments
premium + Accrued + Cash)
/ Net assets
======================= ============== ================================
As of 31 Dec 2016:
+"Modified duration" measures the sensitivity of
bond prices to interest rates
"Sensitivity to credit" measures the sensitivity
of bond prices to credit spreads
"Yield to call" is the yield of the portfolio at
the expected repayment date of the bonds
"Yield to perpetuity" is the yield of the portfolio
assuming that securities are not repaid but kept
outstanding to perpetuity.
Performance - Total Shareholder Return (NAV plus
dividends, per share)
1 month 3 months 6 months YTD 1 year Since inception
1.82% 2.25% 6.63% 2.92% 2.92% 1.59%
Monthly Performance - Total Shareholder Return
(NAV plus dividends, per share)
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
% % % % % % % % % % % % %
2015 - - - - - - - - - - 0.19 -1.48 -1.29
2016 -4.02 -4.59 3.56 1.16 2.61 -1.94 2.78 1.67 -0.20 2.00 -1.55 1.82 2.92
6- NAV evolution
Share price
Share price (mid) +
Date NAV (mid) NAV + dividends dividends
05/11/2015 97.97 101.50 97.97 101.50
27/11/2015 98.19 101.50 98.19 101.50
31/12/2015 96.74 101.50 96.74 101.50
29/01/2016 92.85 101.50 92.85 101.50
26/02/2016 88.24 101.25 88.59 101.60
24/03/2016 91.39 96.50 91.74 96.85
29/04/2016 92.45 96.50 92.80 96.85
27/05/2016 93.87 95.50 95.22 96.85
30/06/2016 92.02 95.50 93.37 96.85
29/07/2016 94.62 93.50 95.97 94.85
26/08/2016 94.72 94.50 97.57 97.35
30/09/2016 94.52 95.50 97.37 98.35
28/10/2016 96.47 95.50 99.32 98.35
25/11/2016 93.43 93.50 97.78 97.85
31/12/2016 95.21 92.50 99.56 96.85
7- Exposures to counterparties
The Company implements hedging and derivative strategies:
* Currency risk is systematically hedged through
currency forward agreements with one counterparty,
CACEIS, rated A/A-1 at S&P.
* Interest rate risk is partly hedged to neutralise the
impact on the portfolio yield of the difference
between the GBP yield curve and other yield curves in
investment currencies. This is implemented via Bond
Futures traded on Eurex.
* Credit derivatives are used as a hedge around
specific risks related to the economic or
geopolitical environment, or as a risk overlay taken
on specific issuing entities whose credit is expected
to benefit from the changes affecting the sector.
Derivative contracts are standardised under the ISDA
documentation. The Company has opened ISDA contracts
with three counterparties: Credit Suisse, JP Morgan
and Goldman Sachs.
As of 31 December 2016, net exposures to the above
counterparties are as follows:
Risk Instrument Counterparty S&P Rating Net exposure
(% of NAV)
Currency FX forward CACEIS A 0.33
Interest
rate Bond futures Eurex Clearing AA 0.80
Credit CDS Credit Suisse BBB+ 0.01
Goldman
Sachs BBB+ 2.49
JP Morgan A- 1.29
The Company has the capacity to borrow for investment
purposes. For this reason, it has negotiated credit
lines and implemented borrowing contracts with
two counterparties: GMRA with Goldman Sachs and
French law "convention FBF" with an operating entity
rated A/A-1 of French banking group BPCE. As of
31 December 2016, the Company did not have any
opened repo trades.
8- Outlook
After a volatile start, the banking sector ended
2016 on a firm tone.
The pace of regulatory changes is now slowing down,
regulators are increasingly showing more pragmatism
and a number of supervisory rules have been clarified.
For instance, mechanics of capital buffers and
their impact on capacity to pay dividends and hybrid
coupons have now reached a consensual understanding.
A new draft of the Capital Requirement Directive
has finally been published in November. The ECB
now communicates openly and directly with analysts
about its Supervisory Review and Evaluation Process.
Bank fundamentals continue to improve quarter after
quarter. Capital continues to build up to reach
historical levels, liquidity is stronger than ever
and future profitability is supported by the prospect
of higher interest rates.
In this context, bank managements are in a better
position to accelerate the transition of their
liabilities into the new regulatory framework.
Calls and tenders continued to be announced on
a regular basis, even on instruments that provide
liquidity at a competitive cost for the issuers.
For the above reasons, our outlook remains constructive.
On the newly issued instruments, such as AT1s,
we expect prices to normalise further as buffers
continue to increase, giving clear visibility on
coupon payments to investors. On the legacy instruments,
we expect issuers to continue taking out their
old liabilities. Finally, we expect a number of
banks to succeed in the execution of their restructuring
plans, as regulatory interference from supervisors
reduces and investors get progressively more comfortable
with the profitability prospects the sector has
to offer.
Gildas Surry
Axiom Alternative Investments SARL
17 March 2017
Investment Portfolio
GBP'000 % of NAV
Investment in bonds at fair value
through profit or loss
Crédit Agricole SA 7.500%
Perp 06/23/26 2,006 3.46
Axiom Contingent Capital 1,831 3.16
Lloyds Bank PLC 13.000% Perp 1,765 3.04
Société Générale
1.749% Perp 04/05/17 1,694 2.92
Royal Bank of Scotland Group
PLC 5.500% Perp 06/30/17 1,623 2.80
Saxo bank 9.75% 02/26/20 1,259 2.17
Société Générale
7.375% Perp 09/13/21 1,214 2.09
BNP Paribas SA 6.75 0% Perp 03/14/22 1,205 2.08
Groupama SA 6.375% Perp 05/28/24 1,203 2.07
Old Mutual Bond PLC 7.875% 11/03/25 1,117 1.93
Sparekassen Sjaelland 10.835%
Perp 10/30/18 1,084 1.87
Barclays PLC 7 875% Perp 09/15/22 1,000 1.72
NIBC Bank NV 7.625% Perp 10/18/17 991 1.71
Coventry Building Society 6.375%
11/01/19 968 1.67
Barclays Bank PLC 7.000% 09/15/19 952 1.64
Lloyds Bank PLC 11.750% Perp 878 1.51
Banco Popular Espanol SA 8.000%
07/29/21 855 1.47
Allied Irish Banks PLC 7.375%
Perp 12/03/20 845 1.46
HBOS Capital Funding LP 6.850%
Perp 06/23/17 825 1.42
Banca Monte dei Paschi de Siena
SPA 3.625% 04/01/19 822 1.42
Catlin Insurance Co Ltd 4.000%
Perp 04/19/17 810 1.40
RBS Capital Trust 6.8% Perp 06/30/17 803 1.38
Unicredit SPA 6.75% Perp 09/10/21 802 1.38
Crédit Agricole SA 6.637%
Perp 772 1.33
RZB Finance Jersey IV 0 Perp
05/16/17 767 1.32
Deutsche Postbank IV 5.983% Perp
06/29/17 751 1.30
Popular Capital SA 6% Perp 04/20/17 737 1.27
BNP Paribas Fortis SA 0 Perp 707 1.22
Hypo Real Intl Trust 1 5.864%
Perp 06/04/17 675 1.16
Credit Logement SA 0.834% Perp
06/16/17 674 1.16
SwedBank AB 6.000% Perp 03/17/22 653 1.13
Royal Bank of Scotland Group
PLC 6.666% Perp 10/05/17 646 1.11
KA Finanz AG 5.430% 02/13/24 631 1.09
Co-Operative Bank 11.000% 12/20/23 603 1.04
Axiom Equity C FCP 556 0.96
Banco Bilbao Vizcaya Arg 8.875%
Perp 04/14/21 553 0.95
Fuerstenberg Capital II GmbH
5.625% Perp 06/30/17 545 0.94
Royal Bank of Scotland Group
PLC 6.990% Perp 10/05/17 527 0.91
Standard Chartered PLC 2.549%
Perp 01/30/27 509 0.88
ING Groep NV 6.875% Perp 04/16/22 489 0.84
CYBG PLC 5.000% 02/09/26 481 0.83
Hong Kong & Shanghai Bank 1.035%
Perp 04/27/17 481 0.83
Banco Santander SA 6.250% Perp
03/12/19 480 0.83
Capital Funding GmbH 2.088% Perp 477 0.82
Royal Bank of Scotland Group
PLC 7.648% Perp 09/30/31 463 0.80
RZB Finance (Jersey) Limited
0.895% Perp 06/15/17 452 0.78
Deutsche Bank AG 7.125% Perp
04/30/26 442 0.76
Achmea BV 6% Perp 11/01/2017 440 0.76
Banco BPM SPA 9.000% Perp 06/25/18 427 0.74
Immigon Portfolioabbau AG 6.000%
03/30/2017 419 0.72
Barclays Bank PLC 8.125% Perp
06/15/17 414 0.71
Bank of Ireland Holdings 2.931%
Perp 06/07/17 371 0.64
Royal Bank of Scotland Group
PLC 6.990% Perp 10/05/17 353 0.61
Santander Perpetual 1.282% 06/10/17 352 0.61
DB Cap Fin Trust I 1.750% perp
06/27/17 321 0.55
National Westminster Bank PLC
9.000% Perp 309 0.53
Monte dei Paschi Siena 2.787%
10/31/18 300 0.52
Banca Carige SPA 8.338% Perp 272 0.47
Deutsche Postbank Fund I 0.640%
Perp 06/02/17 266 0.46
BBVA Intl Pref Uniperson 1.231%
Perp 04/19/17 259 0.45
Argon Capital PLC 2.697% Perp
06/30/17 256 0.44
Banco de Credito Social Cooperativo
SA FRN 9.000% 11/03/26 256 0.44
Fuerstenberg Capital 1.451% Perp
06/30/17 246 0.42
Bank of Scotland PLC 7.281% Perp
05/31/26 239 0.41
HSBC Bank PLC 1.500% Perp 09/29/17 233 0.40
Delta Lloyd NV 4.375% Perp 06/13/24 206 0.36
MPOS Capital Trust I 6.587% 05/07/17 200 0.35
Banca Monte dei Paschi 2.290%
05/15/18 194 0.33
Skipton Building Society 6.875%
Perp 04/13/17 193 0.33
HT1 Funding GmbH 6.352% Perp
06/30/17 192 0.33
Barclays Bank PLC 6.000% Perp
12/15/17 191 0.33
Principality Building Society
7.000% Perp 06/01/20 190 0.33
BCP Finance Cp 1.742% Perp 06/09/17 190 0.33
Anton Veneta Cap Trust I 5.987%
Perp 186 0.32
GNB Cia de Seguros de Vida SA
3.184% Perp 06/19/17 164 0.28
Lloyds Banking Group PLC 9.75%
Perp 148 0.26
Popular Capital SA 1.321% Perp
06/06/17 128 0.22
National Westminster Bank 11.500%
Perp 12/17/52 122 0.21
GNB Cia de Seguros de Vida SA
1.884% 12/19/22 116 0.20
Monte dei Paschi Siena 5.000%
04/21/20 100 0.17
Pastor Part Preferntes 1.842%
Perp 04/27/17 66 0.11
Bremer Landesbank 8.500% Perp
06/29/20 65 0.11
BA-CA Finance Cayman 2 Ltd 0.719%
perp 03/22/18 64 0.11
Anton Venta Capital Trust 5.984%
06/27/17 37 0.06
Santander UK PLC 6.984% Perp
02/09/18 34 0.06
Banco Pinto & Sotto May 0.678%
Perp 06/04/17 9 0.01
------------ ------------
49,145 84.72
------------ ------------
Principal Risks
Risk is inherent in the Company's activities, but
it is managed through an ongoing process of identifying
and assessing risks and ensuring that appropriate
controls are in place. The key risks faced by the
Company, along with controls employed to mitigate
those risks, are set out below.
