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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Chenavari Capital Solutions Limited | LSE:CCSL | London | Ordinary Share | GG00BMGNHZ00 | RED 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% | 47.58 | 35.00 | 60.16 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMCCSL
RNS Number : 7746U
Chenavari Capital Solutions Limited
20 January 2017
Chenavari Capital Solutions Limited
(a closed-ended investment company limited by shares incorporated under the laws of
Guernsey with registered number 56977)
Annual Report and Audited Annual Financial Statements
For the year ended 30 September 2016
Potential investors are "qualified eligible persons" and "Non-United States Persons" within the meaning of the US Commodity Futures Trading Commission Regulation 4.7.
Chenavari Credit Partners LLP (the "Investment Manager") is registered as a commodity pool operator ("CPO") with the Commodity Futures Trading Commission (the "CFTC") and is a member of the National Futures Association ("NFA") in such capacity under the U.S. Commodity Exchange Act, as amended ("CEA"). With respect to Chenavari Capital Solutions Limited, the Investment Manager has claimed an exemption pursuant to CFTC Rule 4.7 for relief from certain disclosure, reporting and recordkeeping requirements applicable to a registered CPO. Such exemption provides that certain disclosures specified in section 4.22 (c) and (d) of the regulation are not in its audited annual financial statements and annual report.
Contents
Commodity Exchange Affirmation Statement
Highlights for the year ended 30 September 2016
Corporate Summary
General Information
Chairman's Statement
Investment Manager's Report
Disclosure of Directorships in Public Companies Listed on Recognised Stock Exchanges
Report of the Directors
Corporate Governance Report
Statement of Principal Risks and Uncertainties
Audit Committee Report
Directors' Remuneration Report
Statement of Directors' Responsibilities
Independent Auditor's Report to the Members of Chenavari Capital Solutions Limited
Statement of Comprehensive Income
Statement of Financial Position
Statement of Changes in Equity
Statement of Cash Flows
Condensed Schedule of Investments, at Fair Value
Notes to the Financial Statements
FORWARD-LOOKING STATEMENTS
This annual report includes statements that are, or may be considered, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "anticipates", "plans", "expects", "targets", "aims", "intends", "may", "will", "can", "can achieve", "would" or "should" or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this annual report, including in the Chairman's Statement. They include statements regarding the intentions, beliefs or expectations of the Company or the Investment Manager concerning, among other things, the investment objectives and investment policies, financing strategies, investment performance, results of operation, financial condition, liquidity prospects, dividend policy and targeted dividend levels of the Company, the development of its financing strategies and the development of the markets in which it, directly and through special purpose vehicles, will invest in and issue securities and other instruments. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not guarantees of future performance. The Company's actual investment performance, results of operations, financial condition, liquidity, dividend policy and dividend payments and the development of its financing strategies may differ materially from the impression created by the forward-looking statements contained in this document. In addition, even if the investment performance, results of operations, financial condition, liquidity, dividend policy and dividend payments of the Company and the development of its financing strategies are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods. Important factors that may cause differences include, but are not limited to: changes in economic conditions generally and in the structured finance and credit markets particularly; fluctuations in interest and currency exchange rates, as well as the degree of success of the Company's hedging strategies in relation to such changes and fluctuations; changes in the liquidity or volatility of the markets for the Company's investments; declines in the value or quality of the collateral supporting many of the Company's investments; legislative and regulatory changes and judicial interpretations; changes in taxation; the Company's continued ability to invest its cash in suitable investments on a timely basis; the availability and cost of capital for future investments; the availability of suitable financing; the continued provision of services by the Investment Manager and the Investment Manager's ability to attract and retain suitably qualified personnel; and competition within the markets relevant to the Company. These forward-looking statements speak only as at the date of this annual report. Subject to its legal and regulatory obligations, the Company expressly disclaims any obligations to update or revise any forward-looking statement (whether attributed to it or any other person) contained herein to reflect any change in expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based. The Company qualifies all such forward-looking statements by these cautionary statements.
Commodity Exchange Affirmation Statement
Commodity Exchange Affirmation Statement Required by the Commodity Exchange Act, Regulation --4.7(b)(3)(i)
I, Kate Haswell, hereby affirm that, to the best of my knowledge and belief, the information contained in this Annual Report and Audited Annual Financial Statements is accurate and complete.
Kate Haswell
Chief Compliance Officer and representative of the Chenavari Credit Partners LLP, Commodity Pool Operator of Chenavari Capital Solutions Limited
20 January 2017
Highlights for the year ended 30 September 2016
-- During the year ended 30 September 2016 (the "Year"), the Company produced a net asset value ("NAV") total return of 4.23% (dividends reinvested) (2015: 7.68%).
-- The NAV per Ordinary Share ("Share") declined from 99.41 pence at 30 September 2015 to 94.26 pence at 30 September 2016 net of distributions.
-- Dividends of 7.5 pence per Share were declared in respect of the Year (2015: 7.5 pence), of which 6 pence per Share was paid during the Year, with a final dividend for the Year of 1.5 pence per Share paid on 12 December 2016.
-- The Company's mid-market share price at 30 September 2016 was 85.0 pence (2015: 98.25 pence), representing a discount to NAV of 9.83% (2015: 1.17%).
-- The profit of the Company for the Year was GBP5.0 million (2015: GBP9.5 million), or 3.80 pence per Share (2015: 7.31 pence per Share), taking into account recognition of the following significant items:
o total net income of GBP6.7 million (2015: GBP11.4 million).
o total operating expenses of GBP1.7 million (2015: GBP1.9 million).
-- During the Year, the Company invested GBP6.4 million in bank capital solutions transactions (2015: GBP65.0 million) through the purchase of two primary transactions (2015: seven) and one secondary transaction (2015: four)
-- At 30 September 2016, the Company was 91% invested (2015: 92%) in thirteen positions including ten primary transactions valued at GBP85.1 million (2015: eleven valued at GBP92.4 million) and three secondary transactions valued at GBP22.2 million (2015: four valued at GBP27.1 million). The Company had other assets and liabilities equating to 3.19% of NAV and cash equating to 9.39% of NAV at 30 September 2016 (2015: 4.91% and 3.37%).
-- On 13 December 2016, the Company announced its intention to cease making any further investments with immediate effect and that, from 1 January 2017, it will commence a realisation period which will involve the return of unencumbered cash balances to Shareholders. It is expected that the current portfolio will be substantially realised (assuming no assets are sold or otherwise disposed of) and over 90% of the projected cash proceeds returned to investors before the end of 2020.
Corporate Summary
For the year ended 30 September 2016
The Company
Chenavari Capital Solutions Limited (the "Company") is a closed-ended Collective Investment Scheme registered pursuant to The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended (the "Law") and the Registered Collective Investment Scheme Rules 2008 issued by the Guernsey Financial Services Commission (the "Commission").
The IPO of the Company raised gross proceeds of GBP130.3 million and the Company's Shares were admitted to trading on the Specialist Fund Segment of the London Stock Exchange ("SFS") 7 October 2013.
Investment objective and policy
The investment objective of the Company is to provide Shareholders with an attractive return, while limiting downside risk, through investment in bank capital solutions transactions primarily with UK and European banks.
Investment Period and Realisation Period
Following the extension of the investment period to 31 December 2016 approved by Shareholders at an EGM on 18 December 2015 (the "Investment Period"), the Company continued its ability to invest its cash balances in accordance with its investment policy, to the extent that such cash was not required for working capital purposes or the payment of dividends in accordance with the Company's dividend policy up to and including 31 December 2016, subject to the restrictions applicable to the extension period.
On 13 December 2016 the Company announced its intention to cease making any further investments with immediate effect and that, from 1 January 2017, it will commence a realisation period which will involve the return of unencumbered cash balances to Shareholders. It is expected that the current portfolio will be substantially realised (assuming no assets are sold or otherwise disposed of) and over 90% of the projected cash proceeds returned to investors before the end of 2020.
Target returns and dividend policy
The Company's target NAV total net return to investors is 8-10 % per annum over the life of the Company. From 1 January 2017, returns to Shareholders will be predominantly from the return of unencumbered cash balances arising as a result of investments maturing in accordance with their terms or otherwise and as dividend income.
The Investment Manager and Investment Adviser
The Company's Investment Manager is Chenavari Investment Managers (Luxembourg) SARL, a non-cellular company incorporated in Luxembourg under registered number B 0143992, and is licenced and regulated by the Commission de Surveillance du Secteur Financier ("CSSF") in Luxembourg to undertake the activities of an Alternative Investment Fund Manager ("AIFM"). The Investment Manager is a wholly owned entity within the Chenavari Group.
The Investment Manager has appointed Chenavari Credit Partners LLP (the "Investment Adviser"), which is also a member of the Chenavari Group, to provide investment advisory services to the Investment Manager. The Investment Adviser is a limited liability partnership incorporated in England and Wales under registered number OC337434 and is regulated and authorised in the UK by the FCA under registration number 484392 and in the United States by the SEC under Investment Adviser registration number 801/72662.
Asset values
At 30 September 2016, the Company's NAV was GBP122.8 million, with the NAV per Share amounting to 94.26p. The Company publishes its NAV on a monthly basis. The NAV is calculated as the Company's assets at fair value less liabilities, measured in accordance with International Financial Reporting Standards ("IFRS").
Duration
The Company has an indefinite life.
Corporate Summary (continued)
For the year ended 30 September 2016
Website
The Company's website address is www.chenavaricapitalsolutions.com
Listing Information
The Company's Shares are admitted to trading on the SFS.
The ISIN number of the Shares is GG00BCHWW517 and the SEDOL is BCHWW51.
The closing price of the Shares quoted on the SFS at 30 September 2016 was 85.0p per Share.
The average closing price of the Shares over the year to 30 September 2016 was 88.0p per Share.
General Information
Hot Features
Premium
Directors Registered Office
Rob King (Non-executive Director
and Chairman) Old Bank Chambers
Iain Stokes (Non-executive Director) La Grande Rue
René Mouchotte (Non-executive
Director) St Martin's
Guernsey
GY4 6RT
Investment Manager and AIFM Investment Adviser
Chenavari Investment Managers Chenavari Credit Partners
(Luxembourg) SARL LLP
2, Boulevard de la Foire 1 Grosvenor Place
L-1528 London
Luxembourg SW1X 7JH
Solicitors to the Company (as Solicitors to the Company
to United States law) (as to English law)
Gowling WLG (UK) LLP
Reed Smith LLP (formerly Wragge
Lawrence Graham & Co
The Broadgate Tower LLP)
20 Primrose Street 4 More London Riverside
London London
EC2A 2RS SE1 2AU
Advocates to the Company
Corporate Broker (as to Guernsey law)
Fidante Partners Europe Limited,
trading as Fidante Capital Mourant Ozannes
1 Tudor Street 1 Le Marchant Street
London St Peter Port
EC4Y 0AH Guernsey
GY1 4HP
Administrator and Company Secretary Sub-Administrator
Morgan Sharpe Administration
Limited Quintillion Limited
Old Bank Chambers 24-26 City Quay
La Grande Rue Dublin 2
St Martin's Ireland
Guernsey
GY4 6RT
Custodian and Principal Bankers
and AIFMD Article 36 Custodian Auditor
J.P. Morgan Chase Bank NA, Deloitte LLP
Jersey Branch P.O. Box 137
J.P. Morgan House Regency Court
Grenville Street Glategny Esplanade
St Helier St. Peter Port
Jersey Guernsey
JE4 8QH GY1 3HW
Depository and AIFMD
Registrar Article 36 Custodian
Capita Registrars (Guernsey) Quintillion Services
Limited Limited
Mont Crevelt House 24-26 City Quay
Bulwer Avenue Dublin 2
St Sampson Ireland
Guernsey
Elavon Financial Services
GY2 4LH Limited
Block E
Cherrywood Business
Park
Loughlinstown
Dublin 18
Ireland
Chairman's Statement
Introduction
On behalf of the Board, I am pleased to present the Company's annual report and audited financial statements for the year ended 30 September 2016.
Following the extension of the investment period to 31 December 2016, the Company invested a further GBP6.4 million through the purchase of two primary and one secondary transactions and, as at 30 September 2016, the Company was 91% invested in thirteen positions (excluding foreign exchange positions and hedges), with its unencumbered cash position being GBP11.5 million at the year end.
Realisation of Investment Portfolio
On 13 December 2016, the Company announced its intention to cease making any further investments with immediate effect and that, from 1 January 2017, it will commence a realisation period (the "Realisation Period") which will involve the return of unencumbered cash balances to Shareholders. It is anticipated that such encumbered cash balances will arise predominantly as a result of investments maturing in accordance with their terms.
Apart from cessation of new investments, no further change to the Company's investment policy is proposed.
The precise mechanism for any return of cash to Shareholders will depend upon the relevant factors prevailing at the time and will be at the discretion of the Board, but may include a combination of capital distributions, share repurchases and redemptions. The amount and frequency of such distributions will be at the Company's absolute discretion. The Company may hold back the payment of cash proceeds during the Realisation Period until a material amount is available for distribution to Shareholders to avoid the cost and administrative burden of distributing small amounts.
It is the Company's intention to maintain its admission to trading of the Shares on the Special Fund Segment of the London Stock Exchange (the "Admission") until further notice. Any proposal to cancel the Admission would only be completed with the approval of Shareholders at an extraordinary general meeting.
The Company will continue to publish monthly NAV's and factsheets.
During the Realisation Period, it is inevitable that the Company's portfolio will become less diversified as assets are realised and the proceeds returned to Shareholders. Shareholders and prospective investors should note that this may increase the risk of an investment in the Company.
Based on the cash flows used to calculate the Base Case internal rate of return referred to in the Investment Manager's report, it is expected that the current portfolio will be substantially realised (assuming no assets are sold or otherwise disposed of) and over 90% of the projected cash proceeds returned to investors before the end of 2020.
Performance
The profit for the Year was GBP5.0 million, equivalent to earnings per Share of 3.80 pence.
During the Year, the Company's NAV total return was 4.23% (dividends reinvested) and was 16.72% since inception (net of issue costs and dividends reinvested). The NAV per Share declined from 99.41 pence at 30 September 2015 to 94.26 pence at 30 September 2016 as a result of dividends exceeding profit for the Year.
Due to the increased discount to NAV at the end of the period, the share price total return for the Year was --4.37%, dividends reinvested. Since launch, the share price total return to the end of the Year was 3.17% (dividends reinvested).
During the Year the Share price moved from 98.25 pence at the close of business on 30 September 2015 to 85.0 pence on 30 September 2016. The discount to NAV moved from 1.17% on 30 September 2015 to 9.83% on 30 September 2016.
Dividends
Dividends declared for the Year came to 7.5 pence, of which three dividends were declared and paid in the Year and a fourth was declared and paid after the Year end (during the Year: 2p per Share paid on 26 February 2016 for the period ending 31 December 2015, 2p per Share on 27 May 2016 for the period ending 31 March 2016 and 2p per Share on 26 August 2016 for the period ending 30 June 2016; and following Year end, 1.50p per Share paid on 12 December 2016 for the final period ending 30 September 2016).
Chairman's Statement (continued)
Investment Portfolio and Performance
The details of the portfolio and performance are set out in the Investment Managers Report on page 10.
Board Review
During the year the Board undertook a review of its own performance and an evaluation of the operations of the Company's service providers. This is detailed further on pages 21 and 22.
We also noted Shareholder responses from the Annual General Meeting ("AGM") held on 16 March 2016 in that Mr Mouchotte, by virtue of his directorship of the Investment Manager (the "AIFM") and other funds within the Chenavari group, is not considered independent. Given Mr Mouchotte's directly relevant investment experience, the independent Directors are of the opinion that Shareholders' interests are best served through Mr Mouchotte's continued appointment and his contribution is considered to be an integral part of the Board's decision making process.
Outlook
On 23 June 2016, the United Kingdom voted in a referendum to leave the European Union. Significant uncertainties exist on the exit process and the consequences of such decision.
Since this decision, markets initially saw extreme volatility in forex and equity, and credit markets moved significantly down. The Company had built up sufficient cash reserves in order to meet margin calls on the FX forwards used to hedge the non-GBP fund assets. Given the high volatility expected in FX the Company has chosen to increase the buffer held against these hedging positions and has prudently monitored cash levels.
The Company has three assets that are linked to the UK economy and which have not felt any negative impact since the vote. The Investment Manager continues to monitor these positions actively but does not expect to see any deterioration in performance over the short term.
The focus for the Company over the coming months will be to exit its investments in the portfolio in an orderly manner and return capital to investors in the most expedient way at any particular point in the Realisation Period. As noted in the Company's Report on Viability, the Directors expect that the current portfolio will be substantially realised (assuming no assets are sold or otherwise disposed of) and over 90% of the projected cash proceeds returned to investors before the end of 2020.
The Investment Manager has set out to Shareholders the likely capital returns under a Base Case scenario and the Board will be working with the Investment Manager on the return of both capital and income. As the Company progresses through the Realisation Period and the total assets of the Company contract following each return of capital, the Board will also be working with its service providers to manage the total expense ratio.
Following consultation, it has been agreed to provide quarterly investor calls with Shareholders and these will be announced to the market in advance.
Annual General Meeting
The AGM of the Company will be held at midday on 28 March 2017 and Shareholders are invited to attend.
Rob King
Non-executive Chairman
20 January 2017
Investment Manager's Report
Investment Review
The Company launched with GBP130.3 million gross proceeds in October 2013. As of 30 September 2016, the Company was 91% invested.
The sector allocation as of 30 September 2016 reflected the anticipated target portfolio with a significant representation of corporate and SME loans.
Percentage Percentage Percentage Percentage
of NAV of NAV of NAV of NAV
Asset class 30 September 30 September 31 March 30 September
breakdown 2014 2015 2016 2016
------------------ -------------- -------------- ----------- --------------
SME loans 33.77% 52.32% 48.57% 47.39%
------------------ -------------- -------------- ----------- --------------
Corporate
loans 19.97% 29.01% 31.42% 31.16%
------------------ -------------- -------------- ----------- --------------
Mortgages 5.59% 10.57% 10.16% 8.87%
------------------ -------------- -------------- ----------- --------------
Trade Finance
loans 3.96% 0.32% 0.00% 0.00%
------------------ -------------- -------------- ----------- --------------
Financials 2.87% 0.00% 0.00% 0.00%
------------------ -------------- -------------- ----------- --------------
Commercial
Mortgages 1.50% 0.00% 0.00% 0.00%
------------------ -------------- -------------- ----------- --------------
Cash, Collateral
& Hedges 32.34% 7.78% 9.85% 12.58%
------------------ -------------- -------------- ----------- --------------
Total 100.0% 100.0% 100.0% 100.0%
------------------ -------------- -------------- ----------- --------------
Geographically the portfolio diversification continued to increase as the consequence of new investment and amortizing positions.
Percentage Percentage Percentage Percentage
of NAV of NAV of NAV of NAV
Geographic 30 September 30 September 31 March 30 September
breakdown 2014 2015 2016 2016
----------------- -------------- -------------- ----------- --------------
U.K. 8.69% 20.91% 20.63% 19.50%
----------------- -------------- -------------- ----------- --------------
Spain 0.42% 13.07% 14.83% 15.24%
----------------- -------------- -------------- ----------- --------------
Portugal 26.89% 18.96% 14.15% 13.31%
----------------- -------------- -------------- ----------- --------------
Germany 3.66% 9.44% 10.20% 10.55%
----------------- -------------- -------------- ----------- --------------
Italy 0.31% 7.86% 8.72% 9.41%
----------------- -------------- -------------- ----------- --------------
USA 6.36% 7.00% 7.67% 7.84%
----------------- -------------- -------------- ----------- --------------
Switzerland 7.53% 7.26% 5.78% 3.66%
----------------- -------------- -------------- ----------- --------------
Netherlands 1.43% 1.52% 1.67% 1.55%
----------------- -------------- -------------- ----------- --------------
France 4.31% 1.58% 1.60% 2.07%
----------------- -------------- -------------- ----------- --------------
Other Countries 8.06% 4.62% 4.90% 4.29%
----------------- -------------- -------------- ----------- --------------
Cash, Accruals,
Collateral,
FX & Hedges 32.34% 7.78% 9.85% 12.58%
----------------- -------------- -------------- ----------- --------------
Total 100.0% 100% 100% 100%
----------------- -------------- -------------- ----------- --------------
As at 30 September, the top five holdings were the following:
Underlying
Assets Fair Value Percentage
Sector Country (GBP) of NAV
----------- ------------ ----------- -----------
SME Loans Portugal 16,350,901 13.31%
----------- ------------ ----------- -----------
SME Loans Spain 15,443,842 12.57%
----------- ------------ ----------- -----------
Corporate
Loans UK 13,421,618 10.99%
----------- ------------ ----------- -----------
Corporate
Loans Germany 13,494,093 10.93%
----------- ------------ ----------- -----------
Corporate
Loans Germany 11,360,912 9.25%
----------- ------------ ----------- -----------
Investment Manager's Report (continued)
Performance
During the period from 1 October 2015 to 30 September 2016, the Company's NAV total return (dividends reinvested) was 4.23%.
