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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Chenavari Toro Income Fund Limited | LSE:TORO | London | Ordinary Share | GG00BWBSDM98 | EUR SHS NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0.525 | 0.51 | 0.54 | 0.525 | 0.52 | 0.525 | 100,000 | 08:00:26 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Trust,ex Ed,religious,charty | 25.88M | 21.06M | 0.0683 | 6.44 | 135.76M |
From Apr 2019 to Apr 2024
TIDMTORO
RNS Number : 7805U
Toro Limited
23 January 2017
Toro Limited
(a closed-ended investment company limited by shares incorporated under the laws of
Guernsey with registered number 59940)
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 "Portfolio 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 the Toro Limited, the Portfolio 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
Portfolio Manager's Report
Board of Directors
Disclosure of Directorships
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
Statement of Comprehensive Income
Statement of Financial Position
Statement of Changes in Equity
Statement of Cash Flows
Condensed Schedule of Investments
Notes to the Financial Statements
Appendix 1
AIFMD Disclosures (Unaudited)
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 Portfolio 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 Portfolio Manager and the Portfolio 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 Affirmation 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 Chenavari Credit Partners LLP, Commodity Pool Operator of Toro Limited.
20 January 2017
Highlights for the year ended 30 September 2016 (the "Year")
-- During the Year, the Company's net asset value ("NAV") per Ordinary Share ("Share") decreased by 4.10% to close at 97.38 cents net of dividends paid.
-- During the period from 1 October 2015 to 30 September 2016, the Company's NAV total return (dividends reinvested) was 3.27%.
-- Dividends of 6.50 cents per Share were declared with respect to the Year, of which 5.25 cents per Share (and an additional 2 cents per Share relating to the previous financial year) were paid during the Year, with a final dividend of 1.25 cents per Share paid on 1 December 2016.
-- The Company's mid-market share price at 30 September 2016 was 83.5 cents (2015: 98.5 cents), representing a discount to NAV of 14.26% (2015: 2.99%).
-- The profit of the Company for the Year was EUR11.2 million (2015: EUR12.3 million), or 3.09 cents per Share (2015: 3.52 cents per share), taking into account recognition of the following significant items:
o total net income of EUR18.6 million
o total operating expenses of EUR7.1 million.
-- At 30 September 2016, the Net Asset Value was EUR352.0 million, the Company was 91.1% invested and its free cash holdings were EUR24.5 million.
Corporate Summary
For the year ended 30 September 2016
The Company
Toro 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 Company's Ordinary Shares (the "Shares") were admitted to trading on the Specialist Fund Segment ("SFS") of the London Stock Exchange and the Channel Islands Security Exchange Authority Limited ("CISEAL") on 8 May 2015.
Investment objective and policy
The investment objective of the Company is to deliver an absolute return from investing and trading in Asset Backed Securities ("ABS") and other structured credit investments in liquid markets, and investing directly or indirectly in asset backed transactions including, without limitation, through the origination of credit portfolios.
Target returns and dividend policy
On the basis of market conditions as at the date of the prospectus (28 April 2015), and whilst not forming part of its investment objective or investment policy, the Company will target (i) a NAV total return (including dividend payments) of 12 to 15 per cent per annum over three to five years once the Company is fully invested and (ii) a dividend of 5 per cent per annum payable quarterly in March, June, September and December of each year. Relative to this return, dividends of 6.50 cents per Share were declared with respect to the Year.
Asset Values
At 30 September 2016, the Company's NAV was EUR352 million (2015: EUR367 million), with the NAV per share amounting to 97.38 cents (2015: 101.54 cents). 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.
Website
The Company's website address is www.torolimited.gg
Listing Information
The Company's Shares are admitted to trading on the SFS and CISEAL.
The ISIN number of the Euro Shares is GG00BWBSDM98 and the SEDOL is BWBSDM9.
The closing price of the Shares quoted on the SFS at 30 September 2016 was 83.5 cents per Share.
The average closing price of the Shares over the Year was 86.3 cents per Share.
General Information
Hot Features
Premium
Directors Registered Office
Frederic Hervouet (Non-executive
Chairman) Old Bank Chambers
John Whittle (Non-executive
director) La Grande Rue
Roberto Silvotti (Non-executive
director) St Martin's
Guernsey
GY4 6RT
Portfolio Manager AIFM
Chenavari Credit Partners Carne Global AIFM Solutions
LLP (C.I.) Limited
1 Grosvenor Place 8th Floor
London Union House
SW1X 7JH Union Street
St Helier
Jersey
JE2 3RF
Corporate Broker Registrar
Fidante Partners Europe Limited, Capita Registrars (Guernsey)
trading as Fidante Capital Limited
1 Tudor Street Mont Crevelt House
London Bulwer Avenue
EC4Y 0AH St Sampson
Guernsey
GY2 4LH
Solicitors to the Company Advocates to the Company
(as to English law) (as to Guernsey law)
Gowling WLG (UK) LLP Mourant Ozannes
4 More London Riverside 1 Le Marchant Street
London St Peter Port
SE1 2AU Guernsey
GY1 4HP
Administrator and Company Custodian and Principal
Secretary Bankers
Morgan Sharpe Administration J.P. Morgan Chase Bank
Limited N.A
Old Bank Chambers Jersey Branch
La Grande Rue J.P. Morgan House
St Martin's Grenville Street
Guernsey St Helier
GY4 6RT Jersey
JE4 8QH
Sub-Administrator Auditor
Quintillion Limited Deloitte LLP
24-26 City Quay P.O. Box 137
Dublin 2 Regency Court
Ireland Glategny Esplanade
D02 NY19 St. Peter Port
Guernsey
GY1 3HW
Chairman's Statement
Introduction
On behalf of the Board, I am pleased to present my report on the Company's progress for the Year.
Financial Performance
The Company's share price was 83.5 cents as of 30 September 2016, trading then at a discount to NAV of 14.26%.
During the period from 1 October 2015 to 30 September 2016, the Company's NAV total return (dividends reinvested) was 3.27%.
Over the Year the Company generated a profit of EUR11.2 million or a profit of 3.09 cents per Share.
The NAV per share was 97.38 cents at 30 September 2016 (101.54 cents 30 September 2015).
The Company's NAV decreased during the Year by 4.1%, net of dividends paid.
The Board noted the widening of the discount in year. As such, subsequent to the year end, the Board initiated the buy-back policy published in the Prospectus (and further set out in the Report of the Directors on page 15) as per the shareholder circular dated 22 July 2016.
Dividends
During the Year, the Company has declared two dividends of 2 cents each and two dividends of 1.25 each cents. The total dividend declared for the Year is 6.5 cents, to be compared with an annual target of 5 per cent of the Issue Price per Share as set out in the IPO prospectus (equivalent to 5 cents).
Investment Portfolio and 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. Given the high volatility expected in FX the Company has chosen to increase the cash buffer held and has prudently monitored cash levels.
The fund doesn't have any large single deal exposure to the UK and most of the exposure is not direct. The underlying exposure to UK assets is disclosed in the Investment Manager Report. There has been no negative credit migration or price action 3 months after the vote. The Investment Manager continues to monitor these exposures actively but does not expect to see any deterioration in performance over the short term.
Over the course of the Year Toro invested in an originator, Taurus Corporate Financing LLP ("Taurus"), a Guernsey limited liability partnership, in relation to the Originated Transactions Strategy of the Company, via a loan investment of EUR35 million. Taurus agreed to act as the originator for, and will hold risk retention securities in, a CLO for which the collateral manager is Chenavari Investment Managers.
As of 30 September 2016, the Company was 91.1% invested, gross of repurchase agreements with a total negative value of 0.26% of the NAV. For further detail on the investment portfolio and outlook please refer to the Portfolio Manager's report on pages 8 to 12.
Frederic Hervouet
Non-executive Chairman
20 January 2017
Portfolio Manager's Report
Performance
During the Year, the Company made a net profit of EUR11.1 million and distributed dividends of EUR26.2 million (some of which related to the year ended 30 September 2015). Together, these resulted in a decrease in NAV of EUR15.0 million or 4.16 cents per Share.
During the period from 1 October 2015 to 30 September 2016, the Company's NAV total return (dividends reinvested) was 3.27%.
The month-on-month NAV performance since inception was the following (with dividends reinvested at NAV):
Year YTD Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec ------ ------ ------- ------- ------ ------ ------ ------- ------- ------- ------ ------ ------ ------ 2015 4.53% - - - - 2.06% 0.15% 0.45% 0.64% 0.28% 0.02% 0.52% 0.34% 2016 2.36% -0.34% -2.44% 0.69% 0.92% 0.95% -0.04% 0.29% 1.13% 1.23%
Since inception, the Company has paid the following dividends:
Period ending Dividend (cents
per Share)
30 September
2015 2.00
31 December
2015 2.00
31 March
2016 2.00
30 June
2016 1.25
30 September
2016 1.25
In relation to the Year, the Company declared dividends totalling 6.5 cents per Share, to be compared with a twelve-month target of 5 per cent of the issue price (i.e. 5 cents) as per the IPO Prospectus. Dividend payments in the Year totalled 7.25 cents per Share as the dividend for the period ending 30 September 2015 (relating to the previous financial year) was paid in the Year and the dividend for the period ending 30 September 2016 was paid after the end of the Year.
Portfolio breakdown
As of 30 September 2016, the Company was 91.1% invested.
The NAV allocation as of 30 September 2016 was as follows:
30 September 30 September
2016 2015
Asset class breakdown % NAV % NAV
Equity Securities 0.05% 0.07%
Bond 0.69% 0.09%
Arbitrage CDO 18.97% 22.22%
Commercial mortgage-backed
security 3.30% 2.72%
Arbitrage CLO 22.08% 27.65%
Residential mortgage-backed
security 9.98% 19.41%
Balance Sheet CLO 5.31% 2.53%
Consumer ABS 4.74% 3.36%
Senior Loan 0.72% 2.16%
Whole Loan 1.53% 1.63%
Non-performing loan 7.97% -
Preferred equity 5.58% -
Equity 10.18% -
Repo 0.28% (5.07%)
Cash, Hedges and Accruals 8.62% 23.23%
Total 100% 100%
------------- -------------
Portfolio Manager's Report (continued)
Portfolio breakdown (continued)
The geographical breakdown of the underlying assets is as follows:
30 September 30 September
2016 2015
Geographic breakdown % NAV % NAV
European Union 9.66% 7.11%
France 3.09% 2.72%
Germany 7.68% 4.76%
Great Britain 15.14% 25.18%
Ireland 13.57% 2.86%
Italy 3.77% 3.65%
Netherlands 7.48% 7.59%
Portugal 2.62% -
Spain 20.15% 15.43%
U.S.A 4.46% 2.78%
Other 3.64% 4.69%
Cash and collateral 8.74% 23.23%
Total 100.00% 100.00%
------------- -------------
Investment Strategy
Public ABS Strategy: The Company will opportunistically invest or trade in primary and secondary ABS markets to seek out opportunities that aim to unlock significant value from ABS investments that the Portfolio Manager considers to be mispriced by the market relative to their intrinsic value.
Private Asset Backed Finance Strategy: Through the Portfolio Manager, the Company will leverage on the extensive relationships it has with European Banks and retail credit firms in order to gain access and invest in private asset backed finance transactions that are otherwise unlisted and difficult to source.
Direct Origination Strategy: The Company will primarily invest, on a buy-to-hold basis, in Originators of securitisation vehicles by retaining the requisite Retention Securities in such vehicles, pursuant to the relevant risk retention requirements in the EU or the US. This strategy benefits from a liquidity premium and 'alpha' by participating in the origination, as well as enhanced economics on the retained interests, with further added value derived from the team's sourcing and structuring capabilities. Additional investment opportunities may also include providing warehouse credit facilities.
Gearing
The Company may use borrowings from time to time for the purpose of short term bridging, financing Share buy backs, repurchase agreements with market counterparties or managing working capital requirements, including hedging facilities. Cash borrowings can contribute alongside other forms of leverage to increase the level of gearing of the Company. The Company may also use gearing to increase potential returns to Shareholders. In the past, the Portfolio Manager has employed leverage against senior tranches of ABS to enhance their returns, and expects it will continue to do so, where the economic terms offered by counterparties can increase potential returns to Shareholders.
Activity of the Year
The Investment Portfolio started the Year with 65% in Public ABS and 16% in Private Asset Backed Finance strategy, and ended the Year with 61.3% in Public ABS, 13.8% in Private Asset Backed Finance strategy, and 15.8% in Direct Origination strategy.
The Portfolio Manager started the Year actively rebalancing the Company's portfolio, increasing its RMBS exposure, in particular, UK non-conforming RMBS, as the Portfolio Manager believed that the robust macroeconomic backdrop and the recovering housing and collateral market in the periphery, together with attractively priced UK RMBS second pay IG tranches, provided potential accelerated cash flow realisation and appreciation supported by improving technicals.
Portfolio Manager's Report (continued)
Activity of the Year (continued)
However, low liquidity conditions persisted into 2016 on the back of a widespread negative market and political concerns surrounding Europe. As a result, the Portfolio Manager added tail-risk hedges whilst reducing the credit sensitivity of the Investment Portfolio with a view to rebalance it from outperforming sectors into those stressed by weak technicals and take advantage of any potential rising market dislocation. Despite this, the Company experienced several markdowns in January and February as a result of this market volatility. The Portfolio Manager began to advocate the increase of the Company's cash position in order to opportunistically invest should structured credit markets overshoot on the back of a potential forced deleveraging, and of particular importance, in response to the upcoming UK's EU referendum (the "Referendum").
In the lead up to the Referendum, the Portfolio Manager adopted a defensive positioning. The Portfolio Manager increased the Company's cash position via mechanical deleveraging and selective sales, particularly with UK RMBS, building up the cash position to c. 22%. The leverage ratio was further reduced to c. 78%, and the Company adopted a more disciplined approach to its portfolio's credit sensitivity, favouring a more neutral profile. All in all, the Company was able to offset its mark-to-market losses caused by the Referendum outcome. In addition, the Company realised some gains on hedges placed prior to the Referendum on iTraxx XOVER indices.
Following the Referendum, the Company elevated trading activities, with c. EUR107m being traded between July and September, with around 80% of the trading volume concentrated on European CLOs, as primary CLO BB and B-rated tranches appeared especially attractive. The neutral credit sensitivity positioning remained until year-end due to the uncertain outlook for Europe and the approaching US presidential election, and the portfolio was rebalanced towards high coupon tranches across sectors, from UK RMBS to Dutch consumer loans ABS, as both prepayment and interest rates were anticipated to fall lower.
In addition, Toro European CLO 2 was priced in August, where the deal was upsized by EUR50m due to oversubscription. Toro retained, through its Originator subsidiary, 55.6% of the equity, entitling it to a 100% rebate of the pro-rata management fees, and as a result of this and a further new direct origination transaction in Spain (funded by the sales proceeds from a secondary ABS), Toro Limited held c. 15.8% in the Direct Origination strategy at year-end. For further information regarding the investment outlook and pipeline, as well as further information on the portfolio composition as of 30 September 2016, please refer to both the preceding and proceeding sections
Investment Outlook
As we turn the page on what has been a highly surprising political year, fundamentals in Europe have changed little over the period. The better growth outlook at the end of 2016 is at risk from rising political uncertainty across the continent. Spain and Ireland should continue to outperform other peripheral countries, translating into fewer non-performing loans on banks' balance sheets and higher recoveries in these jurisdictions. Nonetheless, Brexit could still impact the UK and Irish economic models, a minority government in Spain remains fragile, while Italy is facing yet another period of heightened political uncertainty. The political calendar is also busy for core countries with Dutch, French and German elections scheduled in 2017. Such potential major changes across the European political landscape may eventually create some well needed stability, foster a stronger European block and deliver a fiscal stimulus, all leading to accelerating growth in the area.
The path toward policy normalisation embarked on by the US Federal Reserve is also a precursor to upcoming changes in other developed countries, which raises the risk of greater volatility in rates markets in 2017. While the European Central Bank should pursue an accommodative monetary policy until March 2017 and beyond, the pace of intervention and the transmission mechanisms are likely to gradually become less supportive in the coming years.
Taking such fundamental, political and technical factors into account, the Portfolio Manager believes that European securitisation products continue to offer some of the best risk-adjusted returns in the global credit markets. Valuations continue to be more compelling in European ABS than in corporate credit, especially as the exposure to interest rate volatility is limited and central bank policy much less distortive. At the same time, the Portfolio Manager will continue to hedge the portfolio dynamically, making capital preservation a priority in an environment characterised by unpredictable and binary events. As strategies on the current Public ABS portfolio are progressively exited, the rebalancing toward the Private Asset Backed Finance and Direct Origination strategies will accelerate in the next 12 months. Indeed, recently launched Direct Origination investments will be expanded and attractive opportunities are likely to emerge from the new regulatory framework and ongoing bank deleveraging and disintermediation.
Portfolio Manager's Report (continued)
Investment Outlook (continued)
Public ABS
European ABS should still benefit from the existing factors such as scarcity of supply, negative net issuance, attractive floating yields, positive credit fundamentals and supportive monetary policy in both the UK and the Eurozone. Alpha continues to be generated on the current Public ABS portfolio, especially on CDO of ABS and legacy ABS, but the Portfolio Manager sees fewer opportunities going forward as the outstanding ABS universe continues to shrink.
