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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Axiom European Financial Debt Fund Limited | LSE:AXI | London | Ordinary Share | GG00BTC2K735 | ORD NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 85.50 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
TIDMAXI
RNS Number : 0656V
Axiom European Financial Debt Fd Ld
04 April 2019
4 April 2019
Hot Features
Premium
Axiom European Financial Debt Fund Limited
(the "Company")
Annual Financial Report for the year ended 31 December 2018
Axiom European Financial Debt Fund Limited, a closed-ended Guernsey
fund, today announces its Annual Financial Report for the year
ended 31 December 2018.
Highlights
31 December 31 December
2018 2017
Net assets GBP76,976,000 GBP79,364,000
Net asset value ("NAV") per Ordinary
Share 90.08p 104.43p
Share price 88.00p 105.25p
(Discount)/premium to NAV (2.31)% 0.79%
(Loss)/profit for the year GBP(7,099,000) GBP9,743,000
Dividend per share declared in respect
of the year 6.00p 6.00p
Total return per Ordinary Share (based
on NAV) [1] -8.00% +16.14%
Total return per Ordinary Share (based
on share price) [1] -10.69% +20.43%
Ordinary Shares in issue at year end
[2] 85,452,024 75,999,351
[1] Total return per Ordinary Share has been calculated by comparing
the NAV or share price, as applicable, at the start of the
year with the NAV or share price, as applicable, plus dividends
paid, at the year end.
[2] On 4 February 2019, the Company issued 6,400,880 new Ordinary
Shares, raising gross proceeds of GBP5.94 million. At the date
of signing this report, there were 91,852,904 Ordinary Shares
in issue.
William Scott, Chairman, commented:
"The Company made good progress on several fronts during what
was a challenging market background in 2018. In absolute terms,
investment returns were frustrating: taking into account dividends
paid, the total return per share over the year net of all expenses
was -8.0% (2017: +16.14%). After a recovery in the third quarter
of the year, the vast majority of this loss occurred in the final
quarter of 2018. I am pleased to say that most of this has been
recouped in the first quarter of 2019 and up to 29 March 2019
(the latest available data at the time of writing), the total
return per share net of all expenses is +6.00%.
"The investment thesis that the Company was set up to exploit,
namely change in the regulatory environment applying to the capital
structures of financial institutions, remains intact. Regulatory
change is relentless. Indeed, the opportunity set within the AT1
asset class continues to grow as more issuers tap the markets.
The Company outperformed all funds in our immediate peer group
in 2017, remained in the middle of the peer group performance
pack in 2018 in tough market conditions and, since the beginning
of 2019, in the market recovery, performance has been impressive
at 6.00% as at the time of writing, above any other fund in the
asset class.
"We and our Investment Manager, Axiom, therefore remain positive
and continue to believe the Company is well positioned to capture
the value inherent in the sector."
Gildas Surry, Investment Manager, said:
"Over the year, the spreads of subordinated debt have widened
from 104 bps to 227 bps. We believe the decline in financial valuations
is not justified given the strong fundamentals. The latter have
not stopped improving since the crisis (average capital level
significantly increased to 14.70% in September 2018, four times
as much as in 2007) and we have seen a number of favourable developments
throughout the year confirming the continuous normalisation of
European bank balance sheets: ongoing improvement in credit metrics
alongside a steady reduction in stocks of non-performing bank
loans (average NPL ratio down to 3.4% in September 2018), strong
quarterly results, sustained momentum in credit rating upgrades,
and stress tests passed with success on historically severe assumptions.
Only Italian banks remain under close surveillance.
"We believe this dichotomy between fundamentals and valuations
offers very attractive entry points: the underlying credit quality
has not changed, and prices should recover as soon as the negative
sentiment reverses.
"Finally, on the regulatory side, the latest updates in the Banking
Package (CRD5 / CRR2 / BRRD2 / SRMR) brought more visibility while
confirming the potential performance of our legacy strategies.
The implementation of MREL continues to provide an attractive
set of investment opportunities within the asset class and we
see the regulatory catalyst as relevant as ever.
"For the above reasons, we remain constructive and continue to
believe the Company is well positioned in capturing the value
of the sector."
Enquiries to:
Axiom Alternative Investments Elysium Fund Management MHP Communications
SARL Limited Reg Hoare
David Benamou Giles Robinson
Gildas Surry Charles Hirst
Jerome Legras
axiom@mhpc.com
www.axiom-ai.com axiom@elysiumfundman.com Tel: +44 20 3128
Tel: +44 20 3807 0670 Tel: +44 1481 810 100 8100
A copy of the Company's Annual Report and Financial Statements
for the year ended 31 December 2018 will shortly be available
to view and download from the Company's website,
http://axiom-ai.com/web/en/axiom-european-financial-debt-fund-limited-2/.
Neither the contents of the Company's website nor the contents
of any website accessible from hyperlinks on the Company's website
(or any other website) is incorporated into or forms part of this
announcement.
The following text is extracted from the Annual Report and Financial
Statements of the Company for the year ended 31 December 2018:
Strategic Report
Overview and Investment Strategy
General information
Axiom European Financial Debt Fund Limited (the "Company") is
an authorised closed-ended Guernsey investment company with registered
number 61003. Its Ordinary Shares were admitted to the premium
listing segment of the FCA's Official List and to trading on the
Premium Segment of the Main Market of the London Stock Exchange
(the "Premium Segment") on 15 October 2018 ("Admission") (prior
to this, the Ordinary Shares traded on the Specialist Fund Segment
("SFS") of the London Stock Exchange).
Investment objective
The investment objective of the Company is to provide Shareholders
with an attractive return, while limiting downside risk, through
investment in the following financial institution investment instruments:
* Regulatory capital instruments, being financial
instruments issued by a European financial
institution which constitute regulatory capital for
the purposes of Basel I, Basel II or Basel III or
Solvency I or Solvency II;
* Other financial institution investment instruments,
being financial instruments issued by a European
financial institution, including without limitation
senior debt, which do not constitute regulatory
capital instruments; and
* Derivative instruments, being CDOs, securitisations
or derivatives, whether funded or unfunded, linked or
referenced to regulatory capital instruments or other
financial institution investment instruments.
Investment policy
The Company seeks to invest in a diversified portfolio of financial
institution investment instruments. The Company focuses primarily
on investing in the secondary market, although instruments have
been, and may also in the future be, subscribed in the primary
market where the Investment Manager, Axiom Alternative Investments
SARL ("Axiom"), identifies attractive opportunities.
The Company invests its assets with the aim of spreading investment
risk.
For a more detailed description of the investment policy, please
see the Company's Prospectus, which is available on the Company's
section of the Investment Manager's website
(http://www.axiom-ai.com/web/data/prospectus/ENG/AEFD-prospectus-UK.pdf).
Chairman's Statement
I am pleased to present our report for the year ended 31 December
2018.
Results
The Company made good progress on several fronts during what was
a challenging market background in 2018. In absolute terms, investment
returns were frustrating: taking into account dividends paid,
the total return per share over the year net of all expenses was
-8.0% (2017: +16.14%). After a recovery in the third quarter of
the year, the vast majority of this loss occurred in the final
quarter of 2018. I am pleased to say that most of this has been
recouped in the first quarter of 2019 and up to 29 March 2019
(the latest available data at the time of writing), the total
return per share net of all expenses is +6.00%.
Our Investment Manager, Axiom, gives a detailed, comprehensive
report on both the markets and portfolio composition in the Investment
Manager's Report of this document and on the drivers behind these
results. I shall not repeat that here.
In aggregate, the Company reported a net loss after tax for the
year ended 31 December 2018 of GBP7.1 million (2017: profit of
GBP9.7 million), representing a loss per Ordinary Share of 8.48p
(2017: earnings of 15.88p) and the Company's NAV at 31 December
2018 was GBP77.0 million (90.08p per Ordinary Share) (2017: GBP79.4
million, 104.43p per Ordinary Share).
Dividends
The Company declared four dividends each of 1.50p per Ordinary
Share in relation to the year: one was declared after the balance
sheet date and was paid on 22 February 2019 to Shareholders on
the register at 1 February 2019. During the period, actual payments
of 6.00p were made, being the May, August and November dividends
of 1.50p each and the 1.50p dividend in respect of the period
ended 31 December 2017 which was paid on 23 February 2018.
Transition of listing, placing programme and fundraising
We remain committed to expanding the size of the Company to improve
the return economics for Shareholders by spreading the burden
of the operational costs of the Company over a larger asset base
and also improving trading liquidity in our shares.