The month-on-month total return since inception, dividends reinvested, was as follows:
Year YTD Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec ------ ------ ------- ------- ------- ------ ------ ------- ------- ------- ------- ------- ------- ------- 2013 0.74% -0.04% -0.19% 0.98% 2014 5.76% 0.68% 0.56% 0.95% 0.67% 0.67% -0.19% -0.58% 1.37% -0.93% 1.52% 0.28% 0.64% 2015 3.08% -0.10% 1.10% -1.01% 0.70% 0.98% 2.25% 0.19% 0.20% 0.70% 0.83% -0.01% -2.72% 2016 6.27% -1.42% -0.19% 2.41% 0.37% 1.81% 1.09% 0.42% -0.18% 1.85%
Since inception, the Company paid the following dividends:
Period ending Dividend (cents
per Share)
30 June
2014 4.00
30 September
2014 1.25
31 December
2014 1.35
31 March
2015 1.20
30 June
2015 2.00
30 September
2015 2.95
31 December
2015 2.00
31 March
2016 2.00
30 June
2016 2.00
30 September
2016 1.50
New Primary Transactions:
In January 2016 the Company invested EUR4 million in junior instruments in a short term loan warehousing transaction backed by a portfolio of leveraged corporate loans. Senior finance was provided by a leading global bank and financial services .
In May 2016, the Company re-invested approximately GBP3.5 million in a repeat transaction replacing an exposure that had recently matured in the portfolio. The transaction is a first loss exposure to SME and corporate loans extended by a large Swiss bank (the "Bank"). The loan portfolio is very granular with over 1,500 reference entities and a maximum concentration of 0.5%. The transaction references the core on-going business of the Bank. The Bank has a long track record of lending in the Swiss SME and corporate market and has experienced extremely low loan losses over the last 10 years with minimal increase through the financial crisis. The tight underwriting standards and borrower characteristics are integral to this stable performance.
Investment Outlook
We note the Company has determined that no further extension to the Investment Period will be sought and that it intends to commence the Realisation Period with effect from 1 January 2017. This is explained in the Chairman's Statement on page 8.
The Investment Adviser maintains a Base Case, an Upside Case and a Stress Case for each investment in the portfolio, depending on its characteristics and underlying collateral. The cases are derived from a combination of: initial cases derived at the time of investment from analysis of the transaction's structure and the underlying portfolio data, regular tracking of the performance of the transaction's underlying collateral pool and market implied factors such as credit spreads or the performance of other similar deals.
Investment Manager's Report (continued)
Investment Outlook (continued)
As of 30 October 2016, the Investment Adviser's indicative estimates of the internal rates of portfolio return, calculated on the invested capital of the Company, are:
-- 12.15% if all investments perform in line with the "Base Case"; -- 16.91% if all investments perform in line with the "Upside Case"; and -- 3.51% if all investments perform in line with the "Stress Case".
Shareholders should note that, due to the diversification of the portfolio's holdings, it is unlikely that all investments would perform in line with either the Upside or Stress case.
Under the Base Case, it is estimated that investment cash flows during 2017 will be as detailed below, but there can be no assurances to this effect.
-- Q1 2017 - GBP6.9m -- Q2 2017 - GBP7.3m -- Q3 2017 - GBP5.3m -- Q4 2017 - GBP8.3m
Based on the cash flows used to calculate the Base Case internal rate of return above, it is expected that the current portfolio will be substantially realised (assuming no assets are sold or otherwise disposed of) and over 90% of the projected cash proceeds returned to investors before the end of 2020.
Indicative internal rates of portfolio return are dependent on the underlying Base Case, Upside Case and Stress Case asset assumptions that are made by the Investment Adviser. These include, but are not limited to, predictions of default, prepayment, recovery, amortisation, interest rates, asset spread, portfolio replenishment and issuer optional redemptions. The figures are calculated on invested capital of the Company and do not reflect indications of NAV total return. The figures are based on long-term performance projections of the investment strategy and market conditions at the time of modelling and are therefore subject to change. There is no guarantee that any indicative rates of returns can be achieved. Investors should not place any reliance on such target return in deciding whether to invest in the Company. Stress Tests present a set of hypothetical scenarios that assume changes for one or more market variable in order to assess the effect on the portfolio. The results shown represent estimated gross performance of the portfolio under the market conditions stated and do not reflect any management or performance fees or other expenses. The Investment Adviser has made assumptions that it deems reasonable and used the best information available to calculate the rate of return case estimates. If a different set of assumptions were used in these calculations, there could be a material difference in the calculated estimates. Please refer to the prospectus dated 23 September 2013 for risk factors (a copy of which is on the website of the Company at www.chenavaricapitalsolutions.com). Hypothetical performance results have many inherent limitations and no representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular investment programme.
The Company attempts to remove FX risk from its non-GBP investments by hedging the notional or Mark-to-Market values with FX forwards which are rolled continually. This removes the NAV volatility that could be caused from FX movements but introduces a liquidity risk since, as GBP weakens illiquid positions increase in value while the FX forwards decrease in value but have daily margin calls from the counterparties.
The Investment Manager has an internal risk policy that require a percentage of notional of the FX forward position to be held as cash in order to meet margin calls. Following Brexit this percentage has been increased for the Company to 6% in order to be prudent. The need to hold a buffer may impact the speed of return of capital to shareholders.
Chenavari Investment Managers (Luxembourg) SARL
Investment Manager
20 January 2017
Board of Directors
Directors
The Directors are responsible for the determination of the Company's investment objective and investment policy and have overall responsibility for the Company's activities including the review of investment activity and performance and the control and supervision of the Investment Manager. All of the Directors are non-executive and, save for René Mouchotte (as described below), are independent of the Investment Manager and the Investment Adviser.
The Directors meet at least four times per annum.
The Directors are as follows:
Robert King (aged 53)
Rob is a non-executive director for a number of open and closed ended investment funds and companies including, Threadneedle UK Select Fund Limited and Weiss Korea Opportunities Fund Limited. Prior to becoming an independent non-executive director in 2011 he was a Director of Cannon Asset Management Limited and their associated companies, from October 2007 to February 2011. Prior to this he was a Director of Northern Trust International Fund Administration Services (Guernsey) Limited where he had worked from 1990 to 2007. He has been in the offshore finance industry since 1986 specialising in administration and structuring of offshore open and closed ended investment funds. Rob is British and resident in Guernsey.
Iain Stokes, non-executive director (aged 52)
Iain acts as a consultant for Wyvern Partners, an independent corporate advisory firm. In his early career he worked in audit and advisory for BDO before joining Guernsey International Fund Managers Limited (part of Barings) in 1996. Iain joined Mourant International Finance Administration ("MIFA") in 2003 and as Group Managing Director, he was a member of the executive team that managed the sale of MIFA to State Street in 2010. He was a Senior Managing Director with State Street Alternative Investment Solutions as Head of Private Equity Product, EMEA until 2012. He holds a range of non-executive directorships on fund management and fund investment companies focused on alternative asset strategies. He is resident in Guernsey.
René Mouchotte, non-executive director (aged 70)
René has over 40 years' experience in senior finance positions. He has held senior positions in various investment banks, including managing director global head of securitisation and tax lease for Credit Agricole Indosuez, Chairman of Eurotitrisation and managing director global head of credit portfolio management for CALYON, independent board member of Banque AIG and has also been a board member of IACPM (International Association of Credit Portfolio Managers) from 2007 to 2009. René is currently an independent board member of Eurotitrisation. He is a non-executive director of Taurus Corporate Financing LLP and of Chenavari Investment Managers (Luxembourg) SARL a non-cellular company incorporated in Luxembourg, as well as a non-executive director of the Chenavari Multi-Strategy Fund Limited (and of its trading subsidiaries), a Cayman Islands umbrella fund. Both of these entities are members of, or managed by members of, the Chenavari Financial Group. René holds an MS in Engineering from Ecole des Mines, an MBA from Columbia University Graduate School of Business, an MA in Finance and Economics from Institut d'Etudes Politiques de Paris and a Post-Master's degree in Economics from Paris University. René is not considered independent of the Advisers for the purposes of the Company's voluntary compliance with the Listing Rules of the Financial Conduct Authority by virtue of his directorship of the other funds managed within the Chenavari Group.
Disclosure of Directorships in Public Companies Listed on Recognised Stock Exchanges
The following summarises the Directors' directorships in other public companies:
Company Name Stock Exchange Rob King F&C Warrior Fund Limited CISEAL F&C Warrior II Fund Limited CISEAL F&C Property Growth and Income Fund CISEAL Golden Prospect Precious Metals Limited LSE-SETSqx Pembroke Heritage Fund Limited CISEAL Weiss Korea Opportunity Ltd AIM Threadneedle UK Select Trust Limited LSE - Main Sienna Investment Company 4 Limited* CISEAL Iain Stokes Cayzer Continuation PCC Limited CISEAL René Mouchotte None held N/A
CISEAL is the abbreviation for Channel Islands Stock Exchange Authority Limited
*Delisted as at 31 December 2016
Report of the Directors
The Directors are pleased to present their Annual Report and Audited Financial Statements for the year ended 30 September 2016. In the opinion of the Directors, the Annual Report and Audited Financial Statements are fair, balanced and understandable and provide the information necessary for Shareholders to assess the Company's performance, business model and strategy.
Incorporation
The Company is a closed-ended limited liability company registered in Guernsey under the Companies (Guernsey) Law, 2008 (as amended) with registered number 56977.
Investment Objective and Policy
The investment objective of the Company is to provide Shareholders with an attractive return, while limiting downside risk, through investment in bank capital solutions transactions primarily with UK and European banks. From 1 January 2017, returns to Shareholders will be predominantly from the distribution of unencumbered cash balances arising as a result of investments maturing in accordance with their terms or otherwise and as dividend income. The investment policy is set out in full in note 1 to the financial statements.
The focus of the Portfolio is on investing in newly issued transactions ("Primary Transactions") referenced to credit exposure although transactions may also be acquired in the secondary market ("Secondary Transactions") where the Investment Adviser identifies attractive opportunities. The Company will invest its assets with the aim of spreading investment risk.
At 30 September 2016, the Portfolio is invested in ten Primary Transactions and these represent 69.33% of the Company's total assets. The Company has flexibility to invest in bank capital solutions transactions with a range of underlying asset types, including (but not limited to) mortgage loans, corporate and SME loans, asset backed securities, derivatives and counterparty risks.
As of 30 September 2016, the Company was 91% invested with a sector allocation that reflects the anticipated target portfolio with a significant representation of corporate and SME loans. No more than 20% of the NAV was exposed to any one Bank Counterparty and the largest position was the Portuguese SME loans transaction at 13.31% of NAV..
Following the extension of the Investment Period approved by Shareholders at an EGM on 18 December 2015, the Company continued its ability to invest its cash balances in accordance with its investment policy. As detailed in the Chairman's statement, the Investment Period is not being further extended and with effect from 1 January 2017, the Company will commence the Realisation Period and return to Shareholders unencumbered cash balances.
Results
The results for the year ended 30 September 2016 are set on page 39. The profit for the year was GBP4,954,240 (2015: GBP9,522,204).
Dividends
The table below sets out the Company's dividend history.
Quarter Announced Record Pay Dividend (pence
ending Date date per Share)
30/06/2014 18/07/2014 01/08/2014 29/08/2014 4.00
30/09/2014 29/10/2014 07/11/2014 28/11/2014 1.20
31/12/2014 21/01/2015 30/01/2015 20/02/2015 1.35
31/03/2015 21/04/2015 01/05/2015 22/05/2015 1.20
30/06/2015 22/07/2015 31/07/2015 21/08/2015 2.00
30/09/2015 22/10/2015 30/10/2015 27/11/2015 2.95
31/12/2015 22/01/2016 05/02/2016 26/02/2016 2.00
31/03/2016 21/04/2016 29/04/2016 27/05/2016 2.00
30/06/2016 28/07/2016 05/08/2016 26/08/2016 2.00
30/09/2016 27/10/2016 04/11/2016 12/12/2016 1.50
The payment of any dividend by the Company is subject to the satisfaction of a solvency test as required by the Companies (Guernsey) Law, 2008 (as amended).
Report of the Directors (continued)
Share Capital
The IPO of the Company raised gross issue proceeds of GBP130.3 million resulting in 130,300,000 Shares being admitted to trading on the SFS of the London Stock Exchange on 7 October 2013. At 30 September 2016, the Company's issued share capital amounted to 130,300,000 Shares, none of which were held in treasury. No Shares were bought back during the year. The current authority to purchase Shares for cancellation expires on the date of the next AGM which will be held in Guernsey on 28 March 2017. The Directors expect to seek renewed authority to purchase Shares for cancellation at that AGM.
Discount control
The Company may, subject to compliance with the Companies (Guernsey) Law, 2008 (as amended), purchase its own Shares in the market on an ad hoc basis with a view to addressing any imbalance between the supply of, and demand for, the Shares, to increase the NAV per Share and to assist in minimising any discount to the NAV per Share in relation to where the market price of a Share trades at more than 7.5% below the latest published NAV per Share for more than 90 days.
Shareholder Information
The NAV will be calculated as of the last Business Day of each month (or at any other times at the Board's discretion) by the Sub-Administrator, based on third party valuations or information supplied by the Bank Counterparties (as applicable) and in consultation with the Advisers. The NAV and the NAV per Share will be published in Pounds Sterling by a RIS announcement and on the website of the Company at www.chenavaricapitalsolutions.com.
Investment Manager
The investment management fee payable to the Investment Manager is paid monthly in arrears at a rate of 1% per annum of NAV, which is based upon the month end NAV and calculated as of the last business day of each month.
The Investment Manager shall be entitled to receive from the Company a performance fee equal to 20% of realised returns (i.e. dividends and capital repayments/returns) to Shareholders, subject to a hurdle of 7.5% per annum with a catch up. For the year ended 30 September 2016, no performance fee was paid or accrued for payment to the Investment Manager.
The Board keeps the performance of the Investment Manager under regular review, and the Management Engagement Committee, comprising all Directors, conducts an annual appraisal of the Investment Manager's performance, and makes a recommendation to the Board about the continuing appointment of the Investment Manager. The Investment Manager has executed the investment strategy according to the Board's expectations and it is the opinion of the Directors that the continuing appointment of Chenavari Investment Managers (Luxembourg) SARL is in the interests of Shareholders as a whole.
Non-mainstream pooled investments
On 1 January 2014, FCA rules concerning the promotion of non-mainstream pooled investments came into effect. The Board conducts and intends to continue to conduct its affairs so that the Company's Shares will be "excluded securities" under the FCA rules.
This is on the basis that the Company which is resident outside the EEA, would qualify for approval as an investment trust by the Commissioners for HM Revenue and Customs if resident and listed in the United Kingdom. Promotion of the Company's Shares will not be subject to the FCA's restriction on promotion of non-mainstream pooled investments.
AIFMD
The Company is considered to be an Alternative Investment Fund ("AIF") under the Alternative Investment Fund Managers Directive ("AIFMD") and is managed by Chenavari Investment Managers (Luxembourg) SARL as Alternative Investment Fund Manager ("AIFM"). However, the Company, as a Guernsey registered closed ended fund which is not currently actively marketed in the EEA, is not significantly impacted by the AIFMD (save for certain consequential effects arising from its appointment of an EU domiciled Alternative Investment fund Manager such as the requirement to appoint a depositary). Quintillion Limited, the Company's Sub-Administrator, was appointed as Depositary for the Company with effect from 1 October 2015. If active marketing is undertaken in the EEA the private placement regime requirements for the relevant jurisdiction would need to be met.
Report of the Directors (continued)
US FATCA
The Foreign Account Tax Compliance Act (FATCA) was introduced by the US in 2010 to identify and report on US citizens, corporates and trusts who held financial assets - whether US source or not - with financial institutions in other jurisdictions. The intention is to reduce tax evasion by ensuring such assets and the related income were being declared on US tax returns.
The Company has registered under the FATCA and its GIIN is RTQKH5.99999.SL.831.
Common Reporting Standard
The Common Reporting Standard ("CRS") is a global tax information sharing initiative promoted by the O.E.C.D., similar to FATCA, which came into force on 1 January 2016. Approximately 60 'Early Adopter' ("EA") countries have signed up to comply with CRS from 1 January 2016 with a further 40 countries in agreement to comply from 1 January 2017. The requirements of CRS are closely aligned to requirements under a FATCA Model 1 Intergovernmental agreement where certain disclosure requirements may be imposed in respect of certain investors in the Company. It is expected that, where applicable, information that may need to be disclosed would include certain information about investors, their ultimate beneficial owners and/or controllers, and their investment in and returns from the Company.
SFS and FATCA/CRS Exemptions
Whilst there are exemptions to reporting interests (holdings) in shares that are 'regularly traded on an established securities market' the UK FATCA and US FATCA rules and supporting guidance interpret this phrase differently and have tests to help establish adherence. The end result is that if the definition cannot be met - and the US IGA specifically suspends it for Investment Entities - some holdings will instead require the application of FATCA due diligence and subsequent reporting of holders. Helpfully some holding types can be treated as excluded accounts for reporting purposes (e.g. the UK's HMRC now excludes CREST holdings), and there is more to be announced. CRS similarly adds further differences and thus complications.
Further developments will continue to be monitored by the Company's specialist service providers to ensure that the Company remains compliant with each of FATCA and CRS.
Significant Shareholdings
Shareholders with holdings of more than 3.0% of the Shares of the Company at 30 September 2016 were as follows:
Number Percentage
Name of Shares of Share capital
------------------------------------- ----------- ------------------
Chase Nominees Limited 31,431,886 24.12
------------------------------------- ----------- ------------------
HSBC Global Custody Nominee (UK)
Limited 21,379,430 16.41
------------------------------------- ----------- ------------------
Nortrust Nominees Limited 11,695,287 8.98
------------------------------------- ----------- ------------------
Nortrust Nominees Limited 9,377,611 7.20
------------------------------------- ----------- ------------------
Arbuthnot Latham (Nominees) Limited 6,911,697 5.30
------------------------------------- ----------- ------------------
K.B. (C.I.) Nominees Limited 5,587,500 4.29
------------------------------------- ----------- ------------------
HSBC Global Custody Nominee (UK)
Limited 4,774,060 3.66
------------------------------------- ----------- ------------------
Arbuthnot Latham (Nominees) Limited 4,682,353 3.59
------------------------------------- ----------- ------------------
Going Concern
The Directors believe that it is appropriate to adopt the going concern basis in preparing the financial statements. In reaching their view, the Directors have considered that from 1 January 2017 the Realisation Period will commence as explained in the Chairman's Statement on page 8. The Directors have further considered the Company's holding in cash and cash equivalents and the distribution features of the Company's income generating investments, meaning the Company has adequate financial resources to meet its liabilities as they fall due over a period of at least twelve months from the date of approval of the financial statements.
Report on Viability
The Directors have reviewed the viability of the Company in light of the Realisation Period. On reviewing the portfolio of assets of the Company, the Directors expect that the current portfolio will be substantially realised (assuming no assets are sold or otherwise disposed of) by the end of 2020.
The Directors have based their opinion on the valuation of the assets of the Company as at 30 September 2016 and have further considered that the Investment Adviser maintains a Base Case, an Upside Case and a Stress Case for each investment in the portfolio, depending on its characteristics and underlying collateral. The cases are derived from a combination of initial cases derived at the time of investment from analysis of each transaction's structure and the underlying portfolio data, regular tracking of the performance of the transaction's underlying collateral pool and market implied factors such as credit spreads or the performance of other similar deals.