Within the legacy spectrum, the Portfolio Manager favours periphery RMBS and CLO 1.0 mezzanine tranches, where call probability remains high as Toro's holdings of Kildare 2007-1 and Celtic 12 both demonstrated in 2016. The Portfolio Manager also prefers high coupon tranches such as CLO 2.0 BB and B-rated tranches given the absolute attractive risk/reward and relative wide basis to investment grade-rated tranches. The Portfolio Manager will avoid long duration and low coupon tranches given negative Euribor. According to Morgan Stanley (2017 European ABS Outlook), as much as 56% of the legacy EUR-denominated bonds are currently cutting off coupon payments (floored at zero though) to noteholders.
Although alpha generating opportunities will become scarcer, the structural change in liquidity and volatility will also create tactical opportunities where the Portfolio Manager could opportunistically increase the ABS exposure if the market overshoots.
Private Asset Backed Finance Strategy
In 2016, two private asset backed finance transactions were successfully exited (an investment on a pool of UK mortgage loans and an investment backed by a London office property). Three investments are still outstanding including a CLO warehouse maturing in January 2017 and a Spanish non-performing loan transaction, named WIND. The Portfolio Manager expects the performance of the latter, which disappointed in 2016, to stabilise in 2017 as collections accelerate on the back of the recent change of servicer and the continuing improvement in the Spanish residential market.
Two new transactions were initiated in 2016, including Project Sacramento which consisted of the acquisition of a circa GBP120m static portfolio of 16,000 UK hire-purchase receivables. The lack of competitive offering across both the prime and near-prime space allowed the originator to access favourable pricing of risk. The transaction was structured in order to maximise the alignment of interests with the originator, providing an excess spread from the revenue waterfall together with a clawback mechanism in case of high default and/or prepayment rates. The Portfolio Manager sees a projected return of 13%, benefiting from attractive financing terms.
Allocation to the Private Asset Backed Finance Strategy is likely to exceed 20% of Toro's NAV in the coming months. The Portfolio Manager will favour niche transactions within less competitive sectors over competitive large portfolio of vanilla products in core jurisdictions or non-performing loans in the periphery.
Direct Origination Strategy
Allocation to the Direct Origination should increase from 16% to over 35% in the coming 12 months, reflecting the growth in non-bank lending opportunities for both corporates and consumers.
Firstly, the launch of Taurus Corporate Finance LLP (the originator entity fully owned by Toro) and subsequent pricing of Toro CLO 2 in 2016 paved the way for further similar transactions in 2017. Taurus, acting as the borrower under a credit facility, has been ramping up newly originated loans and, bar any significant market disruptions, an original portfolio of circa EUR150m should be ready for a CLO take out in Q1 2017. Taurus will then retain a 5% minimum horizontal slice of the transaction, equivalent to the risk retention requirement. This investment represents a unique opportunity and entitles the Fund to a 100% rebate of the pro-rata CLO management fees. The anticipated gross yield on the bundled investment is forecast at over 20% under a base case scenario and 12% when applying a full credit cycle scenario (for further details please see the Performance Attribution call Q3 2016 transcript available on www.torolimted.gg/documents).
Leveraged loan valuations are currently within fair value levels due to the expectation for improving fundamentals next year. Default rates on leveraged loans, on the other hand, are currently low at 0.53% over the last 12 months (Credit Suisse). Going forward, the Portfolio Manager expects leveraged loan default rates to continue to stay at or below historical averages of 2%.
Portfolio Manager's Report (continued)
Investment Outlook (continued)
Secondly, Toro will continue to launch and expand direct lending platforms with local partners, especially within the periphery where banks carry on deleveraging and focusing on core businesses, therefore creating a gap to be filled by non-traditional lenders. We expect to develop the Irish (Shamrock) and Spanish (SpRED) origination platforms that were launched in 2016 and focused on the residential market.
Buy-to-let lending in Ireland presents an attractive investment opportunity due to the reluctance of banks to extend credit in this space. This is primarily due to i) the high non-performing buy-to-let loan stock that banks still hold, ii) the high capital charges that banks experience on buy-to-let loans and iii) political pressure for banks to focus their mortgage lending on owner-occupied products. The lack of competition means that loans with attractive risk reward characteristics can be written: we are targeting a portfolio with a 5% annual coupon at an average 65% loan-to value. The anticipated exit will be achieved through a capital markets RMBS transaction following a 18 month ramp up period.
The Spanish housing market gathered steam this year and Barcelona, where Toro initiated its first real estate development project with a local developer, is leading the residential market recovery in Spain. According to Tinsa, a Spanish home valuation specialist, prices increased by 9% in the Catalan capital in the first three quarters of 2016. As demand for new-build is high in some specific areas, Toro will continue to selectively finance some projects alongside a fully aligned partner as bank financing remains unavailable for developers.
The ongoing rotation in the portfolio from public ABS to private asset finance and direct origination should increase the gross interest income to 9% and overall yield to 14% in 2017, as indicated in the chart below. Coupled with a sensible hedging policy, the Portfolio Manager will seek to generate sustainable income for shareholders in the long term while protecting capital in case of disruptive events.
Post Balance Sheet Events
On 20 October 2016 the Company declared a further dividend payment of 1.25 cents per share for the quarter to 30 September 2016 which was paid on 1 December 2016.
Subsequent to the year end, the Board initiated the buy-back policy published in the Prospectus as per the shareholder circular dated 22 July 2016.
Chenavari Credit Partners LLP
Portfolio 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 Portfolio Manager. All of the Directors are non-executive and, except for Roberto Silvotti (as described below), are independent of the Portfolio Manager.
The Directors meet at least quarterly.
The Directors are as follows:
Frederic Hervouet, non-executive Chairman (aged 43)
Frederic Hervouet has over 20 years' experience in the financial markets and asset management industry with a focus on multi-asset class investment management, risk management, structured products and structured finance. Mr. Hervouet holds a Masters Degree (DESS 203) in Financial Markets, Commodity Markets and Risk Management and an MSc in Applied Mathematics and International Finance from University Paris Dauphine. Previously Mr. Hervouet worked for two multibillion multi-strategy hedge funds specialising in quantitative strategies, convertible arbitrage, derivatives and emerging markets debt. Mr. Hervouet is an independent director of Tetragon Financial Group Limited and Tetragon Financial Group Master Fund Limited and Funding Circle SME Income Fund Limited. Mr Hervouet is also a Board member of the General Partner on Terra Firma Private Equity funds and Lakestar Private Equity funds. Prior to this role, Mr. Hervouet was managing director and head of commodity derivatives in Asia for BNP Paribas. Mr Hervouet is a resident of Guernsey. He is a member of the UK Institute of Directors ("IoD"), of the UK AIC, Association of Investment Companies, of the Guernsey Chamber of Commerce and of the Guernsey Investment Fund Association ("GIFA").
John Whittle, non-executive director (aged 61)
John Whittle has significant experience of the loan market and is a non-executive director of International Public Partnerships Ltd (as audit committee chair), Starwood European Real Estate Finance LTD (as audit committee chair), India Capital Growth Fund Ltd, Globalworth Real Estate Investments Ltd (as audit committee chair), GLI Finance Ltd (as audit committee chair) and Aberdeen Frontier Markets Investment Company Ltd (as chairman). Mr. Whittle worked as a chartered accountant at PriceWaterhouseCoopers. He is a Chartered Accountant and holds an IoD Diploma in Company Direction. Prior to acting as a non-executive director, Mr. Whittle was finance director at Close Fund Services, a large independent fund administrator. He has also held senior positions at John Lewis, Vodafone and as CFO of Windsmoor (London LSE).
Roberto Silvotti, non-independent non-executive director (aged 58)
Roberto Silvotti has over 20 years' experience in both academic and senior credit market positions, and was formerly the Chief Risk Officer of the Chenavari Financial Group. He started his career as Professor of Mathematics in institutions such as Columbia University (New York), The Institute for Advanced Study (Princeton, New Jersey) and Scuola Normale Superiore (Pisa, Italy). Mr. Silvotti then moved to the capital markets industry. Over the past 10 years, he has held senior positions in various investment banks, including risk manager at Goldman Sachs, head of credit derivatives risk management for Banca Intesa, global head of structured credit trading at Calyon, global head of derivatives structuring and new product development at Dresdner Kleinwort. Prior to his role as Chief Risk Officer of the Chenavari Financial Group he was co-head of structured credit and head of index strategy at Royal Bank of Scotland. Mr Silvotti is a director of Chenavari Multi-Strategy Credit Fund Limited, Chenavari Investment Managers (Guernsey) Limited and Chenavari Investment Managers (Luxembourg) Sàrl and, as such, is not considered independent of the Portfolio Manager.
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 Frederic Hervouet Tetragon Financial Group Limited Euronext Funding Circle SME Income Fund Limited LSE John Whittle International Public Partnerships Ltd LSE India Capital Growth Fund Ltd AIM Aberdeen Frontier Markets Investment Company Ltd AIM Starwood European Real Estate Finance Limited LSE Global worth Real Estate Investments Limited AIM GLI Finance Ltd AIM Robert Silvotti None held N/A
Report of the Directors
The Directors are pleased to present their Annual Report and Audited Financial Statements for the Year. 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 59940.
Results
The results for the year to 30 September 2016 are set out in the Statement of Comprehensive Income on page 39. The profit for the Year was EUR11.2 million.
Dividends
Dividends of 6.5 cents per Share were declared in respect of the Year. Dividend payments in the Year were 7.25 cents per Share, which included dividends relating to the previous financial year, as follows:
Period ending Dividend (cents
per Share)
30 September
2015 2.00
31 December
2015 2.00
31 March
2016 2.00
30 June
2016 1.25
30 September
2016 1.25
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).
Share Capital and discount control
Details of the rights attaching the Shares are set out in Note 16 of the Financial Statements on page 72. At 30 September 2016, the Company's issued share capital amounted to 361.45 million shares, none of which were held in treasury. No shares were bought back during the Year, but a programme of Share repurchases commenced after the Year end.
The Company may, subject to compliance with the Companies Law (Guernsey) 2008 (the "Law"), 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 the price at which Shares may be trading.
As set out in the Prospectus, the Directors will give consideration to using surplus cash to purchase Shares under this authority, but are not bound to do so, where the market price of a Share trades at more than 7.5% below the latest published NAV per Share for more than 180 days. Surplus cash for these purposes will comprise undistributed coupons and the proceeds of normal portfolio realisations. The Board will continue to apply the buy back policy published in the Prospectus (and set out above) but may, at its sole discretion and without limit, make additional purchases of Shares beyond those required by the policy as per the shareholder circular dated 22 July 2016.
The current authority to purchase shares for cancellation or holding in treasury expires on the date of the next Annual General Meeting ("AGM") which will be held in Guernsey on 17 March 2017. The Directors intend to seek annual renewal of this buyback authority from Shareholders each year at the Company's AGM. If the Company purchases any of its Shares, the maximum price (exclusive of expenses) which may be paid for a Share must not be more than the higher of (i) 5 % above the average of the mid-market values of a Share for the five Business Days before the purchase is made, or (ii) the higher of the price of the last independent trade and the highest current independent bid for the Shares. In addition, Shares will be purchased through the market only at prices below the last published NAV per Share, which should have the effect of increasing the NAV per Share for the remaining Shareholders. Any such purchase will be carried out in accordance with the Companies Law, which provides inter alia, that any buy-back is subject to the Company passing the solvency test contained in the Companies Law at the relevant time. The minimum price payable per Share is GBP0.01.
Report of the Directors (continued)
Investors should note that the purchase of Shares by the Company is entirely discretionary and no expectation or reliance should be placed on the Directors exercising such discretion on any one or more occasions. Investors should also note that any purchase or redemption of Shares will be subject to the ability of the Company to fund the purchase price or redemption amount. Purchases of Shares may be made only in accordance with the Law, the Disclosure Guidance and Transparency Rules. The Company is not required to comply with the provisions of Chapter 12 of the Listing Rules regarding market repurchases by the Company of its shares. Nonetheless, by adopting the policy above, the Company will voluntarily be complying with the provisions of Listing Rule 12.4.1 and 12.4.2.
The Law allows companies to hold shares acquired by way of market purchase as treasury shares, rather than having to cancel them, and Shares purchased since Year end have been placed in treasury. This gives the Company the ability to re-issue Shares quickly and cost effectively, thereby potentially improving liquidity and providing the Company with additional flexibility in the management of its capital base. No Shares will be sold from treasury for cash at a price less than the NAV per Share at the time of their sale without Shareholder approval. During the period when the Company holds Shares as treasury shares, the rights and obligations in respect of those Shares may not be exercised or enforced by or against the Company.
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 bank counterparties (as applicable) or derived from valuation models prepared by the Portfolio manager. The NAV and the NAV per Share will be published in Euros by an RIS announcement and on the website of the Company at www.torolimited.gg.
Portfolio Manager
The Board keeps the performance of the Portfolio Manager under regular review, and the management engagement committee, comprising all Directors, conducts an annual appraisal of the Portfolio Manager's performance, and makes a recommendation to the Board about the continuing appointment of the Portfolio Manager. The Portfolio 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 Credit Partners LLP is in the interests of shareholders as a whole.
The portfolio management fee payable to the Portfolio 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 Portfolio Manager shall be entitled to receive from the Company a performance fee in respect of each Class of Shares as detailed in note 4 of the financial statements. Performance fees of EUR1,971,246 (period ended 30 September 2015: EUR2,165,819) were charged in the Year. As at 30 September 2016 EUR2,837,574 was payable (2015: EUR2,165,819).
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's new 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.
Report on Viability
The Directors have assessed the viability of the Company over the three years to 30 September 2019. The Board have chosen this timeframe as it reflects a reasonable investment horizon with regards risks and uncertainty and the Board have reviewed a cash flow forecast prepared by the Portfolio Manager consistent with this time horizon. In making this assessment, the Directors have considered detailed information provided at Board meetings taking account of the Company's balance sheet, gearing level, share price discount, asset allocation, operating expenses, investment strategy, the potential impact of the relevant principal risks detailed in the Statement of Principal Risks and Uncertainties on pages 24 to 25 and the expected future cash flows based on the current portfolio. The assumptions herein are based on there being no significant change in the global financial and or credit markets over the three year period.
In making this assessment, the Directors had regard for the expected yield from the portfolio and the significant margin over the low cost base of the Company and it is the Board's opinion that the Company would continue to hold sufficient cash to meet its expenses given the low cost base of the Company.
Report of the Directors (continued)
Report on Viability (continued)
Based on the above, the Board confirms it has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period of this assessment.
The aforementioned principal risks, set out on pages 24 and 25, will continue to be monitored closely.
Going Concern
Going concern refers to the conclusion that the Company has the resources to continue in operation for the foreseeable future. After analysing the following, the Directors believe that it is appropriate to adopt the going concern basis in preparing the financial statements:
1. Working capital - As at 30 September 2016, there was working capital of approximately EUR30.8 million. The Directors noted that as at 30 September 2016 (i) the gross investment income for the Year was approximately EUR18.3 million. As such the Board believes the Company has sufficient capital to cover all expenses (which mainly consist of management fees, performance fees, administration fees and professional fees) and to meet all of its obligations as they fall due.
2. Closed-ended Company - The Company has been registered with the Guernsey Financial Services Commission as a Registered Closed-ended Collective Investment Scheme, as such there cannot be any shareholder requested redemptions, and therefore no cash flows out of the Company in this respect. Subsequent to the year end, the Board initiated the buy back policy published in the Prospectus (and set out above) as per the shareholder circular dated 22 July 2016.
3. Investments - The Company has a tradable portfolio, therefore the investments can be sold for cash in most market conditions. At 30 September 2016 the market value of level 1 and 2 securities was EUR258.3 million and the Company had cash balances of EUR24.5 million adjusting for repurchase agreements. Part of the portfolio is less liquid, consisting of level 3 assets, under certain market circumstances already seen in the past, most of the portfolio which consists of ABS can become less liquid and the cost of unwinding may become significant. This risk is mitigated by the closed-ended nature of the Company.
Based on the above assessments, the Directors are of the opinion that the Company is able to meet its liabilities as they fall due for payment because it has and is expected to maintain, adequate cash resources. Given the nature of the Company's business, the Directors have a reasonable expectation that the Company has adequate financial resources to continue in operational existence for the foreseeable future. Accordingly, the financial statements have been prepared on a going concern basis.
AIFMD
Under European Law the Company is considered to be an Alternative Investment Fund ("AIF") under the AIFMD and has appointed Carne Global AIFM Solutions (C.I.) Limited as the Company's external AIFM.
The Company currently intends to operate as an externally managed non-EEA domiciled AIF with a non-EEA AIFM for the purposes of the AIFM Directive and as such neither it nor the AIFM will be required to seek authorisation under the AIFM Directive. However, following national transposition of the AIFM Directive in a given EU member state, the marketing of shares in non-EEA AIFs with a non-EEA AIFM (such as the AIFM) to investors in that EU member state is prohibited unless certain conditions are met. The AIFM filed a notification on 9 April 2015 with the FCA pursuant to Article 42 of the AIFM Directive to market the Shares in the UK under the UK national private placement regime.