Macroeconomic risk
Adverse changes affecting the global financial
markets and economy as a whole, and in particular
European financial debt markets, may have a material
negative impact on the performance of the Company's
investments. In addition, the Company's non-Pounds
Sterling investments may be affected by fluctuations
in currency exchange rates. Prices of financial
and derivative instruments in which the Company
invests are subject to significant volatility due
to market risk.
The Company may use derivatives, including options,
short market indices, credit default swaps ("CDS"),
and others, to mitigate market-related downside
risk, but the Company is not committed to maintaining
market hedges at any time.
The Company has a systematic hedging policy with
respect to currency risk. The assets denominated
in currencies other than Pounds Sterling are hedged
by the Company (to a certain extent) by using currency
forward agreements to buy or sell a specified amount
of Pounds Sterling on a particular date in the
future.
Historically, foreign exchange hedging has undermined
many closed-ended investment funds, as a result
of sharp movements in the foreign exchange rates
leaving large hedging losses which could not be
met as assets were illiquid and banks were under
severe balance sheet strain and could not offer
forbearance on facilities in breach. The Company
is exposed to foreign exchange hedging risks but
this risk is mitigated by the following: - As at
31 December 2016, only 75.3% of the investment
portfolio is not held in Sterling (46.5% in Euro,
25.3% in US Dollars, 2.2% in Danish Krone and 1.3%
in Canadian Dollars); - Based on the worst case
scenario observed in monthly spot movement in the
past 10 years, our worst case expected hedging
loss on expiry would be 8.46% of NAV; - Our portfolio
trading liquidity is such that it would take 1
day, in normal circumstances, to liquidate sufficient
assets to meet such an anticipated worst case loss;
and - In "stressed" markets, we estimate it would
take 3 days to raise such liquidity.
Over the next three years there is likely to be
significant uncertainty in European markets due
to the UK Referendum decision to leave the European
Union ("Brexit"). During the two year negotiation
period, it is possible that there will be increased
volatility in European financial markets.
Investment risk
There are certain risks associated with the Company's
investment activities that are largely a result
of the Company's investment policy (e.g. a portfolio
concentrated on European financial debt) and certain
investment techniques which are inherently risky
(e.g. short selling).
There are numerous risks associated with having
a concentrated portfolio and that the primary risk
management tool used by the Company is the extensive
research performed by the Investment Manager prior
to investment, along with the ongoing monitoring
of a position once held in the Company's portfolio.
The Board reviews portfolio concentration and receives
a detailed overview of the portfolio positions
quarterly, and more frequently if necessary.
The Company's activities may include short selling
which theoretically could result in unlimited loss.
The Company enters into these positions infrequently,
often using CDS or other derivative positions to
obtain economic short exposure, or to hedge certain
positions, and relies on extensive due diligence
prior to entering into a short position.
The Investment Manager reports to the Board at
each quarterly Board meeting or more frequently,
as necessary, on developments and risks relating
to portfolio positions, financial instruments used
in the portfolio and the portfolio composition
as a whole.
Counterparty risk
The Company will have credit and operational risk
exposure to its counterparties which will require
it to post collateral to support its obligations
in connection with forwards and other derivative
instruments. Cash pending investment or held on
deposit will also be held with counterparties.
The insolvency of a counterparty would result in
a loss to the Company which could be material.
In order to mitigate this risk the Company seeks
to trade only with reputable counterparties that
the Investment Manager believes to be creditworthy.
The Investment Manager negotiates its International
Swaps and Derivatives Association ("ISDA") agreements
to include bilateral collateral agreements. In
addition, cash held will be with financial institutions
with short term credit rating of A-1 (Standard
& Poor's) or P-1 (Moody's).
Exposure to counterparties will be monitored by
the Investment Manager and reported to the Board
each quarter.
Credit risk
The Company may use leverage to meet its investment
objectives. The Company will also use forward contracts
to hedge its non-Pounds Sterling assets. In order
to do this, it will need to have in place credit
lines with one or more financial institutions.
Due to market conditions or other factors credit
lines may be withdrawn and it might not be possible
to put in place alternative arrangements. As such,
the ability to meet the Company's investment objective
and/or hedging strategy may not be met.
The Investment Manager will monitor the use of
credit lines and report to the Board each quarter.
Share price risk
The Company is exposed to the risk that its shares
may trade at a significant discount to NAV or that
the market in the shares will be illiquid. To mitigate
this risk the Company has retained the Broker to
maintain regular contact with existing and potential
shareholders. In addition, the Company may instigate
a share buyback programme in an attempt to reduce
the discount. The Board monitors the trading activity
of the shares on a regular basis and addresses
the premium/discount to NAV at its regular quarterly
meetings.
From launch on 5 November 2015 to 31 December 2016,
the Company's shares traded at an average premium
of 3.34% to NAV. The premium rose as high as 17.20%
on 12 February 2016, after the NAV fell in a difficult
start to 2016 for European financial debt markets.
As the NAV recovered, the premium of the share
price to NAV decreased and moved to a small discount
on 22 July 2016. Since July, the share price has
tracked the NAV reasonably closely (trading at
both a discount and premium) and at the year end
the shares traded at a 2.85% discount to NAV.
Regulatory risk
Changes in laws or regulations, or a failure to
comply with these, could have a detrimental impact
on the Company's operations. Prior to initiating
a position, the Investment Manager considers any
possible legal and regulatory issues that could
impact the investment and the Company. The Company's
advisers and service providers monitor regulatory
changes on an ongoing basis, and the Board is apprised
of any regulatory inquiries and material regulatory
developments on a quarterly basis.
Brexit may, in time, lead to divergence in regulatory
regimes between the UK and the European Union and
may create additional investment and trading opportunities.
However, in a process which is yet to be determined,
it is too early to fully appreciate what these
opportunities will be or when they will present
themselves.
Reputational risk
Reputational damage to the Company or the Investment
Manager as a result of negative publicity could
adversely affect the Company. To address this risk,
the Company has engaged the Broker and a public
relations firm to monitor media coverage and actively
engage with media sources as necessary. The Board
receives an update from the Broker and the Investment
Manager on a quarterly basis and considers measures
to address concerns as they arise.
Environment, Employee, Social and Community Issues
As an investment company, the Company does not
have any employees or physical property, and most
of its activities are performed by other organisations.
Therefore, the Company does not combust fuel and
does not have any greenhouse gas emissions to report
from its operations, nor does it have responsibility
for any other emissions producing sources.
The Investment Manager does not consider the impact
that an entity in which the Company invests may
have on the community. However, the Board believes
that the Company does not have any direct impact
on the community or environment and, as a result,
does not maintain policies in relation to these
matters.
Gender Diversity
The Board of Directors of the Company currently
comprises three male Directors. Further information
in relation to the Board's policy on diversity
can be found in the Directors' Remuneration Report.
Key Performance Indicators
The Board uses the following key performance indicators
("KPIs") to help assess the Company's performance
against its objectives. Further information regarding
the Company's performance is provided in the Chairman's
Statement and the Investment Manager's Report.
Dividends per Ordinary Share
As set out in the Prospectus, the Company intends
to distribute all of its income from investments,
net of expenses, by way of dividends on a quarterly
basis. The Company may retain income for distribution
in a subsequent quarter to that in which it arises
in order to smooth dividend amounts or for the
purposes of efficient cash management. On admission,
it was the intention for the Company to pay dividends
totalling at least 6 pence per Share in respect
of the period from Admission to 31 December 2016.
The Company announced dividends of GBP3,464,000
(6.00p per Ordinary Share) for the period ended
31 December 2016 (see note 6 for further details).
Only 4.35p of the 6.00p per Ordinary Share dividends
declared out of the profits for the period ended
31 December 2016 had been deducted from the 31
December 2016 NAV as the dividend of 1.65p per
Ordinary Share announced on 18 January 2017, payable
to shareholders on record at 3 February 2017, and
which was paid on 24 February 2017, had not been
provided for in these financial statements at 31
December 2016 as, in accordance with IFRS, it was
not deemed to be a liability of the Company at
that date.
As the Company suffered a loss for the period on
foreign currency exchange and on investments held
at fair value through profit or loss, the earnings
of 2.44p per Ordinary Share for the period were
significantly below the target 6.00p dividend per
Ordinary Share. Therefore, the remaining 3.56p
dividend per Ordinary Share for the period was
paid from the Company's distributable reserves.