Report of the Directors (continued)
Report on Viability (continued)
As of 31 October 2016, the Investment Adviser's indicative estimates of the internal rates of portfolio return, calculated on the invested capital of the Company, are:
-- 12.15% if all investments perform in line with the "Base Case"; -- 16.91% if all investments perform in line with the "Upside Case"; and -- 3.51% if all investments perform in line with the "Stress Case".
The Directors believe that over the next two years a significant proportion of the assets of the Company will be realised and over 90% of the projected cash proceeds returned to investors before the end of 2020. The Directors have therefore revised the period of viability of the Company to two years and will reassess the position at the end of each accounting period to determine the future viability of the Company, which will be largely dependent on the remaining portfolio. For the determination of the viability period, the Directors have taken into consideration the above assumptions, and that the Company will continue to meet its liabilities on an on-going basis, the Directors have a reasonable expectation that the Company will be able to continue in operation over the two year period.
The principal risks, which are set out in these financial statements on pages 23 to 25, will continue to be monitored closely as these represent the key areas most likely to impact the viability of the Company and also its ability to exit its assets during the Realisation Period.
Directors
The Directors of the Company during the year and at the date of this Report are set out on page 7.
At 30 September 2016 the Directors held the following Shares in the Company: Mr King 30,000, Mr Stokes 40,000 and Mr Mouchotte 5,000.
None of the Directors or any persons connected with them have had a material interest in the Company's transactions or agreements during the year. Mr Mouchotte, by virtue of his directorship of the AIFM and other funds within the Chenavari group, is not considered independent.
Retirement by Rotation
Under the terms of their appointment, each Director is required to retire by rotation and be subject to re-election at least every three years. The Directors are required to seek re-election if they have already served for more than nine years. Mr Mouchotte, by virtue of his other directorships, is required to be re-elected on an annual basis. The Company may terminate the appointment of a Director immediately on serving written notice and no compensation is payable upon termination of office as a Director of the Company becoming effective.
Disclosure of Information to Auditors
The Directors who held office at the date of approval of these financial statements confirm that, so far as they are each aware, there is no relevant audit information of which the Company's auditor is unaware; and each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information.
Independent Auditor
Deloitte was formally re-appointed as the Company's auditor for the 2016 year-end audit following the AGM on 16 March 2016.
A resolution for the reappointment of Deloitte will be proposed at the next AGM.
Signed on behalf of the Board of Directors by:
Rob King,
Non-executive Chairman
Iain Stokes,
Non-executive Director
20 January 2017
AIFM's Report to Shareholders
The Company is an alternative investment fund (an "AIF") as defined by the Alternative Investment Fund Directive ("AIFMD") and has appointed Chenavari Investment Managers (Luxembourg) SARL (the "Investment Manager"), as the Investment Manager in accordance with the terms of an investment management agreement. The Investment Manager has appointed Chenavari Credit Partners LLP to provide investment advisory services to the Investment Manager.
The investment management agreement can be terminated by either party on 12 months' written notice, with such notice not to be served before the fourth anniversary of Admission, which is 16 September 2017.
Under the terms of the investment management agreement dated 23 September 2013 as novated on 22 July 2014, the Investment Manager receives a fee of one-twelfth of 1% on the NAV of the Company, payable monthly in arrears. The total management fees for the year amounted to GBP1,230,093 for Chenavari Investment Managers (Luxembourg) SARL (30 September 2015 the equivalent was GBP1,282,996 for Chenavari Investment Managers (Guernsey) Ltd and GBP213,164 for Chenavari Investment Managers (Luxembourg) SARL) with GBP100,494 (2015: GBP107,192) in outstanding accrued fees at the year end.
The Investment Manager is also entitled to receive from the Company, a performance fee equal to 20% of realised returns (i.e. dividends and capital repayments/returns) to Shareholders, subject to a hurdle of 7.5% per annum with a catch up. The catch up operates such that a performance fee shall not become payable until the Company has distributed to Shareholders an amount equal to the Gross Issue Proceeds as increased by a hurdle rate of 7.5% per annum (the "Hurdle"). Thereafter, amounts available for distribution in excess of the Hurdle shall be distributed by the Company as to 50% to Shareholders and paid as to 50% to the Investment Manager until the Investment Manager has received 20% of all amounts in excess of the Gross Issue Proceeds. Thereafter, all further amounts available for distribution by the Company shall be distributed as to 80% to Shareholders and paid as to 20% by way of payment of the performance fee to the Investment Manager.
As of 30 September 2016, no performance fee was accrued according to those principles.
As described on page 22, the Management Engagement Committee carried out its third review of the performance and capabilities of the Investment Manager during November 2016 to confirm that the continued appointment of the Investment Manager is deemed to be in the interest of Shareholders.
Total gross remuneration paid by the AIFM to its nine staff for 2016 financial year end was EUR 796,294.
Chenavari Investment Managers (Luxembourg) SARL
20 January 2017
Corporate Governance Report
The Company was admitted to trading on the SFS of the London Stock Exchange on 7 October 2013 and as such, the Listing Rules applicable to closed-ended investment companies which are listed on the premium listing segment of the Official List of the UKLA do not apply to the Company.
Whilst the Company is subject to the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority ("DTR") while admitted to trading on SFS, the Directors have resolved that, as a matter of good corporate governance, the Company will also voluntarily comply with certain provisions of the Listing Rules, including the relevant provisions of Chapter 9 regarding corporate governance and continuing obligations.
The Directors recognise the value of the UK Corporate Governance Code (the "UK Code") and have taken appropriate measures to ensure that the Company complies with the UK Code. The UK Code is publically available at www.frc.org.uk/Our-Work/Codes-Standards/Corporate-governance.aspx.
Compliance with the UK Code
As the Company has voluntarily complied with the UK Code, there is a requirement to provide Shareholders with a statement on how the main and supporting principles set out in the UK Code have been applied and whether the Company has complied with the provisions of the UK Code. The Board recognises the importance of a strong corporate governance culture and has established a framework for corporate governance which it considers to be appropriate to the business of the Company. The Board has reviewed the principles and recommendations of the UK Code and considers that the Company has complied throughout the period, except as disclosed below:
Section A-C: The Company does not have a Deputy Chairman, Executive Directors or a Chief Executive Officer. Accordingly, provisions of the UK Code relating to the Deputy Chairman, Executive Directors and Chief Executive Officer do not apply to the Company.
Explanation: As the UK Code itself states, investment companies typically have a Board structure that differs from those of other companies and this affects the relevance of particular provisions of the UK Code. Due to the nature of the Company's business and the structure of its relationships with its Administrator, Sub-Administrator, Custodian, Investment Adviser and Investment Manager, the Directors do not believe it would be at present cost-effective or advisable to have full-time Executive Directors.
Section A4.1: The Company has not appointed one of the independent non-executive Directors to be the senior independent director.
Explanation: An independent senior director has not been identified and such a role is not considered necessary because the Company has adopted a policy that the composition of the Board of Directors, which is required by the Company's Articles to comprise of at least two persons, is at all times such that a majority of the Directors are independent of the Investment Manager and Investment Adviser and any company in the same group as the Investment Manager and Investment Adviser. The Chairman and Mr Stokes are free from any conflicts of interest and are independent of the Investment Manager and Investment Adviser and of any company in the same group as the Investment Manager and Investment Adviser, however, Mr Mouchotte, by virtue of his directorship of the AIFM and other funds within the Chenavari group, is not considered independent. Given Mr Mouchotte's directly relevant investment experience, the independent Directors are of the opinion that Shareholders' interests are best served through Mr Mouchotte's continued appointment and his contribution is considered to be an integral part of the Board's decision making process.
Section B2.1: The Company has not established a nomination committee to lead the process for Board appointments and make recommendations to the Board.
Explanation: The appointment of new Directors forms part of the schedule of matters reserved for the Board through the Management Engagement Committee and the Board considers that the process for Board appointments to be the Board's responsibility in accordance with the principles set out in the UK Code.
Section B2.3: Non-executive Directors should be appointed for specified terms subject to re-election and to statutory provisions relating to the removal of a Director.
Explanation: Non-executive Directors are not appointed for a specified term and the Company's articles of association require that all Directors retire by rotation at the annual general meetings of the Company.
Section C3.1: the Board should establish an Audit Committee of at least three, or in the case of smaller companies, two, independent non-executive directors.
Corporate Governance Report (continued)
Explanation: The Company's Audit Committee comprises all members of Board; however Mr Mouchotte, by virtue of his directorship of the Investment Manager and other funds managed within the Chenavari Group, is not considered independent of the Advisers for the purposes of the UK Code. Given Mr Mouchotte's directly relevant investment experience, the independent members of the Audit Committee are of the opinion that Shareholders' interests are best served through Mr Mouchotte's membership of the Audit Committee.
Section C3.5: The audit committee should review arrangements by which staff of the Company may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. The audit committee's objective should be to ensure that arrangements are in place for the proportionate and independent investigation of such matters and for appropriate follow-up action.
Explanation: Given the Directors are non-executive and the Company does not have employees, there is no whistle-blowing policy and the Company relies on the Company Secretary and other third-party service providers to address any concerns raised.
Section C3.6: The Company does not have an internal audit function.
Explanation: The Directors believe that this requirement of the UK Code was intended for companies with internal accounting departments. The Company has no employees and relies on its Administrator and Sub-Administrator for assistance in drawing up its financial statements and reports to Shareholders. Annually, the Director's review this approach.
Section D.1: The Board has not established a remuneration committee to consider executive directors remuneration to promote the long-term success of the Company.
Explanation: In view of its non-executive nature, the Board considers that it is not appropriate for there to be a separate remuneration committee. The Audit Committee makes all representations to the Board regarding Directors' remuneration. The Board as a whole fulfils the functions of the remuneration committee, and a separate Directors' Remuneration Report is set out on pages 30 and 31 of these Financial Statements.
Further details of compliance with the UK Code are noted in the succeeding pages. There have been no instances of non-compliance, other than those noted above and the Company has therefore not reported further in respect of these provisions.
The Guernsey Financial Services Commission issued a Finance Sector Code of Corporate Governance (the "GFSC Code") which came into effect on 1 January 2012. As the Company voluntarily reports by reference to the UK Code, it is deemed by the GFSC also to meet the requirements of the GFSC Code.
Composition and Independence of the Board
The Board currently consists of three non-executive Directors. Biographies for all the Directors can be found on page 13. The Chairman and Mr Stokes are considered independent of the Investment Manager and Investment Adviser for the purposes of the Company's compliance with the UK Code. However Mr Mouchotte, by virtue of his directorship of the AIFM and other funds within the Chenavari group, is not considered independent.
As Chairman of the Board, Mr King is responsible for the leadership of the Board and ensuring its effectiveness in all aspects of its role. In considering the independence of the Chairman, the Board has taken note of the criteria set out in B.1.1 of the UK Code relating to independence, and has determined that Mr King is an Independent Director.
The Company has no employees and therefore there is no requirement for a chief executive. The Board is responsible for the appointment and monitoring of all service providers to the Company. Between formal meetings there is regular contact with the Investment Manager, Investment Adviser and the Corporate Broker. The Directors are kept informed of investment and financial controls and other matters that are relevant to the business of the Company and should be brought to the attention of the Directors. The Directors also have access to the Company Secretary and, where necessary in the furtherance of their duties, to independent professional advice at the expense of the Company.
The Board holds quarterly Board meetings, the Audit Committee meets at least three times a year and the Management Engagement Committee meets at least annually. In addition, ad hoc meetings of the Board to review specific items between the regular scheduled quarterly meetings can be arranged.
Corporate Governance Report (continued)
Attendance at the Board, Audit Committee and Management Engagement Committee meetings during the year was as follows:
Director Board meetings Audit Committee Management Engagement
meetings Committee meetings
---------------- ----------------- ------------------ ------------------------
Held Attended Held Attended Held Attended
---------------- ------ --------- ------ ---------- -------- --------------
Rob King 12 11 4 4 2 2
---------------- ------ --------- ------ ---------- -------- --------------
Iain Stokes 12 12 4 4 2 2
---------------- ------ --------- ------ ---------- -------- --------------
Rene Mouchotte 12 11 4 4 2 2
---------------- ------ --------- ------ ---------- -------- --------------
At Board meetings the Directors review the management of the Company's assets and all other significant matters so as to ensure that the Directors maintain overall control and supervision of the Company's affairs. Agendas and Board papers are circulated in advance of meetings to assist members to discharge their duties appropriately. The Company maintains a formal schedule of matters reserved for the Board. The Directors are responsible for the determination of the Company's investment objective and investment policy and have overall responsibility for the Company's activities including the review of investment activity and performance and the control and supervision of the Investment Manager.
The Board has reviewed its composition and believes that the current appointments provide an appropriate range of skills, experience and diversity. In the context of the Realisation Period, the Board is committed to continuing to review its current composition. No board appointments were made in the period under review. Diversity is important in bringing an appropriate range of skills and experience to the Board, but the Board has not set itself objectives in relation to this element of board composition. In the context of a relatively small Board, the policy when recruiting a new Director, is to appoint individuals on their merit and suitability for the role.
Audit Committee
An Audit Committee has been established consisting of all Directors with Mr Stokes appointed as Chairman. The Audit Committee's primary function is to assist the Board in fulfilling its oversight responsibilities and under the Terms of Reference its main duties include financial reporting, risk management systems, compliance, whistle blowing and fraud. It will review the scope, results, cost effectiveness, independence and objectivity of the external auditor. Further details on the Audit Committee can be found in the Audit Committee Report on page 26.--
Management Engagement Committee
The Board has established a Management Engagement Committee with formal duties and responsibilities. The Management Engagement Committee commits to meeting at least once a year and comprises the entire Board with Mr King appointed as Chairman. Its principal duty is to consider the terms of appointment of the Investment Manager and it will annually review that appointment and the terms of the Investment Management Agreement and Investment Advisory Agreement. Its duties and responsibilities also extend to the regular review of the performance of and contractual arrangements with other service providers.
The Management Engagement Committee carried out its annual review of the performance and capabilities of the Investment Manager and Investment Adviser during November 2016 to confirm that the continued appointment of Chenavari Investment Managers (Luxembourg) SARL as Investment Manager and Chenavari Credit Partners LLP as Investment Adviser are deemed to be in the interest of Shareholders. As part of the review process, the Management Engagement Committee concluded that the Company's other service providers are performing in accordance with the Company's expectations and contractual arrangements.
Board Performance
During November 2016, the Management Engagement Committee formally evaluated the Board's effectiveness by considering the balance of skills, experience, independence and knowledge of the Company on the Board, its diversity, how the Board works together as a unit, the allocation of sufficient time to the Company as well as other factors relevant to its effectiveness. The Management Engagement Committee found the performance of the Chairman, individual Directors and the Board as a whole over the review period to be as expected.
Investor Relations
Shareholders are able to contact the Company directly through its dedicated e-mail address (chenavaricapitalsolutions@chenavari.com) or by correspondence sent to the Company Secretary (chenavari@morgansharpe.com), Investment Manager or Corporate Broker. As a consequence, the Board receives appropriate updates from the Company Secretary, Investment Manager or Corporate Broker relative to such correspondence to keep it informed of Shareholders' sentiment or analyst views.
The Company also publishes a monthly factsheet on its website www.chenavaricapitalsolutions.com, which includes updates on markets and the Company's performance.
Statement of Principal Risks and Uncertainties
Summary
An investment in the Shares is only suitable for institutional investors and professionally advised private investors who understand and are capable of evaluating the merits and risks of such an investment and who have sufficient resources to be able to bear any losses (which may equal the whole amount invested) that may result from such an investment. Furthermore, an investment in the Shares should constitute part of a diversified investment portfolio. It should be remembered that the price of securities and the income from them can go down as well as up.
The risks set out below are those which are considered to be the material risks relating to an investment in the Shares but are not the only risks relating to the Shares or the Company. Additional risks and uncertainties of which the Company is presently unaware or that the Company currently believes are immaterial may also adversely affect its business, financial condition, results of operations or the value of the Shares.
The Board have carried out a robust assessment to identify the principal risks that could affect the Company, including those that would threaten its business model, future performance, solvency or liquidity. The Board has adopted a controls based approach to its risk monitoring requiring each of the relevant service providers including the Investment Manager to establish the necessary controls to ensure that all known risks are monitored and controlled in accordance with agreed procedures. The Directors receive periodic updates at their Board meetings on key risks and have adopted their own control review to ensure where, possible, risks are monitored appropriately.
Risk Explanation/Mitigant
----------------------- --------------------------------------------------
Collateral Investment Instruments issued by Bank
risk (default, counterparties and purchased by the Company
recovery, prepayment) are linked to the credit performance
of the Collateral. This means that defaults
or credit losses in the Collateral may
adversely impact the performance of the
Company, the NAV and the value of the
Shares.
The Investment Adviser undertakes a fundamental
credit review entailing the selection
and optimisation of the Collateral underlying
a Bank Capital Solutions Transaction
and develops quantitative scenarios using
default rates, loss severities and prepayments
applied to sub-pools within the Collateral.
Alongside the fundamental credit analysis,
the structural features of the transaction
are also assessed. This includes a review
of the payment waterfall, the subordination
of the proposed Investment Instrument,
the extent of the reserve fund, the amortisation
profile and extension risk.
Where it is considered desirable, the
Company may enter into hedging transactions
designed to protect against or mitigate
the consequences of single reference
obligations defaulting and/or more generalised
credit events.
----------------------- --------------------------------------------------
Bank counterparty Bank capital solutions transactions may
risk expose the Company to the Bank Counterparty's
credit risk. The terms of such transactions
will generally include credit rating
triggers such that the transaction is
terminated or accelerated, or other credit
support features are activated, if the
Bank Counterparty's credit ratings decline
by more than a predetermined threshold.
The Company may enter into credit hedging
arrangements to ensure that the net exposure
to any Bank Counterparty is no more than
20% of the NAV as at the date that any
relevant credit hedging contract matures
or is adjusted or rolled over.
----------------------- --------------------------------------------------
Currency risk The type of securities in which the Company
invests, to the extent not sterling denominated,
may be sensitive to changes in foreign
exchange rates.
The Company may implement hedging strategies
designed to protect investments from
movements in exchange rates. Such strategies
may include (but are not limited to)
options, forwards, and futures.
----------------------- --------------------------------------------------
Statement of Principal Risks and Uncertainties (continued)
Risk (continued) Explanation/Mitigant (continued)
----------------- -----------------------------------------------
Valuation and Investments are valued in accordance
classification with the Company's Valuation Policy,
of financial which is compiled with reference to
assets at fair key principles comprising independence,
value through documentation, transparency, consistency
profit or loss and relevance. The Valuation Policy
risk documents the pricing process and timeline,
with particular reference to difficult
to value securities, and sets out escalation
procedures.
The Board has established a committee
to review the valuation of illiquid
Investment Instruments, particularly
where a valuation is provided by a single
counterparty or where the Investment
Adviser's risk officer recommends a
materially different valuation than
that provided by a counterparty. The
Company has also engaged Duff & Phelps,
Ltd ("Duff & Phelps"), as a valuation
advisor to provide certain limited procedures
on some Transactions' valuation which
the Investment Adviser identified and
requested Duff & Phelps to perform.
For the avoidance of doubt, notwithstanding
the Company's engagement with Duff &
Phelps, the Valuation Committee of the
Company remains ultimately responsible
for the determination of the Fair Value
of each Transaction, but may consider
Duff & Phelps' input in making such
determinations. Specifically, as of
30 September 2016, Duff & Phelps estimated
ranges of Fair Value for the Company's
interests in 5 transactions
The Board requested the Audit Committee
to further consider risks concerning
valuation with work undertaken by the
Audit Committee discussed on page 26.
As a result of the work undertaken by
the Audit Committee, the Board is satisfied
that the valuation of financial assets
at fair value through profit or loss
was correctly stated in the financial
statements.
----------------- -----------------------------------------------
Investment The Company is dependent on the expertise
Manager and of the Investment Manager, the Investment
Investment Adviser and their respective key personnel
Adviser risks to evaluate investment opportunities
and to implement the Company's investment
objective and investment policy.