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.
Report of the Directors (continued)
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
The Company has received the following notifications of major interests in Shares:
Notification received from Number Percentage
of shares of share capital
----------------------------------- ------------ ------------------
Chenavari European Opportunistic
Credit Master Fund LP, Loic Fery 115,808,030 32.04%
----------------------------------- ------------ ------------------
The Concert Party
As a Guernsey company which has its shares admitted to trading on the Specialist Fund Segment of the London Stock Exchange, the Company is subject to The City Code on Takeovers and Mergers (the "Code"). Under Rule 9 of the Code, any person who acquires an interest (as defined in the Code) in shares which, taken together with shares in which he is already interested and shares in which persons acting in concert with him are interested, carry 30 per cent. or more of the voting rights of a company which is subject to the Code, is normally required to make a general offer to all the remaining shareholders to acquire their shares.
Similarly, when any person, together with persons acting in concert with him, is interested in shares which in the aggregate carry not less than 30 per cent. of the voting rights of such a company, but does not hold shares carrying more than 50 per cent. of such voting rights, a general offer will normally be required if any further interests in shares are acquired by any such person.
When members of a concert party hold more than 50 per cent. of the voting rights in a company, no obligations normally arise from acquisitions by any member of the concert party. They may accordingly increase their aggregate interests in shares without incurring any obligation under Rule 9 to make a general offer, although individual members of a concert party will not be able to increase their percentage interests in shares through or between a Rule 9 threshold without Panel consent.
Rule 37 of the Takeover Code further provides that when a company redeems or purchases its own voting shares, any resulting increase in the percentage of shares carrying voting rights in which a person or group of persons acting in concert is interested will be treated as an acquisition for the purpose of Rule 9.
Report of the Directors (continued)
The Concert Party (continued)
An offer under Rule 9 must be made in cash and at the highest price paid by the person required to make the offer, or any person acting in concert with him, for any interest in shares of the company during the 12 months prior to the announcement of the offer.
Shares representing 30% or more (but less than 50%) of the voting rights of the Company are held by a concert party comprising Chenavari Credit Partners LLP (acting as discretionary portfolio manager for Chenavari European Opportunistic Credit Fund Limited), other group companies in the Chenavari Financial Group, certain other individuals connected with, or employed by, the Chenavari Financial Group (including Roberto Silvotti, a director of the Company) (the "Concert Party").
In August 2016, Independent Shareholders approved waivers from the Panel relating to the obligation on any member of the Concert Party (including the Portfolio Manager individually) to make a general offer that would otherwise arise as a result of the issue of the shares to the Portfolio Manager in connection with the performance fee arising in the year to 30 September 2015, or the exercise of the buyback authority.
If the Concert Party's aggregate shareholding were to increase to greater than 50 per cent. of the Company's total voting rights, as a result of the exercise of the buyback authority and/or the issue of Shares relating to the performance fee or otherwise, no obligations would normally arise from acquisitions by any member of the Concert Party. They may accordingly increase their aggregate interests in Shares without incurring any obligation under Rule 9 to make a general offer, although individual members of the Concert Party will not be able to increase their percentage interests in Shares through or between a Rule 9 threshold without Panel consent.
Directors
The Directors of the Company during the year and at the date of this Report are set out on page 6.
Directors' and Other Interests
The Directors' holdings and interests in the Company are listed in note 4 on page 55.
Mr Silvotti, by virtue of his directorships of entities within the Portfolio Manager's group, previous roles with the Portfolio Manager and other funds managed within the Chenavari Group is not considered independent of the Portfolio Manager.
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. 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 the Auditor
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 LLP ("Deloitte") was re-appointed as the Company's Auditor for the 2016 audit following the AGM on 18 March 2016.
A resolution for the re-appointment of Deloitte will be proposed at the next AGM.
Signed on behalf of the Board of Directors by:
Frederic Hervouet, Chairman
John Whittle, Director
20 January 2017
Corporate Governance Report
The Company is admitted to trading on the Specialist Fund Segment ("SFS") of the London Stock Exchange 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 ("DTRs") while traded on the 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
Pursuant to the listing rules of the UKLA, the Company is required 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, AIFM, Custodian and Portfolio 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 Portfolio Manager and any company in the same group as the Portfolio Manager; the Chairman of the Board of Directors is free from any conflicts of interest and is independent of the Portfolio Manager and of any company in the same group as the Portfolio Manager; and that no partner, employee or professional adviser to the Portfolio Manager or any company in the same group as the Portfolio Manager may be a Director of the Company at any time.
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: All newly appointed Directors shall stand for election by the shareholders at the next AGM following their appointment. The Directors shall retire by rotation every three years and, if appropriate, offer themselves for re-election in accordance with UKLA Listing Rules LR 15.4.7 and 15.2.13A, with which the Company voluntarily complies. Mr Silvotti is subject to annual re-election as he is not considered to be independent due to his current appointment to the Boards of other Company's in the Group of the Portfolio Manager and previous appointment as CRO of the Portfolio Manager.
Corporate Governance Report (continued)
Compliance with the UK Code (continued)
Explanation: (continued) Directors who have served on the Board for more than nine years are subject to annual re-election. The names of Directors submitted for appointment or reappointment shall be accompanied by sufficient biographical details to enable shareholders to make an informed decision.
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.
Explanation: The Company's Audit Committee comprises all members of Board, however Mr Silvotti, by virtue of his directorship and previous roles with the Portfolio Manager and other funds managed within the Chenavari Group, is not considered independent of the Advisers. Given Mr Silvotti's extensive investment experience, the independent members of the Audit Committee are of the opinion that shareholder interests are best served through Mr Silvotti's membership of the Audit Committee. Per the Code, for small companies the Company Chairman may be a member but not the Chair 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. As such the applicable internal controls that would normally be expected exist within those organisations. The Audit Committee reviews their internal controls as part of its work. 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 and nominee committee. The Board of Directors make all representations 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 page 30 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 6. Mr Hervouet and Mr Whittle are considered independent of the Advisers for the purposes of the Company's compliance with the UK Code. However Mr Silvotti, by virtue of his directorship and previous roles with the Portfolio Manager and other funds managed within the Chenavari Group is not considered independent of the Advisers and therefore will be re-elected annually at the AGM.
The Chairman of the Board is Frederic Hervouet and, in this function, is responsible for the leadership of the Board and ensuring its effectiveness on 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 Hervouet is an Independent Director.
Corporate Governance Report (continued)
Composition and Independence of the Board (continued)
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 Portfolio Manager and the Corporate Broker. The Directors are kept fully 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.
Attendance at the Board, Audit Committee and Management Engagement Committee meetings for the year ended 30 September 2016 was as follows:
Audit Committee Management Engagement
Director Board meetings meetings Committee meetings
------------------- ----------------- ------------------ ------------------------
Held Attended Held Attended Held Attended
------------------- ------ --------- ------ ---------- -------- --------------
Frederic Hervouet 9 8 5 4 1 1
------------------- ------ --------- ------ ---------- -------- --------------
John Whittle 9 8 5 5 1 1
------------------- ------ --------- ------ ---------- -------- --------------
Roberto Silvotti 9 9 5 5 1 1
------------------- ------ --------- ------ ---------- -------- --------------
At the 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 Portfolio Manager.
The Board has a breadth of experience relevant to the Company and the Directors believe that any changes to the Board's composition can be managed without undue disruption. With any new director appointment to the Board, consideration will be given as to whether an induction process is appropriate.
The Board has reviewed its composition and believes that the current appointments provide an appropriate range of skills, experience and diversity. In order to maintain its diversity, 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 and is chaired by John Whittle and also has Frederic Hervouet as a member. The Audit Committee was also attended by Roberto Silvotti. 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 pages 26 and 27.
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 John Whittle appointed as Chairman. Its principal duty is to consider the terms of appointment of the Portfolio Manager and it will annually review that appointment and the terms of the Portfolio Management 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 review of the performance and capabilities of the Portfolio Manager at its meeting on 19 October 2016 to confirm that the continued appointment of Chenavari Credit Partners LLP as Portfolio Manager is deemed to be in the interest of shareholders. At the same meeting, the Management Engagement Committee concluded that the Company's other service providers were performing in accordance with the Company's expectations and contractual arrangements in place.
Corporate Governance Report (continued)
Board Performance
The Management Engagement Committee formally evaluated the Board's effectiveness on 19 October 2016 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 through Chenavari investor relations (e-mail address TLIR@chenavari.com) or by correspondence sent to the Company Secretary (toro@morgansharpe.com) or the Corporate Broker. As a consequence, the Board receives appropriate updates from the Company Secretary, Portfolio 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.torolimited.gg, which include 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 Directors have undertaken a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity, and have undertaken a detailed review of the effectiveness of the risk management and internal control systems. The Directors are comfortable that the risks are being appropriately monitored.
Risk Explanation/Mitigant
--------------------- -------------------------------------------------
Collateral risk Investment Instruments purchased by
(default, recovery, the Company are linked to the credit
prepayment) performance of the underlying 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 Portfolio Manager conducts detailed
fundamental, statistical and scenario
analyses. 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. 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.
--------------------- -------------------------------------------------
Market risk The fund is exposed to several market
factors. In particular, this fund is
primarily driven by underlying asset
appreciation/depreciation, captured
in the "Collateral Risk" section above.
The market price of the instruments
can also be affected by the changes
in expectations on the underlying collateral
and the ability to pay. In the short
term, the unrealised performance can
be affected by the sentiment of the
market, supply/demand of asset types,
expectations on unemployment, GDP growth,
credit cycle and stability of the Eurozone.
Because the liquidity of the instruments
is relatively low, prices will tend
to be sticky, but can be at risk to
sudden jumps in price when momentum
of sentiment is strong enough and certain
pools of investors are forced to liquidate.
The timing of these technical factors
can be quite out of sync with fundamentals.
The Company is closed ended, and has
tight limits on leverage. It is well
setup to ride out any short-term dislocations
in pricing without being forced to liquidate
investments at technically distressed
prices. Internal risk guidelines impose
a maximum loss of -10% for a +50% widening
combined -15% equity scenario. This
is achieved by employing hedging strategies
using liquid instruments. This reduces
the beta of the portfolio compared to
some of its peers.
--------------------- -------------------------------------------------
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 and documents the pricing
risk 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 Portfolio
Manager's risk officer recommends a
more conservative valuation than that
provided by a counterparty.
--------------------- -------------------------------------------------
Statement of Principal Risks and Uncertainties (continued)
Risk Explanation/Mitigant
------------------ --------------------------------------------------
Valuation and The Portfolio Manager also engaged Duff
classification & Phelps, Ltd ("Duff & Phelps"), on
of financial behalf of the Company, as a valuation
assets at fair advisor to provide certain limited procedures
value through on some Transactions' valuation which
profit or loss the Investment Adviser identified and
risk (continued) 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 4 transactions.
The Board requested the Audit Committee
to further consider this risk with work
undertaken by the Audit Committee discussed
on page 28. 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.
------------------ --------------------------------------------------
Replenishment The terms of an investment may permit
risk (quality the relevant counterparty to alter the
of new reference composition of the collateral. The Portfolio
assets) Manager will seek to ensure that the
investment documents clearly define
eligible replacement assets to mitigate
the risk of inferior quality assets
being added. In certain cases, and to
the extent possible in respect of primary
investments, the Portfolio Manager may
negotiate veto rights for investors
on new names being added to the collateral
pool.
------------------ --------------------------------------------------
Call risk Investments may have call features which,
if activated, would result in re-investment
risks for the Company. This is mitigated
by restricting the situations where
an investment can be terminated and/or
by requiring that premiums be payable
to investors when an investment is called.
------------------ --------------------------------------------------
Portfolio Manager The Company is dependent on the expertise
risks of the Portfolio Manager and their respective
key personnel to evaluate investment
opportunities and to implement the Company's
investment objective and investment
policy.
The Board has instructed the Portfolio
Manager to conduct the Company's investment
related activities in compliance with
the applicable law, the Company's investment
objectives and guidelines and the Company's
contractual obligations.
The Management Engagement Committee
carried out its review of the performance
and capabilities of the Portfolio Manager
at its meeting on 19 October 2016 and
confirmed that the continued appointment
of the Portfolio Manager is deemed to
be in the interest of shareholders.
There can be no assurance that the Portfolio
Manager's past performance will be any
guide to future performance or results.
------------------ --------------------------------------------------
Operational The Company is exposed to the risk arising
risks from any failures of systems and controls
in the operations of the Portfolio Manager,
Administrator, the Sub-Administrator
and the Custodian. The Board and its
Audit Committee regularly review reports
from the Portfolio Manager and the Administrator
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 Audit Committee is 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 judgments which they contain.
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, Chenavari Credit Partners LLP as Portfolio Manager, Carne Global AIFM Solutions (C.I.) Limited as AIFM, JPMorgan Chase Bank National Association as Custodian, Depositary and Principal Bankers and Capita Registrars (Guernsey) Limited as Registrar (together the "Outsourced Service Providers"). Please see note 5 for further details in relation to these service providers.
Membership of the Committee
The Audit Committee was established on incorporation and consists of Frederic Hervouet, Roberto Silvotti and myself, John Whittle, as its Chairman. All the members of the Audit Committee are non-executive directors. Mr Hervouet and I are considered independent of the Advisers for the purposes of the Company's compliance with the UK Code however Mr Silvotti, by virtue of his directorship and previous roles with the Portfolio Manager and other funds managed within the Chenavari Group is not considered independent of the Advisers. The Audit Committee has concluded that its membership meets the requirements of C.3.1 of the UK Code and 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
Audit Committee Report (continued)
Membership of the Committee (continued)
-- factors impacting the Company's Financial Statements.
The Audit Committee meets at least three times a year. During the Year the Audit Committee has met five times. Personnel 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 period under review, the Audit Committee has met five 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 judgments
-- We reviewed the appropriateness of the Company's significant accounting policies, critical accounting judgments 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 management accounts, budgets and monthly NAVs, focusing on the significant accounting matters set out below.
-- In undertaking this review, we discussed with the Administrator, Sub-Administrator and Deloitte the critical accounting policies and judgments 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 judgments 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.
Significant Accounting Matters
During the Period the Audit Committee considered key accounting issues, matters and judgments 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 EUR321.2 million and represented 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 Portfolio Manager, the Administrator, the Sub-Administrator, the Custodian, the Audit Committee, the AIFM and the Board.
Investments are valued in accordance the Company's Valuation Policy and with the Accounting Policies set out in note 2.2 to the financial statements. The Valuation Policy is compiled with reference to key principles comprising; independence, documentation, transparency, consistency and relevance and documents the pricing process and timeline, with particular reference to difficult to value securities, and sets out escalation procedures.
Audit Committee Report (continued)
The Audit Committee required the Portfolio 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 Portfolio 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 Portfolio Manager provided an assessment of the manager's independence and reliability. Additionally, the Audit Committee required the Portfolio Manager to provide a reasoned assessment of fair value for each investment held and its classification in the fair value hierarchy.
During the Year the Portfolio Manager also engaged Duff & Phelps, Ltd ("Duff & Phelps"), on behalf of the Company, 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 4 transactions.
Following discussion, we were satisfied that the judgments 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 8 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 income statement. This is explained further in note 2.4 to the financial statements.
Portfolio Manager's Fee
The Audit Committee identified the calculation of the Portfolio Manager's Fee (including Performance Fee) to represent a significant risk of misstatement in the Company's financial reporting given the complexity of the calculation and the related party relationship. The Committee requested the Administrator, Sub-Administrator and Portfolio 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 Portfolio Management Agreement. The Audit Committee reviewed a detailed calculation methodology prepared by the Sub-Administrator and agreed the calculation with the Portfolio Manager.
IFRS 10 Consideration
The Audit Committee has considered and challenged the judgements made by the Directors in considering whether the Company and the Originator meet the criteria described in IFRS to be considered an investment entity. Having considered these judgements, the Audit Committee agreed with the conclusions reached.
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, 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.
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 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. The Audit Committee confirms that this is an ongoing process in order to manage the significant risks faced by the Company. Annually, the Audit Committee reviews the effectiveness of the Company's material controls, including financial, operational and compliance controls. We deem that, to date, there are no significant issues in this area that need to be brought to your attention. The Board visited the Portfolio Manager on 12 October 2016 in order to review the valuation of securities contained in the portfolio.
Audit Committee Report (continued)
External Audit
It is the responsibility of the Audit Committee to monitor the performance, independence, objectivity and re-appointment of Deloitte. On 7 September 2016, we 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. Deloitte attended 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 Portfolio 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.
The Committee is required to assess and report to the Board on the effectiveness of the audit process. During the Year it accomplished this as follows:
-- Met with Deloitte and reviewed the audit plan as above; -- Met with Deloitte and reviewed the audit report at the conclusion of the audit;
-- In addition the Chairman discussed the effectiveness of the audit with staff of the Administrator and Sub-Administrator; and
-- Completed a comprehensive check list covering all aspects of the audit process. -- Reviewed the FRC audit quality review
From its work the Committee concluded that audit process had been effective.