During the year, notwithstanding the difficult markets, we completed
two incremental placings of shares: on 13 February 2018, the Company
placed a further 8,229,174 new Ordinary Shares at a price of 107.50p
per new Ordinary Share, raising gross proceeds of GBP8.85 million.
On 15 August 2018, the Company completed an additional placing
of 1,223,499 new Ordinary Shares at a price of 98.50p per new
Ordinary Share, raising gross proceeds of GBP1.21 million. On
19 October 2018, we refreshed the Placing Programme Prospectus
to enable the Company to continue to expand by placing up to 500
million new Ordinary Shares at not less than the prevailing NAV
(cum income) per share at the time of issue plus a premium to
cover the costs and expenses of the relevant placing. After the
year end, on 4 February 2019, the Company raised gross proceeds
of GBP5.94 million from the placing of 6,400,880 new Ordinary
Shares at 92.81p per new Ordinary Share. In just under a year,
therefore, we have expanded the number of shares in issue by 20%.
In the 30 June 2018 interim financial statements, we outlined
a proposal to transfer the listing of the Company's Ordinary Shares
from the Specialist Fund Segment to the Premium Segment of the
main market of the London Stock Exchange, and I am pleased to
say that this transfer took place on 15 October 2018.
This move, together with the greater availability of shares in
issue for trading, may make the Company's shares more accessible
to some categories of investor and improve trading liquidity for
all Shareholders. As the Company grows over time, we hope that
it will become increasingly investable for larger institutional
investors.
Outlook
2018 was very much a mixed and challenging market context with
a self-fulfilling spiral of poor liquidity, open-ended fund redemptions
and falls in asset prices notwithstanding that, in general, the
underlying fundamentals have continued to improve. This dichotomy
between fundamentals and prices offers very attractive entry points
for new money and we were able to take advantage of that by issuing
further shares after the year end. Listed closed-end funds are
ideally suited to navigating volatile markets in general and this
structure has served the Company well in 2018 and we expect it
will continue to do so for many years to come. By contrast, open-ended
funds are vulnerable to the flows of subscriptions and redemptions
effectively forcing them to buy assets at market highs and to
sell at market lows, actions which erode performance over market
cycles. As a closed-ended Company, our shares may trade at a premium
or at a discount to NAV per share. In recent weeks, the discount
has widened slightly to 7.97% but it remains relatively low in
comparison to many other funds and will present further opportunities
to encourage investment in an attractive asset class at an additional
discount to intrinsic value.
The investment thesis that the Company was set up to exploit,
namely change in the regulatory environment applying to the capital
structures of financial institutions, remains intact. Regulatory
change is relentless. Indeed, the opportunity set within the AT1
asset class continues to grow as more issuers tap the markets.
The Company outperformed all funds in our immediate peer group
in 2017, remained in the middle of the peer group performance
pack in 2018 in tough market conditions and, since the beginning
of 2019, in the market recovery, performance has been impressive
at 6.00% as at the time of writing, above any other fund in the
asset class.
We and our Investment Manager, Axiom, therefore remain positive
and continue to believe the Company is well positioned to capture
the value inherent in the sector.
William Scott
Chairman
3 April 2019
Investment Manager's Report
1- Market developments
In January, subordinated financials started on a very strong tone
despite new MiFID 2 rules impacting trading conditions. In a context
of rates steadily increasing on the back of the "broadest synchronised
global growth upsurge since 2010" as observed by IMF's Christine
Lagarde on her way to Davos, banks were in strong demand and investors
kept searching for yield with limited duration. Additional Tier
1s ("AT1s") rallied strongly in the first three weeks followed
by legacy instruments, floaters in particular.
On Non-Performing Loans ("NPLs"), the ECB pressure found some positive
response in Italy with banks such as Intesa, UBI and Banco BPM
raising their targeted NPL sales.
The start of the quarter 4 earnings season was more mixed with
poor performance in Investment Banking (UBS), the impact of one-offs
(like IFRS 9) and provisions from specific corporates: Carillion
for UK banks or Duro Felguera in Spain (Santander). Still, capital
ratios remained stable overall and asset quality continued to improve.
Consolidation remained a wishful thought from regulators as the
Unicredit CEO dismissed it and Arkéa confirmed its plan to
exit Crédit Mutuel. In restructurings, NordLB confirmed it
would keep Deutsche Hypo and Cerberus, together with JC Flowers,
were selected as bidders for HSH Nordbank.
Three new AT1s were issued by RBI, UBS and Belfius. Monte Paschi
and IKB issued a Tier 2 ("T2"), while BFCM, Santander, Unicredit,
SocGen and BPCE issued new Non-Preferred Seniors. Santander UK
called the rump of its 6.984 Perp step-up, and Intesa launched
a tender on government guaranteed senior bonds.
In ratings, we would highlight the upgrade of RBS's ring-fenced
entity at Moody's, and the positive outlook of Unicredit.
In February, subordinated financials saw a negative trend in valuations
driven by investor concerns towards rate increases, Italian elections,
the formation of a government in Germany and a lack of progress
in the Brexit negotiations. Still, the quarter 4 earnings season
showed some fundamental improvements: annual profits for RBS; resumption
of dividends for RBI, StanChart and Bank of Ireland; mitigation
of IFRS 9; and Basel IV impacts. An emerging theme was capital
return and some, like Lloyds and Barclays, discussed share buybacks.
Intesa, Sabadell and Bankia presented their strategic plans and
others, like Mediobanca and Banco BPM, received the approval of
their internal capital model, confirming the trend towards regulatory
forbearance. The EBA stress tests were announced for November but
were not expected to bring any surprises. Lastly, the EIOPA released
a report that provided enough clarity for insurers to contemplate
new RT1 issues.
In corporate actions: the sale of HSH was announced within the
deadline set by the EC; Credito Valtellinese launched its highly
dilutive capital raise; and Provident announced a rights issue.
In addition, Credit Mutuel Arkea was leading an initiative to split
from its parent, and Vivat's shareholder was facing governance
issues in China. On the IPO front, NIBC was about to launch and
Deutsche Bank was selling down its asset management unit (DWS).
Rating actions were mixed: Barclays and HSBC Bank were on review
for downgrade for the impact of ringfencing and Caixa Geral in
Portugal was upgraded to Ba3.
Unipol and BNP issued T2s and Scor announced an insurance RT1 deal.
Lastly, Nordea announced the call of its EUR CMS, a situation we
had followed since November.
In March, European financials had a negative month in sympathy
with the rest of the markets, while outflows accelerated in High
Yield funds (EUR18 billion since the beginning of the year). European
long-term rates fell in fear of a new trade war, while concerns
rose about the pace of tightening led by the Fed. On a positive
note, Spain's rating was upgraded to A- by S&P for the rebound
of its economy.
European authorities published their proposals on NPLs. Draghi
widened the debate to Level 3 on hard-to-value assets, diverting
the attention away from the Italian sector. Still, BPER launched
its NPL securitisation, Banco BPM announced it could dispose more
and UBI Banca got its NPL reduction plan approved.
Litigation risk resurfaced with RBS and SocGen indicating they
were within weeks of settling with the US on mortgages and US sanctions
respectively.
Deutsche Bank successfully completed the IPO of its asset management
but communicated poorly about its performance this year so far.
Barclays got the approval of its ringfencing plans and Credito
Valtellinese successfully completed its IPO.
Consolidation continued. 15 bidders were interested in Banco Caixa
Geral in Spain. Bankia considered itself a perfect fit for a would-be
acquirer and, in Italy, Credito Emiliano was ready for acquisitions.