The Board has instructed the Investment
Manager to conduct the Company's investment
related activities in compliance with
the applicable law, the Company's investment
objective, investment policy and guidelines
and the Company's contractual obligations.
The Management Engagement Committee
carried out its annual review of the
performance and capabilities of the
Investment Manager in November 2016
and has confirmed the continued appointment
of the Investment Manager is deemed
to be in the interest of Shareholders.
There can be no assurance that the Investment
Manager's past performance will be any
guide to future performance or results.
----------------- -----------------------------------------------
Tax, legal Changes in the Company's tax status
and regulatory or tax treatment may adversely affect
risks the Company, and if the Company becomes
subject to the UK offshore fund rules
there may be adverse tax consequences
for certain UK resident Shareholders.
The Company expects that US taxpayers
generally would be subject to adverse
US tax consequences in respect of their
investment in the Shares under US tax
rules applicable to passive foreign
investment companies ("PFIC"). Accordingly,
the acquisition of Shares may not be
a suitable investment for U.S. Holders
(other than U.S. Holders that are tax-exempt
organisations). U.S. Holders should
consult their tax advisers regarding
the application of the PFIC rules to
an investment in Shares.
----------------- -----------------------------------------------
Statement of Principal Risks and Uncertainties (continued)
Risk (continued) Explanation/Mitigant (continued)
------------------- -----------------------------------------------------
Tax, legal On 23 November 2015 Guernsey issued
and regulatory regulations to implement the Common
risks (continued) Reporting Standard ("CRS") under Guernsey's
domestic law. The regulations follow
on from the commitment made on 29 October
2014 by Guernsey, along with the other
Crown Dependencies and a number of other
jurisdictions, to start exchanging information
under the CRS in respect of accounts
maintained by financial institutions
in Guernsey by 2017 at the earliest.
The regulations will take effect from
1 December 2015 and will require Reporting
Financial Institutions in Guernsey to
apply from 1 January 2016 prescribed
due diligence procedures to all financial
accounts maintained by them in order
to identify and report, where appropriate,
certain information to Guernsey's income
tax office ("ITO"), which in turn will
transmit that information the following
year to the tax offices of relevant
jurisdictions. The requirements of CRS
are closely aligned to requirements
under the FATCA Model 1 Intergovernmental
agreement.
Changes in the Basel III standards or
other changes in the regulation of bank
capital adequacy may make bank capital
solutions transactions unattractive
for Bank Counterparties or reduce the
rates of return available, both of which
may adversely affect the Company.
The AIFMD seeks to regulate AIFMs established
in the EU and prohibits such managers
from managing any AIF or marketing shares
in such funds to investors in the EU
unless the AIFM has been authorised.
The Company, as a Guernsey registered
closed ended fund which is not currently
actively marketed in the EEA, is not
directly impacted by the AIFMD (save
for certain consequential effects arising
from its appointment of an EU domiciled
AIFM, such as the requirement to appoint
a depositary). The Board acknowledges
that if active marketing is undertaken
in the EEA the private placement regime
requirements for the relevant jurisdiction
would need to be met.
The Board and its advisers have also
implemented policies and risk based
controls to monitor both the investment
and operational risks that impact the
Company to facilitate compliance with
AIFMD. The Board is cognisant of the
European Union's ongoing discussions
regarding, inter alia, passporting arrangements
for AIFs and ESMA's recommendations
as regards to so called "third countries",
i.e. non-EU member states. The Board
and its advisers monitor developments
to ensure continued compliance and to
ensure that any potential opportunities
are not missed.
The Administrator, Sub-Administrator,
Broker and Investment Manager provide
regular updates to the Board on compliance
with the prospectus and changes in regulation.
------------------- -----------------------------------------------------
Operational The Company is exposed to the risk arising
risks from any failures of systems and controls
in the operations of the Investment
Manager, AIFM, Administrator, the Sub-Administrator
and the Custodian. The Board and its
Audit Committee regularly review reports
from its Outsourced Service Providers
on their internal controls.
------------------- -----------------------------------------------------
Audit Committee Report
I am pleased to report to you on the activities of the Audit Committee for the year ended 30 September 2016.
The Board has established terms of reference in respect of the membership of the Audit Committee, its duties, reporting responsibilities, and authority given to its members (the "Terms of Reference"). The Terms of Reference are reviewed on a regular basis and a copy can be accessed on the Company's website at www.chenavaricapitalsolutions.com.
The Audit Committee continues to be supportive of the latest UK Code recommendations and is of the opinion that the revised UK Code allows it to act as a key independent oversight committee contributing to a climate of discipline and control.
Terms of Reference
The Audit Committee's primary function is to assist the Board in fulfilling its oversight responsibilities and, under the Terms of Reference, its main duties include:
Financial Reporting
-- monitoring the integrity of the financial statements of the Company, including its annual and half-yearly reports and any other formal announcement relating to its financial performance;
-- reviewing significant financial reporting issues and judgements which they contain, including the consistency of accounting policies, the methods used to account for significant or unusual transactions, accounting for key estimates and judgements, the clarity and completeness of disclosure in the Company's financial reports and all material information presented with the financial statements, such as corporate governance statements relating to the audit, risk management, internal control, the going concern basis of accounting and longer term viability.
Risk Management Systems
-- review the adequacy and effectiveness of the Company's risk management systems and review and approve the statements to be included in the annual report concerning risk management.
Compliance, Whistle blowing and Fraud
-- review the adequacy and security of the Company's arrangements to raise concerns, if any, about possible wrongdoing in financial reporting or other matters;
-- reviewing the Company's procedures for detecting fraud;
-- reviewing the Company's systems and controls for the prevention of bribery and receive reports on non-compliance;
-- reviewing the adequacy and effectiveness of the Company's anti-money laundering systems and controls; and
-- reviewing the adequacy and effectiveness of the Company's compliance function.
External audit
-- overseeing the relationship with the external auditor including making recommendations of remuneration, terms of engagement, assessing independence and objectivity, compliance with relevant ethical and professional guidance on the rotation of audit partners, the level of fees paid by the Company, assessing qualifications, expertise and resources and the effectiveness of the audit process.
In regard to the above duties, I confirm, on behalf of the Audit Committee, that, to the best of our knowledge and belief, we have fulfilled our responsibilities in line with our Terms of Reference and in accordance with the UK Code.
Delegation of Duties
The Company has no employees and all functions, including the preparation of the financial statements, have been outsourced to various service providers. Morgan Sharpe Administration Limited have been appointed as Administrator and Company Secretary, Quintillion Limited as Sub-Administrator and Depositary, Chenavari Investment Managers (Luxembourg) SARL as Investment Manager and AIFM, JPMorgan Chase Bank National Association as Custodian and Principal Bankers and Capita Registrars (Guernsey) Limited as Registrar (together the "Outsourced Service Providers"). Please see page 7 for further details in relation to the Outsourced Service Providers.
Audit Committee Report (continued)
Membership of the Committee
The Audit Committee was established on incorporation and consists of Rob King, Rene Mouchotte and myself, Iain Stokes, as its Chairman. All the members of the Audit Committee are non-executive Directors. Mr King and I are considered independent of the Advisers for the purposes of the Company's compliance with the UK Code however Mr Mouchotte, by virtue of his directorship of the AIFM and other funds within the Chenavari group, is not considered independent. The Audit Committee has concluded that its membership and competence meets the requirements of C.3.1 of the UK Code.
Each member is financially literate and has knowledge of the following key areas:
-- financial reporting principles and accounting standards; -- the regulatory framework within which the Company operates; -- the Company's internal control and risk management environment; and -- factors impacting the Company's financial statements.
The Audit Committee meets at least three times a year. Representatives from the Company's Outsourced Service Providers along with representatives of the Company's external auditor, Deloitte LLP ("Deloitte"), attend Audit Committee meetings when appropriate.
In his role as a member of the Audit Committee, each member is available to discuss any particular matter with his fellow Board members and in addition the Audit Committee has the opportunity to meet with Deloitte without the presence of Outsourced Service Providers. In order to ensure that all Directors are kept up to date and informed of the Audit Committee's work, I provide a verbal report to the Board at Board meetings on key matters discussed at the Audit Committee meetings. In addition, the minutes of all Audit Committee meetings are available to the Board.
How the Audit Committee has Discharged its Responsibilities
In the year under review, the Audit Committee met four times, attendance at which is set out on page 22. The Audit Committee meetings focused on the following key areas:
Monitoring the integrity of the financial statements including significant judgements
-- We reviewed the appropriateness of the Company's significant accounting policies, critical accounting judgements and key sources of uncertainty and monitored changes to, and compliance with, accounting standards on an ongoing basis.
-- Prior to making any recommendations to the Board, we reviewed the Annual Report and Audited Financial statements for the year ended 30 September 2016 (the "Annual Report"). We compared the results with investment models, management accounts, budgets and monthly NAVs, focusing on the significant accounting matters set out below.
-- In undertaking this review, we discussed with the Investment Manager, AIFM, Investment Adviser, Administrator, Sub-Administrator and Deloitte the critical accounting policies and judgements that have been applied and at the request of the Audit Committee, the Administrator and Sub-Administrator confirmed that they were not aware of any material misstatements including matters relating to the Annual Report presentation. Deloitte also reported to the Audit Committee on any misstatements that they had found during the course of their work and confirmed no material amounts remained unadjusted.
-- At its meeting to review the Annual Report, the Audit Committee received and reviewed a report on the audit from Deloitte. On the basis of its review of the report, the Audit Committee is satisfied Deloitte has fulfilled its responsibilities with diligence and professional scepticism.
-- The Audit Committee is satisfied that the Annual Report appropriately addresses the critical judgements and key estimates (both in respect to the amounts reported and the disclosures) and that the significant assumptions used for determining the value of assets and liabilities determined were in compliance with IFRS and were reasonable.
-- The Audit Committee is therefore satisfied that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's performance, business model and strategy.
Audit Committee Report (continued)
Significant Accounting Matters
During the year the Audit Committee considered key accounting issues, matters and judgements regarding the Company's financial statements and disclosures including those relating to:
Valuation and Classification of Financial Assets at Fair Value through Profit or Loss
At 30 September 2016, the Company's investments had a fair value of GBP105.9m and represent a substantial portion of net assets of the Company. As such this is the largest factor in relation to the accuracy of the financial statements and is monitored by the Investment Manager, the Investment Adviser, the Administrator, the Sub-Administrator, the Custodian, the Audit Committee and the Board.
Investments are valued in accordance with the Company's Valuation Policy and with the Accounting Policies set out in note 2 to the Financial Statements. The Valuation Policy is compiled with reference to key principles comprising independence, documentation, transparency, consistency and relevance, and it documents the pricing process and timeline, with particular reference to difficult to value securities, and sets out escalation procedures.
The Audit Committee required the Investment Manager to provide detailed analysis of the broker quotes obtained for investments, including the liquidity, the number of quotes received, and the range of quotes. For primary transactions, the Investment Manager's own analysis of the fair value of the deal was compared to the quotes obtained and where pricing was obtained from the manager of the transaction, the Investment Manager provided an assessment of the manager's independence and reliability.
Where broker quotes are not available, and pricing is the result of the Investment Adviser's internal models, a specialist third party, Duff and Phelps, was engaged to provide estimated ranges of Fair Value for those transactions as at 30 September 2016. In addition to assessing the internal models, the review considered underlying portfolio performance, the requirements of IFRS 13 to use 'market participant' assumptions that are as realistic as possible and the income, market and cost approach to estimate Fair Value. The Audit Committee met with the Investment Adviser and Deloitte and further challenged the key assumptions of the internal models, in particular their sensitivities using stress scenarios. Additionally, the Audit Committee required the Investment Manager to provide a reasoned assessment of fair value for each investment held and its classification in the fair value hierarchy.
Following discussion, we were satisfied that the judgements made and methodologies applied were prudent and appropriate and that the correct accounting treatment has been adopted. Please see further details outlined in notes 2 and 7 to the financial statements.
Income Recognition
For primary and secondary transactions, the Audit Committee considered whether the separate presentation of interest income in the statement of comprehensive income is required or if a net fair value movement is more appropriate.
Due to the nature of the Company's investment strategy resulting in the possibility of investments being sold before maturity and given the consequent inherent uncertainty of using maturity dates to calculate income using the Effective Interest Rate method, for both primary and secondary investments, the Company's accounting policy recognises only a net fair value movement rather than reporting a split between fair value movement and interest income in the Statement of Comprehensive Income. This is explained further in notes 7 and 11 to the financial statements.
Investment Manager's Fee
The Audit Committee identified the calculation of the Investment Manager's Fee to represent a significant risk of misstatement in the Company's financial reporting. The Committee requested the Administrator, Sub-Administrator, Auditor and Investment Manager to work together to ensure that the Management Fee calculation agreed to the terms of the Management Fee calculation methodology as set out in the Investment Management Agreement. The Audit Committee reviewed a detailed calculation methodology prepared by the Sub-Administrator and agreed the calculation with the Investment Manager.
Assessment of Principal Risks and Uncertainties
The risks associated with the Company's financial assets, as disclosed in the financial statements, particularly in note 6 to the Financial Statements, represent a key accounting disclosure. The Audit Committee critically reviews, on the basis of input from relevant Outsourced Service Providers, the process of ongoing identification and measurement of these risks disclosures.
Audit Committee Report (continued)
Risk Management and Internal Controls
The Board as a whole is responsible for the Company's system of internal control; however, the Audit Committee assists the Board in meeting its obligations in this regard. The daily operational activities of the Company were delegated to the Outsourced Service Providers and as a result the Company has no direct internal audit function and instead places reliance on the external and internal audit controls applicable to the Outsourced Service Providers as regulated entities. The Audit Committee regularly monitors confirmations from the Outsourced Service Providers to the Company that no material issues have arisen in respect of the system of internal controls and risk management operated within the Company's Outsourced Service Providers also considers the Management Engagement Committee's conclusions that the Company's Outsourced Service Providers are performing in accordance with the Company's expectations and contractual arrangements. Annually, the Audit Committee reviews the effectiveness of the Company's material controls, including financial, operational and compliance controls.
External Audit
It is the responsibility of the Audit Committee to monitor the performance, independence, objectivity and re-appointment of Deloitte. We met with Deloitte in May 2016 to review their Interim Review Report in relation to the Company's Unaudited Interim Financial statements for the period from 1 October 2015 to 31 March 2016. In August 2016, we further met with Deloitte who presented their Audit Strategy and Plan for the year; we agreed the audit plan for the year, highlighting the key financial statement and audit risks, to seek to ensure that the audit was appropriately focused. In October 2016, we met with the Investment Adviser and Deloitte to review the assessment of fair value for each investment held and its classification in the fair value hierarchy. Deloitte attends our Audit Committee meetings throughout the year, as appropriate, which allows the opportunity to discuss any matters the auditor may wish to raise without the Investment Manager or other Outsourced Service Providers being present.
Deloitte provides feedback at each Audit Committee meeting on topics such as the key accounting matters, mandatory communications and the control environment.
Deloitte was formally re-appointed as the Company's auditor for the 2016 year-end audit following the AGM on 16 March 2016. Deloitte LLP have expressed their willingness to continue in office as Auditor. The Audit Committee continues to be satisfied with the performance of Deloitte. We have therefore recommended to the Board that Deloitte, in accordance with agreed terms of engagement and remuneration, should continue as the Company's auditor and a resolution proposing their reappointment will be submitted at the forthcoming AGM. The lead audit partner will be rotated every five years to ensure continued independence and objectivity. In advance of the commencement of the annual audit, the Audit Committee reviewed a statement provided by Deloitte confirming their independence within the meaning of the regulations and professional standards. In addition, in order to satisfy itself as to Deloitte's independence, the Audit Committee undertook a review of the auditor compensation and the balance between audit and non-audit fees.
During the year the value of non-audit services provided by Deloitte amounted to GBP13,032. Non-audit services mainly comprise tax compliance reporting are not deemed to be material and amounted to approximately 11% of the total fees paid by the Company to Deloitte.
Committee Effectiveness
The effectiveness of the Audit Committee is reviewed on an annual basis by both the Board and the Audit Committee. Following such reviews, I am pleased to advise that the Audit Committee is considered to continue to operate effectively and efficiently. A member of the Audit Committee will be available to Shareholders at the forthcoming AGM of the Company to answer any questions relating to the role of the Audit Committee.
Signed on behalf of the Audit Committee by:
Iain Stokes
Audit Committee Chairman
20 January 2017
Directors' Remuneration Report
The Directors' remuneration report has been prepared on behalf of the Directors in accordance with the UK Code.
The Directors do not consider it necessary for the Company to establish a separate Remuneration Committee since the Board's remuneration forms part of the schedule of matters reserved for the Board and the matters recommended by the UK Code that would be delegated to such a committee, is considered by the Board as a whole.
The Company's policy is to ensure that the fees payable to the Directors reflect the time spent by the Directors on the Company's affairs, the responsibilities borne by the Directors and are sufficient to attract, retain and motivate Directors of a quality required to run the Company successfully.
The Company's policy is to review fee rates periodically. Where fee rates are reviewed, such a review will take account of fees paid to directors of comparable companies but will not necessarily result in any changes to the fee levels.
No element of the Directors' remuneration is performance related, nor does any Director have any entitlement to pensions, Share options or any long term incentive plans from the Company.
Following a recommendation from the Chairman, having regard to the level of fees payable to non-executive Directors that reflects comparable compensation levels of the peer universe for the Company, the role that individual Directors fulfil in respect of Board and Committee responsibilities, it is the responsibility of the Board as a whole to determine and approve the Directors' fees.
The Chairman's remuneration is decided separately and is approved by the Board as a whole.
The Directors are currently subject to the following annual remuneration in the form of Directors' fees:
Rob King GBP40,000
Iain Stokes GBP40,000
Rene Mouchotte GBP37,500
------------
Total GBP117,500
The Company's Articles limit the fees payable to Directors in aggregate to GBP300,000 per annum.
The remuneration policy set out above is the one applied for the year ended 30 September 2016. In the context of the Realisation Period, the Board is committed to continuing to review its current composition and fee basis.
Directors' and Officers' liability insurance cover is maintained by the Company on behalf of the Directors.
Mr. King was appointed as a non-executive Director on 21 July 2015 whilst Mr. Stokes and Mr. Mouchotte have served as non-executive Directors since 21 August 2013. Each Director's appointment letter provides that all records received by them during the course of their directorship remain the property of the Company. The Directors' appointments can be terminated in accordance with the Articles and without compensation. There is no notice period specified in the Articles for the removal of Directors. The Articles provide that the office of Director shall be terminated by, among other things: (a) written resignation; (b) unauthorised absences from Board meetings for a consecutive period of twelve months and the Board resolve that the Director in question's office be vacated; (c) unanimous written request of the other Directors; and (d) the Director in question becomes ineligible to be a Director in accordance with Section 137 of the Law.
Under the terms of their appointment, each Director is required to retire by rotation and be subject to re-election at least every three years. The Directors are required to annually seek re-election if they have already served for more than nine years. The Company may terminate the appointment of a Director immediately on serving written notice and no compensation is payable upon termination of office as a Director of the Company becoming effective.
The amounts payable to Directors shown in note 4 to the Financial Statements were for services as non-executive Directors. No Director has a service contract with the Company, nor are any such contracts proposed.
Directors' Remuneration Report (continued)
At 30 September 2016 the Directors held the following Shares in the Company: Mr King 30,000, Mr Stokes 40,000 and Mr Mouchotte 5,000.
Signed on behalf of the Board of Directors by:
Rob King,
Non-executive Chairman
Iain Stokes,
Non-executive Director
20 January 2017
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Directors' Report and the financial statements in accordance with applicable Guernsey law and regulations.
Guernsey Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with IFRS as adopted by the European Union and applicable law.
Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing these financial statements, the Directors are required to:
-- properly select and apply accounting policies;
-- present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
-- provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and
-- make an assessment of the Company's ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with The Companies (Guernsey) Law 2008. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in Guernsey and the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Directors' Responsibility Statement
We confirm that to the best of our knowledge:
-- the financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;
-- the directors' report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces;
-- the Annual Report and Audited Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for Shareholders to assess the Company's performance, business model and strategy; and
-- The Annual Report includes information required by the LSE and for ensuring the Company complies with the relevant provisions of the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority.