If markets were to continue to fall indefinitely
or if the portfolio were to suffer stock-specific
losses indefinitely, this approach may not be sustainable
in the long run, depending on the rate of such
losses, but since the period end the Company has
recovered a significant proportion of those investment
losses and, as at 28 February 2017, the Company
had a NAV (after deduction of the 6.00p dividend)
of 97.01p per Ordinary Share, which is 99.0% of
the NAV at launch. The portfolio as at 28 February
2017 had a weighted average yield to call of 12.74%,
which is in excess of what is required to meet
the Company's long term target return of 10% p.a.
net of operating expenses and its dividend target
of 6.00p per share which is a yield of 6.18% on
the NAV as at that date.
NAV and total return
In line with the Prospectus, the Company is targeting
a net total return on invested capital in excess
of 10 per cent. per annum over a seven year period.
The Company achieved a total return of 1.59% in
the period ended 31 December 2016. The underperformance
compared to the seven year target was largely the
result of the fall in the European financial debt
market at the start of 2016. As set out above,
almost all of these losses have been recovered
as at the end of February 2017 and the weighted
average yield to call on the portfolio is such
that the Board believes that both the target rate
of return and dividend policy remain achievable.
Premium/discount of share price to NAV
The Board regularly monitors the premium/discount
of the price of the Ordinary Shares to the NAV
per share. Should the discount of share price to
NAV become unacceptable to the Board, the Company
may buy back some of its shares. As such, the Board
will put forward a proposal to shareholders at
the upcoming Annual General Meeting to renew the
authority to buy back shares.
At 31 December 2016 the share price was 92.50p,
a 2.85% discount to NAV.
William Scott
Chairman
17 March 2017
Statement of Comprehensive Income
for the period from 7 October 2015 (date of incorporation)
to 31 December 2016
Note Period from
7 October
2015 to
31 December
2016
GBP'000
Income
Bond income 3,549
Credit default swap income 17 148
Bank interest receivable 2
------------
Total income 3,699
------------
Investment gains and losses
on investments held at fair
value through profit or loss
Realised gains on disposal
of bonds 14 2,998
Movement in unrealised gains
on bonds 14 2,197
Realised losses on derivative
financial instruments 17 (5,987)
Movement in unrealised gains
on derivative financial instruments 17 114
------------
Total investments gains and
losses (678)
------------
Expenses
Investment management fee 8a (345)
Administration fee 8b (140)
Directors' fees 8f (110)
Other expenses 11 (355)
------------
Total expenses (950)
------------
Profit from operating activities
before gains and losses on
foreign currency transactions 2,071
Loss on foreign currency (670)
------------
Profit from operating activities
after gains and losses on
foreign currency transactions
and before taxation 1,401
------------
Taxation 12 (62)
------------
Profit for the period attributable
to the Owners of the Company 1,339
------------
Earnings per Ordinary Share
- basic and diluted 13 2.44p
------------
All of the items in the above statement are derived
from continuing operations.
The accompanying notes form an integral part of
these financial statements.
Statement of Changes in Equity
for the period from 7 October 2015 (date of incorporation)
to 31 December 2016
Share Distributable
Note capital reserves Total
GBP'000 GBP'000 GBP'000
Opening balance at 7 October - - -
2015
Profit for the period from
incorporation to 31 December
2016 - 1,339 1,339
Contributions by and distributions
to Owners
Ordinary Shares issued 20 - 60,318 60,318
Share issue costs - (1,188) (1,188)
Dividends paid 6 - (2,459) (2,459)
------------ ------------ ------------
At 31 December 2016 - 58,010 58,010
------------ ------------ ------------
There were no other comprehensive income items
in the period.
The accompanying notes form an integral part of
these financial statements.
Statement of Financial Position
as at 31 December 2016
As at
Note 31 December
2016
GBP'000
Non-current assets
Investment in bonds at fair 14,
value through profit or loss 18 49,145
------------
Current assets
Collateral accounts for derivative
financial instruments at
fair value through profit
or loss 15 4,548
Derivative financial assets
at fair value through profit
or loss 17 207
Other receivables and prepayments 16 825
Cash and cash equivalents 6,152
------------
Total current assets 11,732
------------
Total assets 60,877
------------
Current liabilities
Derivative financial liabilities
at fair value through profit
or loss 17 (2,626)
Other payables and accruals 19 (241)
------------
Total liabilities (2,867)
------------
Net assets 58,010
------------
Share capital and reserves
Share capital 20 -
Distributable reserves 58,010
------------
Total equity holders' funds 58,010
------------
Net asset value per Ordinary
Share: basic and diluted 21 95.21p
These financial statements were approved by the
Board of Directors on 17 March 2017 and were signed
on its behalf by:
William Scott John Renouf
Chairman Director
17 March 2017 17 March 2017
The accompanying notes on form an integral part
of these financial statements.
Statement of Cash Flows
for the period from 7 October 2015 (date of incorporation)
to 31 December 2016
Note Period from
7 October
2015 to
31 December
2016
GBP'000
Cash flows from operating
activities
Net profit before taxation 1,401
Adjustments for:
Foreign exchange movements (670)
Realised gains on bonds 14 (2,998)
Movement in unrealised gains
on bonds 14 (2,197)
Realised losses on derivative
financial instruments 17 5,987
Movement in unrealised gains
on derivative financial instruments 17 (114)
Increase in operating assets:
Payment to collateral accounts
for derivative financial
instruments 15 (4,548)
Purchase of bonds 14 (124,470)
Sale of bonds 14 80,520
Increase in operating liabilities:
Premiums received from selling
credit default swap agreements 17 3,675
Premiums paid on buying credit
default swap agreements 17 (1,035)
Purchase of foreign currency
derivatives 17 (159,249)
Close-out of foreign currency
derivatives 17 153,270
Purchase of bond futures 17 2,596
Sale of bond futures 17 (2,552)
Proceeds from sale and repurchase
agreements 17 5,918
Payments to close out sale
and repurchase agreements 17 (6,077)
------------
Net cash outflow from operating
activities before working
capital changes (50,543)
Increase in other receivables
and prepayments (825)
Increase in other payables
and accruals 241
Taxation paid 12 (62)
------------
Net cash outflow from operating
activities (51,189)
Cash flows from financing
activities
Proceeds from issue of Ordinary
Shares 60,318
Share issue costs paid (1,188)
Dividends paid 6 (2,459)
------------
Net cash inflow from financing
activities 56,671
------------
Increase in cash and cash
equivalents 5,482
Cash and cash equivalents
brought forward -
Effect of foreign exchange
on cash and cash equivalents 670
------------
Cash and cash equivalents
carried forward 6,152
------------
Supplemental disclosure of
cash flow information
Cash paid during the period
for interest 2,086
Cash received during the
period for interest 4,876
The accompanying notes form an integral part of
these financial statements.
Notes to the Financial Statements
for the period from 7 October 2015 (date of incorporation)
to 31 December 2016
1. General information
The Company was incorporated as an authorised closed-ended
investment Company, under the Law on 7 October
2015 with registered number 61003. Its Ordinary
Shares were admitted to trading on the Specialist
Fund Segment of the London Stock Exchange on 5
November 2015.
Investment objective
The investment objective of the Company is to provide
Shareholders with an attractive return, while limiting
downside risk, through investment in the following
financial institution investment instruments:
* Regulatory Capital Instruments, being financial
instruments issued by a European financial
institution which constitute regulatory capital for
the purposes of Basel I, Basel II or Basel III or
Solvency I or Solvency II;
* Other financial institution investment instruments,
being financial instruments issued by a European
financial institution, including without limitation
senior debt, which do not constitute Regulatory
Capital Instruments; and
* Derivative Instruments, being CDOs, securitisations
or derivatives, whether funded or unfunded, linked or
referenced to Regulatory Capital Instruments or Other
financial institution investment instruments.
Investment policy
The Company will seek to invest in a diversified
portfolio of financial institution investment instruments.
The Company will focus primarily on investing in
the secondary market although instruments may also
be subscribed in the primary market where the Investment
Manager, Axiom, identifies attractive opportunities.
The Company will invest its assets with the aim
of spreading investment risk.
2. Statement of compliance
a) Basis of preparation
These financial statements present the results
of the Company for the period from 7 October 2015
(date of incorporation) to 31 December 2016. These
financial statements have been prepared in accordance
with International Financial Reporting Standards
("IFRS"), as adopted by the European Union.
b) Going concern
After making reasonable enquiries, and assessing
all data relating to the Company's liquidity, including
its significant cash resources, income stream and
level 1 investments, the Directors have a reasonable
expectation that the Company has adequate resources
to continue in operational existence for the foreseeable
future and do not consider there to be any threat
to the going concern status of the Company. Therefore,
the financial statements have been prepared on
a going concern basis.
c) Basis of measurement
The financial statements have been prepared on
a historical cost basis, except for financial instruments
(including derivative financial instruments), which
are measured at fair value through profit or loss.
The financial statements have been prepared on
a going concern basis.
d) Use of estimates and judgements
The preparation of financial statements in conformity
with IFRSs requires management to make judgements,
estimates and assumptions that affect the application
of policies and the reported amounts of assets
and liabilities, income and expenses. The estimates
and associated assumptions are based on historical
experience and various other factors that are believed
to be reasonable under the circumstances, the results
of which form the basis of making judgements about
carrying values of assets and liabilities that
are not readily apparent from other sources. Actual
results may differ from these estimates.
The estimates and underlying assumptions are reviewed
on an ongoing basis. Revisions to accounting estimates
are recognised in the period in which the estimate
is revised, if the revision affects only that period,
or in the period of the revision and future periods,
if the revision affects both current and future
periods.
Judgements made by management in the application
of IFRSs that have a significant effect on the
financial statements and estimates with a significant
risk of material adjustment in the next year are
discussed in note 3.
3. Significant accounting policies
a) Income and expenses
Bank interest, bond income and credit default swap
income is recognised on a time-proportionate basis.
Dividend income is recognised when the right to
receive payment is established.
All expenses are recognised on an accruals basis.