In insurance, Axa surprised the consensus by announcing a transformational acquisition of XL and Prudential announced a demerger of their European asset management M&G. Aviva also moved aggressively against its preference share investor base by threatening a repayment at nominal value. After unprecedented political and investor pressure, management backtracked but the broader UK preference share market had been rattled. MACIF announced the call of its floater perp, BBVA and CS the call of their first AT1s. Santander, Unicaja Banco and Caixabank each issued AT1s but it was HSBC and Axa who repriced down the market with generous pricing terms in their new issues. In April, European financials had a constructive month after geopolitical tensions eased around Syria, and Brexit softened towards a bespoke customs union, which offset the impact from US rate increases. Ratings were upgraded for Spanish banks and other issuers like SocGen or de Volksbank in the Netherlands. NPL derisking continued to be a priority for lawmakers in Europe, especially in Germany, and banks in Italy: Intesa announced a large disposal of its NPLs with Intrum. The earnings season started rather well with strong results in IB equities for Barclays and UBS, and in UK retail banking for Lloyds and RBS. On governance, we would note the management changes at SocGen, Natixis, BPCE and more importantly Deutsche Bank, where the IB would be rightsized and the franchise refocused on Germany. Credit Mutuel Arkéa in France went against the flow of bank consolidation - a wishful thinking by European regulators - by voting for the separation from its central body, to the unprecedented risk of seeing its management dismissed. New AT1s were issued by SocGen, Pfandbriefbank, KBC and Bawag. Phoenix issued a new RT1, while Aegon, Leeds, Quilter and Caixabank issued new T2s. In calls, UBS confirmed the call of its USD 4.75 low trigger coco issued in 2013, DB called its 8% Fixed-to-fixed and Aegon announced it would call its legacy instruments by 2026. Last but not least, investors in Aviva preference shares would receive a compensation if they sold their position on the back of the contentious comments by the CEO last month. During May, European financials went through a severe correction and a flight to quality due to the newly formed populist Italian government, the change of prime minister in Spain, the lack of progress on Brexit preparations in the UK and concerns about the Turkish economy. Quarter 1 results were resilient as banks reported an improvement in asset quality and stable costs, offsetting a slowdown in revenues. More positively, RBS confirmed the resolution of its litigation on US RMBS and SocGen announced that it was near a settlement on LIBOR and Libya transactions. Deutsche Bank completed its integration with Postbank but was downgraded one notch by S&P. On the regulatory front, the EU released a new proposal for CRR2 with some new grandfathering provisions towards 2024 for non-EU instruments in line with the draft from March. This new context prompted HSBC to requalify some legacy T2 instruments. The extension risk led to a market wide repricing of the disco instruments. Unicredit had also been challenged by an investor with respect to the recognition of its Cashes (equity-linked instruments) as regulatory capital. Issuers continued to call their legacy perpetuals: HSBC 8% and 8.125%, Aegon 6%, BNP 7.781% and DB 8% Fixed-to-fixed, and Intesa 8.047% step-up. The subordinated debt market experienced much volatility in June amid a fickle political environment: the EU cohesion and the German coalition both threatened by migration policies, the lack of significant progress on Brexit and the elections in Turkey. Despite all this the ECB aimed to reassure with its decision to keep interest rates unchanged until at least the end of summer 2019. The Itraxx Sub Fin Index tightened slightly and ended the month at 180 bps (compared to 205 bps at the end of May). All bar one of the 35 establishments tracked by the FED passed the US stress tests (results as at 21 June). Only the American subsidiary of Deutsche Bank failed. This was a warning that should have resulted in an acceleration of the restructuring already initiated by the bank. On the regulatory front, several recent changes were a source of new opportunities for our strategies. The European Parliament published its CRR2/BRR2 bill at the end of June, which followed the European Council's bill published at the end of May. There were divergent views on the existence of a transitional period for instruments issued by non-EU member states. Both bodies must now agree on the final CRR2/BRR2 text by the end of the year. The Bank of England published its latest rules on MREL which go against HSBC's decision to requalify some of the Legacy instruments into T2, pushing up the prices of some "Discos". Capital transactions continued despite market volatility with Standard Chartered, Bawag and even Novo Banco launching buybacks or exchange offers on their legacy instruments. Financial securities experienced a more stable market in July. The Itraxx Sub Fin Index continued to tighten ending the month at 155 bps (vs. 180 bps at the end of June). The prospect of a "Soft Brexit" after the departure of two ministers from Theresa May's government, and the strong earnings supported the market. Credit Suisse and UBS stood out for their strong quarterly performance and the Irish banks benefited from an improvement in their asset quality. Only Sabadell disappointed with a CET1 ratio down by 1% driven by the EUR177 million write-down of non-performing assets being sold and the costs related to the IT integration of TSB. Several rating upgrades took place with RBS T2 bonds moving to Investment Grade rating (Baa3 at Moody's), BFCM Non-Preferred Senior Securities (A+ at Fitch) and KBC (A at S&P). Consolidation continued in the financial sector: acquisition of the Belgian private bank of Société Générale by ABN Amro and the Italian bank Carige, under pressure from the ECB to find a buyer. In the Netherlands, the government announced the removal of the deductibility of the interest charges for the new regulatory debt formats (AT1 and RT1) from January 2019. The issuers (Rabobank, ABN and Vivat) promptly declared that they would not exercise the tax call options on their securities. Finally, the EBA issued its official response confirming there were no clear grounds to believe that the ECB had failed to carry out its supervisory responsibilities with regards to the eligibility as regulatory capital of the so-called "UniCredit Cashes" bonds. The row was triggered by an English hedge fund and led to a sharp decline in the instrument price. The primary market was active with the AT1 issued by Credit Suisse (USD2 billion) with a generous coupon of 7.5%. August proved a volatile month for financial securities due to political uncertainty. The Itraxx Sub Fin Index however widened back to its June level at 180 bps. Italy was working on its budget proposal which was to be finalized by mid-October. The draft should have outlined the actions needed to reduce the Italian deficit over the next two years. In Turkey, policymakers' actions provided some short-term stability for the Lira. The markets were eagerly waiting for a concrete action plan which was to coincide with the new medium-term economic programme due by mid-September. In the UK, 80% of the Brexit agreement had been negotiated and the possibility of a soft Brexit was gaining ground. With the release of the latest earnings results, we considered that the second quarter was predominantly positive given the strong NII and asset quality trajectories triggering EPS and DPS revisions. Moody's also upgraded the credit ratings for Caixabank and Commerzbank. With regards to NPLs, the European Commission approved the prolongation of the Italian guarantee scheme (GACS) to secure NPLs until 7 March 2019. Irish banks were making important progress on the gradual rundown of their inventory. Consolidation continued in the financial sector. Press articles started giving substance to the mergers between Deutsche Bank and Commerzbank and between SocGen and UniCredit. In France we should mention the merger of CNP Assurances (leader in life insurance) and La Banque Postale (7th largest mortgage lender). Credit Suisse redeemed its strategic cocos (9.5% coupon) and, rather surprisingly, Barclays and BNP came to the AT1 market. The deals were oversubscribed several times, which was evidence of the risk appetite and the important amount of cash available. In September, financials performed well despite a heavy political agenda. While negotiations between the EU and the UK continued to stagnate, especially around the Irish border issue, eyes turned to Italy's 2019 budget. The coalition finally agreed a deficit target of 2.4% of GDP, higher than the request from the Finance Minister, but that was enough for the market to rally. Mr Draghi's comments on a "relatively vigorous" rebound in Eurozone inflation, expected to be 1.7% by 2020, had an impact on interest rates, which rose sharply. In the banking sector, the EU Single Supervisor indicated that consolidation was needed for EU banks' profitability. Headlines continued to mention the mergers between UniCredit and Société Générale, and between Deutsche Bank and Commerzbank. On the former, CEO Mustier reiterated that UniCredit was focused on organic growth. On the latter, the Deutsche Bank CEO played down the talk of a possible merger but the German government was
quoted as open to the idea.
On conduct issues, Danske Bank was embroiled in a serious money
laundering probe involving its Estonian subsidiary while ING settled
its own case with a EUR750 million fine. Balance sheet clean-ups
continued with UniCredit, BPER, BBVA, Bankia and Novo Banco all
preparing new disposals.
The primary market was active this month. BBVA, Bankia, SocGen,
Rabobank, Credit Suisse and HSBC took advantage of the positive
market direction to issue AT1 bonds. In the secondary market,
Nordea, BCP and Caixa Geral called their discounted perps while
Standard Life Assurance announced its tender on its legacy insurance-guaranteed
bonds.
Financial stocks fell sharply in October, in line with the rest
of the market. From a macroeconomic standpoint, elements of concern
remained the same: political situation in Italy, complicated negotiations
around Brexit and evolution of central banks' monetary policies.
In this context, the Itraxx Sub Fin Index ended the month at 190
bps, a widening of 15 bps over the month, relatively low in comparison
with financials' equities.
In Italy, the European Commission rejected the budget plan and
asked the government to submit a new one. As expected, Moody's
downgraded Italy's rating one notch, ranking the country just
above High Yield. However, Moody's maintained a stable outlook,
which contained the spread widening.
In Spain, the banks were impacted by the Supreme Court deliberations
on tax imposed on mortgages and the risk of retroactivity.
Banks' quarterly earnings confirmed the improvement of fundamentals.
Strong updates came from HSBC and UBS as well as Credit Suisse's
private bank. Spanish banks' results came above consensus with
Santander beating its 11% CET1 end-of-year target ratio. Among
the Nordics, SEB stood out with a strong quarter.