This responsibility statement was approved by the Board of Directors on 20 January 2017 and is signed on its behalf by:
Non-Executive Director: Non-Executive Director:
Date: 20 January 2017 Date: 20 January 2017
Independent Auditor's Report to the Members of Chenavari Capital Solutions Limited
Opinion on financial statements of Chenavari
Capital Solutions Limited
In our opinion the financial statements:
* give a true and fair view of the state of the
Company's affairs as at 30 September 2016 and of its
profit for the year ended 30 September 2016;
* have been properly prepared in accordance with
International Financial Reporting Standards (IFRSs)
as adopted by the European Union; and
* have been prepared in accordance with the
requirements of the Companies (Guernsey) Law, 2008.
The financial statements that we audited comprise:
* the Statement of Comprehensive Income;
* the Statement of Financial Position;
* the Statement of Cash Flows;
* the Statement of Changes in Equity; and
* the related notes 1 to 21.
The financial reporting framework that has been
applied in their preparation is applicable law
and IFRSs as adopted by the European Union.
Summary of our audit approach
=======================================================================================================================
Key risks The key risks that we identified in
the current year were:
* Valuation and classification of financial assets at
fair value through profit or loss; and
* Revenue recognition.
Within this report, any new risks
are identified with and any risks
which are the same as the prior year
identified with .
================================================== ===================================================================
Materiality The materiality that we used in the
current year was GBP2.5m which was
determined on the basis of 2% of net
asset value.
================================================== ===================================================================
Scoping The Company is a standalone entity.
Consistent with 2015, we tailored
the scope of our audit taking into
account the types of investments held
within the Company.
================================================== ===================================================================
Going concern and the Directors' assessment
of the principal risks that would threaten the
solvency or liquidity of the Company
=======================================================================================================================
We have reviewed the Directors'
statement regarding the appropriateness We confirm that
of the going concern basis we have nothing
of accounting and the Directors' material to add
statement on the longer-term or draw attention
viability of the Company both to in respect of
contained within pages 17 and these matters.
18 of the Report of the Directors.
We agreed with
We are required to state whether the directors'
we have anything material to adoption of the
add or draw attention to in going concern basis
relation to: of accounting and
-- the Directors' confirmation we did not identify
on page 23 that they have carried any such material
out a robust assessment of uncertainties.
the principal risks facing However, because
the Company, including those not all future
that would threaten its business events or conditions
model, future performance, can be predicted,
solvency or liquidity; this statement
-- the disclosures on pages is not a guarantee
23-25 that describe those risks as to the Company's
and explain how they are being ability to continue
managed or mitigated; as a going concern.
-- the Directors' statement
on page 17 to the financial
statements about whether they
considered it appropriate to
adopt the going concern basis
of accounting in preparing
them and their identification
of any material uncertainties
to the Company's ability to
continue to do so over a period
of at least twelve months from
the date of approval of the
financial statements; and
-- the Directors' explanation
on pages 17 and 18 as to how
they have assessed the prospects
of the Company, over what period
they have done so and why they
consider that period to be
appropriate, and their statement
as to whether they have a reasonable
expectation that the Company
will be able to continue in
operation and meet its liabilities
as they fall due over the period
of their assessment, including
any related disclosures drawing
attention to any necessary
qualifications or assumptions.
====================================================== ===============================================================
Independence
==================================================== =================================================================
We are required to comply We confirm that we
with the Financial Reporting are independent of
Council's Ethical Standards the Company and we
for Auditors and confirm have fulfilled our
that we are independent other ethical responsibilities
of the Company and we have in accordance with
fulfilled our other ethical those standards. We
responsibilities in accordance also confirm we have
with those standards. not provided any of
the prohibited non-audit
services referred to
in those standards.
==================================================== =================================================================
Our assessment of risks of material misstatement
The assessed risks of material misstatement
described below are those that had the greatest
effect on our audit strategy, the allocation
of resources in the audit and directing the
efforts of the engagement team.
Risk How the scope of our audit
responded to the risk
Valuation and classification
of financial assets at
fair value through profit To test the valuation of
or loss investments as at 30 September
2016 we performed the following
Investments held by the procedures:
Company as at 30 September * Assessed the design and implementation of controls
2016 had a fair value over the valuation of investments to determine
of GBP108m (2015: GBP120m) whether appropriate oversight had been exercised
representing 88% of the within the valuation process;
net asset value of the
Company. Details of investments
are disclosed in note * Assessed the valuation policy and methodology adopted
7. Investments comprise by management in comparison to IFRS and industry
the most quantitatively practice;
significant balance and
is an area of focus because
they are the main driver * Where valuation models were used, we engaged our
of the Company's performance internal fair valuation specialists to review the
and net asset value. models and methodology used and challenged the
appropriateness thereof. This included checking the
Most investments are consistency of model parameters and key assumptions
not actively traded and to original documents and other inputs against actual
their valuation is reliant loan performance data;
either on broker quotes
or derived from valuation
models prepared by the * Where broker pricing was used, we obtained
Investment Manager. The independent price quotes from the brokers;
inputs to those valuation
models can be judgemental
and may include but are * For a sample of investments, we obtained price
not limited to interest information from independent sources such as Markit
rates, pre-payment rates, to determine whether this information was consistent
discount rate and credit with prices used;
default rates.
Inputs to the internal * For a sample of investments realised during the
valuation models and period, we reviewed the accuracy of management's
those provided by brokers valuations by comparing the price at which
may be unobservable and investments were realised to the price recorded by
there could be a lack the Company at the time of disposal; and
of liquidity in the quotations
provided. During the
year, the Company engaged * Compared the results of the Company's independent
an independent valuation valuation specialist to that performed by our
specialist to separately internal fair valuation specialists to assess whether
value the investments they are consistent.
priced through internal
valuation models. Further
details of the accounting
policy and methodology To test the classification
for the valuation of of the investments on the
investments are described fair value hierarchy, we
in note 2.2 to the financial reviewed and challenged
statements. management's classification
of investments within the
fair value hierarchy and
the associated disclosures
based on the evidence obtained.
Classification of investments We also performed the following
within the fair value procedures:
hierarchy is a significant * Reviewed the number of broker quotes obtained by
judgement. In particular management;
determining what constitutes
observable evidence of
trading in investments * Reviewed evidence of third party transactions used to
is subjective in the corroborate broker valuations; and
absence of public sources
of information.
* Reviewed the disclosures provided, including
For investments classified sensitivity analysis to movements in key inputs for
as being at level 3 in investments classified as level 3 in the fair value
the fair value hierarchy, hierarchy.
determining the appropriate
disclosure of risks and
sensitivities also requires
judgement.
Revenue recognition
Interest income and fair To test revenue recognition,
value adjustments (GBP6.7m) we performed the following
(2015:(GBP11.4m)) are procedures:
the Company's material * Assessed the design and implementation of the
income streams and revenue controls around revenue recognition;
recognised is a key determinant
in the reported financial
performance. We focused * Recalculated the expected interest received on
on this area due to the investments based on contractual agreements, holding
significance of income periods and principal amounts;
to the Company.
Given the concentration * Verified receipts of interest to bank and to
of the portfolio and counterparty interest statements;
the bespoke nature of
the primary transactions,
the expected cash flows * Recalculated accrued interest amounts based on the
over the holding period period elapsed since the last interest payment date;
may be complex. For the and
secondary transactions
the holding period will
also impact on the income * Tested the realised gain/(loss) for the period on a
to be recognised by the sample basis by reviewing sale documentation,
Company. For these reasons, comparing proceeds to receipts in the bank statements
identifying the element and recalculation of any profit or loss on disposal.
of yield on an investment
that represents interest
income and that represents
return of capital may
be more difficult. As
a result interest income
is aggregated with fair
value movements on investments
in the statement of comprehensive
income. We also focused
on calculation of realised
and unrealised gains
and losses.
The accounting policy
on revenue recognition
has been disclosed in
note 2.4 and a breakdown
of total income has been
provided on note 11.
=================================== ==================================================================
Last year our audit report included a risk relating
to calculation of management and performance
fees. This risk has not been included this year
as the balance is below our determined materiality
and is dependent on control processes where there
is no history of errors being identified. We
have included a new risk on revenue recognition
as it had the greatest effect to our approach
as explained in the risk table above.
The description of risks above should be read
in conjunction with the significant issues considered
by the Audit Committee discussed on pages 28
and 29. Management's consideration of the critical
accounting estimates and judgements is included
in note 3.
These matters were addressed in the context of
our audit of the financial statements as a whole,
and in forming our opinion thereon, and we do
not provide a separate opinion on these matters.
Our application of materiality
=================================================================
We define materiality as the magnitude of misstatement
in the financial statements that makes it probable
that the economic decisions of a reasonably knowledgeable
person would be changed or influenced. We use
materiality both in planning the scope of our
audit work and in evaluating the results of our
work.
Based on our professional judgement, we determined
materiality for the financial statements as a
whole as follows:
Materiality GBP2,455,000 (2015: GBP2,600,000)
====================== =======================================
Basis for determining 2% of net asset value (2015: 2%
materiality of net asset value)
====================== =======================================
Rationale for We have derived our materiality
the benchmark based on the net asset value of
applied the Company as we consider it
to be the most important balance
upon which the shareholders would
judge the performance of the Company.
====================== =======================================
We agreed with the Audit Committee that we would
report to the Committee all audit differences
in excess of GBP49,100 (2015: GBP52,000), as
well as differences below that threshold that,
in our view, warranted reporting on qualitative
grounds. We also report to the Audit Committee
on disclosure matters that we identified when
assessing the overall presentation of the financial
statements.
An overview of the scope of our audit
=================================================================
Our audit was scoped by obtaining an understanding
of the Company and its environment, including
internal control, and assessing the risks of
material misstatement. Audit work to respond
to the risks of material misstatement was performed
directly by the audit engagement team.
The administrator and sub-administrator maintain
the books and records of the entity. The investment
manager and investment adviser maintain detailed
documentation pertaining to the investment activities
of the entity. Our audit therefore included obtaining
an understanding of these service organisations
(including, in respect of the sub-administrator,
obtaining their internal controls report) and
their relationship with the Company.
Matters on which we are required to report by
exception
Adequacy of explanations received
and accounting records
Under the Companies (Guernsey) We have nothing
Law, 2008 we are required to to report in respect
report to you if, in our opinion: of these matters.
* we have not received all the information and
explanations we require for our audit; or
* proper accounting records have not been kept; or
* the financial statements are not in agreement with
the accounting records.
Our duty to read other information
in the Annual Report
Under International Standards We confirm that
on Auditing (UK and Ireland), we have not identified
we are required to report to any such inconsistencies
you if, in our opinion, information or misleading statements.
in the Annual Report is:
* materially inconsistent with the information in the
audited financial statements; or
* apparently materially incorrect based on, or
materially inconsistent with, our knowledge of the
Company acquired in the course of performing our
audit; or
* otherwise misleading.
In particular, we are required
to consider whether we have
identified any inconsistencies
between our knowledge acquired
during the audit and the Directors'
statement that they consider
the Annual Report is fair,
balanced and understandable
and whether the Annual Report
appropriately discloses those
matters that we communicated
to the Audit Committee which
we consider should have been
disclosed.
Other matter
==============================================================================================
Corporate Governance Statement
Although not required to do We have nothing
so, the Directors have voluntarily to report arising
chosen to make a corporate from our review.
governance statement detailing
the extent of their compliance
with the UK Corporate Governance
Code. We reviewed the part
of the Corporate Governance
Statement relating to the Company's
compliance with certain provisions
of the UK Corporate Governance
Code.
Respective responsibilities of Directors and
Auditor
As explained more fully in the Directors' Responsibilities
Statement, the Directors are responsible for
the preparation of the financial statements and
for being satisfied that they give a true and
fair view. Our responsibility is to audit and
express an opinion on the financial statements
in accordance with applicable law and International
Standards on Auditing (UK and Ireland). We also
comply with International Standard on Quality
Control 1 (UK and Ireland). Our audit methodology
and tools aim to ensure that our quality control
procedures are effective, understood and applied.
Our quality controls and systems include our
dedicated professional standards review team
and independent partner reviews.
This report is made solely to the Company's members,
as a body, in accordance with Section 262 of
the Companies (Guernsey) Law, 2008. Our audit
work has been undertaken so that we might state
to the Company's members those matters we are
required to state to them in an auditor's report
and/or those further matters we have expressly agreed to report to them on in our engagement letter and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
David Becker (Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Recognised Auditors
St Peter Port, Guernsey
20 January 2017
Statement of Comprehensive Income
For the year ended 30 September 2016
For the For the
year ended year ended
30 September 30 September
2016 2015
Note GBP GBP
Income
Interest income 2 25,168 14,961
Net gain on financial assets
and financial liabilities
held at fair value through
profit or loss 11 6,685,529 11,414,220
Total net income 6,710,697 11,429,181
------------- -------------
Expenses
Management fee 4 1,230,093 1,282,996
Administration fee 5(b) 52,000 52,000
Sub-administration fee 5(c) 82,384 93,102
Custodian fees 5(d) 31,500 31,500
Corporate broking fee 5(a) 75,000 75,000
Legal and transaction fees 9,498 77,473
Directors' fee 4 113,388 110,130
Audit fee 94,000 80,000
Other operating expenses 58,654 103,783
Total operating expenses 1,746,517 1,905,984
------------- -------------
Financing costs
Interest expense 9,940 993
Profit for the year 4,954,240 9,522,204
============= =============
Earnings per Share
Basic and diluted 8 3.80p 7.31p
Non-Executive Director: Non-Executive Director:
Date: 20 January 2017 Date: 20 January 2017
All items in the above statement derive from continuing operations.
The condensed schedule of investments and the notes to the financial statements are an integral part of the financial statements.
Statement of Financial Position
As at 30 September 2016
30 September 30 September
2016 2015
Note GBP GBP
Assets
Financial assets at fair value
through profit or loss 2,10 107,971,102 119,879,322
Due from broker 12 6,095,266 7,062,103
Other receivables and prepayments 13 75,347 11,834
Cash and cash equivalents 6,2 11,538,313 4,360,121
Total assets 125,680,028 131,313,380
------------- -------------
Equity
Share capital and share premium 15 127,694,000 127,694,000
Retained (deficit)/earnings (4,871,013) 1,836,597
Total equity 122,822,987 129,530,597
------------- -------------
Current liabilities
Financial liabilities at fair
value through profit or loss 2,10 2,037,756 1,071,648
Due to broker 12 617,079 451,364
Accrued expenses 14 202,206 259,771
Total liabilities 2,857,041 1,782,783
------------- -------------
Total equity and liabilities 125,680,028 131,313,380
------------- -------------
Shares outstanding 15 130,300,000 130,300,000
NAV per Share 9 94.26p 99.41p
Non-Executive Director: Non-Executive Director:
Date: 20 January 2017 Date: 20 January 2017
The condensed schedule of investments and the notes to the financial statements are an integral part of the financial statements.
Statement of Changes in Equity
For the year ended 30 September 2016
Share
capital
Retained and share
earnings premium Total
Note GBP GBP GBP
At 30 September 2015 1,836,597 127,694,000 129,530,597
Total comprehensive income 4,954,240 - 4,954,240
Distributions to equity
Shareholders 17 (11,661,850) - (11,661,850)
At 30 September 2016 (4,871,013) 127,694,000 122,822,987
============= ============ =============
For the year ended 30 September 2015
Share
capital
Retained and Share
earnings premium Total
Note GBP GBP GBP
At 30 September 2014 (128,207) 127,694,000 127,565,793
Total comprehensive income 9,522,204 - 9,522,204
Distributions to equity
Shareholders 17 (7,557,400) - (7,557,400)
At 30 September 2015 1,836,597 127,694,000 129,530,597
============ ============ ============
The condensed schedule of investments and the notes to the financial statements are an integral part of the financial statements.
Statement of Cash Flows
For the year ended 30 September 2016
For the For the
year ended year ended
30 September 30 September
2016 2015
GBP GBP
Cash flows from operating activities
Profit for the year 4,954,240 9,522,204
Adjustments for non-cash items
and working capital:
Purchase of investments (8,802,749) (65,672,568)
Disposal and pay downs of investments 23,021,685 24,553,057
Net (gain)/loss on financial
assets and derivatives at fair
value (1,344,608) 10,138,914
Decrease/(increase) in amounts
due from brokers 966,837 (3,274,621)
Increase in other receivables
and prepayments (63,513) (10,753)
Increase in amounts due to brokers 165,715 451,364
(Decrease)/increase in accrued
expenses (57,565) 10,288
Net cash inflow/(outflow) from
operating activities 18,840,042 (24,282,115)
------------- -------------
Cash flows from financing activities
Distributions to equity Shareholders (11,661,850) (7,557,400)
Net cash outflow from financing
activities (11,661,850) (7,557,400)
------------- -------------
Net increase/(decrease) in cash
and cash equivalents 7,178,192 (31,839,515)
Cash and cash equivalents at
beginning of the year 4,360,121 36,199,636
Cash and cash equivalents at
end of the year 11,538,313 4,360,121
------------- -------------
The condensed schedule of investments and the notes to the financial statements are an integral part of the financial statements.
Condensed Schedule of Investments, at Fair Value
As at 30 September 2016
Condensed Schedule of Investments, at Fair Value
As at 30 September 2015
U.K. France Germany Ireland Italy Netherlands Portugal Spain Switzerland USA Luxembourg Belgium Others Total Total
----------- ---------- ----------- -------- ----------- ------------ ----------- ----------- ------------ ---------- ----------- -------- ------------ ------------ --------
GBP GBP GBP GBP GBP GBP GBP GBP GBP GBP GBP GBP GBP GBP %
Financial
assets at
fair value
through
profit
or loss
--------------
Debt
securities/
asset backed
securities:
Corporate
loans 16,330,242 2,042,376 1,604,460 646,736 410,379 1,972,480 - 148,821 402,595 9,062,661 698,274 307,986 3,947,727 37,574,737 29.01%
SME loans - - 10,628,252 - 9,767,613 - 24,554,184 13,830,072 8,992,021 - - - - 67,772,142 52.32%
Mortgages 10,740,251 - - - - - - 2,947,681 - - - - - 13,687,932 10.57%
Trade finance
loans 7,903 - - - - - - - 9,068 8,860 - - 390,135 415,966 0.32%
Debt
securities/
asset
backed
securities
total 27,078,396 2,042,376 12,232,712 646,736 10,177,992 1,972,480 24,554,184 16,926,574 9,403,684 9,071,521 698,274 307,986 4,337,862 119,450,777 92.22%
----------- ---------- ----------- -------- ----------- ------------ ----------- ----------- ------------ ---------- ----------- -------- ------------ ------------ --------
Credit
default
swap - - - - - - - - - - - - 428,545 428,545 0.33%
Credit
default
swap total - - - - - - - - - - - - 428,545 428,545 0.33%
----------- ---------- ----------- -------- ----------- ------------ ----------- ----------- ------------ ---------- ----------- -------- ------------ ------------ --------
Financial
assets at
fair value
through
profit
or loss
total 27,078,396 2,042,376 12,232,712 646,736 10,177,992 1,972,480 24,554,184 16,926,574 9,403,684 9,071,521 698,274 307,986 4,766,407 119,879,322 92.55%
----------- ---------- ----------- -------- ----------- ------------ ----------- ----------- ------------ ---------- ----------- -------- ------------ ------------ --------
Financial
liabilities
at fair value
through
profit
or loss
--------------
Derivative
financial
liabilities
Credit
default
swap - - - - - - - - - - - - (370,808) (370,808) (0.29%)
----------- ---------- ----------- -------- ----------- ------------ ----------- ----------- ------------ ---------- ----------- -------- ------------ ------------ --------
Credit
default
swap total - - - - - - - - - - - - (370,808) (370,808) (0.29%)
----------- ---------- ----------- -------- ----------- ------------ ----------- ----------- ------------ ---------- ----------- -------- ------------ ------------ --------
Forward FX
contracts - - - - - - - - - - - - (700,840) (700,840) (0.54%)
----------- ---------- ----------- -------- ----------- ------------ ----------- ----------- ------------ ---------- ----------- -------- ------------ ------------ --------
Forward FX
contracts
total - - - - - - - - - - - - (700,840) (700,840) (0.54%)
----------- ---------- ----------- -------- ----------- ------------ ----------- ----------- ------------ ---------- ----------- -------- ------------ ------------ --------
Financial
liabilities
at fair
value
through
profit
or loss
total - - - - - - - - - - - - (1,071,648) (1,071,648) (0.83%)
----------- ---------- ----------- -------- ----------- ------------ ----------- ----------- ------------ ---------- ----------- -------- ------------ ------------ --------
Total net
investments 27,078,396 2,042,376 12,232,712 646,736 10,177,992 1,972,480 24,554,184 16,926,574 9,403,684 9,071,521 698,274 307,986 3,694,759 118,807,674 91.72%
----------- ---------- ----------- -------- ----------- ------------ ----------- ----------- ------------ ---------- ----------- -------- ------------ ------------ --------
Other assets
and
liabilities 10,722,923 8.28%
------------ --------
Net assets 129,530,597 100.00%
------------ --------
Notes to the Financial Statements
1. General information
Chenavari Capital Solutions Limited (the "Company") is a closed-ended investment company limited by shares. The Company was incorporated with limited liability in Guernsey under the Companies Law (Guernsey) 2008 (the "Law") on 12 July 2013 with registered number 56977, to be a Registered closed-ended Collective Investment Scheme. The principal legislation under which the Company operates is the Law.