Deloitte was re-appointed as the Company's auditor for the 2016 audit following the AGM on 18 May 2016. The lead audit partner will be rotated every five years to ensure continued independence and objectivity. 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 until the forthcoming AGM. 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 $36,380 consisting of tax and reporting services. Non-audit services were primarily in relation to PFIC statement preparation for the Company and the Audit Committee is satisfied that the overall quantum of ongoing non-audit services is not anticipated to be material. Deloitte also charged a fee for the interim financial statements of GBP19,000.
Committee Effectiveness
The effectiveness of the Audit Committee was reviewed by both the Board and Audit Committee as part of the annual Board Evaluation process at the meeting held on 19 October 2016. 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:
John Whittle
Chairman, Audit Committee
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. The Board's remuneration along with the matters recommended by the UK Code that would be delegated to such a committee, are 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 be sufficient to attract, retain and motivate directors of a quality required to run the Company successfully. The Chairman of the Board is paid a higher fee in recognition of his additional responsibilities, as are the Chairman of the Audit Committee and the Management Engagement Committee. The policy is to review fee rates periodically, although such a review will not necessarily result in any changes to the rates, account will be taken of fees paid to directors of comparable companies.
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:
Frederic Hervouet (Chairman
of the Board) GBP50,000
John Whittle (Audit Committee
Chair) GBP40,000
Roberto Silvotti GBP30,000
------------
Total GBP120,000
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 and is not expected to change in the foreseeable future.
Directors' and Officers' liability insurance cover is maintained by the Company on behalf of the Directors.
The Directors were appointed as non-executive Directors by letters issued on 20 April 2015. 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.
None of the Directors has any personal financial interest in any of the Company's investments.
Directors' Remuneration Report (continued)
Quantitative Remuneration Disclosure
Appropriate disclosures will be made in due course in accordance with Article 22(2)(e) and 22(2)(f) of the AIFMD.
Signed on behalf of the Board of Directors by:
Frederic Hervouet, Chairman
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 International Financial Reporting Standards (IFRSs) 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, International Accounting Standards 1 requires that the Directors:
-- 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.
This responsibility statement was approved by the Board of Directors on 20 January 2017 and is signed on its behalf by:
Frederic Hervouet
Non-executive Chairman
20 January 2017
Independent Auditor's Report to the Members of Toro Limited
Opinion on financial statements of Toro 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 23.
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;
* Revenue recognition; and
* Non-consolidation of the Originator
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 EUR7m (2015: EUR6.7m)
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.
============== ================================================================
Significant We have included a new risk in the
changes in current year on revenue recognition
our approach as it had a significant effect on
our approach as explained in the risk
table below. We have also included
a new risk on non-consolidation of
the Taurus Corporate Financing LLP
("Originator") as the origination
strategy was only initiated during
the year.
============== ================================================================
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' We confirm that
statement regarding the appropriateness we have nothing
of the going concern basis material to add
of accounting and the Directors' or draw attention
statement on the longer-term to in respect of
viability of the Company both these matters.
contained within pages 16 and
17 of the Report of the Directors. We agreed with
the Directors'
We are required to state whether adoption of the
we have anything material to going concern basis
add or draw attention to in of accounting and
relation to: we did not identify
-- the Directors' confirmation any such material
on page 24 that they have carried uncertainties.
out a robust assessment of However, because
the principal risks facing not all future
the Company, including those events or conditions
that would threaten its business can be predicted,
model, future performance, this statement
solvency or liquidity; is not a guarantee
-- the disclosures on pages as to the Company's
24 and 25 that describe those ability to continue
risks and explain how they as a going concern.
are being managed or mitigated;
-- 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 page 16 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
or loss To test the valuation
of investments as at 30
Investments held by the September 2016 we performed
Company as at 30 September the following procedures:
2016 had a fair value * Assessed the design and implementation of controls
of EUR325m (2015: EUR302m) around the valuation of investments to determine
representing 92% of the whether appropriate oversight had been exercised
net asset value of the within the valuation process;
Company. Details of investments
are disclosed in note
8. Investments comprise * Assessed the valuation policy and methodology adopted
the most quantitatively by management in comparison to IFRS and industry
significant balance and practice;
are an area of focus
because they are the
main driver of the Company's * Where valuation models were used, we engaged our
performance and net asset internal fair valuation specialists to review the
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;
on broker quotes and
in some cases is derived
from valuation models. * Where broker pricing was used, we obtained
The inputs to those valuation independent price quotes from the brokers;
can be judgemental and
may include but are not
limited to interest rates, * For a sample of investments, we obtained price
pre-payment rates, discount information from independent sources such as Markit
rates and credit default to determine whether this information was consistent
rates. with prices used;
Inputs to the internal
valuation models and * For a sample of investments realised during the
those provided by brokers period, we reviewed the accuracy of management's
may be unobservable and valuations by comparing the price at which
the quotations provided investments were realised to the price recorded by
may not reflect a liquid the Company at the time of disposal; and
price. During the year,
the Company engaged an
independent valuation * Compared the results of the Company's independent
specialist to value the valuation specialist to that performed by our
investments priced through internal fair valuation specialists to assess whether
internal valuation models. they are consistent.
Further details of the
accounting policy and
methodology on valuation
of investments are described To test the classification
in note 3.1 to the financial of the investments on
statements. the fair value hierarchy,
we reviewed and challenged
management's classification
of investments within
the fair value hierarchy
and the associated disclosures
based on the evidence
Classification of investments obtained.
within the fair value We also performed the
hierarchy is a significant following procedures:
judgement. In particular * Reviewed the number of broker quotes obtained by
determining what constitutes management;
observable evidence of
trading in investments
is subjective in the * Reviewed evidence of third party transactions used to
absence of public sources corroborate broker valuations; and
of information.
For investments classified * Reviewed the disclosures provided, including
as being at level 3 in sensitivity analysis to movements in key inputs for
the fair value hierarchy, investments classified as level 3 in the fair value
determining the appropriate hierarchy.
disclosure of risks and
sensitivities also requires
judgement.
Revenue recognition
Interest income and fair To test revenue recognition,
value adjustments ((EUR18.1m) we performed the following
2015:(EUR16.4m)) 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
significant value of periods and principal amounts;
income 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 12.
Non-consolidation of
the Originator
* We challenged the Company's assessment that the
Having had regard for Company and Originator both meet the definition of an
the requirements of IFRS investment entity against the criteria set out in
10 - Consolidated Financial IFRS 10 by considering the evidence in support of
Statements ("IFRS 10"), this view including assessing whether the Company and
management has assessed the Originator measure and evaluate their investments
that the Company and on a fair value basis; and
the Originator both meet
the definition of an
investment entity as * We also considered the adequacy of the disclosures
described in note 2.1 within the financial statements required under IFRS
to the financial statements 10 and IFRS 12.
and hence the Originator
and the related originated
CLO ("Toro European CLO
2 Designated Activity
Company" or "TCLO2")
were not consolidated
in the financial statements
of the Company but accounted
for at fair value through
profit and loss.
There is a risk that
the view taken by the
Company is not in accordance
with IFRS 10, that the
treatment adopted is
not acceptable and that
the judgements made by
management in arriving
at its conclusion are
not appropriate.
In addition, as the Originator
is not consolidated,
there are a number of
disclosure requirements
which will be applied
to the Company under
IFRS12 - Disclosure of
Interests in Other Entities
("IFRS 12") and there
is a risk that these
disclosures are incomplete.
================================================== ======================================================================
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 in the current year
on revenue recognition as it had a significant
effect on our approach as explained in the risk
table above. We have also included a new risk
on non-consolidation of the Originator as the
Originator was only set up during the year.
The description of risks above should be read
in conjunction with the significant issues considered
by the Audit Committee discussed on pages 26
to 29. Management's consideration of the critical
accounting estimates and judgements are 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 EUR7,000,000 (2015: EUR6,700,000)
======================= =======================================
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
on 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 EUR140,000 (2015: EUR135,000), 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 We have nothing to report
Although not required arising from our review.
to do so, the Directors
have voluntarily chosen
to make a corporate 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
2 March 2015
30 September to 30 September
2016 2015
Notes EUR EUR
Income
Net gain on financial assets
and financial liabilities
held at fair value through
profit or loss 12 18,133,459 16,428,263
Interest income 493,684 -
------------- -----------------
Total net income 18,627,143 16,428,263
------------- -----------------
Expenses
Management fees 4 (c) 3,540,618 1,403,706
Performance fees 4 (c) 1,971,246 2,165,819
Administration fees 5 (b) 82,496 38,656
Sub-administration fees 5 (c) 260,049 101,333
Custodian and brokerage
fees 5 (d) 43,796 20,494
Legal fees* 569,145 42,227
Directors' fees 4(a) 153,439 70,711
Audit fees 131,847 80,687
AIFM fees 4 (c) 103,931 30,396
Other operating expenses 261,217 113,651
------------- -----------------
Total operating expenses 7,117,784 4,067,680
------------- -----------------
Financing costs
Interest expense 338,965 87,651
------------- -----------------
Profit for the year/period 11,170,394 12,272,932
============= =================
Earnings per Share
Basic and diluted 9 3.09 cents 3.52 cents
*Inclusive of issue costs related to the set up and structuring of the Originator of EUR271,506
All items in the above statement derive from continuing operations.
The Condensed Schedule of Investments and 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
Notes EUR EUR
Assets
Financial assets at fair
value through profit
or loss 2.2,8,11 325,171,844 301,516,954
Due from broker 13 12,984,494 30,558,253
Other receivables and
prepayments 14 66,971 10,514
Cash and cash equivalents 2.5 24,548,560 57,821,432
------------------------ -------------
Total assets 362,771,869 389,907,153
------------------------ -------------
Equity
Share capital and share
premium 16 354,752,496 354,752,496
Retained earnings (2,761,799) 12,272,932
------------------------ -------------
Total equity 351,990,697 367,025,428
------------------------ -------------
Current liabilities
Financial liabilities
at fair value through
profit or loss 2.2,8,11,2.13 3,958,272 19,502,143
Due to broker 13 3,501,238 612,500
Accrued expenses 15 3,321,662 2,767,082
Total current liabilities 10,781,172 22,881,725
------------------------ -------------
Total equity and liabilities 362,771,869 389,907,153
------------------------ -------------
Shares outstanding 16 361,450,000 361,450,000
NAV per share 10 97.38 cents 101.54 cents
__________________________ __________________________
Director: Director:
Date: Date:
The Condensed Schedule of Investments and 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 EUR EUR EUR
At 30 September 2015 12,272,932 354,752,496 367,025,428
Profit for the year 11,170,394 - 11,170,394
Distributions to equity
shareholders (26,205,125) - (26,205,125)
At 30 September 2016 (2,761,799) 354,752,496 351,990,697
============= ============ =============
Share
capital
Retained and share
earnings premium Total
Note EUR EUR EUR
On incorporation at 2
March 2015 - - -
Profit for the period 12,272,932 - 12,272,932
Issue of shares net of
issue costs 16 - 354,752,496 354,752,496
At 30 September 2015 12,272,932 354,752,496 367,025,428
============= ============ =============
The Condensed Schedule of Investments and notes to the financial statements are an integral part of the financial statements.
Statement of Cash Flows
For the year ended 30 September 2016
2 March 2015
30 September to 30 September
2016 2015*
EUR EUR
Cash flows from operating
activities
Profit for the year/period 11,170,394 12,272,932
Adjustments for non-cash items
and working capital:
Purchase of investments (297,989,539) (449,191,270)
Disposal and paydowns of investments 255,773,714 175,966,526
Net (gain)/loss on financial
assets and derivatives at
fair value 3,017,064 (8,790,067)
Decrease/(increase) in amounts
due from brokers 17,573,759 (30,558,253)
Increase in other receivables
and prepayments (56,457) (10,514)
Increase in amounts due to
brokers 2,888,738 612,500
Increase in accrued expenses 554,580 2,767,082
------------------------------ -----------------
Net cash outflow from operating
activities (7,067,747) (296,931,064)
------------------------------ -----------------
Cash flows from financing
activities
Distributions to participating
equity shareholders (26,205,125) -
Issue of shares net of costs - 354,752,496
------------------------------ -----------------
Net cash (outflow)/inflow
from financing activities (26,205,125) 354,752,496
------------------------------ -----------------
Net (decrease)/increase in
cash and cash equivalents (33,272,872) 57,821,432
Cash and cash equivalents
at beginning of the year/period 57,821,432 -
------------------------------ -----------------
Cash and cash equivalents
at end of the year/period 24,548,560 57,821,432
============================== =================
*Presentation restated from 2015 audited financial statements to include the movements on repurchase agreements and reverse repurchase agreements within investment activity and gain/loss on financial assets.
The Condensed Schedule of Investments and 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
Great
Europe France Germany Britain Ireland Italy Netherlands Portugal Spain U.S.A Other* Total Total
EUR EUR EUR EUR EUR EUR EUR EUR EUR USD EUR EUR %
Financial assets
at fair value
through profit
or loss
-----------------
Equity
Securities
Hotels,
Restaurants
& Leisure - - - 190,689 - - - - - - - 190,689 0.05%
Equities
Securities
Total - - - 190,689 - - - - - - - 190,689 0.05%
----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ -------
Debt Securities
Bond 331,590 - - 3,167,259 - - - - - - - 3,498,849 0.99%
Arbitrage CDO 13,982,295 279,101 4,301,298 14,046,398 2,920,716 5,764,743 12,004,162 1,489,247 6,490,292 1,516,569 3,968,510 66,763,331 18.97%
Commercial
mortgage-backed
security 280,605 43,839 1,549,163 9,425,324 - - 176,756 - 5,480 - 140,303 11,621,470 3.30%
Arbitrage CLO 8,484,579 11,627,888 13,357,575 8,666,126 1,531,089 990,891 7,930,652 63,771 3,014,521 14,061,355 8,008,245 77,736,692 22.08%
Residential
mortgage-backed
security 1,398,712 - 35,780 15,174,798 7,458,546 - 71,667 269,171 10,715,702 - - 35,124,376 9.98%
Balance Sheet
CLO 760,593 - - - - 6,517,925 - 7,404,500 4,011,297 - - 18,694,315 5.31%
Consumer ABS - - 7,791,589 2,637,898 - - 6,128,478 - 120,000 - - 16,677,965 4.74%
Senior Loan 3,377,807 - - - - - - - - - - 3,377,807 0.96%
Whole Loan 5,389,701 - - - - - - - - - - 5,389,701 1.53%
Non-performing
loan - - - - - - - - 28,046,479 - - 28,046,479 7.97%
Preferred equity - - - - - - - - 19,377,804 136,535 118,102 19,632,441 5.59%
Equity - - - - 35,847,475 - - - - - - 35,847,475 10.18%
Debt Securities
Total 34,005,882 11,950,828 27,035,405 53,117,803 47,757,826 13,273,559 26,311,715 9,226,689 71,781,575 15,714,459 12,235,160 322,410,901 91.60%
----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ -------
Derivative
Financial Asset
Credit Default
Swap - - - - - - - - - - 831,870 831,870 0.24%
Listed Options - - - - - - - - - - 70,742 70,742 0.02%
Forward FX
Contracts - - - - - - - - - - 683,852 683,852 0.19%
Repurchase
Agreement - - - - - - - - - - 983,790 983,790 0.28%
Derivative
Financial Asset
Total - - - - - - - - - - 2,570,254 2,570,254 0.73%
----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ -------
Financial assets
at fair value
through profit
or loss Total 34,005,882 11,950,828 27,035,405 53,308,492 11,910,351 13,273,559 26,311,715 9,226,689 71,781,575 15,714,459 50,652,889 325,171,844 92.38%
----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ -------
*This consists of all European issued bonds where the fair value is less than 1% of the NAV of the Fund at 30 September 2016.
Condensed Schedule of Investments, at Fair Value (continued)
As at 30 September 2016
Great
Europe France Germany Britain Ireland Italy Netherlands Portugal Spain U.S.A Other* Total Total
------------- ----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ --------
EUR EUR EUR EUR EUR EUR EUR EUR EUR USD EUR EUR %
-------------
Financial
liabilities
at fair
value
through
profit
or loss
-------------
Debt
Securities
Bond - 1,078,750 - - - - - - - - - 1,078,750 0.30%
Senior Loan - - - - - - - - 871,125 - - 871,125 0.25%
Debt
Securities
Total - 1,078,750 - - - - - - 871,125 - - 1,949,875 0.55%
----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ --------
Derivative
Financial
Liabilities
Credit
Default
Swap - - - - - - - - - - 2,008,397 2,008,397 0.57%
Derivative
Financial
liabilities
Total - - - - - - - - - - 2,008,397 2,008,397 0.57%
----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ --------
Financial
liabilities
at fair
value
through
profit
or loss
Total - 1,078,750 - - - - - - 871,125 - 2,008,397 3,958,272 1.12%
----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ --------
Total Net
Investments 34,005,882 10,872,078 27,035,405 53,308,492 11,910,351 13,273,559 26,311,715 9,226,689 70,910,450 15,714,459 48,644,492 321,213,572 91.26%
----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ --------
Other Assets
and
Liabilities 30,777,125 30,777,125 8.74%
----------- ------------ --------
Net Assets 79,421,617 351,990,697 100.00%
----------- ------------ --------
*This consists of all European issued bonds where the fair value is less than 1% of the NAV of the Fund at 30 September 2016.