S&P upgraded Crédit Agricole's long-term rating which led
to an upgrade of the bank's AT1 rating to Investment Grade.
The stock of NPLs continued to decrease in Italy according to
the quarter 2 data published by the Bank of Italy, with Banco
BPM and UBI making solid progress.
With regards to regulation, banks continued recycling their subordinated
bonds by calling grandfathered instruments despite the market
conditions and the upcoming stress tests. Barclays also called
their USD prefs and, for the first time, a legacy instrument was
called at its make-whole price (above 150!) and it came from Santander
UK on its 8.963 Perp-30.
In November, the uncertainties around Brexit and the iterations
of the Italian budget continued to weigh on market sentiment.
The UK parliament struggled to unite behind Theresa May's Withdrawal
deal, ahead of the meaningful vote scheduled for 11 December.
The Italian government was still postponing its new budget target
despite the threat of an excessive deficit procedure considered
by the European Commission.
Mid-November marked the end of a decent earnings season, slightly
above expectations. Note the strong results of Commerzbank and
Société Générale and the substantial improvement
in profits at ABN, UBI, Intesa and Crédit Agricole. As for
Spanish banks, the revised decision of the Supreme Court on transfer
duties for mortgages came in their favour.
More importantly for the sector, the EBA and BoE 2018 stress tests
confirmed the continued improvement in banking fundamentals and
the banks' increased resilience to the most severe stress scenarios
ever considered in Europe. Three UK banks eventually proceeded
with returning capital: Standard Chartered for shareholders, Barclays
and RBS for subordinated bondholders.
The regulatory catalyst was more relevant than ever as shown by
the ongoing calls of grandfathered instruments: two months after
Barclays, RBS called back five legacy instruments. Deutsche Bank,
despite being exposed in further headlines, launched a tender
for two senior instruments.
The primary market remained tight with a limited number of new
issues. UniCredit issued a non-preferred senior via a USD3 billion
private placement at a spread level almost equivalent to one of
their last AT1s issued a year ago, while Sabadell issued a T2
instrument at 510 bp, the highest historical level in two years.
The month of December ended a challenging year shaped by increased
political and economic fear: Brexit, Italy, US trade war with
China and falling oil prices. Investors' perception gradually
deteriorated, and a risk-off sentiment finally materialized at
the end of the year.
As expected, at the end of December, the ECB decided to place
Banca Carige under supervision and temporary administrators were
appointed. The bank had to carry out a capital increase or find
a buyer before the end of 2018.
Regardless of difficult market conditions, 2018 saw a number of
calls of non-eligible debt instruments continuously throughout
the year: Barclays, RBS, Nordea, AXA, BPCE and tentatively Santander,
Aegon, etc.
2- Investment Objective and Strategy
The Company is a closed-ended fund investing in liabilities issued
by European financial institutions, predominantly legacy Tier
1s ("T1s"), T2s, and AT1s across five sub-strategies:
* Liquid Relative Value: instruments issued by large
and strong quality institutions, with significant
liquidity. These can be purchased on either primary
or secondary markets.
* Less Liquid Relative Value: instruments issued by
large and strong quality institutions, with limited
liquidity due to past tenders or complex features
(secondary market).
* Restructuring: instruments issued by institutions in
preparation or implementation of a restructuring
process (secondary market).
* Special Situations: instruments issued by entities in
run-off, under a merger process or split between
several entities (secondary market).
* Midcap Origination: instruments issued by small
institutions or small subsidiaries of larger
institutions (primary market).
3- Company activity
January
In Liquid Relative Value, the Company increased its exposure to
the AT1 segment in the early part of the month but refrained from
taking part to the new issues as valuations got stretched.
In Less Liquid Relative Value, the Company selectively added on
some defensive carry positions such as Fixed-to-fixed bonds from
BNP Paribas and Rabobank's insurer. The Company held a small position
in the Santander UK bond being called.
In Special Situations, the Company added a perpetual ex-convertible
hybrid issued by the Belgian insurer Ageas with a floating rate
coupon at a significant discount. After the strong appreciation,
some positions on CMS-linked perpetuals were reduced.
In Restructuring, the Company took part in the new T2 issued by
IKB, reduced its exposure to legacy T1s issued by another German
lender (bought at 47.00, sold at 52.00) and sold its legacy T1
issued by a Greek bank (bought at 29.00, sold at 56.50).
The Company also increased its rate hedges in order to cushion
the price impact on its longer-duration positions.
February
The Company increased its size by 11% following a successful fifth
placing on 13 February and deployed its new capital as follows:
* Liquid Relative Value: it bought two defensive AT1s
that underperformed in the correction (CS 7.5 and BNP
7.375). It also benefited from the appreciation of
its Vivat T2 position as the issues impacting its
shareholder made it an acquisition target, and sold
the Nordea called bond above par (1% bought at 91 in
November).
* Less Liquid Relative Value: it continued to add carry
positions in Fixed-to-fixed bonds from the largest UK
banks, insurance and building societies and a Dutch
insurer. It took profit on its Crédit Logement
hybrid.
* Special Situation: it increased its exposure to an
equity-linked hybrid issued by a French bank and a
discounted Perp issued by HSBC, while reducing its
exposure to French CMS.
* Restructuring: it sold its Valtellinese bond at 105
(bought at 84 in January), reduced its exposure to
HSH hybrids above 60 (bought at 52) and bought a
small hybrid issued by a Portuguese bank.
* Midcap Origination: it increased its holding in an
illiquid issue from a Spanish mutual.
March
The Company traded the market context with a defensive approach
by proceeding to selective switches of positions.
* Liquid Relative Value: the Company sold its holdings
in Vivat and Santander 5.25 AT1 and, to capture the
new issue premia, took part in the new AT1s by
Santander and Caixabank, the new Scor RT1 and the new
Axa T2.
* Less Liquid Relative Value: at the time of Aviva's
warning for a redemption of its preference shares at
nominal value, the Company had a marginal exposure of
0.40% only and, after reducing slightly its overall
exposure, it opportunistically increased its holding
on Ecclesiastical as well as on preferred shares
issued by an Opco within RBS group. These securities
have more protective language because the bylaws
prevent ordinary shareholders from diluting the vote
of preferential shareholders. It also tactically
added on some Aviva preference shares at discounted
levels.
* Special Situations: the Company added on Standard
Life which, following the sale of its insurance
business to Phoenix, should see the guarantee of its
bonds trigger a tender.
* Restructuring: the Company reduced further its
holding in NDB and added on HSH Nordbank.
* Midcap Origination: finally, the Company invested in
the new Ibercaja AT1.
April
The Company continued to trade with selective switches of positions.
* Liquid Relative Value: the Company reduced its
holdings in insurance RT1s (Direct Line and Scor) and
bank AT1s (Nordea, Credit Suisse, Baer and Virgin
Money) that had held well and invested into the new
KBC and Bawag AT1s.
* Less Liquid Relative Value: the Company reduced its
holdings in Prudential Fixed-to-fixed, and added on
RBS and Lloyds preference shares.
* Special Situations: the Company added on discounted
Perps issued by Aegon.
* Restructuring: the Company sold its holdings in NDB
following the reinstatement of coupons.
* Midcap Origination: the Company invested in Quilter
and Leeds new issues and increased its holding in the
Spanish mutual Caser.
May
In the correction, the Company remained underweight on Italian
bonds and covered its shorts on SocGen discos and Bankinter AT1s.
More specifically:
* Liquid Relative Value: the Company sold its remaining
position on Virgin Money AT1s after CYBG was
confirmed as a potential acquirer. It also sold its
holdings in USD Fixed-to-fixed BNPs given the cost of
hedging back into GBP.
* Less Liquid Relative Value: the Company reduced its
holdings in Aviva and Ecclesiastical preference
shares after the recent rebound, reduced its exposure
to UK discos (HSBC and Barclays) and sourced a rare
T1 step-up issued by Banco BPM in Italy.
* Special Situations: the Company sold its residual
position on Unicredit Cashes around 65.00.
* Restructuring: the Company started a position on IPF
and added on Caixa Geral legacy step-ups.
* Midcap Origination: the Company sold Quilter's recent
issue and took part in new issues: Provident GBP 7%
Senior, Oaknorth Bank GBP 7.75%, Sydbank EUR 5.25%
AT1, and added on PTSB AT1s.
June
Overall, the Company added risk selectively throughout the month:
* Liquid Relative Value: the Company initially sold its
Lloyds AT1 and then took part in the new insurance
RT1 deals from CNP and Vivat. It later sold its Vivat
position on M&A speculation more than 3pts above the
new issue price.