The Company is managed by the Investment Manager, a member of the Chenavari Financial Group. The Investment Manager has appointed the Investment Adviser, also a member of the Chenavari Financial Group, to provide investment advisory services to the Investment Manager.
The Company's Shares are admitted to trading on the SFS of the London Stock Exchange. The Shares were also listed on the Official List of the Channel Islands Securities Exchange on 7 October 2013 but were delisted on 11 August 2014. The Initial Public Offering ("IPO") of the Company raised gross proceeds of GBP130,300,000.
Investment objective
The investment objective of the Company is to provide Shareholders with an attractive return, while limiting downside risk, through investment in bank capital solutions transactions primarily with UK and European banks.
Target returns and dividend policy
The Company expects to target a NAV total net return to investors of 8-10% per annum over the life of the Company and to minimise cash drag to less than 10% of NAV. Returns to Shareholders will be predominantly as dividend income.
Subject to compliance with the Law and the satisfaction of the solvency test, the Company intends to distribute all its income from investments, net of expenses, by way of dividends on a quarterly basis with dividends declared in October, January, April and July and paid in November, February, May and August in each year. 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 purpose of efficient cash management.
Subject to market conditions and the financial position of the Company, returns to Shareholders will be predominantly as dividend income. For the Year the Company has declared and paid three dividends totalling 6p per Share (2p per Share on 26 February 2016 for the period ending 31 December 2015, 2p per Share on 27 May 2016 for the period ending 31 March 2016 and 2.00p per Share on 26 August 2016 for the period ending 30 June 2016). Following the year end, the Company announced a dividend of 1.50p per Share for the final period of the Company's financial year which was paid 12 December 2016.
Whilst it is the Board's intention while the Company is fully invested to maintain these higher levels of dividends when at all possible, target returns and dividend payments should not be taken as a forecast of the Company's future performance, profits or results. The target returns and dividend payments are targets only and there is no guarantee that they can or will be achieved and they should not be seen as an indication of the Company's actual return. Accordingly, investors should not place any reliance on the target returns and dividend payments in deciding whether to invest in the Shares. Dividend payments may fall short of or exceed, the amounts indicated above.
Investment Period and Realisation Period
Following the extension of the Investment Period approved by Shareholders at an EGM on 18 December 2015, the Company continued its ability to invest its cash balances in accordance with its investment policy, to the extent that such cash was not required for working capital purposes or the payment of dividends in accordance with the Company's dividend policy up to and including 31 December 2016 subject to the restrictions applicable to the extended Investment Period.
On 13 December 2016 the Company announced its intention to cease making any further investments with immediate effect and that, from 1 January 2017, it will commence the Realisation Period, which will involve the return of unencumbered cash balances to Shareholders. It is anticipated that such encumbered cash balances will arise predominantly as a result of investments maturing in accordance with their terms. Apart from cessation of new investments, no change to the Company's investment policy is proposed.
The precise mechanism for any return of cash to Shareholders will depend upon the relevant factors prevailing at the time and will be at the discretion of the Board, but may include a combination of capital distributions, share repurchases and redemptions. The amount and frequency of such distributions will be at the Company's absolute discretion.
Notes to the Financial Statements (continued)
1. General information (continued)
Investment policy
The Company seeks to invest in a diversified portfolio of bank capital solutions transactions, entered into primarily with UK and European banks. The focus of the Portfolio is in newly issued transactions ("Primary Transactions") referenced to credit exposure although transactions have been acquired in the secondary market ("Secondary Transactions") where the Investment Adviser identified attractive opportunities.
As of 30 September 2016, the Portfolio reflects the anticipated target portfolio, with the Company 91% invested in thirteen positions including ten Primary Transactions and three Secondary Transactions, with a significant representation of corporate and SME loans. The Investment Manager's report on page 10 provides an analysis of the Portfolio, by asset class, geography and country.
The Company invests its assets with the aim of spreading investment risk.
No more than 20% of the NAV, calculated at the time of investment, will be exposed to any one Bank Counterparty. Such exposure is calculated on a net basis, taking into account effective credit hedging arrangements entered into by the Company in relation to the relevant Bank Counterparty. This limit increases to 25% net exposure to any one Bank Counterparty where, in the Board's opinion, the relevant Investment Instrument is expected to amortise such that, within one year of investment, the expected capital balance outstanding is less than 20% of NAV, calculated at the time of investment.
Where credit hedging arrangements are used in order to comply with these limits, the hedges are maintained such that the net exposure to the Bank Counterparty is no more than 20% of the NAV as at the date that any relevant credit hedging contract matures or is adjusted or rolled over. For the avoidance of doubt, cash pending investment or held on deposit under the terms of an Investment Instrument is held without limit with a financial institution with short term credit ratings of A-2 (Standard & Poor's) or P-2 (Moody's) or better.
The Company invests in a variety of instruments to gain exposure to bank capital solutions transactions, including (but not limited to) debt instruments and synthetic securities ("Investment Instruments").
The Portfolio will have a weighted average expected maturity of no more than 5 years at the end of its Investment Period while each Investment Instrument in the Portfolio will have an expected maturity of no more than eight years. The Company only invests in an Investment Instrument which has a contractual maturity in excess of eight years provided: (i) the Advisers' assessment of such Investment Instrument's expected maturity is less than eight years; (ii) the Board approves such assessment; and (iii) the Portfolio's weighted average expected maturity continues to be less than 5 years from the end of its investment following such investment. The expected maturity of the Portfolio (or an Investment Instrument) is the number of years until the capital invested in the Portfolio (or such Investment Instrument) is expected to be repaid.
On reviewing the portfolio of assets of the Company, the Directors expect that the current portfolio will be substantially realised (assuming no assets are sold or otherwise disposed of) by the end of 2020.
During the Realisation Period, no further investments will be made.
Borrowing and gearing policy
The Company does not intend to use borrowings for investment purposes. However, borrowings may be used from time to time for the purpose of short term bridging, financing repurchases of Shares or managing working capital requirements, including hedging facilities. In this regard, the Company will limit its borrowing from time to time to an amount, which, when aggregated with all outstanding borrowings, would be equivalent to a maximum of 20% of its NAV, at the time of drawdown.
The Board will oversee the level of gearing in the Company, and will review the position with the Advisers on a regular basis.
Hedging and derivatives
The types of securities in which the Company invests may be sensitive to changes in interest rates and, to the extent not Sterling denominated, changes in foreign exchange rates.
Notes to the Financial Statements (continued)
1. General information (continued)
Hedging and derivatives (continued)
The Company may implement hedging and derivative strategies designed to protect investment performance against material movements in exchange rates and interest rates and to protect against credit risk. Such strategies may include (but are not limited to) options, forwards and futures and interest rate or 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 to the investment objective and investment policy.
Investment Instruments may be structured as synthetic securities by means of a credit default swap, or other derivative or risk transfer transaction, entered into between a Bank Counterparty and the Company. Such transactions would typically be fully collateralised, by means of the Company placing a cash deposit or equivalent (including, but not limited to, money market funds and/or investment grade instruments) in an account. The Company will not acquire Investment Instruments where it could lose more than the amount invested.
The Company will use derivative strategies for efficient portfolio management and may also have exposure where an Investment Instrument is structured as a synthetic security as described above. Derivatives will not be used for speculative purposes. There can be no certainty as to the efficacy of any hedging transactions.
In the event of a breach of the investment policy set out above, the Investment Manager shall inform the Directors upon becoming aware of the same and if the Directors consider the breach to be material, notification will be made to a Regulatory Information Service.
No material change will be made to the investment policy without the approval of Shareholders by ordinary resolution.
Cash uses and cash management activities
In accordance with the Realisation Period, the Company's principal use of unencumbered cash will be to return it to Shareholders. Cash will also be retained for working capital purposes (including, in particular, a cash reserve for meeting any required margin calls on derivative positions), for the payment of dividends in accordance with the Company's dividend policy and for settling transactions contractually agreed before 31 December 2016.
Cash held by the Company pending distribution or for working capital purposes will be held in either cash or cash equivalents, including but not limited to money market instruments or funds, bonds, commercial paper or other debt obligations with banks or other counterparties having an investment grade credit rating (as determined by any reputable rating agency selected by the Company).
The Company's objectives when managing capital are to safeguard the Company's ability to continue as a going concern to provide returns to Shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. To maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to Shareholders, return capital to shareholders, issue new shares or sell assets.
2. Summary of significant accounting policies
The principal accounting policies applied in the preparation of these financial statements are set out below.
2.1. Basis of preparation
The Audited Annual Financial Statements for the year ended 30 September 2016 have been prepared in accordance with IFRS as adopted by the European Union, the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority and applicable legal and regulatory requirements of the Law.
The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities held at fair value through profit or loss.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires the Board of Directors to exercise its judgement in the process of applying the Company's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 3.
Notes to the Financial Statements (continued)
2. Summary of significant accounting policies (continued) 2.1 Basis of preparation (continued)
The Directors believe that it is appropriate to adopt the going concern basis in preparing the financial statements. In reaching their view, the Directors have considered that from 1 January 2017 the Realisation Period will commence as explained in Note 1 to these financial statements. The Directors have further considered the Company's holding in cash and cash equivalents and the distribution features of the Company's income generating investments, meaning the Company has adequate financial resources to meet its liabilities as they fall due over a period of at least twelve months from the date of approval of the financial statements.
New standards and interpretations not yet adopted
The Company has not applied the following new and revised IFRS that have been issued but are not yet effective in these financial statements:
-- IFRS 9 Financial Instruments ("IFRS 9")
The International Accounting Standards Board (IASB) has published the final version of IFRS 9 bringing together the classification and measurement, impairment (including the expected loss model for financial assets) and hedge accounting phases of the IASB's project to replace IAS 39 'Financial Instruments: Recognition and Measurement'. IFRS 9 is effective for periods beginning on or after 1 January 2018.
The Company will be required to apply the new classification and measurement model for financial assets. This will include both assessing the business model objective of the Company in holding financial assets for the collection of contractual cash flows and sales of such assets; and assessing whether the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the contractual amount outstanding. Depending on the analysis, the Company may be required to measure its investments in accordance with the new provisions of IFRS 9 under Fair Value through Other Comprehensive Income. In such circumstances the Company would be required to apply the impairment provisions of the new expected loss model. Whilst the Directors have not completed the analysis of the impact, the presence of leverage in the financial assets held by the Company is currently expected to result in the continued classification of financial assets as Fair Value through Profit and Loss with no change to the measurement basis applied.
-- IFRS 15 Revenue from contracts with customers ("IFRS 15")
IFRS 15 establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers.
IFRS 15 is effective for annual periods beginning on or after 1 January 2018 with early adoption permitted.
2.2 Financial assets and financial liabilities at fair value through profit or loss
(a) Classification
The Company classifies its investments in bank capital solutions transactions and derivatives as financial assets or financial liabilities at fair value through profit or loss. These financial assets and financial liabilities are classified as held for trading or designated by the Board of Directors at fair value through profit or loss at inception.
Financial assets or financial liabilities held for trading are those acquired or incurred principally for the purposes of selling or repurchasing in the short term. Derivatives are also categorised as financial assets or financial liabilities held for trading. The Company does not classify any derivatives as hedges in a hedging relationship.
Financial assets and financial liabilities designated at fair value through profit or loss at inception are those that are managed and their performance evaluated on a fair value basis in accordance with the Company's documented investment strategy. The Company's policy is for the Investment Manager and the Board of Directors to evaluate the information about these financial assets on a fair value basis together with other related financial information.
Notes to the Financial Statements (continued)
2. Summary of significant accounting policies (continued)
2.2 Financial assets and financial liabilities at fair value through profit or loss (continued)
(b) Recognition/derecognition
Regular-way purchases and sales of investments are recognised on the trade date - the date on which the Company commits to purchase or sell the investment. Investments are derecognised when the rights to receive cash flows from the investments have expired or the Company has transferred substantially all risks and rewards of ownership.
Regulatory capital transactions may be structured in a variety of ways and are highly bespoke to the needs of the bank involved and the investors in the transaction. In all situations, the amount of interest and principal payable on the instrument will be linked to the credit performance of the underlying collateral. The investment characteristics of regulatory capital transactions are such that principal payments are made more frequently than traditional debt securities. The principal may be repaid at any time because the underlying debt or other assets generally may be repaid at any time.
(c) Measurement
Financial assets and financial liabilities at fair value through profit or loss are initially recognised at fair value. Transaction costs are expensed in the Statement of Comprehensive Income. Subsequent to initial recognition, all financial assets and financial liabilities at fair value through profit or loss are measured at fair value. Gains and losses arising from changes in the fair value of the 'financial assets or financial liabilities at fair value through profit or loss' category are presented in the Statement of Comprehensive Income in the period in which they arise. The net gain on financial assets and financial liabilities held at fair value through profit or loss consists of coupons and interest received and both realised and unrealised gains and losses on financial assets and financial liabilities at fair value through profit or loss, calculated as described in note 7. For the purposes of the statement of cash flows, the coupon income is considered an operating activity.
(d) Fair value estimation
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of financial assets and liabilities traded in active markets (such as publicly traded derivatives and trading securities) are based on quoted market prices at the close of trading on the reporting date. The Company adopted IFRS 13 and this standard requires the Company to use an exit price (a traded market price or mid-price) for both financial assets and financial liabilities where such price falls within the bid-ask spread. In circumstances where the exit price is not within the bid-ask spread, management will determine the point within the bid-ask spread that is most representative of fair value.
If a significant movement in fair value occurs subsequent to the close of trading up to midnight on the period end date, valuation techniques will be applied to determine the fair value. A significant event is any event that occurs after the last market price for a security, close of market or close of the foreign exchange, but before the Company's valuation time that materially affects the integrity of the closing prices for any security, instrument, currency or securities affected by that event so that they cannot be considered 'readily available' market quotations. Where broker quotes are not available, investment valuations are based on the Investment Adviser's internal models.
The fair value of financial assets and liabilities at fair value through profit or loss is measured through a combination of dedicated price feeds from recognised valuation vendors and the application of relevant broker quotations where the broker is a recognised market maker in the respective position.
The fair value of financial assets and liabilities that are not traded in an active market (for example, over-the-counter derivatives) is determined using counterparty valuations for regulatory capital transactions or Markit for credit derivatives instruments. In the opinion of the Directors Markit is the benchmark for Credit Default Swap ("CDS") pricing data. Markit receives data from the official books of market makers, and then subjects it to a rigorous testing process.
(e) Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
2.3 Due from and to brokers
Amounts due from and to brokers represents receivables for securities sold and payables for securities purchased that have been contracted for but not yet settled or delivered on the statement of financial position date, respectively as well as collateral posted to derivatives counterparts.
Notes to the Financial Statements (continued)
2. Summary of significant accounting policies (continued) 2.4 Interest income
For primary and secondary transactions, interest income is recognised in the Statement of Comprehensive Income in net gain on financial assets and financial liabilities held at fair value through profit or loss. Income receivable on cash and cash equivalents is recognised separately through profit or loss in the Statement of Comprehensive Income.
2.5 Cash and cash equivalents
Cash and cash equivalents represents cash in-hand, demand deposits, other short-term highly liquid investments with original maturities of three months or less and bank overdrafts.
2.6 Share Capital
Shares are classified as equity. Incremental costs directly attributable to the issue of Shares are shown in equity as a deduction, net of tax, from the proceeds.
2.7 Foreign currency (a) Functional and presentation currency
The functional and presentation currency of the Company is GBP (GBP). The performance of the Company is measured and reported to the investors in GBP.
(b) Foreign currency translation
Foreign currency transactions are translated into the functional currency of the Company 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 the year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income. Translation differences on non-monetary financial assets and liabilities at fair value through profit or loss are recognised in the Statement of Comprehensive Income within the fair value net gain or loss.
(c) Exchange rates
The foreign currency exchange rates at 30 September 2016 were as follows: EUR 0.8651, USD 0.7698, CHF 0.7941 (30 September 2015: EUR 0.7369, USD 0.6602, CHF 0.6756)
2.8 Transaction costs
Transaction costs on financial assets at fair value through profit or loss include fees and commissions paid to agents, advisers, brokers and dealers. Transaction costs, when incurred, are immediately recognised in the Statement of Comprehensive Income.
2.9 Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board. The Directors are of the opinion that the Company is engaged in a single segment of business, being investments in bank capital solutions transactions. The Directors manage the business in this way.
2.10 Accrued expenses
Expenses are accounted for on an accruals basis.
2.11 Other receivables and prepayments
Other receivables are amounts due in the ordinary course of business. Other receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment.
2.12 Dividend distribution
Dividend distribution to the Company's Shareholders is recognised as a liability in the Company's financial statements and disclosed in the Statement of Changes in Equity in the period in which the dividends are approved by the Board.
Notes to the Financial Statements (continued)
2. Summary of significant accounting policies (continued)
2.13 Taxation
The Company is exempt from Guernsey taxation on income derived outside of Guernsey and bank interest earned in Guernsey. A fixed annual fee of GBP1,200 is payable to the States of Guernsey in respect of this exemption. No charge to Guernsey taxation arises on capital gains.
3. Critical accounting judgements and key sources of estimation uncertainty
The preparation of the Company's Financial Statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and the accompanying disclosures. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.
3.1 Key sources of estimation uncertainty
Fair value of financial instruments
The assets held by the Company are mostly valued through a combination of dedicated price feeds from recognised valuation vendors and the application of relevant broker quotations where the broker is a recognised market maker in the respective position and where there are not readily available, internal valuations are used.
A documented valuation policy determines the hierarchy of prices to be applied to the fair value. Prices are sourced from third party broker or dealer quotes for the relevant security. Where no third party price is available, or where the Investment Manager determines that the third party quote is not an accurate representation of the fair value, the Investment Manager will determine the valuation based on the valuation policy. This may include the use of a comparable arm's length transaction, reference to other securities that are substantially the same, discounted cash flow analysis and other valuation techniques commonly used by market participants making the maximum use of market inputs and relying as little as possible on entity-specific inputs.
The monthly NAV is derived from the Company's valuation policy. In particular, fair values of credit default swaps are determined with the independent pricing by Markit, which is the benchmark of the industry for CDS pricing data. Markit receives data from the official books of market-makers and then subjects it to a rigorous testing and consistency process to provide closing prices, from which are derived the reported fair values of the financial instruments held by the Company.
During the year, the Company made three primary transactions, two of which are held at year end. Based on the hierarchy set out in IFRS 13, one secondary and one primary transactions are classified as Level 2 based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs. The remaining transactions have been classified as Level 3 where broker quotes are unavailable or discounted, or cannot be substantiated by market transactions or where the prices used are derived from internal models. The Directors monitor the availability of observable inputs and if necessary, reclassify to Level 3 where observable trading is not available.
Note 7 outlines the Level 3 classifications and the analysis of the impacts of Level 3 investments on the performance of the Company.