All of the Company's expenses (with the exception
of share issue costs, which are charged directly
to the distributable reserve) are charged through
the Statement of Comprehensive Income in the period
in which they are incurred.
b) Transaction costs
Transaction costs incurred on the acquisition or
disposal of a financial investment designated at
fair value through profit or loss will be charged
through the Statement of Comprehensive Income in
the period in which they are incurred.
c) Foreign currency
Foreign currency transactions are translated into
Sterling using the exchange rates prevailing at
the dates of the transactions. Foreign exchange
gains and losses resulting from the settlement
of such transactions and from the translation at
period-end exchange rates of monetary assets and
liabilities denominated in foreign currencies are
recognised in the Statement of Comprehensive Income.
The exchange rates used by the Company as at 31
December 2016 were GBP1/EUR1.1731, GBP1/US$1.2340,
GBP1/DKK8.7202, GBP1/CA$1.6574 and GBP1/SEK11.2754.
d) Taxation
The Directors intend to conduct the Company's affairs
such that the Company continues to qualify for
exemption from Guernsey taxation.
Investment income is recorded gross of applicable
taxes and any tax expenses are recognised through
the Statement of Comprehensive Income as incurred.
The Company holds investments in several European
countries, in some jurisdictions, investment income
and capital gains are subject to withholding tax
deducted at the source of the income. The Company
presents the withholding tax separately from the
gross investment income in the Statement of Comprehensive
Income. For the purpose of the Statement of Cash
Flows, cash inflows from investments are presented
net of withholding taxes when applicable.
e) Financial assets and liabilities
The financial assets and liabilities of the Company
are investments in bonds at fair value through
profit or loss, collateral accounts for derivative
financial instruments, cash and cash equivalents,
other receivables, derivative financial instruments
and other payables. These financial instruments
are designated at fair value through profit or
loss upon initial recognition on the basis that
they are part of a group of financial assets which
are managed and have their performance evaluated
on a fair value basis, in accordance with investment
strategies and risk management of the Company.
Recognition
The Company recognises a financial asset or a financial
liability when, and only when, it becomes a party
to the contractual provisions of the instrument.
Purchases and sales of financial assets that require
delivery of assets within the time frame generally
established by regulation or convention in the
marketplace are recognised on the trade date, i.e.
the date that the Company commits to purchase or
sell the asset.
Derecognition
A financial asset (or, where applicable, a part
of a financial asset or part of a group of similar
assets) is derecognised where:
* The rights to receive cash flows from the asset have
expired; or
* The Company has transferred its rights to receive
cash flows from the asset or has assumed an
obligation to pay the received cash flows in full
without material delay to a third party under a
"pass-through" arrangement; and
* Either (a) the Company has transferred substantially
all the risks and rewards of the asset, or (b) the
Company has neither transferred nor retained
substantially all the risks and rewards of the asset,
but has transferred control of the asset.
When the Company has transferred its rights to
receive cash flows from an asset (or has entered
into a pass-through arrangement) and has neither
transferred nor retained substantially all the
risks and rewards of the asset nor transferred
control of the asset, the asset is recognised to
the extent of the Company's continuing involvement
in the asset.
The Company derecognises a financial liability
when the obligation under the liability is discharged,
cancelled or expires.
Initial measurement
Financial assets and financial liabilities at fair
value through profit or loss are recorded in the
Statement of Financial Position at fair value.
All transaction costs for such instruments are
recognised directly in the Statement of Comprehensive
Income.
Subsequent measurement
After initial measurement, the Company measures
financial assets which are classified at fair value
through profit or loss, at fair value. Subsequent
changes in the fair value of those financial instruments
are recorded in net gain or loss on financial assets
and liabilities at fair value through profit or
loss. Interest and dividend earned or paid on these
instruments are recorded separately in interest
income or expense and dividend income or expense.
Net gain or loss on financial assets and financial
liabilities at fair value through profit or loss
The Company records its transactions in bonds and
the related revenue and expenses on a trade date
basis. Unrealised gains and losses comprise changes
in the fair value of financial instruments at the
period end. These gains and losses represent the
difference between an instrument's initial carrying
amount and disposal amount, or cash payment on,
or receipts from derivative contracts.
Offsetting of financial instruments
Financial assets and financial liabilities are
reported net by counterparty in the Statement of
Financial Position, provided that the legal right
of offset exists, and is not offset by collateral
pledged to or received from counterparties.
f) Derivative financial instruments
Derivative financial instruments, including credit
default swap agreements, foreign currency forward
contracts, bond future contracts and sale and repurchase
agreements are recognised initially, and are subsequently
measured at fair value. Derivative financial instruments
are classified as assets when their fair value
is positive or as liabilities when their fair value
is negative. Derivative assets and liabilities
arising from different transactions are offset
only if the transactions are with the same counterparty,
a legal right of offset exists, and the parties
intend to settle the cash flows on a net basis.
Fair value movements on derivative financial instruments
are recognised in the Statement of Comprehensive
Income in the period in which they arise.
g) Offsetting of derivative assets and liabilities
IFRS 7, Financial Instruments: Disclosures, requires
an entity to disclose information about offsetting
rights and related arrangements. The disclosures
in note 17 provide users with information to evaluate
the effect of netting arrangements on an entity's
financial position. The disclosures are required
for all recognised financial instruments that could
be offset in accordance with International Accounting
Standard ("IAS") 32, Financial Instruments Presentation.
The disclosures also apply to recognised financial
instruments that are subject to an enforceable
master netting agreement or similar agreement,
irrespective of whether these are offset in accordance
with IAS 32.
h) Collateral accounts for derivative financial
instruments at fair value through profit or loss
Collateral accounts for derivative financial instruments
at fair value through profit or loss comprises
cash balances held at the Company's depositary
and the Company's clearing brokers and cash collateral
pledged to counterparties related to derivative
contracts. Cash that is related to securities sold,
not yet purchased, is restricted until the securities
are purchased. Financial instruments held within
the margin account consist of cash received from
brokers to collateralise the Company's derivative
contracts and amounts transferred from the Company's
bank account.
i) Receivables and prepayments
Receivables are carried at the original invoice
amount, less allowance for doubtful receivables.
Provision is made when there is objective evidence
that the Company will be unable to recover balances
in full. Balances are written-off when the probability
of recovery is assessed as being remote.
There are instruments in the portfolio that do
not pay any distributions because the payment remains
at the discretion of the issuer, or is under regulatory
or state aid restrictions. These are not classified
as "bad debts".
With respect to senior debt only:
* If bond interest has not been received within 30
calendar days of the expected pay date, unless there
is good reason, 50% of the interest will be provided
against; and
* If bond interest has not been received within 60
calendar days of the expected pay date, unless there
is good reason, 100% of the interest will be provided
against.
Bad debts will be considered on an investment by
investment basis and no general provision will
be made.
j) Cash and cash equivalents
Cash in hand and in banks and short-term deposits
which are held to maturity are carried at cost.
Cash and cash equivalents are defined as cash in
hand, demand deposits and short-term, highly liquid
investments readily convertible to known amounts
of cash and subject to insignificant risk of changes
in value.
k) Payables and accruals
Trade and other payables are carried at payment
or settlement amounts. Where the time value of
money is material, payables are carried at amortised
cost. When payables are received in currencies
other than the reporting currency, they are carried
forward, translated at the rate prevailing at the
period end date.
l) Share capital
Ordinary Shares are classified as equity. Incremental
costs directly attributable to the issue of Ordinary
Shares are recognised as a deduction from equity.
When share capital recognised as equity is repurchased,
the amount of the consideration paid, which includes
directly attributable costs, is recognised as a
deduction from equity. Repurchased shares that
are classified as Treasury Shares are presented
as a deduction from equity. When Treasury Shares
are sold or subsequently reissued, the amount received
is recognised as an increase in equity and the
resulting surplus or deficit is transferred to/from
retained earnings.
Funds received from the issue of Ordinary Shares
are allocated to share capital, to the extent that
they relate to the nominal value of the Ordinary
Shares, with any excess being allocated to distributable
reserves.
m) Distributable and non-distributable reserves
All income and expenses, foreign exchange gains
and losses and realised investment gains and losses
of the Company are allocated to the distributable
reserve.
n) NAV per share and earnings per share
The NAV per share disclosed on the face of the
Statement of the Statement of Financial Position
is calculated by dividing the net assets by the
number of Ordinary Shares in issue at the period
end.
Earnings per share is calculated by dividing the
earnings for the period by the weighted average
number of Ordinary Shares in issue during the period.
o) Accounting standards issued but not yet effective
The International Accounting Standards Board ("IASB")
has issued/revised a number of relevant standards
with an effective date after the date of these
financial statements. Any standards that are not
deemed relevant to the operations of the Company
have been excluded. The Directors have chosen not
to early adopt these standards and interpretations
and they do not anticipate that they would have
a material impact on the Company's financial statements
in the period of initial application.
Effective date
IFRS Share-based payments 1 January 2018
2
IFRS Financial Instruments 1 January 2018
9
IFRS Revenue from Contracts with 1 January 2018
15 Customers
IAS Statement of Cash Flows 1 January 2017
7
In July 2014, the IASB issued the final version
of IFRS 9, Financial Instruments that replaces
IAS 39, Financial Instruments: Recognition and
Measurement and all previous versions of IFRS 9.
IFRS 9 brings together all three aspects of the
accounting for financial instruments project: classification
and measurement, impairment and hedge accounting.
IFRS 9 is effective for annual periods beginning
on or after 1 January 2018, with early application
permitted. Except for hedge accounting, retrospective
application is required but providing comparative
information is not compulsory. For hedge accounting,
the requirements are generally applied prospectively,
with some limited exceptions.
The Company plans to adopt the new standard on
the required effective date. During 2016, the Company
performed a high-level impact assessment of all
three aspects of IFRS 9. This preliminary assessment
is based on currently available information and
may be subject to changes arising from further
detailed analyses or additional reasonable and
supportable information being made available to
the Company in the future. Overall, the Company
expects no significant impact on its balance sheet
and equity, and will perform a more detailed assessment
in 2017.
i) Classification and measurement
The Company does not expect a significant impact
on its balance sheet or equity on applying the
classification and measurement requirements of
IFRS 9. It expects to continue measuring at fair
value all financial assets and liabilities currently
held at fair value.
ii) Impairment
IFRS 9 requires the Company to record expected
credit losses on all of its debt securities, loans
and trade receivables, either on a 12-month or
lifetime basis. The Company expects to apply the
simplified approach and record lifetime expected
losses on all investment income and other receivables.