* Less Liquid Relative Value: the Company reduced its
holding in RBS 5.25% and CMZB 8.151% in USD, for its
hedging cost and lower likelihood of take-out, and
added on BBVA's subsidiary in Turkey.
* Special Situations: benefiting from the opportunities
brought by the BoE MREL update, the Company added
some Legacy bonds issued by ring-fenced retail
entities, towards a call or tender by 2021. The
Company increased its holding of a rare Caixa Geral
legacy which could be called anytime following the
issuance of T2. The Company invested in a Prudential
long dated bond with an attractive make-whole call.
* Restructuring: the Company reduced its UK exposure by
selling its Co-Operative Bank equity and bought some
Monte T2 bonds at the lows.
* Midcap Origination: the Company sold its remaining
position in Provident seniors at a gain and invested
in T2s issued by Metro Bank in the UK and a regional
bank in Denmark.
July
The Company reduced its risk into the rally and proceeded to some
defensive switches:
* Liquid Relative Value: the Company sold some recently
issued AT1s/RT1s (RBI, CNP, KBC) to reduce its
extension risk and also reduced its Sabadell and
Bankia AT1s to reduce the beta.
* Less Liquid Relative Value: the Company bought some
Rabobank certificates to monetise the drop that
followed the Dutch government's announcement on the
removal of the tax deductibility.
* Special Situations: the Company sold a small position
on its Fortis Cashes holding.
* Restructuring: the Company invested in a senior bond
issued in GBP by TP Icap with a yield close to 5.5%
for a 2024 maturity. This leader in financial
brokerage saw its share price lose 30% on the back of
its disappointing results and the departure of its
CEO. We expected the group to be in a capacity to
overcome its challenges coming from the merger
initiated in 2016 between two leaders of this
oligopoly-style sector.
* Midcap Origination: the Company sold a small portion
of its OAKNBK holding to maintain some velocity in
the bucket and contain the exposure to the UK ahead
of the final Brexit negotiations at a gain and
invested in T2s issued by Metro Bank in the UK and a
regional bank in Denmark.
August
In this challenging environment for liquidity, the Company proceeded
to some selective arbitrages:
* Liquid Relative Value: the Company invested in a T2
issued by a Spanish local bank with improving credit
fundamentals.
* Less Liquid Relative Value: the Company sold its
Rabobank certificates after the rebound and took a
short position on T1 legacy instrument with a high
cash price and a regulatory call at par. It added on
a T2 position issued by BBVA's subsidiary in Turkey.
This position amounted to 1.0% of NAV.
* Special Situations: the Company added on some
discounted bonds issued by Lloyds Bank's retail
entity.
* Restructuring and Midcap Origination: the Company did
not have any trading activity but continued to
monitor actively the opportunities, in particular the
issuance pipeline of small and medium-sized financial
institutions.
September
In these supportive market conditions, the Company reduced its
risk overall:
* Liquid Relative Value: the Company invested in a
defensive RT1 issued by a UK insurance specialist and
initiated a short on an overpriced Dutch RT1.
* Less Liquid Relative Value: the Company sold its
holding in Santander 2% legacy bonds at a 9%
annualised gain since its purchase last year.
* Special Situations: the Company added on its Standard
Life instruments - which eventually got subject to
tender.
* Restructuring: the Company reduced its holding in
BBVA's subsidiary in Turkey after the rebound, and
added some Tier 3 ("T3") instruments from a UK
insurance specialist whose capital model was subject
to a consultation by the regulator. While it did not
have any exposure before, the Company sold protection
on Danske Bank CDS in absence of bonds in this
defensive part of the capital structure.
* Midcap Origination: the Company reduced its holding
in a small Danish retail bank and added on Permanent
TSB and a new high yield bond issued by a credit
management platform in France.
October
In these adverse conditions, the Company added risk marginally.
* Liquid Relative Value: the Company invested on liquid
AT1s issued by large issuers (3.8%) to capture the
rebound, while keeping its short positions on two
Dutch AT1s subject to the risk of par call.
* Special Situations: the Company capitalised on the
difficult liquidity conditions to add on a discounted
bond issued by a UK ring-fencing entity.
* Restructuring: the Company added on two T2s from
Italian banks at historically low levels.
November
As the adverse market conditions showed no signs of abating, the
Company realised some positions and added risk marginally.
* Restructuring: the Company sold its BCP bond that had
just been called.
* Special Situations: the Company sold a legacy Perp
issued by Aegon whose call had passed and a marginal
position on Standard Life Aberdeen where no further
catalyst was expected in the short-term.
* Less Liquid Relative Value: the Company switched into
a long call bond issued by the operating entity of
HSBC, whose credit profile would be barely impacted
by a hard Brexit scenario.
* Liquid Relative Value: the Company covered its shorts
on the two Dutch AT1s.
December
As the market conditions deteriorated further towards the turn
of the year, the Company traded carefully and did not add any risk.
* Liquid Relative Value: the Company initiated a short
in an AT1 that may skip its first call date over the
next 12 months.
* Restructuring: the Company sold its remaining holding
in BBVA's subsidiary in Turkey at a gain.
* Midcap Origination: the Company sold its residual
position on a Danish AT1 at a gain to generate
capacity for future issuance.
4- Portfolio (as at 31 December 2018)
Strategy allocation (as a % of investments held)
Liquid Relative
Value 17.0%
Less Liquid Relative
Value 28.4%
Restructuring 15.6%
Special Situations 16.0%
Midcap Origination 21.1%
Cash 2.0%
Denomination (as a % of investments held)
EUR 58.9%
GBP 28.3%
USD 11.8%
DKK 1.0%
Portfolio Breakdown (as a % of investments held)
By rating By country
A 5.6% UK 30%
BBB 33.5% France 14%
BB 37.0% Spain 13%
B 16.8% Netherlands 9%
CCC and below 6.3% Italy 9%
NR (Equity) 0.7% Portugal 8%
Germany 6%
By maturity Denmark 4%
<1 year 4.7% Ireland 3%
1-3 24.6% Jersey 2%
3-5 37.1% Belgium 2%
5-7 15.3% Austria 1%
7-10 9.3%
>10 9.1%
NR (Equity) 0.7%
By subordination
Additional Tier
1 30.0%
Legacy Tier 1 45.0%
Tier 2 22.3%
Senior 2.1%
Equity 0.7%
5- Company metrics (as at 31 December 2018)
Share price and NAV Portfolio information
Share price (mid) (GB pence) 88.00 Modified duration 1.63
NAV per share (daily) (GB
pence) 90.08 Sensitivity to credit 7.76
Dividends paid over last
12 months (GB pence) 6.00 Positions 91
Shares in issue 85,452,024 Average price 95.40
Market capitalisation (GBP
mn) 75.198 Running yield 7.52%
Total net assets (GBP mn) 76.976 Yield to perpetuity* 8.12%
Premium/(Discount) (2.3)% Yield to call* 10.06%
Net Return
1 month 3 months 6 months 1 year 3 years Since launch*
-1.43% -5.53% -2.88% -8.00% N/A 2.69%
Monthly performance
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
% % % % % % % % % % % % %
2015 0.19 -1.48 -1.29
2016 -4.02 -4.59 3.57 1.16 2.62 -1.97 2.83 1.69 -0.21 2.06 -1.60 1.91 2.92
2017 2.67 0.93 1.12 2.01 1.72 -1.41 1.86 0.58 1.76 2.72 1.31 2.92 16.14
2018 3.12 -0.70 -1.95 1.14 -5.84 -1.14 1.60 -1.26 2.43 -1.54 -2.68 -1.44 -8.00
*The yield to perpetuity is the yield of the portfolio with the
hypothesis that securities are not reimbursed and kept to perpetuity.
The yield to call is the yield of the portfolio at the anticipated
reimbursement date of the bonds. Past performance does not guarantee
future results. Annualized performance since inception of the unit.