Condensed Schedule of Investments, at Fair Value*
As at 30 September 2015
Cayman Great
Belgium Island France Britain Greece Ireland Italy Jersey Luxembourg Netherlands Spain Other Total Total
---------- -------- -------- ----------- -------- ------------ ---------- ---------- ----------- ------------ ----------- ---------- ------------ -------
EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR %
Financial
assets
at fair
value
through
profit
or loss
-----------------
Equity
securities
Hotel,
restaurant
& leisure - - - 251,913 - - - - - - - - 251,913 0.07%
Equity
securities
Total - - - 251,913 - - - - - - - - 251,913 0.07%
---------- -------- -------- ----------- -------- ------------ ---------- ---------- ----------- ------------ ----------- ---------- ------------ -------
Debt securities
Bond - - - - 326,673 - - - - - - - 326,673 0.09%
Arbitrage
CDO - - - - - 60,649,597 - 3,778,516 2,960 16,184,848 929,506 - 81,545,427 22.22%
Commercial
mortgage-backed
security - - 255,888 8,503,792 - 1,239,191 - - - - - - 9,998,871 2.72%
Arbitrage
CLO - - - 635,665 - 26,497,626 - - 41,380,000 32,958,923 - - 101,472,214 27.65%
Residential
mortgage-backed
security 2,659,256 - - 37,002,104 - 20,426,470 - - - 7,249,959 3,886,990 - 71,224,779 19.41%
Balance
sheet
CLO - 203,257 - - - 5,593,000 - - - - 3,505,742 - 9,301,999 2.53%
Consumer
ABS - - - 3,053,948 - - 5,184,780 - - - 4,084,779 - 12,323,507 3.36%
Senior
loan - - - 7,943,300 - - - - - - - - 7,943,300 2.16%
Whole
loan - - - - - - - - 6,003,365 - - - 6,003,365 1.63%
Debt securities
total 2,659,256 203,257 255,888 57,138,809 326,673 114,405,884 5,184,780 3,778,516 47,386,325 56,393,730 12,407,017 - 300,140,135 81.77%
---------- -------- -------- ----------- -------- ------------ ---------- ---------- ----------- ------------ ----------- ---------- ------------ -------
Derivative
financial
asset
CDS - - - - - - - - - - - 441,378 441,378 0.12%
Listed
options - - - - - - - - - - - 462,606 462,606 0.13%
Forward
FX contracts - - - - - - - - - - - 220,922 220,922 0.06%
Derivative
financial
asset
total - - - - - - - - - - - 1,124,906 1,124,906 0.31%
---------- -------- -------- ----------- -------- ------------ ---------- ---------- ----------- ------------ ----------- ---------- ------------ -------
Financial
assets
at fair
value
through
profit
or loss
total 2,659,256 203,257 255,888 57,390,722 326,673 114,405,884 5,184,780 3,778,516 47,386,325 56,393,730 12,407,017 1,124,906 301,516,954 82.15%
---------- -------- -------- ----------- -------- ------------ ---------- ---------- ----------- ------------ ----------- ---------- ------------ -------
*Table based on country of issuance
Condensed Schedule of Investments, at Fair Value* (continued)
As at 30 September 2015
Cayman Great
Belgium Island France Britain Greece Ireland Italy Jersey Luxembourg Netherlands Spain Other Total Total
---------- -------- -------- ------------- -------- ------------ ---------- ---------- ----------- ------------ ----------- ---------- ------------- --------
EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR %
Financial
liabilities
at fair
value
through
profit
or loss
-------------
Derivative
financial
liabilities
CDS - - - - - - - - - - - (882,755) (882,755) (0.24%)
Forward FX
contracts - - - - - - - - - - - (96,894) (96,894) (0.03%)
Repurchase
agreement - - - (18,522,494) - - - - - - - - (18,522,494) (5.07%)
Derivative
financial
liabilities
total - - - (18,522,494) - - - - - - - (979,649) (19,502,143) (5.34%)
---------- -------- -------- ------------- -------- ------------ ---------- ---------- ----------- ------------ ----------- ---------- ------------- --------
Financial
liabilities
at fair
value
through
profit
or loss
total - - - (18,522,494) - - - - - - - (979,649) (19,502,143) (5.34%)
---------- -------- -------- ------------- -------- ------------ ---------- ---------- ----------- ------------ ----------- ---------- ------------- --------
Total net
investments 2,659,256 203,257 255,888 38,868,228 326,673 114,405,884 5,184,780 3,778,516 47,386,325 56,393,730 12,407,017 145,257 282,014,811 76.81%
---------- -------- -------- ------------- -------- ------------ ---------- ---------- ----------- ------------ ----------- ---------- ------------- --------
Other assets
and
liabilities 85,010,617 23.19%
------------- --------
Net assets 367,025,428 100.00%
------------- --------
*Table based on country of issuance
Notes to the Financial Statements
1. General information
Toro 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 2 March 2015 with registered number 59940, to be a Registered Closed-ended Collective Investment Scheme. The principal legislation under which the Company operates is the Law.
The Company has appointed Carne Global AIFM Solutions (C.I.) Limited as the Company's external AIFM. The AIFM has delegated portfolio management to the Portfolio Manager, Chenavari Credit Partners LLP, a wholly owned member of the Chenavari Financial Group.
The Company's Shares are admitted to trading on the SFS of the London Stock Exchange. Such Shares were also listed on the Official List of the Channel Islands Security Exchange Authority Limited ("CISEAL") on 8 May 2015. The Initial Public Offering ("IPO") of the Company raised gross proceeds of EUR331.8 million. With further issues raising EUR16.4 million (gross of issue) costs on 21 July 2015 and EUR8.8 million (gross of issue costs) on 3 August 2015.
Investment objective
The investment objective of the Company is to deliver an absolute return from, investing and trading in ABS and other structured credit investments in liquid markets and investing directly or indirectly in asset backed transactions including without limitation, through the origination of credit portfolios.
Target returns and dividend policy
On the basis of market conditions as at the date of the prospectus (28 April 2015), and whilst not forming part of its investment objective or investment policy, the Company will target a net total return on invested capital of 12 to 15 per cent per annum over three to five years. 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 payable quarterly in March, June, September and December of each year.
The 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 policy
The Company will seek to invest in a diversified portfolio of exposures to predominantly European based obligors. The Company's investment strategies will be:
The Opportunistic Credit Strategy - the Company will opportunistically invest or trade in primary and secondary market ABS and other structured credit investments including private asset backed finance investments.
The Originated Transactions Strategy - the Company will invest in transactions on a buy-to-hold basis, via a variety of means, including, without limitation, Warehouse Credit Facilities, which can originate credits that may be refinanced in structured credit markets as well as other financing opportunities.
Notes to the Financial Statements (continued)
1. General information (continued)
Originated transactions
The Company intends to invest in Originators (Originators or sponsors of originated credit investments- CLO's or securitisations of pools of consumer loans including residential mortgages, credit card receivables or auto loans) which establish securitisation vehicles and retain the requisite Retention Securities in such vehicles pursuant to the EU Risk Retention Requirements and/or, in future, the U.S. Risk Retention Regulations. In exchange for its capital and participation facilitating retention compliant origination transactions, the Company expects to receive enhanced returns relative to direct investment in structured credit investments (such as CLOs). Such returns may take the form of additional returns from fees, fee rebates or other financial accommodations agreed by parties who may benefit from the Company's involvement depending upon the asset class of a securitisation vehicle.
Eligible investments
Each investment shall, as of the date of acquisition by the Company, be either a debt obligation (including, but not limited to, a bond or loan), a share or equity security, a hybrid instrument, derivative instrument or contract or an equitable or other interest. In addition, the Company may from time to time have surplus cash (for example, following the disposal of an acquired investment). Cash held by the Company pending investment or distribution 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 provided such bank or counterparty has an investment grade credit rating (as determined by any reputable rating agency selected by the Company on the advice of the Portfolio Manager).
Investment restrictions
Concentration Limits
The Company shall comply with the concentration limits set out below, which shall, in relation to each new investment, be tested at the point such new investment is made assessed in accordance with the exposure limit policy.
Where investments are issued by entities with a compartmentalised or cellular legal structure, each compartment or cell shall be considered to be a separate issuer/counterparty provided that the principle of segregation and insolvency remoteness of commitments of the different compartments/cells of such issuer is materially established by law, contract and/or trust.
None of the restrictions set out below shall apply to investments issued or guaranteed by the government of an OECD Member State.
In relation to investments made:
-- no more than 20 per cent of NAV shall be exposed to the credit risk of any underlying single transaction or issue;
-- the top five exposures to any transactions or issues shall not, in aggregate, account for more than 50 per cent. of NAV;
-- no more than 50 per cent of NAV, in aggregate, shall be invested in unlisted investments;
and in each case, the restrictions set out above shall not apply to the Company's investment in Originators but shall be applied on a look through basis to the investments of such Originators; and
-- no more than 20 per cent of NAV, in aggregate, shall be exposed to transactions or issues where the underlying collateral is non-European.
For the purposes of interpreting the above provision, Europe shall include Switzerland, the member states of the EU and EEA and the European Common Customs Territory (from time to time) and, for the avoidance of doubt, shall continue to include any members, who being or subsequently joining as members of such groupings, subsequently cease to be members.
Notes to the Financial Statements (continued)
1. General information (continued)
Hedging and derivatives
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 CDS 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.
The Company may also use hedging or derivatives (both long and short) for investment purposes, for efficient portfolio management, financing or protection of individual or aggregate positions.
In addition, as the Company's base operating currency is Euro, the Company proposes to engage in currency hedging in an attempt to reduce the impact on the Sterling Shares (if any) of currency fluctuations.
Borrowing limits
The Company may use borrowings from time to time for the purpose of short term bridging, financing Share buy backs, repurchase agreements with market counterparties or managing working capital requirements, including hedging facilities. Cash borrowings can contribute alongside other forms of leverage to increase the level of gearing of the Company. The Company may also use gearing to increase potential returns to Shareholders. In the past, the Portfolio Manager has employed leverage against senior tranches of ABS to enhance their returns, and expects it will continue to do so, where the economic terms offered by counterparties can increase potential returns to Shareholders.
The Company has set a borrowing limit such that the Company's gearing shall not exceed 130 per cent at the time of incurrence and deployment of any borrowing. For the purposes of this calculation, gearing will be calculated as the sum of the Company's exposures to each position directly held, divided by the last published NAV (and for the avoidance of doubt, will include the full exposure held by the Company under any full recourse total return swap, but will exclude any borrowing arrangements that are limited-recourse to the Company, such as borrowings by an Originator).
Borrowings employed by the Company may be secured on individual assets or portfolios without recourse to the Company or by a charge over some or all of the Company's assets to take advantage of potentially preferential terms.
The Board will oversee the gearing levels in the Company, and will review the position with the AIFM and the Portfolio Manager on a regular basis.
It is anticipated that the gearing level of any Originators will differ from the above restrictions. Any leverage of an Originator shall be nonrecourse to the Company. In particular, such an Originator may enter into Warehouse Credit Facilities to acquire exposure to assets. Where a Warehouse Credit Facility takes the form of a loan facility, an Originator will borrow funds to acquire assets in anticipation of the creation of a securitisation vehicle to securitise such assets, such facilities generally being non-recourse to the assets of such Originator (other than assets acquired with such funding) and repaid following the transfer of such assets to a securitisation vehicle. Originators will be required to give representations, warranties and indemnities to financing providers including confirmations relating to compliance with risk retention requirements.
Cash uses and cash management activities
In accordance with the Company's investment policy, the Company's principal use of cash (including the Net Issue Proceeds) has been to fund investments sourced by the Portfolio Manager, ongoing operational expenses and payment of dividends and other distributions to Shareholders in accordance with the Company's dividend policy as set out in the section entitled "Dividend Policy" in Part I of the prospectus.
Notes to the Financial Statements (continued)
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 IFRSs as issued by the International Accounting Standards Board, 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.
The Directors are of the opinion that the Company is able to meet its liabilities as they fall due for payment because it has and is expected to maintain, adequate cash resources. Given the nature of the Company's business, the Directors have a reasonable expectation that the Company has adequate financial resources to continue in operational existence for the foreseeable future. Accordingly, the financial statements have been prepared on a going concern basis.
Application of IFRS 10, its related Investment Entities Amendment and IFRS 12
The Company has adopted IFRS 10 'Consolidated Financial Statements' and as an investment entity is required to measure the investment in its subsidiaries at fair value, to the extent that these subsidiaries also meet the definition of investment entities themselves. The financial statements therefore comprise the results of the Company only. A subsidiary is an entity controlled by the Company. A Company has control of an investee, when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee as defined in IFRS 10 'Consolidated Financial Statements'.
During the year, the Company made an investment in a new subsidiary, Taurus Corporate Financing LLP ("Taurus" or "Originator") in which it holds 100% of the partnership interest. The Board determined that both the Company and Taurus meet the definition of an investment entity as set out under IFRS 10 and that therefore the Company should measure its investment in Taurus at fair value rather than consolidate its results.
An entity shall consider all facts and circumstances when assessing whether it is an investment entity, including its purpose and design. Under the definition of an investment entity, as set out in paragraph 27 in the standard, the entity must satisfy all three of the following tests:
i) Obtains funds from one or more investors for the purpose of providing those investors with investment management services;
ii) Commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both (including having an exit strategy for investments); and
iii) Measure and evaluate the performance of substantially all of its investments on a fair value basis.
The three essential criteria met by the Company and the Originator are:
i) Typically, an investment entity would have several investors who pool their funds to gain access to investment management services and investment opportunities that they might not have had access to individually. The Company and the Originator through the Company obtain funds from a diverse group of external shareholders;
ii) An investment entity should not hold its investments indefinitely. Whilst some investments held by either the Company or the Originator may be retained for a longer period, such investments will have a contractual maturity and hence a limited life;
iii) The Company and the Originator measure and evaluate the performance of their investments on a fair value basis and believe that investor focus is on the fair value of the portfolio. This is also consistent with the basis of reporting internally to the Board of each entity which will use the fair value information as the primary measurement attribute to evaluate the performance of substantially all of their investments and to make investment decisions.
The Directors are of the opinion that the Company and the Originator therefore meet the criteria set out in IFRS 10.
Notes to the Financial Statements (continued)
2. Summary of significant accounting policies (continued) 2.1 Basis of preparation (continued)
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 however these are not expected to have a material impact:
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 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 Portfolio 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.
(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.
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 (continued)
ABS 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 ABS 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 8. 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 year 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.
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. Where broker quotes are not available, investment valuations are based on the Portfolio Manager's internal models.
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 ABS or Markit for credit derivatives instruments. In the opinion of the Directors Markit is the benchmark for CDS pricing data. Markit receives data from the official books of market makers, and then subjects it to a rigorous testing process.
Loan investments are classified as at fair value through profit or loss, as these financial assets form part of the overall investment portfolio, these assets are managed and their performance is evaluated on a fair value basis. The loans are not traded in an active market and their fair value is determined using valuation techniques which reference the value of the underlying collateral attaching to the loans. Adjustments to the fair value are considered in light of changes in the credit quality of the borrower, the value of the underlying collateral and any relevant market changes.
Refer Note 3.1 and Note 8 for further disclosure and analysis of valuation of assets and liabilities which contain unobservable inputs.
(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.
Notes to the Financial Statements (continued)
2. Summary of significant accounting policies (continued) 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.
These amounts are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment for amounts due from brokers.
2.4 Interest income
Interest income on transactions 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. The costs are those which were necessary for the initial issue of shares. Such costs and expenses were fixed at 2 per cent of the gross issue proceeds.
2.7 Foreign currency
(a) Functional and presentation currency
The functional and presentation currency of the Company is EUR (EUR).The performance of the Company is measured and reported to the investors in EUR.
(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 period-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: GBP 1.1559 USD 0.8898 (2015: GBP 1.3570 USD 0.8959).
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 Accrued expenses
Expenses are accounted for on an accruals basis.
2.10 Other receivables and prepayments
Other receivables are amounts due in the ordinary course of business. Other receivables are accounted for on an accruals basis.
2.11 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)
2.12 Taxation
The Company is exempt from Guernsey taxation on income derived outside of Guernsey and bank interest earned in Guernsey. No charge to Guernsey taxation arises on capital gains.
2.13 Securities sold under agreements to repurchase and securities purchases under agreements to resell
Securities sold under agreements to repurchase ("repurchase agreements") and securities purchased under agreements to resell ("reverse repurchase agreements") are treated as collateralised financing transactions. The financing is carried at the amount at which the securities were sold or acquired plus accrued interest, which approximates fair value. It is the Company's policy to deliver securities sold under agreements to repurchase and to take possession of securities purchased under agreements to resell.