Given that investment income and other receivables
have not been impaired to date, the Company does
not expect there to be a significant impact on
its equity from reviewing the expected credit losses
on investment income and other receivables over
their lifetimes, but it will need to perform a
more detailed analysis which considers all reasonable
and supportable information, including forward-looking
elements to determine the extent of the impact.
iii) Hedge accounting
The Company does not currently designate any hedges
as effective hedging relationships which qualify
for hedge accounting. Therefore, the Company does
not expect there to be any impact with respect
to hedge accounting on the Company as a result
of applying IFRS 9.
The impact that IFRS 15 will have on the Company's
financial statements is also considered to be immaterial
because the Company does not have any contracts
with customers which meet the definition under
IFRS 15.
4. Use of judgements and estimates
The preparation of the Company's financial statements
requires the Directors to make judgements, estimates
and assumptions that affect the reported amounts
recognised in the financial statements and disclosure
of contingent liabilities. However, uncertainty
about these assumptions and estimates could result
in outcomes that could require a material adjustment
to the carrying amount of the asset or liability
in future periods.
Judgements
In the process of applying the Company's accounting
policies, management has made the following judgement
which had a significant effect on the amounts recognised
in the financial statements:
i) Determination of functional currency
The performance of the Company is measured and
reported to investors in Sterling. Although the
majority of the Company's underlying assets are
held in currencies other than Sterling, because
the Company's capital is raised in Sterling, expenses
are paid in Sterling and the Company hedges some
of its foreign currency risk back to Sterling the
Directors consider Sterling to be the Company's
functional currency.
Estimates and assumption
The Company based its assumptions and estimates
on parameters available when the financial statements
were approved. However, existing circumstances
and assumptions about future developments may change
due to market changes or circumstances arising
beyond the control of the Company. Such changes
are reflected in the assumptions when they occur.
i) Valuation of financial assets and liabilities
The Company uses the expertise of the Investment
Manager to assess the prices of investments at
the valuation date. The majority of the prices
can be independently verified with reference to
external data sources, however a minority of investments
cannot be verified by reference to an external
source and the Investment Manager secures an independent
valuation with reference to the latest prices traded
within the market place.
5. Segmental reporting
In accordance with IFRS 8, Operating Segments,
it is mandatory for the Company to present and
disclose segmental information based on the internal
reports that are regularly reviewed by the Board
in order to assess each segment's performance.
Management information for the Company as a whole
is provided internally for decision making purposes.
The Company does compartmentalise different investments
in order to monitor compliance with investment
restrictions, however the performance of these
allocations does not drive the investment decision
process. The Directors' decisions are based on
a single integrated investment strategy and the
Company's performance is evaluated on an overall
basis. Therefore, the Directors are of the opinion
that the Company is engaged in a single economic
segment of business for all decision making purposes.
The financial results of this segment are equivalent
to the results of the Company as a whole.
6. Dividends
As set out in the Prospectus, the Company intends
to distribute all of its income from investments,
net of expenses, by way of dividends on a quarterly
basis. The Company may retain income for distribution
in a subsequent quarter to that which it arises
in order to smooth dividend amounts or for the
purposes of efficient cash management. On admission,
it was the intention for the Company to pay dividends
totalling at least 6 pence per Share in respect
of the period from Admission to 31 December 2016.
As the Company suffered a loss for the period on
foreign currency exchange and on investments held
at fair value through profit or loss, the earnings
of 2.44p per Ordinary Share for the period were
significantly below the target 6.00p dividend per
Ordinary Share. Therefore, the remaining 3.56p
per Ordinary Share for the period was paid from
the Company's distributable reserves.
If markets were to continue to fall indefinitely
or if the portfolio were to suffer stock-specific
losses indefinitely, this approach may not be sustainable
in the long run, depending on the rate of such
losses, but since the period end the Company has
recovered a significant proportion of those investment
losses and, as at 28 February 2017, the Company
had a NAV (after deduction of the 6.00p dividend)
of 97.01p per Ordinary Share, which is 99.0% of
the NAV at launch. The portfolio as at 28 February
2017 had a weighted average yield to call of 12.74%,
which is in excess of what is required to meet
the Company's long term target return of 10% p.a.
net of operating expenses and its dividend target
of 6.00p per share which is a yield of 6.18% on
the NAV at that date.
The Company has declared the following dividends
in respect of the earnings for the period from
incorporation to 31 December 2016:
Total dividend
declared in respect Amount per
Announcement of earnings in Ordinary
date Pay date the period Share
GBP'000
26 January 26 February
2016 2016 178 0.35p
22 April
2016 27 May 2016 547 1.00p
26 August
19 July 2016 2016 820 1.50p
13 October 25 November
2016 2016 914 1.50p
------------ ------------
Dividends declared and
paid in the period 2,459 4.35p
------------ ------------
19 January 24 February
2017 2017 1,005 1.65p
------------ ------------
Dividends declared in
respect of the period 3,464 6.00p
------------ ------------
In accordance with IFRS, dividends are only provided
for when they become a contractual liability of
the Company. Therefore, during the period a total
of GBP2,459,000 was incurred in respect of dividends,
none of which was outstanding at the reporting
date. The fifth dividend of GBP1,005,000 had not
been provided for at 31 December 2016 as, in accordance
with IFRS, it was not deemed to be a liability
of the Company at that date.
7. Related parties
Details of the relationships between the Company,
the Investment Manager, the Administrator, the
Broker, the Registrar, the Depositary and the Directors
are disclosed in note 8.
During the period, the Company purchased 2,910
units in Axiom Contingent Capital, which is managed
by the Investment Manager, for GBP2,123,000 and
subsequently sold 910 units for GBP673,000 making
a realised gain on investment of GBP9,000. At the
period end, the Company held 2,000 units in Axiom
Contingent Capital valued at GBP1,831,000, generating
an unrealised gain of GBP372,000.
During the period, the Company also purchased 740
units in Axiom Equity C FCP, which is managed by
the Investment Manager, for GBP420,000. At the
period end, these units were valued at GBP556,000,
generating an unrealised gain of GBP136,000.
During the period, the investment manager charged
commission of 1.5% on the invested amount as a
result of the investors which it brought into the
Company as part of the placings on 4 March 2016
and 4 October 2016. The total fee charged for the
period was GBP49,000. The Investment Manager chose
to repay this fee to the investors that it introduced.
The Directors are not aware of any ultimate controlling
party.
8. Key contracts
a) Investment Manager
The Company has entered into an Investment Management
Agreement with Axiom Alternative Investments SARL
("Axiom") under which the Company receives investment
advice and management services.
Management fee
Under the terms of the Investment Management Agreement,
a management fee is paid to the Investment Manager
quarterly in arrears. The quarterly fee is calculated
by reference to the following sliding scale:
i. where NAV is less than or equal to GBP250 million,
1% per annum of NAV;
ii. where NAV is greater than GBP250 million but
less than or equal to GBP500 million, 1% per annum
of NAV on the first GBP250 million and 0.8% per
annum of NAV on the balance; and
iii. where NAV is greater than GBP500 million,
0.8% per annum of NAV, in each case, plus applicable
VAT.
If in any quarter (other than the final quarter)
of any accounting period the aggregate expenses
of the Company during such quarter exceed an amount
equal to one-quarter of 1.5% of the average NAV
of the Company during such quarter (such amount
being a "Quarterly Expenses Excess"), then the
management fee payable in respect of that quarter
shall be reduced by the amount of the Quarterly
Expenses Excess, provided that the management fee
shall not be reduced to an amount that is less
than zero and no sum will be payable by the Investment
Manager to the Company in respect of the Quarterly
Expenses Excess.
During the period, a total of GBP345,000 was incurred
in respect of Investment Management fees, of which
GBP72,000 was payable at the reporting date.
In addition, the Investment Manager was paid GBP183,000
for its work on the initial placing. The GBP183,000
is included in share issue costs in the Statement
of Changes in Equity.
Performance fee
The Investment Manager is entitled to receive from
the Company a performance fee subject to certain
performance benchmarks.
The fee is payable as a share of Total Shareholder
Return ("TSR") where TSR is defined as growth in
NAV per share plus dividends per share paid.
The performance fee, if any, is equal to 15% of
TSRs in excess of a hurdle equal to a 7% per annum
cumulative return since Admission, compounded annually.
The performance fee is subject to a high watermark.
The fee, if any, is payable annually and calculated
on the basis of audited annual accounts.
50% of the performance fee will be settled in cash.
The balance will be satisfied in shares, subject
to certain exceptions where settlement in shares
would be prohibited by law or would result in the
Investment Manager or any person acting in concert
with it incurring an obligation to make an offer
under Rule 9 of the City Code, in which case the
balance will be settled in cash.
Assuming no such requirement, the balance of the
performance fee will be settled either by the allotment
to the Investment Manager of such number of new
shares credited as fully paid as is equal to 50%
of the performance fee (net of VAT) divided by
the most recent practicable NAV per share (rounded
down to the nearest whole share) or by the acquisition
of shares in the market, as required under the
terms of the Investment Management Agreement. All
shares allotted to (or acquired for) the Investment
Manager in part satisfaction of the performance
fee will be subject to a lock-up until the date
that is 12 months from the end of the accounting
period to which the award of such shares related.
During the period, no performance fee was incurred
by the Company and there was no balance accrued
at the period end date.
Under the terms of the Investment Management Agreement,
if at any time there has been any deduction from
the management fee as a result of the Quarterly
Expenses Excess or annual expenses excess (a "management
fee deduction"), and during any subsequent quarter:
i. all or part of the management fee deduction
can be paid; and/or
ii. all or part of the management fee deduction
shortfall payment can be repaid,
by the Company to the Investment Manager without:
iii. in any quarter (other than the final quarter)
of any accounting period the aggregate expenses
of the Company during such quarter exceeding an
amount equal to one-quarter of 1.5% of the average
NAV of the Company during such quarter; or
iv. in the final quarter of any accounting period
the aggregate expenses of the Company during such
accounting period exceeding an amount equal to
1.5% of the average NAV of the Company during such
accounting period,
then such payment and/or repayment shall be made
by the Company to the Investment Manager as soon
as is reasonably practicable.