6- NAV evolution
Share price Share price
Date NAV (mid) NAV + dividends (mid) + dividends
05/11/2015 97.97 101.50 97.97 101.50
27/11/2015 98.19 101.50 98.19 101.50
31/12/2015 96.74 101.50 96.74 101.50
29/01/2016 92.85 101.50 92.85 101.50
26/02/2016 88.24 101.25 88.59 101.60
24/03/2016 91.39 96.50 91.74 96.85
29/04/2016 92.45 96.50 92.80 96.85
27/05/2016 93.87 95.50 95.22 96.85
30/06/2016 92.02 95.50 93.37 96.85
29/07/2016 94.62 93.50 95.97 94.85
26/08/2016 94.72 94.50 97.57 97.35
30/09/2016 94.52 95.50 97.37 98.35
28/10/2016 96.47 95.50 99.32 98.35
25/11/2016 93.43 93.50 97.78 97.85
31/12/2016 95.21 92.50 99.56 96.85
31/01/2017 97.75 92.50 102.10 96.85
28/02/2017 97.01 95.00 103.01 101.00
31/03/2017 98.10 100.50 104.10 106.50
28/04/2017 100.07 99.50 106.07 105.50
31/05/2017 100.29 101.50 107.79 109.00
30/06/2017 98.88 97.50 106.38 105.00
31/07/2017 100.72 97.50 108.22 105.00
31/08/2017 99.80 96.00 108.80 105.00
29/09/2017 101.56 98.00 110.56 107.00
31/10/2017 104.32 98.25 113.32 107.25
30/11/2017 104.19 102.50 114.69 113.00
31/12/2017 104.43 105.25 114.93 115.75
31/01/2018 107.69 108.50 118.19 119.00
28/02/2018 105.44 107.00 117.44 119.00
29/03/2018 103.38 106.00 115.38 118.00
30/04/2018 104.56 105.50 116.56 117.50
31/05/2018 96.95 102.50 110.45 116.00
30/06/2018 95.84 102.50 109.34 116.00
31/07/2018 97.37 102.00 110.87 115.50
31/08/2018 94.64 98.75 109.64 113.75
28/09/2018 96.94 97.00 111.94 112.00
31/10/2018 95.45 94.00 110.45 109.00
30/11/2018 91.39 93.00 107.89 109.50
31/12/2018 90.08 88.00 106.58 104.50
7- Outlook
The market was struck by a lack of liquidity at the end of 2018.
Financials led the rise at the beginning of the year despite the
persisting economic concerns (Brexit, the recession in Italy, the
trade war between China and the United States) offset by the relatively
dovish tone of the ECB.
Over the year, the spreads of subordinated debt have widened from
104 bps to 227 bps. We believe the decline in financial valuations
is not justified given the strong fundamentals. The latter have
not stopped improving since the crisis (average capital level significantly
increased to 14.70% in September 2018, four times as much as in
2007) and we have seen a number of favourable developments throughout
the year confirming the continuous normalisation of European bank
balance sheets: ongoing improvement in credit metrics alongside
a steady reduction in stocks of non-performing bank loans (average
NPL ratio down to 3.4% in September 2018), strong quarterly results,
sustained momentum in credit rating upgrades, and stress tests
passed with success on historically severe assumptions. Only Italian
banks remain under close surveillance.
We believe this dichotomy between fundamentals and valuations offers
very attractive entry points: the underlying credit quality has
not changed, and prices should recover as soon as the negative
sentiment reverses.
Finally, on the regulatory side, the latest updates in the Banking
Package (CRD5 / CRR2 / BRRD2 / SRMR) brought more visibility while
confirming the potential performance of our legacy strategies.
The implementation of MREL continues to provide an attractive set
of investment opportunities within the asset class and we see the
regulatory catalyst as relevant as ever.
For the above reasons, we remain constructive and continue to believe
the Company is well positioned in capturing the value of the sector.
Gildas Surry
Axiom Alternative Investments SARL
3 April 2019
Investment Portfolio as at 31 December 2018
GBP'000 % of NAV
Investments in capital instruments at fair value
through profit or loss
Bonds
Achmea BV 6.000% Perp 5,114 6.64
BNP Paribas SA 4.875% Perp 4,973 6.46
Shawbrook Group PLC 7.875% Perp 4,465 5.80
Caja de Seguras Reunidos Cia de Seguros y Reaseguros
SA 8.000% 02/17/26 2,560 3.33
Caixa Geral de Depositos Finance 1.461% Perp 2,509 3.26
BNP Paribas Fortis SA 1.689% Perp 2,390 3.10
HBOS Capital Funding LP 6.850% Perp 2,346 3.05
Banco BPM SPA 9.000% Perp 2,097 2.72
OneSavings Bank PLC 9.125% 05/25/22 2,007 2.61
Saxo Bank 9.750% Perp 1,700 2.21
Hongkong & Shanghai Banking Corporation 2.750% Perp 1,691 2.20
Banco Comercial Portugues SA 4.500% 12/07/27 1,663 2.16
NIBC Bank NV 6.000% Perp 1,544 2.01
National Westminster Bank 2.813% Perp 1,500 1.95
Credito Valtellinese SPA 4.700% 08/04/21 1,464 1.90
UniCredit SpA 6.625% Perp 1,400 1.82
Oaknorth Bank PLC 7.750% 06/01/28 1,287 1.67
Ageasfinlux SA 1.032% Perp 1,279 1.66
Banco Santander SA 1.285% Perp 1,229 1.60
Caixa Sabadell Preferentes SA 1.632% Perp 1,198 1.56
Societa Cattolica di Assicurazioni SC 4.250% 12/14/47 1,177 1.53
Ibercaja Banco, SA 7.000% Perp 1,149 1.49
Rothesay Life PLC 6.875% Perp 1,137 1.48
Permanent TSB PLC 8.625% Perp 1,106 1.44
Bawag Group AG 5.000% Perp 976 1.27
HSH N Funding II Via Banque de Luxembourg 7.250%
Perp 970 1.26
Skipton Building Society 12.875% Perp 927 1.20
ASR Nederland NV 4.625% Perp 917 1.19
GNB Cia de Seguros de Vida SA 1.889% 12/19/22 914 1.19
Louvre Bidco SAS 5.375% 09/30/24 899 1.17
Metro Bank PLC 5.500% 06/26/28 892 1.16
Sparekassen Sjaelland-Fyn AS 4.500% 06/26/28 856 1.11
Liberbank SA 6.875% 03/14/27 841 1.09
International Personal Finance PLC 5.750% 04/07/21 840 1.09
Banco de Sabadell SA 6.125% Perp 813 1.06
Banco Santander SA 5.250% Perp 799 1.04
BNP Paribas 7.375% Perp 784 1.02
Caixabank SA 5.250% Perp 765 0.99
Deutsche Postbank Funding Trust I 0.915% Perp 741 0.96
Caixa Economica Montepio Geral 5.000% Perp 724 0.94
Deutsche Bank AG 7.125% Perp 720 0.93
Banco Santander SA 4.750% Perp 716 0.93
Novo Banco SA 8.500% 07/06/28 711 0.92
UniCredit SPA 8.000% Perp 699 0.91
IKB Deutsche Industriebk 4.000% 01/31/28 685 0.89
Deutsche Bank AG 6.000% Perp 662 0.86
Bank of Ireland 13.375% Perp 657 0.85
HSB Group Inc 2.632% 07/15/27 639 0.83
HSBC Bank Capital Funding LP 5.844% Perp 607 0.79
Deutsche Bank Capital Finance Trust I 1.750% Perp 597 0.78
Banco de Credito Social Cooperativo SA 7.750% 06/07/22 559 0.73
Sainsbury's Bank PLC 6.000% 11/23/27 493 0.64
GNB Cia de Seguros de Vida SA 3.189% Perp 476 0.62
TP ICAP PLC 5.250% 01/26/24 468 0.61
Just Group PLC 3.500% 02/07/25 462 0.60
Lloyds Bank PLC 3.188% Perp 435 0.56
Banca Monte dei Paschi SPA 5.375% 01/18/28 425 0.55
Newcastle Building Society 12.625% Perp 400 0.52
Standard Life Aberdeen 5.500% 12/04/42 384 0.50
Newcastle Building Society 10.750% Perp 362 0.47
Bank of Scotland PLC 9.375% Perp 353 0.46
Coventry Building Society 12.125% Perp 347 0.45
Leeds Building Society 3.750% 04/25/29 321 0.42
Prudential PLC 6.125% 12/19/31 288 0.37
HSBC Bank PLC 3.126% Perp 268 0.35
Leeds Building Society 13.375% Perp 252 0.33
Santander UK PLC 6.222% Perp 225 0.29
Bank of Scotland PLC 13.625% Perp 215 0.28
DZ Bank Perpetual Funding Issuer Jersey Ltd 0.182%
Perp 198 0.26
BA-CA Finance Cayman 2 Ltd 1.178% Perp 195 0.25
BA-CA Finance Cayman Ltd 1.070% Perp 189 0.25
Aegon NV 1.506% Perp 155 0.20
HSBC Bank PLC 2.844% Perp 155 0.20
Deutsche Postbank Funding Trust III 1.067% Perp 148 0.19
IKB Funding Trust I 1.191% Perp 79 0.10
Lloyds Bank PLC 2.628% Perp 71 0.09
Ulster Bank Ireland DAC 11.750% Perp 67 0.09
National Westminster Bank 11.500% Perp 51 0.07
Banco Popular Espanol SA 8.000% 07/29/21 51 0.07
Banco Pinto & Sotto Mayor, SA 1.146% Perp 46 0.06
Banco Popular Espanol SA 8.250% 10/19/21 10 0.01
Popular Capital SA 6.000% Perp - 0.00
Popular Capital SA Perp - 0.00
------------ ------------
77,484 100.67
Other capital instruments
Ecclesiastical Insurance Group PLC 8.625% Perp 1,565 2.03
Lloyds Banking Group PLC 9.250% Perp 1,068 1.39
Bank of Ireland 12.625% Perp 712 0.93
Standard Chartered PLC 7.375% Perp 205 0.27
Standard Chartered PLC 8.250% Perp 141 0.18
National Westminster Bank PLC 9.000% Perp 134 0.17
Natixis SA Perp 32 0.04
------------ ------------