3. Critical accounting judgements and key sources of estimation uncertainty
The preparation of the Company's Annual 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, valuation techniques, and the application of relevant broker quotations where the broker is a recognised dealer in the respective position or derived from valuation models prepared by the Portfolio Manager.
The monthly NAV is derived from the Company's valuation policy. 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 Portfolio Manager determines that the third party quote is not an accurate representation of the fair value, the Portfolio 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.
Based on the hierarchy set out in IFRS 13, 178 transactions are classified as Level 1 or 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 8 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 EUR (EUR) 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 EUR.
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 8.
Investment entity definition
Having considered the criteria set out in IFRS 10, the Directors have determined that both the Company and the Originator meet the definition of an investment entity. Note 2.1 set out the Directors' key considerations in this respect.
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. Hervouet as Non-executive Chairman is GBP50,000 per annum. The fee for Mr. Whittle as Chairman of the Audit Committee is GBP40,000 per annum.
The fee for Mr. Silvotti is GBP30,000 per annum. During the Year, Directors fees of EUR153,439 (period ended 30 September 2015: EUR70,711) were charged to the Company, of which EUR17,254 (30 September 2015 payable: EUR30,343) was prepaid at the end of the Year, of this net prepayment EUR52,385 is reimbursable from Taurus Corporate Financing LLP and received in October 2016, omitting the impact of this the Directors fee payable would be EUR35,131. The Directors elected to receive a portion of their director's remuneration in the form of shares, Frederic Hervouet received 69,250 shares and John Whittle received 27,395 shares. The shares were valued based on the prevailing market NAV at the time of payment.
(b) Shares held by related parties
As at 30 September 2016, the Directors held the following Shares in the Company.
Frederic Hervouet 81,371 John Whittle 37,091 Roberto Silvotti 954,692
Loic Fery is the representative of the managing partner of Chenavari Credit Partners LLP. Chenavari Credit Partners LLP acts as discretionary portfolio manager for Chenavari European Opportunistic Credit Master Fund LP (the "Managed Account"). The Managed Account and Loic Fery hold 32.04% of the shares in Toro Limited as per disclosure page 18.
Roberto Silvotti is a Director of Chenavari Investment Managers (Guernsey) Limited and Chenavari Investment Managers (Luxembourg) S.à.r.l (both being members of the Chenavari Financial Group) and Chenavari Multi Strategy Credit Fund Limited (a company under the discretionary management of Chenavari Investment Managers (Luxembourg) S.à.r.l). He forms part of the Concert Party described on page 18 which includes Chenavari Credit Partners LLP and related Chenavari Group companies, relevant Chenavari Partners and employees and Chenavari European Opportunities Credit Fund Limited. In total, this Concert Party holds approximately 44% of the shares of the Company and is therefore deemed to have a significant influence over Toro Limited through these shareholdings.
(c) AIFM and Portfolio Manager
The Company has appointed Carne Global AIFM Solutions (C.I.) Limited as the Company's external AIFM. The AIFM has delegated portfolio management to the Portfolio Manager. Under the terms of the AIFM Agreement, the AIFM is entitled to receive from the Company an annual fee, payable out of the assets of the Company, of GBP66,000. EUR103,931 has been charged during the Year.
The AIFM and the Company have appointed the Portfolio Manager, Chenavari Credit Partners LLP, a member of the Chenavari Financial Group, as the external Portfolio Manager with delegated responsibility for portfolio management functions in accordance with the Company's investment objectives and policy, subject to the overall supervision and control of the Directors and the AIFM.
Under the terms of the Portfolio Management Agreement the Portfolio Manager is entitled to receive from the Company a portfolio management fee calculated and accrued monthly at a rate equivalent to one-twelfth of 1 per cent. of the NAV per Share Class (before deducting the amount of that month's portfolio management fee and any accrued liability with respect to any performance fee).
Total portfolio management fees for the Year amounted to EUR3,540,618 (period ended 30 September 2015: EUR1,403,706) with EUR295,214 (30 September 2015: EUR325,232) in outstanding accrued fees due at the end of the Year.
Notes to the Financial Statements (continued)
4. Related parties (continued) (c) AIFM and Portfolio Manager (continued)
The Portfolio Manager shall also be entitled to receive a performance fee in respect of each Class of Shares equal to 15 per cent. of the total increase in the NAV per Share of the relevant Class at the end of the relevant Performance Period (as adjusted to, (i) add back the aggregate value of any dividends per Share paid to Shareholders since the end of the Performance Period in respect of which a performance fee was last paid in respect of that Class (or the date of First Admission, if no performance fee has been paid in respect of that Class) and, (ii) exclude any accrual for unpaid performance fees) over the highest previously recorded NAV per Share of the relevant Class as at the end of the relevant Performance Period in respect of which a performance fee was last paid (or the NAV per Share of the relevant class as at First Admission (after deduction of launch costs), if no performance fee has been paid in respect of that Class of Shares) multiplied by the number of issued and outstanding Shares of that Class at the end of the relevant Performance Period, having made adjustments for numbers of Shares of that Class issued or repurchased during the relevant Performance Period.
Performance Period
Subject to any regulatory limitations, the Portfolio Manager has agreed that for a given Performance Period any performance fee shall be satisfied as to a maximum of 60 per cent in cash and as to a minimum (save as set out below) of 40 per cent by the issuance of new Euro Shares (including the reissue of treasury shares) issued at the latest published NAV per Share. At no time shall the Portfolio Manager (and/or any persons deemed to be acting in concert with it for the purposes of the Takeover Code) be obliged, in the absence of a relevant Whitewash Resolution having been passed, to receive further Shares where to do so would trigger a requirement to make a mandatory offer pursuant to Rule 9 of the Takeover Code.
As set out under "Concert Party" on page 18, the issuance of further Shares to the Portfolio Manager will not take place without a Whitewash Resolution from Shareholders. As such, only the cash component of the Performance Fee for the period ended 30 September 2015 has been paid to date. Performance fees of EUR1,971,246 (period ended 30 September 2015: EUR2,165,819) were charged in the Year. As at 30 September 2016 EUR2,837,574 was payable (2015: EUR2,165,819).
The Company has funded investments with a value of EUR66,956,036 (2015: EUR60,328,685) via hybrid instruments or equity issued by legally segregated compartments of AREO S.à.r.l. ("Areo"), a company incorporated in Luxembourg under the Securitization Law of 2004. Areo is majority owned by funds managed by the Chenavari group and is managed by a Board of Directors composed of a majority of independent directors that consider investment opportunities sourced by the Portfolio Manager. The Company is currently invested in two compartments of Areo, and which it fair values in accordance with IFRS 13 as set out in the Company's accounting policies. The Portfolio Manager receives no fees from Areo. Areo is a conduit special purpose vehicle sponsored by a member of the Chenavari Financial Group, for the purposes of the Company's application of Listing Rule II.
5. Material agreements (a) Corporate broker
Fidante Capital, a division of Fidante Partners Europe Limited (formerly Dexion Capital plc), receives a retainer for their corporate broking services of GBP75,000 per annum, payable in arrears.
(b) Administration fee
Morgan Sharpe Administration Limited (the "Administrator") serves as the Company's administrator and secretary. The Administrator is entitled to an annual asset-based fee calculated at a rate of 0.017 per cent per annum of NAV and subject to a minimum fee of GBP70,000 per annum. All fees are payable quarterly in advance. Administration fees for the year amounted to EUR82,496 (period ended 30 September 2015: EUR38,656) of which EUR6,665 (2015: EUR7,907) remained payable at the end of the year.
(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 0.073% per annum of NAV, excluding certain expenses. Sub-Administration fees for the year amounted to EUR260,049 (period ended 30 September 2015: EUR101,333) of which EUR19,176 (2015: EUR22,582) remained payable at the end of the year.
Notes to the Financial Statements (continued)
5. Material agreements
(d) Custodian fee
J.P. Morgan 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 27 April 2015 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 EUR31,500 per annum.
(e) AIFM and Portfolio Manager
Contractual arrangements relating to the AIFM and Portfolio Manager are detailed in note 4.
6. Financial risk management
Throughout the investment process and following acquisition of an investment, the Portfolio Manager is proactive in identifying and seeking to mitigate transaction and portfolio risk.
The Portfolio Manager will be responsible for sourcing potential investments. The Portfolio 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.
6.1 Credit risk
The Company takes on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. 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.
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.
None of the restrictions set out below shall apply to investments issued or guaranteed by the government of an OECD Member State.
In relation to investments made:
-- no more than 20% of NAV shall be exposed to the credit risk of any underlying single transaction or issue;
o As of 30 September 2016, the largest investment represents 10.68% of the NAV.
-- the top five exposures to any transactions or issues shall not, in aggregate, account for more than 50% of NAV;
o As of 30 September 2016, the top 5 investments represent 33.89% of the NAV.
-- no more than 50% of NAV, in aggregate, shall be invested in unlisted investments;
o As of 30 September 2016, 21.69% of the NAV is invested in unlisted investments.
Additionally, in each case, the restrictions set out above shall not apply to the Company's investment in Originators (the originator or sponsor of a CLO or a securitisation of a pools of consumer loan assets) but shall be applied on a look-through basis to the investments of such Originators; and
-- no more than 20% of NAV, in aggregate, shall be exposed to transactions or issues where the underlying collateral is non-European.
o As of 30 September 2016, 10.43% of the NAV is exposed to non-European underlying collateral.
The Company may use borrowings from time to time for the purpose of short term bridging, financing Share buy backs, repurchase agreements with market counterparties or managing working capital requirements, including hedging facilities.
Notes to the Financial Statements (continued)
6. Financial risk management (continued)
6.1 Credit risk (continued)
-- The Company has set a borrowing limit such that the Company's gearing shall not exceed 130% at the time of incurrence and deployment of any borrowing.
o As of 30 September 2016, the gearing of the Company was less than 100%.
In addition, the Company may from time to time have surplus cash (for example, following the disposal of an acquired investment). Cash held by the Company pending investment or distribution 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 provided such bank or counterparty has an investment grade credit rating (as determined by any reputable rating agency selected by the Company on the advice of the Portfolio Manager).
The Company manages the portfolio with appropriate diversification in terms of sectors and geographical breakdowns. As of 30 September 2016, the breakdown of the NAV per asset class and geography was as follows:
30 September 30 September
2016 2015
Asset class breakdown % NAV % NAV
Equity Securities 0.05% 0.07%
Bond 0.69% 0.09%
Arbitrage CDO 18.97% 22.22%
Commercial mortgage-backed
security 3.30% 2.72%
Arbitrage CLO 22.08% 27.65%
Residential mortgage-backed
security 9.98% 19.41%
Balance Sheet CLO 5.31% 2.53%
Consumer ABS 4.74% 3.36%
Senior Loan 0.72% 2.16%
Whole Loan 1.53% 1.63%
Non-performing loan 7.97% -
Preferred equity 5.58% -
Equity 10.18% -
Repo 0.28% (5.07%)
Cash, Hedges and Accruals 8.62% 23.23%
Total 100% 100%
------------- -------------
30 September 30 September
2016 2015
Geographic breakdown % NAV % NAV
European Union 9.66% 7.11%
France 3.09% 2.72%
Germany 7.68% 4.76%
Great Britain 15.14% 25.18%
Ireland 13.57% 2.86%
Italy 3.77% 3.65%
Netherlands 7.48% 7.59%
Portugal 2.62% -
Spain 20.15% 15.43%
U.S.A 4.46% 2.78%
Other 3.64% 4.69%
Cash and collateral 8.74% 23.23%
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 tables:
Royal
30 September Bank of Deutsche Credit
2016 Scotland Bank JP Morgan Suisse Total
S&P rating BBB- BBB+ A-* BBB+
EUR EUR EUR EUR EUR
Cash and cash
equivalents - - 24,548,560 - 24,548,560
Due from
Broker 1,253,954 2,975,342 6,907,698 1,847,500 12,984,494
Credit
Default
Swaps - - 831,870 - 831,870
Listed
Options - - 70,742 - 70,742
Forward FX
contracts - 683,852 - - 683,852
Total
counterparty
exposure 1,253,954 3,659,194 32,358,870 1,847,500 39,119,518
-------------------------- -------------------------- -------------------------- -------------------------- --------------------
Net asset
exposure
% 0.36% 1.04% 9.19% 0.52% 11.11%
Royal
30 September Bank of Deutsche Credit
2015 Scotland Bank JP Morgan Suisse Total
S&P rating BBB- BBB+ A-* BBB+
EUR EUR EUR EUR EUR
Cash and cash
equivalents 158,983 - *57,662,449 - 57,821,432
Due from Broker 7,018,843 6,167,097 17,372,313 - 30,558,253
CDS - - 441,378 - 441,378
Listed Options - - 462,606 - 462,606
Forward FX
contracts - 124,028 - - 124,028
Total counterparty
exposure 7,177,826 6,291,125 75,938,746 - 89,407,697
---------- ---------- ------------ -------- -----------
Net asset exposure
% 1.96% 1.71% 20.69% - 24.36%
* 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 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.
Notes to the Financial Statements (continued)
6. Financial risk management (continued)
6.1 Credit risk (continued)
Offsetting Financial Assets and Financial Liabilities (continued)
The below tables present the Company's financial asset and liabilities subject to offsetting, enforceable master netting agreements.
Assets
Related amount not offset in the Statement
As at 30 September 2016 of Financial Position
------------------------------------------------
Net Amounts of
Gross Amounts Assets
Offset in the Presented in
Gross Amounts Statement of the Statement
of Recognised Financial of Financial Financial Cash collateral
Counterparty Assets Position Position instruments received/pledged Net amount
----------------- --------------- --------------- --------------- ---------------- ----------------- -----------
EUR EUR EUR EUR EUR EUR
Derivative
CDS
JP Morgan 831,870 - 831,870 (831,870) - -
Forward FX
Contracts
Deutsche Bank 683,852 - 683,852 - - 683,852
--------------- --------------- --------------- ---------------- ----------------- -----------
1,515,722 - 1,515,722 (831,870) - 683,852
=============== =============== =============== ================ ================= ===========
Liabilities
Related amount not offset in the Statement
As at 30 September 2016 of Financial Position
------------------------------------------------
Net Amounts of
Gross Amounts Liabilities
Offset in the Presented in
Gross Amounts Statement of the Statement
of Recognised Financial of Financial Financial Cash collateral
Counterparty Liabilities Position Position instruments received/pledged Net amount
----------------- --------------- --------------- --------------- --------------- ----------------- ------------
EUR EUR EUR EUR EUR EUR
Derivative
Contracts
CDS
JP Morgan (2,008,397) - (2,008,397) 831,870 - (1,176,527)
(2,008,397) - (2,008,397) 831,870 - (1,176,527)
=============== =============== =============== =============== ================= ============
Notes to the Financial Statements (continued)
6. Financial risk management (continued)
6.1 Credit risk (continued)
Offsetting Financial Assets and Financial Liabilities (continued)
Assets
Related amount not offset in the Statement
As at 30 September 2015 of Financial Position
------------------------------------------------
Net Amounts of
Gross Amounts Assets
Offset in the Presented in
Gross Amounts Statement of the Statement
of Recognised Financial of Financial Financial Cash collateral
Counterparty Assets Position Position instruments received/pledged Net amount
----------------- --------------- --------------- --------------- ---------------- ----------------- -----------
EUR EUR EUR EUR EUR EUR
Derivative
CDS
JP Morgan 441,378 - 441,378 (441,378) - -
Forward FX
Contracts
Deutsche Bank 220,922 - 220,922 (96,894) - 124,028
--------------- --------------- --------------- ---------------- ----------------- -----------
662,300 - 662,300 (538,272) - 124,028
=============== =============== =============== ================ ================= ===========
Liabilities
Related amount not offset in the Statement
As at 30 September 2015 of Financial Position
------------------------------------------------
Net Amounts of
Gross Amounts Liabilities
Offset in the Presented in
Gross Amounts Statement of the Statement
of Recognised Financial of Financial Financial Cash collateral
Counterparty Liabilities Position Position instruments received/pledged Net amount
----------------- --------------- --------------- --------------- ---------------- ----------------- -----------
EUR EUR EUR EUR EUR EUR
Derivative
Contracts
CDS
JP Morgan (882,755) - (882,755) 441,378 - (441,377)
Forward FX
Deutsche Bank (96,894) - (96,894) 96,894 - -
(979,649) - (979,649) 538,272 - (441,377)
=============== =============== =============== ================ ================= ===========
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 recognised 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.