In the period ended 31 December 2016 the Quarterly
Expenses Excess and annual expenses excess which
would be repayable was GBP231,000.
b) Administrator and Company Secretary
Elysium Fund Management Limited has been appointed
by the Company to provide day to day administration
services to the Company, to calculate the NAV per
share on a weekly basis and to provide company
secretarial functions required under the Law.
Under the terms of the Administration Agreement,
the Administrator is entitled to receive a fee
of GBP110,000 per annum, which is subject to an
annual adjustment upwards to reflect any percentage
change in the retail prices index over the preceding
year. In addition, the Company pays the Administrator
a time-based fee for any work undertaken in connection
with the calculation of the weekly NAV, up to a
maximum of GBP400 per NAV calculation, subject
to a maximum aggregate amount of GBP10,000 per
annum. The Administrator was also paid a one-off
establishment fee of GBP25,000 on Admission. The
GBP25,000 is included in share issue costs in the
Statement of Changes in Equity.
During the period, a total of GBP140,000 was incurred
in respect of Administration fees of which GBP30,000
was payable at the reporting date.
c) Broker
Liberum Capital Limited ("Liberum") has been appointed
to act as Corporate Broker ("Broker") for the Company.
In consideration of Liberum agreeing to act as
Broker the Company pays Liberum an annual retainer
fee of GBP75,000 per annum, paid equally in two
instalments on 1 January and 1 July each year.
For the period from incorporation to 31 December
2016, the Company had paid GBP88,000 in respect
of Broker fees. At the period end date there was
no outstanding balance due to or from Liberum.
In addition, Liberum was paid a total of GBP381,000
for its work on the three placings. The GBP381,000
is included in share issue costs in the Statement
of Changes in Equity.
d) Registrar
Capita Registrars (Guernsey) Limited has been appointed
Registrar of the Company.
Under the terms of the Registrar Agreement, the
Registrar is entitled to receive from the Company
certain annual maintenance and activity fees, subject
to a minimum fee of GBP5,500 per annum.
During the period, a total of GBP20,000 was incurred
in respect of Registrar fees, of which GBP4,000
was payable at 31 December 2016.
e) Depositary
CACEIS Bank France has been appointed by the Company
to provide depositary, settlement and other associated
services to the Company.
Under the terms of the Depositary Agreement, the
Depositary is entitled to receive from the Company:
i. an annual depositary fee of 0.03% of NAV, subject
to a minimum annual fee of EUR25,000;
ii. a safekeeping fee calculated using a basis
point fee charge based on the country of settlement
and the value of the assets; and
iii. an administration fee on each transaction,
together with various other payment/wire charges
on outgoing payments.
During the period, a total of GBP30,000 was incurred
in respect of depositary fees, of which GBP11,000
was payable at the reporting date.
CACEIS Bank Luxembourg is entitled to receive a
monthly fee from the Company in respect of the
provision of certain accounting services which
will, subject to a minimum monthly fee of EUR1,800,
be calculated by reference to the following sliding
scale:
i. where NAV is less than or equal to EUR50 million,
0.04% per annum of NAV;
ii. where NAV is greater than EUR50 million but
less than or equal to EUR100 million, 0.03% per
annum of NAV; and
iii. where NAV is greater than EUR100 million,
0.02% per annum of NAV, in each case, plus applicable
VAT.
During the period, a total of GBP25,000 was incurred
in respect of fees paid to CACEIS Bank Luxembourg,
of which GBP9,000 was payable at 31 December 2016.
f) Directors' remuneration
William Scott (Chairman) is paid GBP35,000 per
annum, John Renouf (Chairman of the Audit Committee)
is paid GBP32,500 per annum, and Max Hilton is
paid GBP27,500 per annum.
The Directors are also entitled to reimbursement
of all reasonable travelling and other expenses
properly incurred in the performance of their duties.
During the period, a total of GBP110,000 was incurred
in respect of Directors' fees, of which GBP24,000
was payable at the reporting date. No bonus or
pension contributions were paid or payable on behalf
of the Directors.
9. Key management and employees
The Company had no employees during the period.
10. Auditor's remuneration
For the period ended 31 December 2016, fees charged
by EY, together with amounts accrued at 31 December
2016, amounted to GBP78,000, of which GBP25,000
related to audit services and GBP53,000 (included
in Share issue costs) related to reporting accountant
and tax work on the IPO. As at 31 December 2016,
GBP25,000 was due to EY.
11. Other expenses
Period from
7 October
2015 to
31 December
2016
GBP'000
Broker fees (note 8c) 88
PR expenses 64
Other expenses 62
Bank charges and interest 41
Depositary fees (note 8e) 30
Audit fees (note 10) 25
Valuation agent fees 25
Registrar fees (note 8d) 20
------------
355
------------
12. Taxation
The Company is exempt from taxation in Guernsey,
and it is the intention to conduct the affairs
of the Company to ensure that it continues to qualify
for exempt company status for the purposes of Guernsey
taxation. The Company pays a fixed fee for the
exemption of GBP1,200 per annum.
The Company has a number of investments in bonds
issued in Italy. Until 6 September 2016, as a Guernsey
registered Company, any income received on Italian
bonds suffered Italian withholding tax at 26%.
In addition, Italian withholding tax was calculated,
by the Depositary, and either charged or received
on the purchase or sale of bond interest bought
or sold with bonds at a rate of 26%. From 6 September
2016, foreign investors resident in Guernsey became
entitled to benefit from exemption on interests
on Italian Government and Corporate bonds and therefore
no further Italian withholding tax has been payable.
13. Earnings per Ordinary Share
The earnings per Ordinary Share of 2.44p is based
on a profit attributable to owners of the Company
of GBP1,339,000 and on a weighted average number
of 54,878,410 Ordinary Shares in issue since Admission.
There is no difference between the basic and diluted
earnings per share.
14. Investments in bonds at fair value through
profit or loss
Period from
7 October
2015 to
31 December
2016
GBP'000
Balance as at 7 October 2015
(date of incorporation) -
Additions in the period 124,470
Sales in the period (80,520)
Movement in unrealised gains
in the period 2,197
Movement in realised gains
in the period 2,998
------------
49,145
------------
Closing book cost 46,948
Closing unrealised gain on
bonds at fair value through
profit or loss 2,197
------------
Closing valuation 49,145
------------
15. Collateral accounts for derivative financial
instruments at fair value through profit or loss
31 December
2016
GBP'000
Goldman Sachs International 2,723
JP Morgan 1,550
Credit Suisse 162
CACEIS Bank France 113
------------
Total collateral held by brokers 4,548
------------
With respect to derivatives, the Company pledges
to third parties cash and/or other liquid securities
("Collateral") as initial margin and as variation
margin. Collateral may be transferred either to
the third party or to an unaffiliated custodian
for the benefit of the third party. In the case
where Collateral is transferred to the third party,
the third party pursuant to these derivatives arrangements
will be permitted to use, reuse, lend, borrow,
hypothecate or re-hypothecate such Collateral.
The third parties will have no obligation to retain
an equivalent amount of similar property in their
possession and control, until such time as the
Company's obligations to the third party are satisfied.
The Company has no right to this Collateral but
has the right to receive fungible, equivalent Collateral
upon the Company's satisfaction of the Company's
obligation under the derivatives.
16. Other receivables and prepayments
31 December
2016
GBP'000
Accrued bond interest receivable 794
Interest due on credit default
swaps 18
Other receivables and prepayments 13
------------
825
------------
17. Derivative financial instruments
Credit default swap agreements
A credit default swap agreement represents an agreement
that one party, the protection buyer, pays a fixed
fee, the premium, in return for a payment by the
other party, the protection seller, contingent
upon a specified credit event relating to an underlying
reference asset. If a specified credit event occurs,
there is an exchange of cash flows and/or securities
designed so the net payment to the protection buyer
reflects the loss incurred by holders of the referenced
obligation in the event of its default. The International
Swaps and Derivatives Association ("ISDA") establishes
the nature of the credit event and such events
include bankruptcy and failure to meet payment
obligations when due.
Period from
7 October
2015 to
31 December
2016
GBP'000
Balance as at 7 October 2015
(date of incorporation) -
Premiums received from selling
credit default swap agreements (3,675)
Premiums paid on buying credit
default swap agreements 1,035
Movement in unrealised losses
in the period 304
Realised gains in the period 98
------------
Outstanding liability due on
credit default swaps as at
31 December 2016 (2,238)
------------
Credit default swap assets
at fair value through profit
or loss 137
Credit default swap liabilities
at fair value through profit
or loss (2,375)
------------
Outstanding liability due on
credit default swaps as at
31 December 2016 (2,238)
------------
Interest paid or received on the credit default
swap agreements has been accounted for in the Statement
of Comprehensive Income as it has been incurred
or received. At the period end, GBP18,000 of interest
on credit default swap agreements was due to the
Company.
Collateral totalling GBP4,435,000 was held in respect
of the credit default swap agreements.
Foreign currency forwards
Foreign currency forward contracts are used for
trading purposes and are used to hedge the Company's
exposure to changes in foreign currency exchange
rates on its foreign portfolio holdings. A foreign
currency forward contract is a commitment to purchase
or sell a foreign currency on a future date and
at a negotiated forward exchange rate.
Period from
7 October
2015 to
31 December
2016
GBP'000
Balance as at 7 October 2015
(date of incorporation) -
Purchase of foreign currency
derivatives 159,249
Closing-out of foreign currency
derivatives (153,270)
Movement in unrealised losses
in the period (190)
Realised losses in the period (5,979)
------------
Net liabilities on foreign
currency forwards as at 31
December 2016 (190)
------------
Foreign currency forward assets
at fair value through profit
or loss 60
Foreign currency forward liabilities
at fair value through profit
or loss (250)
------------
Net liabilities on foreign
currency forwards as at 31
December 2016 (190)
------------
Bond futures
A bond future contract involves a commitment by
the Company to purchase or sell bond futures for
a predetermined price, with payment and delivery
of the bond future at a predetermined future date.