3,857 5.01
------------ ------------
Total investments in capital instruments at fair
value through profit or loss 81,341 105.68
Derivative financial assets at fair value through
profit or loss
Sale and repurchase agreement in respect of Banco
Santander SA 6.375% Perp 1,599 2.08
Sale and repurchase agreement in respect of Santander
UK PLC 7.037% Perp 787 1.02
Standard Chartered Bank Senior CDS 12/20/23 78 0.10
Lloyds Bank PLC Senior CDS 12/20/23 62 0.08
ING Bank NV Subordinated CDS 12/20/23 29 0.04
BNP Paribas SA Senior CDS 12/20/28 15 0.02
RR Future March 2019 4 0.01
------------ ------------
Derivative financial assets at fair value through
profit or loss 2,574 3.35
Derivative financial liabilities at fair value through
profit or loss
Sale and repurchase agreement in respect of BNP
Paribas SA 4.875% Perp (4,518) (5.87)
Sale and repurchase agreement in respect of Achmea
BV 6.000% Perp (4,285) (5.57)
Sale and repurchase agreement in respect of HBOS
Capital Funding LP 6.850% Perp (1,892) (2.46)
Sale and repurchase agreement in respect of Banco
Comercial Portugues SA 4.500% Perp (1,705) (2.21)
Sale and repurchase agreement in respect of Hongkong
& Shanghai Banking Corporation 2.750 % Perp (1,476) (1.92)
Sale and repurchase agreement in respect of UniCredit
SpA 6.625% Perp (1,445) (1.88)
Sale and repurchase agreement in respect of Ageasfinlux
SA 1.032% Perp (1,052) (1.37)
Sale and repurchase agreement in respect of ASR
Nederland NV 4.625% Perp (968) (1.26)
Markit iTraxx Europe Subordinated Financial Index
12/20/23 (523) (0.68)
Markit iTraxx Europe Subordinated Financial Index
06/20/22 (431) (0.56)
Markit iTraxx Europe Subordinated Financial Index
12/20/22 (339) (0.44)
UniCredit SpA Subordinated CDS 12/20/23 (296) (0.38)
Markit iTraxx Europe Subordinated Financial Index
12/20/23 (261) (0.34)
Intesa Sanpaolo SpA Subordinated CDS 12/20/23 (189) (0.25)
Danske Bank A/S Subordinated CDS 12/20/23 (161) (0.21)
Markit iTraxx Europe Subordinated Financial Index
12/20/21 (158) (0.21)
Royal Bank of Scotland Group PLC Subordinated CDS
12/20/23 (97) (0.13)
United Kingdom of Great Britain and Northern Ireland
Senior CDS 12/20/23 (80) (0.10)
Intesa Sanpaolo SpA Senior CDS 12/20/23 (33) (0.04)
UniCredit SpA Subordinated CDS 12/20/21 (29) (0.04)
Lloyds Bank PLC Subordinated CDS 12/20/23 (6) (0.01)
GBP/EUR foreign currency forward (1,034) (1.34)
GBP/USD foreign currency forward (273) (0.35)
GBP/DKK foreign currency forward (22) (0.03)
TY Future T Notes March 2019 (11) (0.01)
------------ ------------
Derivative financial liabilities at fair value through
profit or loss (21,284) (27.66)
Axiom Capital Contingent - Class E 3,050 3.96
Short position in respect of Santander UK PLC 7.037%
Perp covered by sale and repurchase agreement (700) (0.91)
Short position in respect of Banco Santander SA
6.375% Perp covered by sale and repurchase agreement (751) (0.98)
Cash and cash equivalents 2,612 3.39
Collateral accounts for derivative financial instruments
at fair value through profit or loss 8,922 11.59
Other receivables and prepayments 2,088 2.71
Bank overdrafts (166) (0.22)
Other payables and accruals (710) (0.92)
------------ ------------
Net assets 76,976 100.00
------------ ------------
Principal Risks
Risk is inherent in the Company's activities, but it is managed
through an ongoing process of identifying and assessing risks
and ensuring that appropriate controls are in place. The key risks
faced by the Company, along with controls employed to mitigate
those risks, are set out below.
Macroeconomic risk
Adverse changes affecting the global financial markets and economy
as a whole, and in particular European financial debt markets,
may have a material negative impact on the performance of the
Company's investments. In addition, the Company's non-Pounds Sterling
investments may be affected by fluctuations in currency exchange
rates. Prices of financial and derivative instruments in which
the Company invests are subject to significant volatility due
to market risk.
The Company may use derivatives, including options, short market
indices, credit default swaps ("CDS"), and others, to mitigate
market-related downside risk, but the Company is not committed
to maintaining market hedges at any time.
The Company has a systematic hedging policy with respect to currency
risk. Subject only to the availability of suitable arrangements,
the assets denominated in currencies other than Pounds Sterling
are hedged by the Company (to a certain extent) by using currency
forward agreements to buy or sell a specified amount of Pounds
Sterling on a particular date in the future.
Historically, foreign exchange hedging has undermined many closed-ended
investment funds, as a result of sharp movements in the foreign
exchange rates leaving large hedging losses which could not be
met as assets were illiquid and banks were under severe balance
sheet strain and could not offer forbearance on facilities in
breach. The Company is exposed to foreign exchange hedging risks
(see note 24) but this risk is mitigated by the following: - Based
on the worst case scenario observed in monthly spot movement in
the past 10 years, our worst case expected hedging loss on expiry
would be 9.08% of NAV; - Our portfolio trading liquidity is such
that it would take one day, in normal circumstances, to liquidate
sufficient assets to meet such an anticipated worst case loss;
and - In "stressed" markets, we estimate it would take five days
to raise such liquidity.
Following a referendum in June 2016 and the subsequent triggering
of Article 50 in March 2017, the United Kingdom ("UK") was scheduled
to leave the European Union ("EU") on 29 March 2019 ("Brexit").
The 29 March 2019 deadline has been extended, but the time and
form of Brexit is still uncertain.
Brexit has increased the level of economic uncertainty for both
the UK and the EU, and as we continue past the end of the original
two year negotiation period, and (assuming that Brexit occurs)
into any transitional or implementation period it is possible
that there will be increased volatility in European financial
markets, and that the following Brexit risks will impact the Company:
* Laws and regulations: potential changes to UK and
EU-based law and regulation. However, as the Company
is registered in Guernsey, it is protected from this
to some extent; and
* Economic conditions: increased uncertainty, including
specific impacts on growth, inflation, interest and
currency rates, and also prices of capital
instruments and appetite for future financing.
Although the exact impact of Brexit is not known, the Board believes
that the Company is well placed to deal with Brexit.
Investment risk
There are certain risks associated with the Company's investment
activities that are largely a result of the Company's investment
policy (e.g. a portfolio concentrated on European financial debt)
and certain investment techniques which are inherently risky (e.g.
short selling).
There are numerous risks associated with having a concentrated
portfolio and the primary risk management tool used by the Company
is the extensive research performed by the Investment Manager
prior to investment, along with the ongoing monitoring of a position
once held in the Company's portfolio. The Board reviews portfolio
concentration and receives a detailed overview of the portfolio
positions quarterly, and more frequently if necessary.
The Company's activities may include short selling which theoretically
could result in unlimited loss. The Company enters into these
positions infrequently, often using CDS or other derivative positions
to obtain economic short exposure, or to hedge certain positions,
and relies on extensive due diligence prior to entering into a
short position.