Notes to the Financial Statements (continued)
6. Financial risk management (continued)
6.2 Foreign currency risk (continued)
The currency exposure as at 30 September 2016 is as follows:
NAV
impact
for
30 September 30 September a +/-10%
2016 2016 FX
Other net Total Total rate
Currency Investments FX Hedges Cash liabilities exposure exposure move
EUR EUR EUR EUR EUR % NAV %
CHF - - 731 - 731 0.00% 0.00%
GBP 36,844,315 (36,912,938) 35,814 (128,453) (161,262) (0.05%) (0.00%)
USD 8,974,785 (12,412,122) 4,448,590 1,592,521 2,603,774 0.74% 0.07%
------------- ----------
45,819,100 (49,325,060) 4,485,135 1,464,068 2,443,243 0.69% 0.07%
------------ ------------- ---------- ------------- ------------- ------------- ----------
The currency exposure as at 30 September 2015 was:
NAV
impact
for
30 September 30 September a +/-10%
2015 2015 FX
Other net Total Total rate
Currency Investments FX Hedges Cash liabilities exposure exposure move
EUR EUR EUR EUR EUR % NAV %
GBP 50,563,733 (56,900,951) 7,264,772 (195,268) 732,285 0.20% 0.02%
USD 6,123,971 (6,262,666) 8,248,474 - 8,109,779 2.21% 0.22%
------------- ----------
56,687,704 (63,163,617) 15,513,246 (195,268) 8,842,064 2.41% 0.24%
------------ ------------- ----------- ------------- ------------- ------------- ----------
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 does not actively take interest rate risk, but incurs it as a normal course of business and employs a series of hedges to minimise these risks. 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 Portfolio Manager.
Notes to the Financial Statements (continued)
6. Financial risk management (continued)
6.3 Interest rate risk (continued)
Floating
Fixed rate rate Non-interest
interest interest bearing
EUR EUR EUR
30 September 2016
Financial assets at fair
value through profit or
loss 46,933,306 276,546,360 1,692,178
Due from broker - - 12,984,494
Other receivables and
prepayments - - 66,971
Cash and cash equivalents - 24,548,560 -
Financial liabilities
at fair value through
profit or loss (1,078,750) - (2,879,522)
Due to broker - - (3,501,238)
Accrued expenses - - (3,321,662)
45,854,556 301,094,920 5,041,221
---------------------- ------------------------- ------------------
30 September 2015
Financial assets at fair
value through profit or
loss 29,869,845 271,140,273 506,836
Due from broker - 30,558,253 -
Other receivables and
prepayments - - 10,514
Cash and cash equivalents - 57,821,432 -
Financial liabilities
at fair value through
profit or loss (19,405,249) - (96,894)
Due to broker - - (612,500)
Accrued expenses - - (2,767,082)
10,464,596 359,519,958 (2,959,126)
---------------------- ------------------------- ------------------
6.4 Liquidity risk
A proportion of the Company's balance sheet is made up of assets and liabilities which may not be realisable as cash on demand. Under certain market circumstances already seen in the past, most of the portfolio which consists of ABS can become less liquid and the cost of unwinding may become significant. As a result an exposure to liquidity risk exists. This risk is mitigated by the closed-ended nature of the Company.
The table below analyses the Company's liabilities into relevant maturity groups based on the remaining period at the balance sheet date to the contractual maturity date.
Greater
Less than than 3
3 months months Total
EUR EUR EUR
30 September 2016
Financial liabilities
at fair value through
profit or loss - (3,958,272) (3,958,272)
Due to broker (3,501,238) - (3,501,238)
Accrued expenses (3,274,322) (47,340) (3,321,662)
(6,775,560) (4,005,612) (10,781,172)
---------------------------- -------------------------- ---------------------
30 September 2015
Financial liabilities
at fair value through
profit or loss (18,619,388) (882,755) (19,502,143)
Due to broker (612,500) - (612,500)
Accrued expenses (2,694,482) (72,600) (2,767,082)
(21,926,370) (955,355) (22,881,725)
---------------------------- -------------------------- ---------------------
Notes to the Financial Statements (continued)
6. Financial risk management (continued)
6.4 Liquidity risk (continued)
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 Portfolio 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 EUR16,060,679 (2015: EUR15,026,865).
7. The current risk profile of the AIF and the risk management systems employed by the AIFM to manage those risks
The risk management systems employed by the AIFM are designed into and are an integral part of the continuous investment process. Every position is constantly monitored in order to protect downside risk. Exposure limits are applicable to all positions and asset classes at all times. The risk management systems incorporate a Risk Officer who is functionally and hierarchically separate from portfolio management, and who has full access to risk management information. The risk management systems also include risk reporting, the monitoring of risk limits, and breach alert and actions. The Risk Officer reports to the Risk Committee of the AIFM. The Risk Committee has ultimate responsibility for risk management and controls of the AIF and for reviewing their effectiveness on a regular basis, including taking appropriate remedial action to correct any deficiencies. The Risk Committee has determined the current risk profile of the AIF to be low. The AIFM has also implemented a risk management policy to identify generic risk types and to continuously review the limits and parameters used within the risk management system.
8. 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.
For financial assets and liabilities not traded in active markets the fair value is determined by using broker quotations where the broker is a recognised dealer in the respective position, valuation techniques and various methods including the use of comparable recent arm's length transactions, reference to other instruments that are substantially same, discounted cash flow analysis, option pricing models, alternative price sources including a combination of dedicated price feeds from recognised valuation vendors and application of relevant broker quotations where the broker is a recognised market maker in the respective position.
Notes to the Financial Statements (continued)
8. Fair value of financial instruments (continued)
For instruments for which there is no active market, the Company may also use internally developed models, which are usually based on valuation methods and techniques generally recognised as a standard within the industry. Some of the inputs to these models may not be market observable and are therefore based on assumptions.
The level of the fair value hierarchy of an instrument is determined considering the inputs that are significant to the entire measurement of such instrument and the level of the fair value hierarchy within those inputs are categorised.
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.
Notes to the Financial Statements (continued)
8. Fair value of financial instruments (continued)
The following tables show the Company's assets at 30 September 2016 based on the hierarchy set out in IFRS 13:
Quoted
Prices
in active Significant
markets other Significant
for identical observable unobservable
assets inputs inputs
(Level (Level (Level
1) 2) 3) Total
2016 2016 2016 2016
Assets EUR EUR EUR EUR
Financial assets
held for trading
Equity securities
UK: Equity 190,689 - - 190,689
Debt securities (by
instrument currency) -
Europe:
Corporate
& financials - - 7,841,266 7,841,266
UK: Corporate
& financials - 6,423,142 - 6,423,142
Europe:
Sovereign - 331,590 - 331,590
Europe:
Private
Bond - 35,847,475 - 35,847,475
Europe:
Asset backed
securities - 137,687,949 43,749,634 181,437,583
UK: Asset
backed
securities - 41,854,436 4,697,533 46,551,969
USA: Asset
back securities - 14,368,103 1,209,821 15,577,924
Money market
loan - 23,010,251 5,389,701 28,399,952
OTC Derivatives
Credit
Default
Swap - 831,870 - 831,870
Listed
Options 70,742 - - 70,742
Forward
FX Contracts - 683,852 - 683,852
Repurchase
Agreement - 983,790 - 983,790
Total assets 261,431 262,022,458 62,887,955 325,171,844
--------------- ------------ -------------- ------------
Liabilities
Financial liabilities
held for trading
Debt securities (by
instrument currency)
Europe:
Corporate
& financials - 1,078,750 - 1,078,750
Europe:
Money market
loan - 871,125 - 871,125
OTC Derivatives
Credit
default
swaps - 2,008,397 - 2,008,397
Total liabilities - 3,958,272 - 3,958,272
--------------- ------------ -------------- ------------
Notes to the Financial Statements (continued)
8. Fair value of financial instruments (continued)
The following tables show the Company's assets at 30 September 2015 based on the hierarchy set out in IFRS 13:
Quoted
Prices
in active Significant
markets other Significant
for identical observable unobservable
assets inputs inputs
(Level (Level (Level
1) 2) 3) Total
2015 2015 2015
Assets EUR EUR EUR EUR
Financial assets
held for trading
Equity securities
Eurozone:
Equity 251,913 - - 251,913
Debt securities (by
instrument currency)
Europe:
Corporate
& financials - 2,960 - 2,960
UK: Corporate - 3,612,386 - 3,612,386
Europe:
Sovereign - 326,673 - 326,673
Europe:
Private
bond - - 10,130,000 10,130,000
Europe:
ABS - 121,109,352 93,733,471 214,842,823
UK: ABS - 52,532,146 4,746,482 57,278,628
Money market
loan - - 13,946,665 13,946,665
OTC Derivatives
CDS - 441,378 - 441,378
Equity
options 462,606 - - 462,606
Forward
FX contracts - 220,922 - 220,922
Total assets 714,519 178,245,817 122,556,618 301,516,954
--------------- ------------- -------------- -------------
Liabilities
Financial liabilities
held for trading
OTC Derivatives
CDS - (882,755) - (882,755)
Forward
FX contracts - (96,894) - (96,894)
Repurchase
agreements - (18,522,494) - (18,522,494)
Total liabilities - (19,502,143) - (19,502,143)
--------------- ------------- -------------- -------------
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.
Investments classified within Level 3 have significant unobservable inputs, as they trade infrequently.
Forty Level 3 investments were held during the Year
Notes to the Financial Statements (continued)
8. Fair value of financial instruments (continued)
Fair Value Transfer Fair Value
at 1 to/(from) at 30
Product Trade October Level Unrealised September
Type Transaction Date 2015 2 Realised & FX Purchases Sales Redemptions 2016
ARB CDO 1 08/05/2015 1,600,635 - 90,243 142,245 - (1,806,299) (26,824) -
ARB CDO 2 08/05/2015 546,548 - 50,051 (50,137) 12,822 - (71,207) 488,077
ARB CDO 3 08/05/2015 1,552,507 (1,550,889) - - - - (1,618) -
ARB CDO 4 08/05/2015 963,206 - (3,660) (156,340) - (800,000) (3,206) -
ARB CDO 5 08/05/2015 320,000 - 115,137 12,863 - (448,000) - -
ARB CDO 6 08/05/2015 1,615,520 - (75,015) 145,015 - (1,680,000) (5,520) -
ARB CDO 7 19/06/2015 39,115,186 (32,391,686) 1,863,587 (903,294) - - (7,683,793) -
ARB CDO 8 08/05/2015 265,514 (408,217) - (48,468) 191,171 - - -
ARB CLO 9 08/05/2015 752,000 - - 376,000 - - - 1,128,000
ARB CLO 10 08/05/2015 1,086,068 - - 26,400 - - (20,468) 1,092,000
ARB CLO 11 08/05/2015 635,665 - 65,749 4,806 - - (706,220) -
ARB CLO 12 08/05/2015 5,766,810 - 246,169 95,281 - (6,034,250) (74,010) -
ARB CLO 13 19/06/2015 1,627,636 - - 14,820 - - (117) 1,642,339
ARB CLO 14 30/06/2015 202,050 (161,361) 8,984 4,521 - - (54,194) -
ARB CLO 15 16/07/2015 10,130,000 (10,130,000) - - - - - -
ARB CLO 16 24/09/2015 31,250,000 - - (1,802,925) - (1,400,596) - 28,046,479
BS CLO 17 08/05/2015 203,257 - 38,939 48,171 - - (290,367) -
BS CLO 18 08/05/2015 280,065 - - 209,979 - - (20) 490,024
BS CLO 19 08/05/2015 5,593,000 - - (2,440,500) 560,000 - - 3,712,500
CMBS 20 08/05/2015 255,538 - - (42,590) - - - 212,948
CMBS 21 08/05/2015 48,142 (25,771) - (22,371) - - - -
CMBS 22 08/05/2015 20,124 (6,104) 15,721 604 - (29,385) (960) -
RMBS 23 08/05/2015 4,746,482 - (479,405) 937,110 18,636 (5,221,255) (1,568) -
RMBS 24 08/05/2015 34,000 - - (17,000) - - - 17,000
SENIOR
LOAN* 25 08/05/2015 7,943,300 - - - - (7,943,300) - -
WHOLE
LOAN** 26 14/07/2015 6,003,365 - - (476,413) - - (137,251) 5,389,701
BS CLO 27 03/06/2016 - - - (936,000) 4,628,000 - - 3,692,000
RMBS 28 12/05/2016 - - 6,410 (7,497) 218,335 - (19,452) 197,796
RMBS 29 10/03/2016 - - - 219,830 1,726,243 - 5,810 1,951,883
RMBS 30 05/05/2015 - 1,630,991 - 25,209 - - 12 1,656,212
CMBS 31 13/05/2015 - 1,238,261 - (219,625) - - 34,836 1,053,472
CMBS 32 05/05/2015 289,517 902,624 - - (2,063) 1,190,078
RMBS 33 05/05/2015 - 11,333 - 4,707 - - 2,740 18,780
RMBS 34 24/09/2015 - 71,427 - (599) - - 839 71,667
ARB CLO 35 05/05/2015 - 2,112,500 - (550,000) - - 16,321 1,578,821
ARB CLO 36 26/07/2016 - 2,718,645 74,308 (559,575) - - (426,902) 1,806,476
CONS ABS 37 05/05/2015 - 120,000 - - - - - 120,000
RMBS 38 22/06/2016 - - - (766,700) 4,915,966 - - 4,149,266
ARB CLO 39 05/05/2015 - 2,127,695 - (67,945) - - 44,502 2,104,252
ARB CLO 40 05/05/2015 - 1,029,952 - 48,048 - - 184 1,078,184
------------ ------------- ---------- ------------ ----------- ------------- ------------ -----------
122,556,618 (33,613,224) 2,017,218 (5,849,746) 12,560,690 (25,363,085) (9,420,516) 62,887,955
------------ ------------- ---------- ------------ ----------- ------------- ------------ -----------
Notes to the Financial Statements (continued)
8. Fair value of financial instruments (continued)
*Senior Loan secured by borrower's assets
** Whole Loan secured by real estate asset
Product
Type Description
ARB CDO Arbitrage CDO
ARB CLO Arbitrage CLO
BS CLO Balance Sheet CLO
Commercial mortgage-backed
CMBS security
CONS ABS Consumer asset-backed security
Residential mortgage-backed
RMBS security
As of 30 September 2016, twenty-four (2015: twenty-six) investments were categorised within Level 3 of the fair value hierarchy, representing 18.62% (2015: 33.39%) of the NAV.
The below sensitivity analysis presents an approximation of the potential effects of events that could have occurred as at the reporting date, and mostly based on the Portfolio Manager's stress case of 1.5 and 2xCDR ("Constant Default Rate") per product type expressed as a percentage of the NAV, this analysis excludes transaction 26, on which an analysis follows the table.
However, since most valuations were based upon prices received from banks or other market participants, the sensitivity analyses produced are not necessarily based upon the assumptions used by such banks/market participants as these are not made available to the Company.
1.5xCDR 2xCDR
ARB
CDO 0.00% 0.00%
ARB
CLO -0.15% -0.28%
BS CLO -0.21% -0.23%
CMBS 0.00% 0.00%
CONS
ABS 0.00% 0.00%
RMBS -2.92% -2.91%
Transaction 26
The main sensitivity of the transaction is to the long term charter rates of the underlying vessels in collateral. In the Investment Advisors stress case, the impact to the Company's NAV is -0.44%
In addition to the CDR sensitivities above, some transactions are sensitive to specific parameters:
ARB CLO - generally vulnerable to increase in default rate and loss severity of leveraged loans (primarily large cap corporates); though due to structural features, some tranches may benefit from moderate increase in defaults. The default rate and loss severity themselves are affected by state of global and regional economies and capital markets.
BS CLO - generally vulnerable to increase in default rate and loss severity of bank loans to SMEs. The default rate and loss severity themselves are affected by interest rates and state of local economy in particular growth.
CMBS - most of the pre-2008 deals consist of defaulted assets and have high asset concentration. This makes the deals sensitive to recovery rates (market value of commercial real estate) and ability of borrowers to refinance.
CONS ABS - generally sensitive to default rate and loss severity of consumers. The default rate and loss severity themselves are affected by state of local economy in particular unemployment.
RMBS - generally sensitive to default rate and loss severity of owner occupied and buy-to-let real estate. The default rate and loss severity themselves are affected by interest rates and state of local economy in particular unemployment.
Notes to the Financial Statements (continued)
9. Earnings per Share - Basic & Diluted
The earnings per Share - Basic and Diluted of 3.09 cents (2015: 3.52 cents) has been calculated based on the weighted average number of Shares of 361,450,000 (2015: 348,190,411) and a net gain of EUR11,170,394 (2015: gain of EUR12,272,932) over the year. There were no dilutive elements to shares issued or repurchased during the year.
10. NAV per Share
The NAV per share of 97.38 cents (2015: 101.54 cents) is determined by dividing the net assets of the Company attributed to the Shares of EUR351,990,697 (2015: EUR367,025,428) by the number of Shares in issue at 30 September 2016 of 361,450,000 (30 September 2015: 361,450,000).