Period from
7 October
2015 to
31 December
2016
GBP'000
Balance as at 7 October 2015
(date of incorporation) -
Purchase of bond futures (2,596)
Sale of bond futures 2,552
Movement in unrealised gains
in the period -
Realised gains in the period 53
------------
Balance receivable on bond
futures as at 31 December 2016 9
------------
Bond future assets at fair
value through profit or loss 10
Bond future liabilities at
fair value through profit or
loss (1)
------------
Balance receivable on bond
futures as at 31 December 2016 9
------------
Sale and repurchase agreements
Under the terms of a sale and repurchase agreement
("repo") one party in the agreement acts as a borrower
of cash, using a security held as collateral, and
the other party in the agreement acts as a lender
of cash. Almost any security may be employed in
the repo. Interest is paid by the borrower for
the benefit of having funds to use until a specified
date on which the effective loan needs to be repaid.
Period from
7 October
2015 to
31 December
2016
GBP'000
Balance as at 7 October 2015
(date of incorporation) -
Opening of sale and repurchase
agreements (5,918)
Closing-out of sale and repurchase
agreements 6,077
Realised losses in the period (159)
------------
Total liabilities on sale and
repurchase agreements as at
31 December 2016 -
------------
Interest paid on sale and repurchase agreements
has been accounted for in the Statement of Comprehensive
Income as it has been incurred. At 31 December
2016 no interest on sale and repurchase agreements
was payable by the Company.
Offsetting of credit default swap agreements
The Company presents the fair value of its derivative
assets and liabilities on a gross basis, no such
assets or liabilities have been offset in the Statement
of Financial Position. Certain derivative financial
instruments are subject to enforceable master netting
arrangements, such as ISDA master netting agreements,
or similar agreements that cover similar financial
instruments.
The similar agreements include derivative clearing
agreements, global master repurchase agreements,
global master securities lending agreements, and
any related rights to financial collateral. The
similar financial instruments and transactions
include derivatives, sale and repurchase agreements,
reverse sale and repurchase agreements, securities
borrowing, and securities lending agreements.
The Company's agreements allow for offsetting following
an event of default, but not in the ordinary course
of business, and the Company does not intend to
settle these transactions on a net basis or settle
the assets and liabilities on a simultaneous basis.
The table below sets out the carrying amounts of
recognised financial assets and liabilities that
are subject to the above arrangements, together
with held or pledged against these assets and liabilities
as at 31 December 2016:
Effect of
remaining
rights of
offset that
do not meet
the criteria
for offsetting
Gross Amounts Net amount in the Statement
carrying offset presented of Financial
amount in accordance in Statement Position
before with offsetting of Financial - Cash held Net
offsetting criteria Position as collateral exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Financial
assets
Derivatives 207 - 207 - 207
Collateral
held 4,548 - 4,548 (2,559) 1,989
------------ ------------ ------------ ------------ ------------
Total assets 4,755 - 4,755 (2,559) 2,196
------------ ------------ ------------ ------------ ------------
Financial
liabilities
Derivatives (2,626) - (2,626) 2,559 (67)
------------ ------------ ------------ ------------ ------------
Total liabilities (2,626) - (2,626) 2,559 (67)
------------ ------------ ------------ ------------ ------------
18. Fair value of financial instruments at fair
value through profit or loss
The following table shows financial instruments
recognised at fair value, analysed between those
whose fair value is based on:
* Quoted prices in active markets for identical assets
or liabilities (Level 1);
* Those involving inputs other than quoted prices
included in Level 1 that are observable for the asset
or liability, either directly (as prices) or
indirectly (derived from prices) (Level 2); and
* Those with inputs for the asset or liability that are
not based on observable market data (unobservable
inputs) (Level 3).
At 31 December 2016, the financial assets and liabilities
designated at fair value through profit or loss
were as follows:
31 December 2016
Level Level Level Total
1 2 3
GBP'000 GBP'000 GBP'000 GBP'000
Listed bonds 47,467 1,678 - 49,145
Credit default swaps - (2,238) - (2,238)
Derivative financial instruments 9 (190) - (181)
------------ ------------ ------------ ------------
47,476 (750) - 46,726
------------ ------------ ------------ ------------
Level 1 financial instruments include listed bonds
and bond future contracts which have been valued
at fair value by reference to quoted prices in
active markets. No unobservable inputs were included
in determining the fair value of these investments
and, as such, alternative carrying values for ranges
of unobservable inputs have not been provided.
Level 2 financial instruments include credit default
swap agreements, foreign currency forward contracts
and sale and repurchase agreements. Each of these
financial investments are valued by the Investment
Manager using market observable inputs. The fair
value of these securities may be based on, but
are not limited to, the following inputs: market
price of the underlying securities; notional amount;
expiration date; fixed and floating interest rates;
payment schedules; and/or dividends declared.
The model used by the Company to fair value credit
default swap agreements prices a credit default
swap as a function of its schedule, deal spread,
notional value, credit default swap curve and yield
curve. The key assumptions employed in the model
include: constant recovery as a fraction of par,
piecewise constant risk neutral hazard rates and
default events being statistically independent
of changes in the default-free yield curve.
The fair values of the derivative financial instruments
are based on the forward foreign exchange rate
curve.
Transfers between levels
Transfers between levels during the period are
determined and deemed to have occurred at each
financial reporting date. There were no investments
classified as Level 3 during the period, and no
transfers between levels in the period. See notes
14, 15 and 17 for movements in instruments held
at fair value through profit or loss.
19. Other payables and accruals
31 December
2016
GBP'000
Other accruals 75
Investment management fee (note
8a) 72
Administration fee (note 8b) 30
Audit fees (note 10) 25
Directors' fees (note 8f) 24
Depositary fees (note 8e) 11
Registrar fees (note 8d) 4
------------
241
------------
20. Share capital
31 December 2016
Number GBP'000
Authorised:
Ordinary shares of no par value Unlimited -
------------ ------------
Allotted, called up and fully
paid:
Ordinary Shares of no par value 60,930,764 -
------------ ------------
At the initial placing, on 3 November 2015 the
Company issued 50,737,667 Ordinary Shares of no
par value for GBP1.00 each, raising proceeds of
GBP50.74 million.
On 4 March 2016 the Company raised GBP3.55 million
through the placing of 3,945,555 new Ordinary Shares
of no par value. The Ordinary Shares were issued
at a price of 90.00p per share.
On 4 October 2016 the Company raised a further
GBP6.03 million through the placing of 6,247,542
new Ordinary Shares of no par value. The Ordinary
Shares were issued at a price of 96.50p per share.
At 31 December 2016, the total number of Ordinary
Shares in issue was 60,930,764.
The Ordinary Shares carry the right to receive
all dividends declared by the Company. Shareholders
are entitled to all dividends paid by the Company
and, on a winding up, provided the Company has
satisfied all of its liabilities, the shareholders
are entitled to all of the surplus assets of the
Company. Shareholders will be entitled to attend
and vote at all general meetings of the Company
and, on a poll, will be entitled to one vote for
each Share held.
21. Net asset value per Ordinary Share
The net asset value per Ordinary Share is based
on the net assets attributable to owners of the
Company of GBP58,010,000, and on 60,930,764 Ordinary
Shares in issue at the period end.
22. Financial instruments and risk management
The Investment Manager manages the Company's portfolio
to provide Shareholders with attractive return,
while limiting downside risk, through investment
in the following financial institution investment
instruments:
* Regulatory capital instruments, being financial
instruments issued by a European financial
institution which constitute regulatory capital for
the purposes of Basel I, Basel II or Basel III or
Solvency I or Solvency II;
* Other financial institution investment instruments,
being financial instruments issued by a European
financial institution, including without limitation
senior debt, which do not constitute regulatory
capital instruments; and
* Derivative instruments, being CDOs, securitisations
or derivatives, whether funded or unfunded, linked or
referenced to regulatory capital instruments or other
financial institution investment instruments.
The Company invests its assets with the aim of
spreading investment risk.
Risk is inherent in the Company's activities, but
it is managed through a process of ongoing identification,
measurement and monitoring. The Company is exposed
to market risk (which includes currency risk, interest
rate risk and price risk), credit risk and liquidity
risk from the financial instruments it holds. Risk
management procedures are in place to minimise
the Company's exposure to these financial risks,
in order to create and protect Shareholder value.
Risk management structure
The Investment Manager is responsible for identifying
and controlling risks. The Board of Directors supervises
the Investment Manager and is ultimately responsible
for the overall risk management approach within
the Company.
The Company has no employees and is reliant on
the performance of third party service providers.
Failure by the Investment Manager, Administrator,
Depositary, Registrar or any other third party
service provider to perform in accordance with
the terms of its appointment could have a significant
detrimental impact on the operation of the Company.
The market in which the Company participates is
competitive and rapidly changing.
Risk concentration
Concentration indicates the relative sensitivity
of the Company's performance to developments affecting
a particular industry or geographical location.
Concentrations of risk arise when a number of financial
instruments or contracts are entered into with
the same counterparty, or where a number of counterparties
are engaged in similar business activities, or
activities in the same geographic region, or have
similar economic features that would cause their
ability to meet contractual obligations to be similarly
affected by changes in economic, political or other
conditions. Concentrations of liquidity risk may
arise from the repayment terms of financial liabilities,
sources of borrowing facilities or reliance on
a particular market in which to realise liquid
assets. Concentrations of foreign exchange risk
may arise if the Company has a significant net
open position in a single foreign currency, or
aggregate net open position in several currencies
that tend to move together.
Within the aim of maintaining a diversified investment
portfolio, and thus mitigating concentration risks,
the Company has established the following investment
restriction in respect of the general deployment
of assets:
Concentration
No more than 15% of NAV, calculated at the time
of investments, will be exposed to any one financial
counterparty. This limit will increase to 20% where,
in the Investment Manager's opinion (having informed
the Board in writing of such increase) the relevant
financial institution investment instrument is
expected to amortise such that, within 12 months
of the date of the investment, the expected exposure
(net of any hedging costs and expenses) will be
equal to or less than 15% of NAV, calculated at
the time of the investment.
Market risk
i) Price risk
Price risk exposure arises from the uncertainty
about future prices of financial instruments held.