3.2 Critical judgements in applying accounting policies
Functional currency
The Board of Directors considers GBP (GBP) as the currency that most fairly represents the economic effect of the underlying transactions, events and conditions. The performance of the Company is measured and reported to the investors in GBP.
Valuation and classification of investments
The Board of Directors consider the valuation of investments and the classification of these investments in the fair value hierarchy as the critical judgements. The fair value of investments is described in 3.1 above and the judgements associated with the disclosures in the fair value hierarchy are described in note 7.
Notes to the Financial Statements (continued)
4. Related Parties
(a) Directors' Remuneration & Expenses
The Directors of the Company are remunerated for their services at such a rate as the Directors determine. The fee for Mr. Mouchotte is GBP37,500. The fee for Mr. Stokes as Chairman of the Audit Committee is GBP40,000 per annum. The fee for Mr. King as Chairman is GBP40,000 per annum.
During the year ended 30 September 2016, directors fees of GBP113,388 (2015: GBP110,130) were charged to the Company, of which none (2015: GBP3,982) remained payable at the end of the year.
(b) Shares held by related parties
As at 30 September 2016, the Directors held the following interests: Mr King 30,000 Shares, Mr Stokes 40,000 Shares and Mr Mouchotte 5,000 Shares in the Company.
As at 30 September 2016, neither the Investment Manager nor partners and employees of the Investment Manager or the Investment Adviser held any of the Issued Share Capital. Chenavari Investment Managers Holdings, which is the holding Company of the Investment Manager and the Investment Adviser held 1,310,000 shares of the Company (approximately 1% of the shares of the Company)
(c) Investment Manager and AIFM
The Company receives investment management services from the Investment Manager, a limited company (Société à Responsabilité Limitée de Droit Luxembourgeois) incorporated in Luxembourg. Under the terms of the investment management agreement dated 23 September 2013 as novated on 22 July 2014 the Investment Manager receives in return a fee of one-twelfth of 1% on the NAV, payable monthly in arrears. The Investment Manager has appointed the Investment Adviser, to provide investment advisory services to the Investment Manager. The Investment Manager is responsible for paying the Investment Adviser. The Investment Management Agreement is terminable by either the Investment Manager or the Company giving to the other not less than 12 months' written notice, such notice not to be served before the fourth anniversary of Admission.
Total management fees for the year amounted to GBP1,230,093 for Chenavari Investment Managers (Luxembourg) SARL (30 September 2015 the equivalent was GBP1,282,996 for Chenavari Investment Managers (Guernsey) Ltd and GBP213,164 for Chenavari Investment Managers (Luxembourg) SARL) with GBP100,494 (2015: GBP107,192) in outstanding accrued fees at the year end.
The Investment Manager is also entitled to receive from the Company a performance fee equal to 20% of realised returns (i.e. dividends and capital repayments/returns) to Shareholders, subject to a hurdle of 7.5% per annum with a catch up. The catch-up operates such that a performance fee shall not become payable until the Company has distributed to Shareholders an amount equal to the Gross Issue Proceeds as increased by a hurdle rate of 7.5% per annum (the "Hurdle"). Thereafter, amounts available for distribution in excess of the Hurdle shall be distributed by the Company as to 50% to Shareholders and paid as to 50% to the Investment Manager until the Investment Manager has received 20% of all amounts in excess of the Gross Issue Proceeds. Thereafter, all further amounts available for distribution by the Company shall be distributed as to 80% to Shareholders and paid as to 20% by way of payment of the performance fee to the Investment Manager.
As of 30 September 2016, no performance fee was accrued according to those principles.
The Company has funded investments with a value of GBP43,941,503 via Convertible Preferred Equity Certificates and/or occasionally beneficiary shares issued by legally segregated compartments of AREO SARL ("Areo"), a company incorporated in Luxembourg under the Securitization Law of 2004. Areo is owned by the Chenavari group and Chenavari funds and is managed by a Board of Directors composed of a majority of independent directors that consider investment opportunities sourced by the Investment Adviser. The Company is currently invested in seven compartments of Areo, and which it fair values in accordance with IFRS 13 as set out in the Company's accounting policies. The Investment Manager and Investment Adviser receive no fees from Areo in relation to these transactions.
Notes to the Financial Statements (continued)
5. Material Agreements (a) Corporate broker
Fidante Partners Europe Limited, trading as Fidante Capital, (formerly Dexion Capital plc) receives a retainer for their corporate broking services of GBP75,000 per annum, payable semi-annually in arrears.
(b) Administration fee
Morgan Sharpe Administration Limited (the "Administrator") serves as the Company's administrator and secretary. The Administrator is entitled to a fee of GBP52,000 per annum. All fees are payable quarterly in advance. Administration fees for the year amounted to GBP52,000 (2015: GBP52,000).
(c) Sub-administration fee
The Administrator has appointed Quintillion Limited (the "Sub-Administrator") as the Company's sub-administrator.
The Sub-Administrator is entitled to receive an annual asset-based fee from the Company of up to 0.085% per annum of NAV, excluding certain expenses. Sub-administration fees for the year amounted to GBP82,384 (2015: GBP93,102) of which GBP7,073 (2015: GBP14,681) remained payable at the end of the year.
(d) Custodian fee
JPMorgan Chase Bank N.A has been appointed to act as custodian to the Company and to provide custodial, settlement and other associated services to the Company. Under the provisions of the custodian agreement dated 5 September 2013 the Custodian is entitled to a safekeeping and administration fee on each transaction calculated using a basis point fee charge based on the country of settlement and the value of the assets together with various other payment/wire charges on outgoing payments, subject to an aggregate minimum fee of GBP31,500 per annum.
(e) Investment Manager
Contractual arrangements relating to the Investment Manager are detailed in note 4.
6. Financial risk management
The responsibility for financial risk management lies with the Board of the Company but it has delegated the day to day monitoring of this to the Investment Manager.
The Investment Adviser will be responsible for sourcing potential investments. Recommended investments will be presented to the Investment Manager for its approval. The Investment Manager will not be required to, and generally will not, submit decisions concerning the discretionary or ongoing management of the Company's assets for the approval of the Board, except where such approval relates to an application of the investment guidelines or a conflict of interest. Any investment recommended by the Investment Adviser which the Investment Manager rejects will however, be promptly notified to the Board.
6.1 Credit risk
The main concentration of credit risk to which the Company is exposed arises from the Company's investments in Regulatory Capital Transactions.
The Company mitigates its credit risk on Regulatory Capital transactions through extensive due diligence before investment.
To the extent that the Portfolio is exposed to underlying concentrations in any one geographical region, borrower sector or credit or asset type, an economic downturn relating generally to such geographical region, borrower type or credit or asset type may result in an increase in underlying defaults or prepayments within a short time period. This could reduce the Company's income (and thus the ability to pay dividends to Shareholders), the NAV and the value of the Shares. The Portfolio is expected to carry leveraged exposure and an increase in credit losses with respect to any or all Collateral could reduce the Company's income (and thus the ability to pay dividends to Shareholders), the NAV and the value of the Shares.
Notes to the Financial Statements (continued)
6. Financial risk management (continued)
6.1 Credit risk (continued)
No more than 20% of the NAV, calculated at the time of investment, will be exposed to any one Bank Counterparty. Such exposure will be calculated on a net basis, taking into account effective credit hedging arrangements entered into by the Company in relation to the relevant Bank Counterparty. This limit shall increase to 25% net exposure to any one Bank Counterparty where, in the Board's opinion, the relevant Investment Instrument is expected to amortise such that, within one year of investment, the expected capital balance outstanding is less than 20% of NAV, calculated at the time of investment.
As of 30 September 2016, the Company had no exposure above the 20% limit.
Where credit hedging arrangements are used in order to comply with these limits, the hedges will be maintained such that the net exposure to the Bank Counterparty is no more than 20% of the NAV as at the date that any relevant credit hedging contract matures or is adjusted or rolled over.
For the avoidance of doubt, cash pending investment or held on deposit under the terms of an Investment Instrument may be held without limit with a financial institution with short term credit ratings of A-2 (Standard & Poor's) or P-2 (Moody's) or better.
The Company manages the portfolio with appropriate diversification in terms of sectors and geographical breakdowns. As of 30 September 2016 and 30 September 2015, the breakdown of the NAV per asset class and geography was as follows:
30 September 30 September
Asset class breakdown 2016 2015
% NAV % NAV
Mortgages 8.87% 10.57%
Corporate loans 31.16% 29.01%
SME loans 47.39% 52.32%
Trade Finance loans - 0.32%
Cash, Hedges and Accruals 12.58% 7.78%
------------- -------------
Total 100.00% 100.00%
============= =============
30 September 30 September
Geographic breakdown 2016 2015
% NAV % NAV
U.K. 19.50% 20.91%
France 2.07% 1.58%
Germany 10.55% 9.44%
Ireland - 0.50%
Italy 9.41% 7.86%
Netherlands 1.55% 1.52%
Portugal 13.31% 18.96%
Spain 15.24% 13.07%
Switzerland 3.66% 7.26%
USA 7.84% 7.00%
Luxembourg 0.42% 0.54%
Belgium - 0.24%
Finland 0.58% -
China 0.22% -
Japan 0.16% -
Australia 0.44% -
Canada 0.24% -
Denmark 0.25% -
Others 1.98% 3.34%
Cash, Hedges and Accruals 12.58% 7.78%
------------- -------------
Total 100.00% 100.00%
============= =============
Notes to the Financial Statements (continued)
6. Financial risk management (continued) 6.1 Credit risk (continued)
The Company is also exposed to counterparty credit risk on forwards, cash and cash equivalents, amounts due from brokers and other receivable balances, as shown in the following table:
Bank of
30 September 2016 America Citigroup JP Morgan* Total
S&P Rating A-2 A-2 A-2
GBP GBP GBP GBP
Cash and cash equivalents - - 11,553,424 11,553,424
Due from broker 5,669,137 - 426,129 6,095,266
Credit default swaps 223,318 375,649 - 598,967
Forward FX contracts (2,037,756) - - (2,037,756)
Total counterparty
exposure 3,854,699 375,649 11,979,553 16,209,901
------------ ---------- ----------- ------------
Net asset exposure
% 3.14% 0.31% 9.75% 13.20%
Bank of
30 September 2015 America Citigroup JP Morgan* Total
S&P Rating A-2 A-2 A-2
GBP GBP GBP GBP
Cash and cash equivalents - - 4,360,121 4,360,121
Due from broker 3,652,408 105,107 3,304,588 7,062,103
Credit default swaps 67,144 (9,407) - 57,737
Forward FX contracts (700,840) - - (700,840)
Total counterparty
exposure 3,018,712 95,700 7,664,709 10,779,121
------------ ---------- ----------- ------------
Net asset exposure
% 2.33% 0.07% 5.92% 8.32%
* JP Morgan cash and cash equivalents represents cash held in a custodian account.
Offsetting Financial Assets and Financial Liabilities
The Company enters into transactions with a number of counterparties whereby the resulting financial instrument is subject to an enforceable master netting arrangement or similar agreement, such as an International Swaps and Derivatives Association ("ISDA") Master Agreement (a "Master Netting Agreement"). Such Master Netting Agreements may allow for net settlement of certain open contracts where the Company and the respective counterparty both elect to settle on a net basis. In the absence of such an election, contracts will be settled on a gross basis. All Master Netting Agreements allow for net settlement at the option of the non-defaulting party in an event of default, such as failure to make payment when due or bankruptcy.
The Company receives and provides cash collateral in respect of derivative transactions subject to the standard industry terms of ISDA's Credit Support Annex.
None of the financial assets and financial liabilities are offset in the Statement of Financial Position, as the Master Netting Agreements create a right of set-off of recognized amounts that is enforceable only following an event of default, insolvency or bankruptcy of the Company or counterparties. In addition, the Company and its counterparties do not intend to settle on a net basis or to realise the assets and settle the liabilities simultaneously.
6.2 Foreign currency risk
Foreign currency risk is the risk of gain or loss resulting from exposure to movements on exchange rates on investments priced in currencies other than the base currency of the Company. The Company does not actively take risk in foreign currency, but incurs it as a normal course of business and employs a series of economic hedges to minimise these risks.
The currency exposure as at 30 September 2016 is as follows:
NAV impact
for a
Other 30 September 30 September +/-10%
net 2016 Total 2016 Total FX rate
Currency Investments FX Hedges Cash assets exposure exposure move
GBP GBP GBP GBP GBP % %
CHF 4,008,443 (4,080,061) 116,729 - 45,111 0.04% 0.00%
EUR 57,900,296 (58,351,031) 1,826,765 (9,127) 1,366,903 1.11% 0.11%
USD 24,855,004 (24,838,363) 54,685 4,003 75,329 0.06% 0.01%
------------ ------------- ---------- -------- ------------- ------------- -----------
86,763,743 (87,269,455) 1,998,179 (5,124) 1,487,343 1.21% 0.12%
------------ ------------- ---------- -------- ------------- ------------- -----------
Notes to the Financial Statements (continued)
6. Financial risk management (continued) 6.2 Foreign currency risk (continued)
The currency exposure as at 30 September 2015 is as follows:
NAV impact
for a
Other 30 September 30 September +/-10%
net 2015 Total 2015 Total FX rate
Currency Investments FX Hedges Cash assets exposure exposure move
GBP GBP GBP GBP GBP % %
CHF 8,992,021 (9,803,512) 861,736 - 50,245 0.04% 0.00%
EUR 65,580,378 (66,550,109) (286,739) 1,752,755 496,285 0.38% 0.04%
USD 20,432,512 (21,605,899) 1,073,578 - (99,809) (0.08%) (0.01%)
------------ ------------- ---------- ---------- ------------- ------------- -----------
95,004,911 (97,959,520) 1,648,575 1,752,755 446,721 0.34% 0.03%
------------ ------------- ---------- ---------- ------------- ------------- -----------
6.3 Interest rate risk
Interest rate risk is the risk of gain or loss resulting from exposure to movements on interest rates. The Company only holds floating rate financial instruments which have little exposure to fair value interest rate risk as, when the short term interest rates increase, the interest on a floating rate note will increase. The value of assed backed securities may be affected by interest rate movements. Interest receivable on bank deposits or payable on bank overdraft positions will be affected by fluctuations on interest rates; however the underlying cash positions will not be affected.
The Company's continuing position in relation to interest rate risk is monitored by the Investment Manager.
30 September 2016
Floating
Fixed rate rate Non-interest
interest interest Bearing
GBP GBP GBP
Financial assets at fair
value through profit or
loss 17,297,258 90,673,844 -
Cash and cash equivalents - 11,538,313 -
Due from broker - 5,669,137 426,129
Other receivables and prepayments - - 75,347
Financial liabilities at
fair value through profit
or loss - - (2,037,756)
Due to broker - (186,475) (430,604)
Accrued expenses - - (202,206)
----------- ------------ -------------
17,297,258 107,694,819 (2,169,090)
----------- ------------ -------------
30 September 2015
Floating
Fixed rate rate Non-interest
interest interest Bearing
GBP GBP GBP
Financial assets at fair
value through profit or
loss 21,381,027 98,498,295 -
Cash and cash equivalents - 4,360,121 -
Due from broker - 4,857,985 2,204,118
Other receivables and prepayments - - 11,834
Financial liabilities at
fair value through profit
or loss (370,808) - (700,840)
Due to broker - - (451,364)
Accrued expenses - - (259,771)
----------- ------------ -------------
21,010,219 107,716,401 803,977
----------- ------------ -------------
6.4 Liquidity risk
A proportion of the Company's statement of financial position is made up of assets and liabilities which may not be realisable as cash on demand. As a result an exposure to liquidity risk exists. This risk is mitigated by the closed-ended nature of the Company and the reinvestment Period and distribution features.
Notes to the Financial Statements (continued)
6. Financial risk management (continued)
6.4 Liquidity risk (continued)
The table below analyses the Company's liabilities into relevant maturity groups based on the remaining period at the statement of financial position date to the contractual maturity date.
30 September 2016
Greater
Less than than 3
3 months months Total
GBP GBP GBP
Financial liabilities at
fair value through profit
or loss (2,037,756) - (2,037,756)
Due to broker (617,079) - (617,079)
Accrued expenses (164,207) (38,000) (202,207)
------------
(2,819,042) (38,000) (2,857,042)
------------ --------- ------------
30 September 2015
Greater
Less than than 3
3 months months Total
GBP GBP GBP
Financial liabilities at
fair value through profit
or loss (700,840) (370,808) (1,071,648)
Due to broker (451,364) - (451,364)
Accrued expenses (251,771) (8,000) (259,771)
-------------
(1,403,975) (378,808) (1,782,783)
------------ ----------- -------------
The Company is all equity funded and has been established as a Registered Closed-ended Collective Investment Scheme. Other than in the circumstances and subject to the conditions set out in Part I of the prospectus, Shareholders will have no right to have their Shares redeemed or repurchased by the Company at any time. Shareholders wishing to realise their investment in the Company will normally therefore be required to dispose of their Shares through the secondary market.
6.5 Price risk
Market price risk arises mainly from uncertainty about future prices of financial instruments and credit ratings of debt issuers in which the Company invests. Market price risk represents the potential loss the Company may suffer through price movements on its investments.
The Company is exposed to market price risk arising from the investments in equity securities, debt and derivatives.
The Investment Manager manages the Company's price risk and monitors its overall market positions on a daily basis in accordance with the Company's investment objective and policies. The Company's overall market positions are monitored on a quarterly basis by the Board of Directors.
As at 30 September 2016, a 5% movement in prices (with all other variables held constant) would have resulted in a change to the total net assets of GBP5,296,667 (2015: GBP5,940,384).
7. Fair value of financial instruments
The fair values of financial assets and liabilities traded in active markets (such as publicly traded derivatives and trading securities) are based on quoted market prices at the close of trading on the year end date. The Company has adopted IFRS 13, 'Fair value measurement' and this standard requires the Company to price its financial assets and liabilities using the price in the bid-ask spread that is most representative of fair value for both financial assets and financial liabilities. If a significant movement in fair value occurs subsequent to the close of trading up to midnight on the year end date, valuation techniques will be applied to determine the fair value. No such event occurred. An active market is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
Notes to the Financial Statements (continued)
7. Fair value of financial instruments (continued)
For financial assets and liabilities not traded in active markets the fair value is determined by using various methods including internal models, alternative price sources including a combination of dedicated price feeds from recognised valuation vendors and the application of relevant broker quotations where the broker is a recognised dealer in the respective position. Where broker quotes are not available, investment valuations are based on the Investment Adviser's internal models.
The hierarchy is broken down into three levels based on the observability of inputs as follows:
Level 1: Quoted price (unadjusted) in an active market for an identical instrument.
Level 2: Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques for which all significant inputs are directly or indirectly observable from market data.
Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument's valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability.
The determination of what constitutes 'observable' requires significant judgement by the Company. The Company considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.
The following tables show the Company's assets and liabilities at 30 September 2016 based on the hierarchy set out in IFRS 13:
Quoted
prices
in active
markets Significant Significant
for identical other observable unobservable
assets inputs inputs
(Level (Level (Level
Assets 1) 2) 3) Total
GBP GBP GBP GBP
Financial assets held
for trading
Debt securities (by
instrument currency)
Europe: Asset
backed securities - - 61,309,771 61,309,771
UK: Asset backed
securities - 6,858,967 14,348,393 21,207,360
US: Asset backed
securities - 13,494,092 11,360,912 24,855,004
OTC Derivatives
Credit default
swaps - 598,967 - 598,967
-------------------------------- ------------------ -------------- ------------
Total
assets - 20,952,026 87,019,076 107,971,102
--------------- ------------------ -------------- ------------
Liabilities
GBP GBP GBP GBP
Financial liabilities
held for trading
OTC Derivatives
Forward FX contracts - (2,037,756) - (2,037,756)
-------------------------------- ------------------ -------------- ------------
Total liabilities - (2,037,756) - (2,037,756)
---------------- ------------------ -------------- ------------
Notes to the Financial Statements (continued)
7. Fair value of financial instruments (continued)
The following tables show the Company's assets and liabilities at 30 September 2015 based on the hierarchy set out in IFRS 13:
Quoted
prices
in active
markets Significant Significant
for identical other observable unobservable
assets inputs inputs
(Level (Level (Level
Assets 1) 2) 3) Total
GBP GBP GBP GBP
Financial assets held
for trading
Debt securities (by
instrument currency)
Europe: Asset
backed securities - 19,622,183 54,892,479 74,514,662
UK: Asset backed
securities - 7,018,368 17,485,235 24,503,603
US: Asset backed
securities - - 20,432,512 20,432,512
OTC Derivatives
Credit default
swaps - 428,545 - 428,545
-------------------------------- ------------------ -------------- ------------
Total
assets - 27,069,096 92,810,226 119,879,322
--------------- ------------------ -------------- ------------
Liabilities
Financial liabilities
held for trading
OTC Derivatives
Credit default
swaps - (370,808) - (370,808)
Forward FX contracts - (700,840) - (700,840)
-------------------------------- ------------------ -------------- ------------
Total liabilities - (1,071,648) - (1,071,648)
---------------- ------------------ -------------- ------------
Financial instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within Level 2. These include corporate bonds, asset backed bonds, certain non-sovereign obligations and over-the-counter derivatives. As Level 3 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information.