11. Financial assets and financial liabilities at fair value through profit or loss
30 September 30 September
2016 2015
EUR EUR
Financial assets at fair value
through profit or loss :
Held for trading:
- Debt securities 25,557,709 13,745,346
- ABS 232,274,177 272,121,451
- Sovereign bonds 331,590 326,673
- Equity securities 190,689 251,913
- Fund investments 35,847,475 -
- Listed options 70,742 462,606
- Money market loan 28,399,950 13,946,665
- CDS 831,870 441,378
- Forward FX contracts 683,852 220,922
- Repurchase agreement 983,790 -
------------- -------------
Total financial assets at fair
value through profit or loss 325,171,844 301,516,954
------------- -------------
Financial liabilities at fair
value through profit or loss
:
Held for trading:
- Debt securities (1,078,750) (882,755)
- CDS (2,008,397) (96,894)
- Money market loan (871,125) -
- Repurchase agreement - (18,522,494)
------------- -------------
Total financial liabilities
at fair value through profit
or loss (3,958,272) (19,502,143)
------------- -------------
12. Net gain/(loss) on financial assets and financial liabilities held at fair value through profit or loss
30 September 30 September
2016 2015
Net gain on financial assets
and liabilities at fair value
through profit or loss held
for trading EUR EUR
- Credit default swaps (1,242,748) 503,968
- Debt securities 1,519,828 4,636,839
- Asset backed securities 19,267,289 8,178,651
- Equity securities (25,853) 13,231
- Investment in Taurus Corporate
Financing LLP 847,475 -
- Listed options (3,201,562) 2,488,952
- Futures (12,345) (64,970)
- Loans 1,045,091 550,951
Net gain on financial assets
and liabilities at fair value
through profit or loss held
for trading 18,197,175 16,307,622
------------- -------------
Notes to the Financial Statements (continued)
12. Net gain/(loss) on financial assets and financial liabilities held at fair value through profit or loss (continued)
30 September 30 September
2016 2015
Net (loss)/gain on foreign
exchange and forward contracts EUR EUR
Realised gain on forward contracts 7,919,768 261,270
Unrealised gain on forward
contracts 559,824 124,028
Realised (loss)/gain on foreign
exchange (3,998,349) 948,008
Unrealised loss on foreign
exchange (4,544,959) (1,212,665)
Net (loss)/gain on foreign
exchange and forward contracts (63,716) 120,641
------------- -------------
Net gain on financial assets
and liabilities at fair value
through profit or loss and
foreign exchange and forward
contracts 18,133,459 16,428,263
------------- -------------
13. Due from and to brokers
30 September 2016 30 September 2015
EUR EUR
Collateral and funding cash 7,634,973 10,868,726
Receivables for securities sold 5,349,521 19,689,527
12,984,494 30,558,253
------------------------- --------------------------
Payables for securities purchased 3,501,238 612,500
3,501,238 612,500
------------------------- --------------------------
14. Other receivables and prepayments
30 September 2016 30 September 2015
EUR EUR
Prepaid Custodian fee 1,128 -
Prepaid D&O Insurance fees 6,542 5,661
Prepaid Directors fees 17,254 -
Prepaid listing fee - 4,853
Other fees 42,047 -
66,971 10,514
-------------------------------- --------------------------------
15. Accrued expenses
30 September 30 September
2016 2015
EUR EUR
Management fee (295,214) (325,232)
Performance fees (2,837,574) (2,165,819)
Administration fee (6,665) (7,907)
Audit fee (47,340) (72,600)
Corporate brokering fee (35,823) (42,406)
Sub-Administration fee (19,176) (22,582)
Legal fee (1,875) (989)
Director's fee - (30,343)
Custodian fee - (17,811)
Other fee (77,995) (81,393)
(3,321,662) (2,767,082)
------------- -------------
Notes to the Financial Statements (continued)
16. 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.
Assenting Toro Capital I-A and I-B Shareholders were issued roll-over Shares in the Company as an in specie distribution of the liquidation proceeds to which they were entitled (the "Roll-Over Shares"). In consideration for the issuance of Roll-Over Shares, the liquidator and the Company entered into a transfer agreement under which the liquidator transferred to the Company the beneficial interest in the seed assets with a value approximately equal to the aggregate NAV of the Toro Capital I shares held by the Assenting Toro Capital Shareholders as at the valuation date.
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 NAVs 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 NAVs of any of the issued class of 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. There are currently no external capital requirements.
Notes to the Financial Statements (continued)
17. 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 of investing in ABS and other structured credit investments in liquid markets and the Company's performance is evaluated on an overall basis.
The Company invests in a diversified portfolio. 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 Condensed Schedule of Investments.
18. 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 January, April, July and October each year and paid in March, July, September and December,. The Company declared a dividend of 2 cents per Share in January 2016 for the period from 1 October 2015 to 31 December 2015, 2 cents per Share in April 2016 for the period from 1 January 2016 to 31 March 2016, 1.25 cents per Share in July 2016 for the period from 1 April 2016 to 31 June 2016 and 1.25 cents per Share in October 2016 for the period from 1 July 2016 to 30 September 2016.
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.
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 Fund 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.
For short CDS positions, where the Company has sold protection, the maximum potential payout in the event of a default of the underlying instrument is the nominal value of the protection sold.
The market for CDS may from time to time be less liquid than debt securities markets. Due to the lower amount of cash required to hold a position in the CDS versus cash bond markets, the opposite has shown to be true during times of market illiquidity. In relation to CDS where the Company sells protection the Company is subject to the risk of a credit event occurring in relation to the reference issuer. Furthermore, in relation to CDS where the Company buys protection, the Company is subject to the risk of the counterparty of the CDS defaulting.
Listed Options (Equity Options)
A listed option is a derivative financial instrument that establishes a contract between two parties concerning the buying or selling of an asset at a reference price during a specified time frame. During this time frame, the buyer of the option gains the right, but not the obligation, to engage in some specific transaction on the asset, while the seller incurs the obligation to fulfil the transaction if so requested by the buyer.
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/period-end date, and is included in the Statement of Comprehensive Income.
Notes to the Financial Statements (continued)
19. Derivative financial instruments
The following table shows the Company's derivative position as at 30 September 2016:
Financial Financial
assets liabilities
at fair at fair Notional
value value amount Maturity
EUR EUR EUR
20 December
CDS Sell Protection 831,870 - (35,500,000) 2020
20 December
CDS Buy Protection - (1,327,039) 41,500,000 2020
20 June
CDS Buy Protection - (360,828) 4,500,000 2021
20 December
CDS Buy Protection - (320,530) 4,000,000 2021
21 October
Listed Options 58,729 - 58,729 2016
16 December
Listed Options 12,013 - 12,013 2016
FX Contracts
14 December
GBP sell 665,595 - (37,578,533) 2016
14 December
USD sell 18,257 - (12,430,379) 2016
14 December
EUR buy - - 50,008,912 2016
---------- ------------- -------------
1,586,464 (2,008,397) 14,570,742
---------- ------------- -------------
The following table shows the Company's derivative position as at 30 September 2015:
Financial Financial
assets liabilities
at fair at fair Notional
value value amount Maturity
EUR EUR EUR
20 June
CDS Buy Protection - (882,755) 18,000,000 2020
20 June
CDS Sell Protection 441,378 - (9,000,000) 2020
16 October
Listed Options 462,606 - 462,606 2015 to
18 December
2015
FX Contracts
14 December
GBP sell 220,922 - (57,121,874) 2015
14 December
USD sell - (96,894) (6,165,771) 2015
14 December
EUR buy - - 63,287,645 2015
---------- ------------- -------------
1,124,906 (979,649) 9,462,606
---------- ------------- -------------
20. Securities sold under agreements to repurchase and securities purchased under agreements to resell
Securities sold under agreements to repurchase ("repurchase agreements") and securities purchased under agreements to resell ("reverse repurchase agreements") are treated as collateralised financing transactions. The financing is carried at the amount at which the securities were sold or acquired plus accrued interest, which approximates fair value. It is the Company's policy to deliver securities sold under agreements to repurchase and to take possession of securities purchased under agreements to resell.
As of 30 September 2016, there is a repurchase agreement in place. The key terms are as follows:
Main terms of the repurchase agreement in place as of 30 September 2016:
Maturity: 12 Nov 2016 (3 months)
Rate: 2.5%
Notional: 974,250
Notes to the Financial Statements (continued)
21. Interests in other entities
List of subsidiaries
Taurus Corporate Financing LLP ("the Subsidiary") meets the definition of a subsidiary in accordance with IFRS 10. The subsidiary is a fully owned subsidiary of the Company and is measured at fair value through profit or loss. The reconciliation of the subsidiary carrying value per the financial statements is shown below:
Carrying
Opening Investments Net gain value
EUR EUR EUR EUR
Taurus Corporate
Financing LLP - 35,000,000 847,475 35,847,475
As noted in Note 2.1, the Board determined that the Subsidiary meets the definition of an investment entity as set out under IFRS 10 and that therefore the Subsidiary should measure its investment in TCF Loan Warehouse 1 Designated Activity Company (the "Warehouse") at fair value rather than consolidate its results. The Warehouse is a fully owned subsidiary of the Subsidiary and was measured at fair value through profit or loss. The reconciliation of the Warehouse's carrying value as disclosed in the financial statements of Taurus is shown below:
Carrying
Opening Investments Net gain value
EUR EUR EUR EUR
TCF Loan Warehouse
1 Designated Activity
Company - 15,499,999 186,746 15,686,745
Interests in Other Entities
Subsidiary undertaking
At 30 September 2016, the Company had one Subsidiary undertaking as defined under IFRS 10. To meet the definition of a subsidiary under the single control model of IFRS 10, the investor has to control the investee.
Control involves power, exposure to variability of returns and a linkage between the two:
(i) The investor has existing rights that give it the ability to direct the relevant activities that significantly affect the investee's returns;
(ii) The investor has exposure or rights to variable returns from its involvement with the investee; and
(iii) The investor has the ability to use its power over the investee to affect the amount of the investor's returns.
In the case of the Subsidiary, the relevant activities are the investment decisions which it makes. Power over its relevant activities is attributed to the Company through the equity investment it has, as the holder of the majority of the shares of the Subsidiary. The impact of this is it gives the Company the ability to direct the Subsidiary, and hence, decision making power on the life of the Subsidiary, and therefore the ability to control the variability of returns.
To determine control, there has to be a linkage between power and the exposure to the risks and rewards. The main linkage noted is from the equity which would allow the Company to control the continual payments of returns, and it is therefore an indication of linkage between power and variability in returns.
In accordance with IFRS 12 paragraph 19, the Company is also required to disclose the following information:
(i) Name; Taurus Corporate Financing LLP (ii) Place of business;
Old Bank Chambers
La Grande Rue
St Martin's
Guernsey
GY4 6RT
(iii) Ownership interests held; 100%
Notes to the Financial Statements (continued)
21. Interests in other entities (continued)
In accordance with IFRS 12 paragraph 19, the Company is also required to disclose the following additional information for unconsolidated subsidiaries of a subsidiary which is an investment entity:
(i) Name; TCF Loan Warehouse 1 Designated Activity Company (ii) Place of business;
3(rd) Floor,
Kilmore House,
Park Lane,
Spencer Dock,
Dublin 1
Ireland
(iii) Ownership interests held; 100% 22. Significant events during the year and post balance sheet events
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. Given the high volatility expected in FX the Company has chosen to increase the cash buffer held and has prudently monitored cash levels.
The fund doesn't have any large single deal exposure to the UK and most of the exposure is not direct. The underlying exposure to UK assets is disclosed in the Investment Manager Report. There has been no negative credit migration or price action 3 months after the vote. The Investment Manager continues to monitor these exposures actively but does not expect to see any deterioration in performance over the short term.
Over the course of the Year Toro invested in an originator, Taurus Corporate Financing LLP ("Taurus"), a Guernsey limited liability partnership, in relation to the Originated Transactions Strategy of the Company, via two investments in loan warehouse transactions of EUR23 million and EUR12 million respectively. Taurus agreed to act as the originator for, and will hold risk retention securities in, a CLO for which the investment manager is Chenavari Investment Managers.
On 22 July 2016, an ordinary resolution, expressed to take effect on Admission, was passed granting the Company authority to make market purchases of up to 14.99% of the Shares in issue following Admission. This authority is due to expire on the earlier of the conclusion of the first AGM of the Company and eighteen months from the date of the passing of the resolution. The Directors intend to seek annual renewal of this buyback authority from Shareholders each year at the Company's AGM.
On 20 October 2016 the Company declared a further dividend payment of 1.25 cents per share for the quarter to 30 September 2016 which was paid on 1 December 2016.
On 25 November 2016 the Board approved the issue of 896,262 Shares to the Portfolio Manager for a value of EUR866,327 as settlement for the performance fee earned to 30 September 2015 that was not previously settled through cash.
23. Approval of the financial statements
The Audited Financial Statements were approved for issue to shareholders by the Directors on 20 January 2017.
Appendix 1
AIFMD Disclosures - (Unaudited)
Quantitative Remuneration Disclosure for the AIFM
The total fee paid to the AIFM by the Company for the year ended 30 September 2016 is disclosed in note 4.
The AIFM is not subject to the provisions of Article 13 of the AIFM Directive, which require the AIFM to adopt remuneration policies and practices in line with the principles detailed in Annex II of the Directive. However, in accordance with Article 22 of the AIFM Directive and Article 107 of the AIFM Regulations, the AIFM must make certain disclosures in respect of the remuneration paid to its staff.
The AIFM has identified 8 staff as falling within the scope of the disclosure requirements (the "Identified Staff"). These Identified Staff are senior management, named as Designated Persons of the AIFM's managerial functions, members of the Board of Directors, and a risk officer as control function. With the exception of 2 individuals, one acting as a non-executive Director and the other as compliance officer, both of whom are external to the Carne group of companies, all Identified Staff of the AIFM are part of the Carne Group and as such receive no separate remuneration for their role within the AIFM. Instead they are remunerated as employees of other Carne group companies with a combination of fixed and variable discretionary remuneration where the latter is assessed on the basis of their overall individual contribution to the group, with reference to both financial and non-financial criteria, and not directly linked to the performance of the staff of specific business units or targets reached. The annualised remuneration amount paid to all of the Identified Staff of the AIFM in respect of their work with the AIFM for the 12 month period to 31 March 2016 was GBP 108,280. There was no variable component to this remuneration and none of the AIFM's Identified Staff are in a position to materially impact the risk profile of the Company. The AIFM manages other AIFS. The AIFM has no staff other than the Identified Staff.
Liquidity
Liquidity risk is monitored by the AIFM on an ongoing basis. The Risk Committee for the AIFM monitors the liquidity risk of the Company to ensure that the liquidity profile of the investments of the Fund complies with its underlying obligations.
At the date of this annual report there are no assets held by the Company which are subject to special arrangements arising from their illiquid nature. There has been no change to the liquidity management system and procedures during the period since incorporation. Please refer to the notes in the financial statements for an analysis of the Company's liabilities and their maturity dates at 30 September 2016.
Risk
The AIFM has delegated the portfolio management of the Company to the Portfolio Manager whilst retaining responsibility for the risk management functions for the Company in accordance with the AIFMD. The AIFM's overall risk management process monitors the consistency between the risk profile of the Company and the investment objective, policies and strategy of the Company.
Responsibility for day to day management of the Company's risk has been delegated to the Risk Officer, who works together with the transversal risk team at the Portfolio Manager. The Risk Officer reports to the Risk Committee of the AIFM. The Risk Committee has ultimate responsibility for risk management and controls of the Company and for reviewing their effectiveness on a regular basis, including taking appropriate remedial action to correct any deficiencies. The Risk Committee manages the risks of the Company through the Risk Management Policy and Procedure (the "RMPP"). The Risk Committee monitors all risk limits to ensure compliance or that corrective action is taken in the event of breaches. The Risk Committee monitors to see if limit levels are being approached and endeavours to take appropriate steps to avoid limit breaches. The Risk Committee is responsible for the implementation of the RMPP. Operational risk is monitored through periodic due diligence of delegates and ongoing monitoring of reporting from delegates.
The Risk Committee has oversight of the risk management framework of the Company and specifically the effectiveness of the risk management function with respect to governance and risk compliance. The Committee ensures that market risk, liquidity risk, credit risk, counterparty risk and operational risk are identified, measured, monitored and managed in line with the AIFM's RMPP and consistent with the Prospectus of the Company. The Committee addresses any risk related issues and escalates to the AIFM Board if necessary. The Committee is appointed by and reports to the AIFM Board.
The AIFM has assessed the current risk profile of the Company to be low.
Appendix 1 (continued)
AIFMD Disclosures - (Unaudited) (continued)
Leverage
The leverage limitation provisions of the AIFM Directive do not apply to the Company because the Company is a "non-EU AIF" and the AIFM is a "non-EU AIFM". Consequently, the AIFM (where it undertakes Portfolio Management directly or otherwise the Portfolio Manager as delegate of this function) is not required to set a maximum level of leverage (as calculated pursuant to the AIFM Directive) for the Company. Notwithstanding this, the Company has set a borrowing limit such that the Company's gearing shall not exceed 130 per cent at the time of incurrence and deployment of any borrowing. For the purposes of this calculation, gearing will be calculated as the sum of the Company's exposures to each position directly held, divided by the last published NAV (and for the avoidance of doubt, will include the full exposure held by the Company under any full recourse total return swap, but will exclude any borrowing arrangements that are limited-recourse to the Company, such as borrowings by an Originator).
There has been no change to the maximum level of leverage which the AIFM may employ on behalf of the Company. The actual level of gearing employed by the Company at 30 September 2016 was 90.39%.
Material Changes to Information
Article 23 of the AIFM Directive requires certain information to be made available to investors before they invest and requires material changes to this information to be disclosed in the annual report. There have been no material changes (other than those already reflected in the Annual Report) to the information requiring disclosure.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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January 23, 2017 02:00 ET (07:00 GMT)
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