It represents the potential loss that the Company
may suffer through holding positions in the face
of price movements. The investments in bonds and
bond futures at fair value through profit or loss
(see notes 14, 17 and 18) are exposed to price
risk and it is not the intention to mitigate the
price risk.
At 31 December 2016, if the valuation of these
investments at fair value through profit or loss
had moved by 5% with all other variables remaining
constant, the change in net assets would amount
to approximately +/- GBP2,458,000. The maximum
price risk resulting from financial instruments
is equal to the GBP49,154,000 carrying value of
investments at fair value through profit or loss.
ii) Foreign currency risk
Foreign currency risk is the risk that the value
of a financial instrument will fluctuate because
of changes in foreign currency exchange rates.
Currency risk arises when future commercial transactions
and recognised assets and liabilities are denominated
in a currency that is not the Company's functional
currency. The Company invests in securities and
other investments that are denominated in currencies
other than Sterling. Accordingly, the value of
the Company's assets may be affected favourably
or unfavourably by fluctuations in currency rates
and therefore the Company will necessarily be subject
to foreign exchange risks.
In order to limit the exposure to foreign currency
risk, the Company entered into hedging contracts
during the period. At 31 December 2016, the Company
held the following foreign currency forward contracts:
Maturity date Amount to be Amount to be purchased
sold
8 March 2017 EUR34,000,000 GBP29,022,000
8 March 2017 US$13,400,000 GBP10,617,000
8 March 2017 DKK13,500,000 GBP1,548,000
8 March 2017 CA$1,110,000 GBP662,000
8 March 2017 US$7,500,000 EUR7,154,000
As at 31 December 2016 a proportion of the net
financial assets of the Company were denominated
in currencies other than Sterling as follows:
Investments
at fair
value Foreign
through Cash currency
profit and cash forward
or loss Receivables equivalents Exposure contract Net exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Euro 20,651 495 2,613 23,759 (22,902) 857
US Dollars 15,318 137 92 15,547 (16,938) (1,391)
Danish
Krone 1,084 19 457 1,559 (1,548) 11
Canadian
Dollars 646 10 39 695 (670) 25
------------ ------------ ------------ ------------ ------------ ------------
37,699 661 3,201 41,561 (42,058) (497)
------------ ------------ ------------ ------------ ------------ ------------
Other future foreign exchange hedging contracts
may be employed, such as currency swap agreements,
futures contracts and options. There can be no
certainty as to the efficacy of any hedging transactions.
At 31 December 2016, if the exchange rates had
strengthened/weakened by 5% against Sterling with
all other variables remaining constant, net assets
at 31 December 2016 would have decreased/increased
by GBP25,000.
ii) Interest rate risk
Interest rate risk arises from the possibility
that changes in interest rates will affect future
cash flows or the fair values of financial instruments.
The Company is exposed to risks associated with
the effects of fluctuations in the prevailing levels
of market interest rates on its financial instruments
and cash flow. However, due to the fixed rate nature
of the majority of the bonds, cash and cash equivalents
of GBP6,152,000 and investment in bonds of GBP7,878,000
were the only interest bearing financial instruments
subject to variable interest rates at 31 December
2016. Therefore, if interest rates had increased/decreased
by 50 basis points, with all other variables remaining
constant, the change in the value of interest cash
flows of these assets in the period would have
been GBP41,000/GBP(64,000).
Fixed Variable Non-interest
interest interest bearing Total
GBP'000 GBP'000 GBP'000 GBP'000
Financial assets
Investments in bonds
at fair value through
profit or loss 34,796 7,878 6,471 49,145
Collateral accounts for
derivative financial
instruments at fair value
through profit or loss - - 4,548 4,548
Other receivables - - 812 812
Cash and cash equivalents - 6,152 - 6,152
------------ ------------ ------------ ------------
Total financial assets 34,796 14,030 11,831 60,657
------------ ------------ ------------ ------------
Financial liabilities
Derivative financial
liabilities at fair value
through profit or loss (2,238) - (181) (2,419)
Other payables and accruals - - (241) (241)
------------ ------------ ------------ ------------
Total financial liabilities (2,238) - (422) (2,660)
------------ ------------ ------------ ------------
Total interest sensitivity
gap 32,558 14,030 11,409 57,997
------------ ------------ ------------ ------------
It is estimated that the fair value of the bonds
at 31 December 2016 would increase/decrease by
+/-GBP521,000 (1.06%) if interest rates were to
change by 50 basis points.
The Investment Manager manages the Company's exposure
to interest rate risk, paying heed to prevailing
interest rates and economic conditions, market
expectations and its own views as to likely movements
in interest rates.
Although it has not done so to date, the Company
may implement hedging and derivative strategies
designed to protect investment performance against
material movements in interest rates. Such strategies
may include (but are not limited to) interest rate
swaps and will only be entered into when they are
available in a timely manner and on terms acceptable
to the Company. The Company may also bear risks
that could otherwise be hedged where it is considered
appropriate. There can be no certainty as to the
efficacy of any hedging transactions.
Credit risk
Credit risk is the risk that a counterparty to
a financial instrument will fail to discharge an
obligation or commitment that it has entered into
with the Company, resulting in a financial loss
to the Company.
At 31 December 2016, credit risk arose principally
from investment in bonds of GBP49,145,000, cash
and cash equivalents of GBP6,152,000 and balances
held as collateral for derivative financial instruments
at fair value through profit or loss of GBP4,548,000.
The Company seeks to trade only with reputable
counterparties that the Investment Manager believes
to be creditworthy.
The Investment Manager manages the Company's credit
risk by investing in a diverse portfolio of bonds,
in line with the Prospectus. At 31 December 2016,
the bond rating profile of the portfolio as detailed
in the Investment Manager's Report was as follows:
Percentage
A 2.82
BBB 17.07
BB 54.11
B 14.10
CCC and below 6.49
No rating 5.40
------------
100.00
------------
The cash pending investment may be held without
limit with a financial institution with a credit
rating of A-1 (Standard & Poor's) or P-1 (Moody's)
to protect against counterparty failure.
The Company may implement hedging and derivative
strategies designed to protect against credit risk.
Such strategies may include (but are not limited
to) credit default swaps and will only be entered
into when they are available in a timely manner
and on terms acceptable to the Company. The Company
may also bear risks that could otherwise be hedged
where it is considered appropriate. There can be
no certainty to the efficacy of hedging transactions.
Due to the Company's investment in credit default
swap agreements the Company is exposed to additional
credit risk as a result of possible counterparty
failure. The Company has entered into ISDA contracts
with Credit Suisse, JP Morgan and Goldman Sachs,
rated BBB+, BBB+ and A- respectively. At 31 December
2016, the overall net exposure to these counterparties
was 3.79% of NAV. The collateral held at each counterparty
is disclosed in note 15.
Liquidity risk
Liquidity risk is defined as the risk that the
Company will encounter difficulties in realising
assets or otherwise raising funds to meet financial
commitments. The principal liquidity risk is contained
in unmatched liabilities. The liquidity risk at
31 December 2016 was low since the ratio of cash
and cash equivalents to unmatched liabilities was
26:1.
In addition, the Company diversifies the liquidity
risk through investment in bonds with a variety
of maturity dates, as follows:
Percentage
Less than 1 year 23.90
1 to 3 years 26.97
3 to 5 years 15.79
5 to 7 years 12.30
7 to 10 years 13.54
More than 10 years 7.50
------------
100.00
------------
As at 31 December 2016, the Company's liabilities
fell due as follows:
Percentage
1 to 3 months 17.14
3 to 6 months -
6 to 12 months -
1 to 3 years 6.06
3 to 5 years 76.80
------------
100.00
------------
23. Capital management policy and procedures
The Company's capital management objectives are:
* to ensure that it will be able to meet its
liabilities as they fall due; and
* to maximise its total return primarily through the
capital appreciation of its investments.
Pursuant to the Company's Articles of Incorporation,
the Company may borrow money in any manner. However,
the Board has determined that the Company should
borrow no more than 20% of direct investments.
The Board, with the assistance of the Investment
Manager, monitors and reviews the structure of
the Company's capital on an ad hoc basis. This
review includes:
* how funds could be returned to Shareholders;
* the current and future levels of gearing;
* the need to buy back Ordinary Shares for cancellation
or to be held in treasury, which takes account of the
difference between the NAV per share and the share
price; and
* the current and future dividend policy.
The Company uses sale and repurchase agreements
to increase the gearing of the Company. The Company
did not have any open sale and repurchase agreements
at 31 December 2016.
As disclosed in the Statement of Financial Position,
at 31 December 2016, the total equity holders'
funds were GBP58,010,000.
24. Capital commitments
The Company holds a number of derivative financial
instruments which, by their very nature, give rise
to capital commitments post 31 December 2016. These
are as follows:
* At the period end, the Company had sold 17 credit
default swap agreements for a total of GBP2,541,000,
each receiving quarterly interest. The exposure of
the Company in relation to these agreements at the
period end date was GBP52,387,000. Collateral of
GBP4,435,000 at 31 December 2016 for these agreements
was held.
* At the period end the Company had committed to five
foreign currency forward contracts dated 8 March 2017
to buy GBP41,849,000 and EUR7,154,000 (GBP6,098,000).
At 31 December 2016, the Company could have affected
the same trades and purchased GBP42,059,000 and
EUR7,131,000 (GBP6,079,000), giving rise to a loss of
GBP190,000.
* At 31 December 2016, the Company had taken a long
position maturing on 29 March 2017, committing the
Company to a purchase of a gilt future for
GBP3,088,000.
25. Contingent assets and contingent liabilities
There were no contingent assets or contingent liabilities
in existence at the period end.
26. Events after the financial reporting date
On 18 January 2017, the Company declared a dividend
of 1.65p per Ordinary Share for the period from
1 October 2016 to 31 December 2016, which (in accordance
with IFRS) was not provided for at 31 December
2016, out of the profits for the period ended 31
December 2016 (see note 6). This dividend was paid
on 24 February 2017.
-- ENDS --
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR OKCDDQBKDFND
(END) Dow Jones Newswires
March 20, 2017 03:01 ET (07:01 GMT)
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