Investments classified within Level 3 have significant unobservable inputs, as they trade infrequently.
There has been one transfer from Level 3 to Level 2 during the year. The Company identified through its valuation process that market based observable inputs had become available which required this investment to be reclassified as Level 2 investments. Ten Level 3 investments were held during the Year. There has also been one transfer from Level 2 to Level 3.
30/09/2015 30/09/2016
Transfer
from/to
Product Trade Fair Level Unrealised Fair
type Transaction date value 2 Realised & FX Purchases Sales Redemption value
GBP GBP GBP GBP GBP GBP GBP
BS
CLO 4 26/11/2013 24,554,184 - - (8,203,283) - - - 16,350,901
BS
CLO 5 30/04/2014 9,975,204 - - 1,385,708 - - - 11,360,912
BS
CLO 6 23/05/2014 10,041,342 (13,494,092) - 1,686,206 1,766,544 - - -
ARB
CLO 7 25/11/2013 415,964 - 57,032 43,916 - - (516,912) -
NPL 8 07/10/2014 13,830,073 - 61,844 3,696,148 - (2,144,223) - 15,443,842
NPL 9 24/09/2015 2,947,681 - (1,725) 290,574 - (130,768) - 3,105,762
ARB
CLO 10 09/06/2015 3,792,929 - 371,748 (162,710) - (4,001,967) - -
BS
CLO 11 19/12/2014 6,373,322 - - 794,546 - - - 7,167,868
BS
CLO 12 26/06/2015 3,394,292 - - 481,347 - - - 3,875,639
RMBS 13 18/02/2015 3,721,883 - 874,451 (422,049) - (3,247,511) - 926,774
BS
CLO 14 29/12/2014 13,763,352 - - 236,648 - (14,000,000) - -
BS
CLO 15 11/05/2016 - - - (578,382) 14,000,000 - - 13,421,618
BS
CLO 16 26/05/2016 - - - 566,941 3,441,502 - - 4,008,443
BS
CLO 17 15/07/2016 - 10,438,171 (174,304) 1,093,449 - - - 11,357,316
----------- ------------- ---------- ------------ ----------- ------------- ----------- -----------
92,810,226 (3,055,921) 1,189,046 909,059 19,208,046 (23,524,469) (516,912) 87,019,075
----------- ------------- ---------- ------------ ----------- ------------- ----------- -----------
Notes to the Financial Statements (continued)
7. Fair value of financial instruments (continued)
30/09/2014 30/09/2015
Transfer
to
Product Trade Fair Unrealised Level Fair
type Transaction date value Realised & FX Purchases Sales Redemption 2 value
GBP GBP GBP GBP GBP GBP GBP GBP
ARB
CLO 1 12/09/2014 3,904,693 (307,703) 83,251 - (3,678,331) - (1,910) -
RMBS 2 27/06/2014 7,137,042 (3,287) (92,438) 553,300 (576,250) - (7,018,367) -
ARB
CDO 3 18/10/2013 1,715,108 868,286 (367,069) - (2,216,325) - - -
BS
CLO 4 26/11/2013 34,179,011 - (10,078,840) 454,013 - - - 24,554,184
BS
CLO 5 30/04/2014 9,404,704 - 570,500 - - - - 9,975,204
BS
CLO 6 23/05/2014 9,571,633 - 469,709 - - - - 10,041,342
ARB
CLO 7 25/11/2013 5,050,763 123,302 (41,004) - - (4,717,097) - 415,964
NPL 8 07/10/2014 - (245,249) 90,664 16,959,582 (2,974,924) - - 13,830,073
NPL 9 24/09/2015 - - (8,488) 2,956,169 - - - 2,947,681
ARB
CLO 10 09/06/2015 - - 122,334 3,670,595 - - - 3,792,929
BS
CLO 11 19/12/2014 - - (371,760) 6,745,082 - - - 6,373,322
BS
CLO 12 26/06/2015 - - 207,255 3,187,037 - - - 3,394,292
RMBS 13 18/02/2015 - - 379,855 3,342,028 - - - 3,721,883
BS
CLO 14 29/12/2014 - - (236,648) 14,000,000 - - - 13,763,352
----------- ---------- ------------- ----------- ------------ ------------ ------------ -----------
70,962,954 435,349 (9,272,679) 51,867,806 (9,445,830) (4,717,097) (7,020,277) 92,810,226
----------- ---------- ------------- ----------- ------------ ------------ ------------ -----------
As of 30 September 2016, ten (2015: eleven) investments were categorised within Level 3 of the fair value hierarchy, representing 70.85% (2015: 71.65%) of the NAV.
In order to measure Level 3 assets sensitivities, the Company is using the stress scenario prepared by the Investment Adviser. Those scenario are stressing all main parameters simultaneously and do not represent levels at which a transaction who occur on those investments in normal conditions. Typical parameters stressed are default rates, recovery rates and prepayment rates. The intensity of stress varies across the portfolio and differ according to asset class, sector, vintage and country.
The below sensitivity analysis presents an approximation of the potential effects of events that could have occurred as at the reporting date.
Transaction 4
The main sensitivity of the transaction is to the occurrence of defaults and recovery rates in the underlying reference pool.
In the Investment Adviser's stress case the impact to the Company's NAV is 1.64%.
Transaction 5
The main sensitivity is to extension risk of the deal.
In the Investment Adviser's stress case the impact to the Company's NAV is 1.13%.
Transaction 8
The main sensitivity of the transaction is to the collection level on the pool of loans.
In the Investment Adviser's stress case the impact to the Company's NAV is 1.96%.
Transaction 9
The main sensitivity of the transaction is to the collection level on the pool of loans.
In the Investment Adviser's stress case the impact to the Company's NAV is 0.91%.
Notes to the Financial Statements (continued)
7. Fair value of financial instruments (continued)
Transaction 11
The main sensitivity of the transaction is to the occurrence of defaults and recovery rates in the underlying reference pool.
In the Investment Adviser's stress case the impact to the Company's NAV is 1.31%.
Transaction 12
The main sensitivity of the transaction is to the occurrence of defaults and recovery rates in the underlying reference pool.
In the Investment Adviser's stress case the impact to the Company's NAV is 0.65%.
Transaction 13
The main sensitivity of the transaction is to the exit price for the portfolio.
In the Investment Adviser's stress case the impact to the Company's NAV is 0.28%.
Transaction 15
The main sensitivity of the transaction is to the occurrence of defaults in the underlying reference pool and extension risk.
In the Investment Adviser's stress case the impact to the Company's NAV is 0.72%.
Transaction 16
The main sensitivity of the transaction is to the occurrence of defaults and recovery rates in the underlying reference pool.
In the Investment Adviser's stress case the impact to the Company's NAV is 1.76%.
Transaction 17
The main sensitivity of the transaction is to the occurrence of defaults and recovery rates in the underlying reference pool.
In the Investment Adviser's stress case the impact to the Company's NAV is 1.70%.
8. Earnings per Share - Basic & Diluted
The earnings per Share - Basic and Diluted of 3.80p (2015: 7.31p) has been calculated based on the weighted average number of Shares of 130,300,000 (2015: 130,300,000) and a net gain of GBP4,954,240 (2015: GBP9,522,204).
There were no dilutive elements to Shares issued or repurchased during the Year.
9. NAV per Share
The NAV per Share of 94.26p (2015: 99.41p) is determined by dividing the net assets of the Company attributed to the Shares of GBP122,822,987 (2015: GBP129,530,597) by the number of Shares in issue at 30 September 2016 of 130,300,000 (2015: 130,300,000).
Notes to the Financial Statements (continued)
10. Financial assets and financial liabilities at fair value through profit or loss
30 September 30 September
2016 2015
GBP GBP
Financial assets at fair value
through profit or loss :
Held for trading:
- Debt securities 13,421,618 -
- Asset backed securities 93,950,517 119,450,777
- Credit default swaps 598,967 428,545
------------- -------------
Total financial assets at fair
value through profit or loss 107,971,102 119,879,322
------------- -------------
Financial liabilities at fair
value through profit or loss
:
Held for trading:
- Credit default swaps - (370,808)
- Forwards FX contracts (2,037,756) (700,840)
------------- -------------
Total financial liabilities
at fair value through profit
or loss (2,037,756) (1,071,648)
------------- -------------
11. Net gain/(loss) on financial assets and financial liabilities at fair value through profit or loss, foreign exchange and forward contracts
30 September 30 September
2016 2015
GBP GBP
Net gain/(loss) on financial
assets and liabilities at fair
value through profit or loss
held for trading
- Credit default swaps 322,947 51,581
- Credit default swap options - 79,955
- Debt securities 38,375 755,827
- Asset backed securities 1,761,524 10,690,866
- Loans (16,945) -
Net gain on financial assets
and liabilities at fair value
through profit or loss held
for trading 2,105,901 11,578,229
------------- -------------
Net gain/(loss) on foreign
exchange and forward contracts
Realised (loss)/gain on forward
contracts (14,055,580) 1,622,046
Unrealised loss on forward
contracts (1,336,915) (2,232,270)
Realised gain on foreign exchange 2,971,399 1,731,292
Unrealised gain/(loss) on foreign
exchange 17,000,724 (1,285,077)
Net gain/(loss) on foreign
exchange and forward contracts 4,579,628 (164,009)
------------- -------------
Net gain on financial assets
and liabilities at fair value
through profit or loss, foreign
exchange and forward contracts 6,685,529 11,414,220
------------- -------------
Notes to the Financial Statements (continued)
12. Due from and to brokers
30 September 30 September
2016 2015
Due from GBP GBP
Collateral and funding cash 5,669,137 4,857,985
Receivables for securities
sold 426,129 2,204,118
6,095,266 7,062,103
------------- -------------
30 September 30 September
2016 2015
Due to GBP GBP
Collateral and funding cash 135,045 -
Payable for securities purchased 482,034 451,364
617,079 451,364
------------- -------------
Collateral and funding cash is held in respect of the credit default contracts as detailed in note 6.1
13. Other receivables and prepayments
30 September 30 September
2016 2015
GBP GBP
Prepaid directors' insurance
fee 9,877 9,878
Prepaid listing fees 3,267 1,956
Prepaid other fee 53 -
Interest receivable 62,150 -
75,347 11,834
------------- -------------
14. Accrued expenses
30 September 30 September
2016 2015
GBP GBP
Management fee 100,494 107,192
Audit fee 38,000 48,000
Corporate brokering fee 37,500 37,500
Sub-administration fee 7,073 14,681
Legal fee 10 22,253
Director's fee - 3,982
Custodian fees 2,668 5,175
Other fees 16,461 20,988
202,206 259,771
------------- -------------
Notes to the Financial Statements (continued)
15. Share capital
The authorised share capital of the Company consists of an unlimited number of unclassified shares of no par value. The unclassified shares may be issued as, (a) Shares in such currencies as the Directors may determine; (b) C Shares in such currencies as the Directors may determine; and (c) such other classes of shares in such currencies as the Directors may determine in accordance with the Articles and the Law. Shares will be redeemable at the option of the Company and not Shareholders.
The rights attaching to the Shares are as follows:
(a) As to income - subject to the rights of any Shares which may be issued with special rights or privileges, the Shares of each class carry the right to receive all income of the Company attributable to the Shares, and to participate in any distribution of such income by the Company, pro rata to the relative NAV of each of the classes of Shares and, within each such class, income shall be divided pari passu amongst the holders of Shares of that class in proportion to the number of Shares of such class held by them.
(b) As to capital - on a winding up of the Company or other return of capital (other than by way of a repurchase or redemption of Shares in accordance with the provision of the Articles and the Law), the surplus assets of the Company attributable to the Shares remaining after payment of all creditors shall, subject to the rights of any Shares that may be issued with special rights or privileges, be divided amongst the holders of Shares of each class pro rata to the relative NAV of each of the classes of Shares and, within each such class, such assets shall be divided pari passu amongst the holders of Shares of that class in proportion to the number of Shares of that class held by them.
(c) As to voting - the holders of the Shares shall be entitled to receive notice of and to attend, speak and vote at general meetings of the Company.
The rights attaching to C Shares are as follows:
(a) subject to the rights of any C Shares which may be issued with special rights or privileges, the C Shares of each class carry the right to receive all income of the Company attributable to the C Shares, and to participate in any distribution of such income by the Company, pro rata to the relevant NAV of each of the classes of C Shares and within each such class income shall be divided pari passu amongst the holders of that class in proportion to the number of C Shares of such class held by them;
(b) the Shares of the relevant class into which C Shares of the relevant class shall convert shall rank pari passu with the Existing Shares of the relevant class for dividends and other distributions made or declared by reference to a record date falling after the Calculation Date; and
(c) no dividend or other distribution shall be made or paid by the Company on any of its shares between the Calculation Date and the Conversion Date (both dates inclusive) and no such dividend shall be declared with a record date falling between the Calculation Date and the Conversion Date (both dates inclusive).
There were no share transactions during the Year.
Capital Management
The Company's objectives when managing capital are to safeguard the Company's ability to continue as a going concern to provide returns to Shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. To maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to Shareholders, return capital to shareholders, issue new shares or sell assets.
16. Segmental reporting
The Board is responsible for reviewing the Company's entire portfolio and considers the business to have a single operating segment. The Board's asset allocation decisions are based on a single, integrated investment strategy being investments in bank capital solutions transactions and the Company's performance is evaluated on an overall basis.
The Company invests in a diversified portfolio of bank capital solutions transactions. The fair value of the major financial instruments held by the Company and the equivalent percentages of the total value of the Company, are reported in the Schedule of Investments.
Revenue earned is reported separately on the face of the Statement of Comprehensive Income as investment income being interest income received from bank capital solutions transactions.
Notes to the Financial Statements (continued)
17. Dividend policy
Subject to compliance with the Companies (Guernsey) Law, 2008 (as amended) and the satisfaction of the solvency test, the Company intends to distribute all its income received from investments, net of expenses, by way of dividends on a quarterly basis with dividends declared in October, January, April and July each year and paid in November, February, May and August. The Company declared a dividend of 2p per Share in January 2016 for the period from 1 October 2015 to 31 December 2015, 2p per Share in April 2016 for the period from 1 January 2016 to 31 March 2016, 2p per Share in July 2016 for the period from 1 April 2016 to 31 June 2016 and 1.50p per Share in October 2016 for the period from 1 July 2016 to 30 September 2016. Refer to Note 15 for the rights attached to each share.
Under the Companies (Guernsey) Law, 2008 (as amended), companies can pay dividends in excess of accounting profit provided they satisfy the solvency test prescribed by the Companies Law. The solvency test considers whether a company is able to pay its debts when they fall due, and whether the value of a company's assets is greater than its liabilities.
18. Derivative financial instruments
The Company holds the following derivative instruments:
CDS
These are derivative contracts referencing an underlying credit exposure, which can either be a single credit issuer or a portfolio of credit issuers. The Company pays or receives an interest flow in return for the counterparty accepting or selling all or part of the risk of default or failure to pay of a reference entity on which the swap is written. Where the Company has bought protection the maximum potential payout is the value of the interest flows the Company is contracted to pay until the maturity of the contract. The Company has not entered into any short CDS position during the year.
Forward Foreign Currency contracts
Forward Foreign Currency contracts entered into by the Company represent a firm commitment to buy or sell an underlying currency at a specified value and point in time based upon an agreed or contracted quantity. The realised/unrealised gain or loss is equal to the difference between the value of the contract at trade date and the value of the contract at settlement date/year-end date, and is included in the Statement of Comprehensive Income.
The following table shows the Company's derivative position as at 30 September 2016:
Financial
Financial liabilities
assets at at fair Notional Maturity
fair value value amount
GBP GBP GBP
20 June
CDS Buy Protection 375,649 - 7,785,900 2020
20 September
CDS Buy Protection 96,092 - 3,892,950 2020
20 June
CDS Buy Protection 127,226 - 2,162,750 2021
FX Contracts
14 October
CHF sell - (63,560) (4,016,501) 2016
16 November
EUR sell - (1,454,771) (56,896,260) 2016
GBP buy 14 October
- - 28,335,439 2016
GBP buy 16 November
- - 56,896,260 2016
14 October
USD sell - (519,425) (24,318,938) 2016
598,967 (2,037,756) 13,841,600
------------- ------------- -------------
Notes to the Financial Statements (continued)
18. Derivative financial instruments (continued)
The following table shows the Company's derivative position as at 30 September 2015:
Financial
Financial liabilities
assets at at fair Notional Maturity
fair value value amount
GBP GBP GBP
20 June
CDS Buy Protection - (370,808) 14,001,100 2020
20 September
CDS Sell Protection 67,145 - 3,316,050 2020
20 June
CDS Sell Protection 361,400 - (7,369,000) 2020
FX Contracts
16 October
CHF sell - (105,533) (9,697,979) 2015
16 October
EUR sell - (266,364) (66,283,745) 2015
16 October
USD sell - (328,943) (21,276,955) 2015
GBP buy 16 October
- - 97,258,679 2015
428,545 (1,071,648) 9,948,150
------------- ------------- -------------
19. Significant events during the year
Rob King was appointed as the Chairman of the Board of Directors with effect from 1 November 2015.
On 24 November 2015, the Company announced its intention to seek Shareholder approval for the extension of its Investment Period for up to 12 months to 31 December 2016. At an EGM on 18 December 2015, Shareholders approved the extension. The extended Investment Period would have ceased before 31 December 2016, with immediate effect, if the Company had not declared and paid, by 29 February 2016, a dividend of at least 2p per Share in respect of the three months to 31 December 2015; and declared and paid, by 31 May 2016, a dividend of at least 2p per Share in respect of the three months to 31 March 2016.
On 23 June 2016, the United Kingdom voted in a referendum to leave the European Union. Significant uncertainties exist on the exit process and the consequences of such decision.
Since this decision, markets initially saw extreme volatility in forex and equity, and credit markets moved significantly down. The Company had built up sufficient cash reserves in order to meet margin calls on the FX forwards used to hedge the non-GBP fund assets. Given the high volatility expected in FX the Company has chosen to increase the buffer held against these hedging positions and has prudently monitored cash levels.
The Company has three assets that are linked to the UK economy and which have not felt any negative impact since the vote. The Investment Manager continues to monitor these positions actively but does not expect to see any deterioration in performance over the short term.
20. Subsequent events
Following the year end, the Company announced a dividend of 1.5p per Share for the final period of the Company's financial year which was paid 12 December 2016.
On 13 December 2016, the Company announced its intention to cease making any further investments with immediate effect and that, from 1 January 2017, it will commence the Realisation Period. As explained in Note 1 to these financial statements, amounts required for working capital purposes (including, in particular, a cash reserve for meeting any required margin calls on derivative positions), for the payment of dividends in accordance with the Company's dividend policy and for settling transactions contractually agreed before 31 December 2016, will be excluded from such returns of cash to Shareholders. The Company will not be under any obligation to sell investments before they mature in order to fund returns of cash to Shareholders, but may do so to optimise returns.
Since the Year end, the Company has purchased 106,000 Shares for a total value of GBP89,570. The Shares purchased have been cancelled and the remaining Shares in issue are 130,194,000.
21. Approval of the financial statements
The Audited Financial Statements were approved for issue to Shareholders by the Directors on 20 January 2017.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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January 20, 2017 12:00 ET (17:00 GMT)
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