The Investment Manager reports to the Board at each quarterly
Board meeting or more frequently, as necessary, on developments
and risks relating to portfolio positions, financial instruments
used in the portfolio and the portfolio composition as a whole.
Counterparty risk
The Company has credit and operational risk exposure to its counterparties
which will require it to post collateral to support its obligations
in connection with forwards and other derivative instruments.
Cash pending investment or held on deposit will also be held with
counterparties. The insolvency of a counterparty would result
in a loss to the Company which could be material.
In order to mitigate this risk the Company seeks to trade only
with reputable counterparties that the Investment Manager believes
to be creditworthy. The Investment Manager negotiates its International
Swaps and Derivatives Association ("ISDA") agreements to include
bilateral collateral agreements. In addition, cash held is only
with financial institutions with short term credit ratings of
A-1 (Standard & Poor's) or P-1 (Moody's) or better.
Exposure to counterparties is monitored by the Investment Manager
and reported to the Board each quarter.
Credit risk
The Company may use leverage to meet its investment objectives.
The Company will also use forward contracts to hedge its non-Pounds
Sterling assets. In order to do this, it will need to have in
place credit lines with one or more financial institutions. Due
to market conditions or other factors, credit lines may be withdrawn
and it might not be possible to put in place alternative arrangements.
As such, the ability to meet the Company's investment objective
and/or hedging strategy may not be met. The Investment Manager
monitors the use of credit lines and reports to the Board each
quarter.
Share price risk
The Company is exposed to the risk that its shares may trade at
a significant discount to NAV or that the market in the shares
will be illiquid. To mitigate this risk the Company increased
the frequency of the publication of its NAV to daily and has retained
the Broker to maintain regular contact with existing and potential
shareholders. In addition, the Company may instigate a share buyback
programme in an attempt to reduce the discount. The Board monitors
the trading activity of the shares on a regular basis and addresses
the premium/discount to NAV at its regular quarterly meetings.
From 1 January 2018 to 31 December 2018, the Company's shares
traded at an average premium to NAV of 1.56% (2017: 1.89% discount).
The discount rose to 3.42% on 8 November 2018 as the NAV increased
as a result of improved banking fundamentals. The premium rose
to 7.71% on 5 July 2018 as markets continued to fluctuate in light
of the fickle political environments. At the year end the shares
traded at a 2.31% discount to NAV.
Regulatory risk
Changes in laws or regulations, or a failure to comply with these,
could have a detrimental impact on the Company's operations. Prior
to initiating a position, the Investment Manager considers any
possible legal and regulatory issues that could impact the investment
and the Company. The Company's advisers and service providers
monitor regulatory changes on an ongoing basis, and the Board
is apprised of any regulatory inquiries and material regulatory
developments on a quarterly basis.
Brexit may, in time, lead to divergence in regulatory regimes
between the UK and the EU and may create additional investment
and trading opportunities. However, in a process which is yet
to be determined, it is too early to fully appreciate what these
opportunities will be or when they will present themselves.
Reputational risk
Reputational damage to the Company or the Investment Manager as
a result of negative publicity could adversely affect the Company.
To address this risk, the Company has engaged a public relations
firm to monitor media coverage and actively engage with media
sources as necessary. The Board also receives updates from the
Broker and the Investment Manager on a quarterly basis and considers
measures to address concerns as they arise.
Environmental, Employee, Social and Community Issues
As an investment company, the Company does not have any employees
or physical property, and most of its activities are performed
by other organisations. Therefore, the Company does not combust
fuel and does not have any greenhouse gas emissions to report
from its operations, nor does it have direct responsibility for
any other emission producing sources.
When making investment decisions, the Investment Manager does
not consider the impact that an entity in which the Company invests
may have on the community. However, the Board believes that all
companies have a duty to consider their impact on the community
and the environment. The Directors, Administrator, Company Secretary
and external auditor are all based in Guernsey and Board meetings
are held in Guernsey, thus negating the need for long commutes
or flights to/from Board meetings, and thereby minimising the
negative environmental impact of travel to/from Board meetings.
Gender Diversity
The Board of Directors of the Company currently comprises three
male Directors. Further information in relation to the Board's
policy on diversity can be found in the Directors' Remuneration
Report.
Key Performance Indicators
The Board uses the following key performance indicators ("KPIs")
to help assess the Company's performance against its objectives.
Further information regarding the Company's performance is provided
in the Chairman's Statement and the Investment Manager's Report.
Dividends per Ordinary Share
As set out in the Prospectus, the Company intends to distribute
all of its income from investments, net of expenses, by way of
dividends on a quarterly basis. The Company may retain income
for distribution in a subsequent quarter to that in which it arises
in order to smooth dividend amounts or for the purposes of efficient
cash management.
The Company announced dividends of GBP5,090,000 (6.00p per Ordinary
Share) for the year ended 31 December 2018 (2017: 6.00p per Ordinary
Share) (see note 6 for further details). The Company has met the
6.00p dividend per share target for 2016, 2017 and 2018 and expects
to continue to be able to pay out dividends of this level in the
future.
NAV and total return
In line with the Prospectus, the Company is targeting a net total
return on invested capital of approximately 10% p.a. over a seven
year period.
The Company achieved a total return of -8.00% in the year ended
31 December 2018 (2017: 16.14%). Although this negative performance
is below the Company's long term target return of 10% p.a. net
of operating expenses, the Board believes that the Company is
in a position to meet the target rate of return in the future.
However, the future rate of return and dividends cannot be guaranteed.
Following a difficult last eight months of 2018, the total return
from inception to 31 December 2018 fell to 2.69% p.a., which is
below the long term target return of 10% p.a. Together with the
Investment Manager, the Board believes that the Company's long-term
target return will continue to be achievable in the future.
Premium/discount of share price to NAV
The Board regularly monitors the premium/discount of the price
of the Ordinary Shares to the NAV per share. Should the discount
of share price to NAV become unacceptable to the Board, the Company
may buy back some of its shares. Accordingly, the Board puts forward
a proposal to Shareholders at the Annual General Meeting to renew
the authority to buy back shares.
At 31 December 2018 the share price was 88.00p (2017: 105.25p),
a 2.31% discount to NAV (2017: 0.79% premium).
William Scott
Chairman
3 April 2019
Statement of Comprehensive Income
for the year ended 31 December 2018
Year ended Year ended
31 December 31 December
Note 2018 2017
GBP'000 GBP'000
Income
Capital instrument income 4,493 2,618
Credit default swap income 882 672
Bank interest receivable 80 -
------------ ------------
Total income 5,455 3,290
------------ ------------
Investment gains and losses on investments
held at fair value through profit
or loss
Realised gains on disposal of capital
instruments and other investments 15 851 3,851
Movement in unrealised (losses)/gains
on capital instruments and other investments 15 (7,860) 448
Realised (losses)/gains on derivative
financial instruments 18 (887) 2,135
Movement in unrealised (losses)/gains
on derivative financial instruments 18 (4,123) 1,955
------------ ------------
Total investment gains and losses (12,019) 8,389
------------ ------------
Expenses
Investment management fee 8a (549) (394)
Other expenses 12 (269) (318)
Transfer of listing fees (192) -
Interest payable and similar charges 11 (180) (4)
Administration fee 8b (125) (122)
Directors' fees 8f (95) (95)
Performance fee 8a - (469)
------------ ------------
Total expenses (1,410) (1,402)
------------ ------------
(Loss)/profit from operating activities
before gains and losses on foreign
currency transactions (7,974) 10,277
Gain/(loss) on foreign currency 875 (501)
------------ ------------
(Loss)/profit from operating activities
after gains and losses on foreign
currency transactions and before taxation (7,099) 9,776
Taxation 13 - (33)
------------ ------------
(Loss)/profit for the year attributable
to the Owners of the Company (7,099) 9,743
------------ ------------
(Loss)/earnings per Ordinary Share
- basic and diluted 14 (8.48)p 15.88p
------------ ------------
All of the items in the above statement are derived from continuing
operations.
There were no other comprehensive income items in the year.
The accompanying notes form an integral part of these financial
statements.
Statement of Changes in Equity
for the year ended 31 December 2018
Distributable
reserves and
Note total
GBP'000
Opening balance at 1 January 2017 58,010
Profit for the year ended 31 December
2017 9,743
Contributions by and distributions to
Owners
Ordinary Shares issued 21 15,989
Share issue costs (631)
Dividends paid 6 (3,747)
------------
At 31 December 2017 79,364
Loss for the year ended 31 December
2018 (7,099)
Contributions by and distributions to
Owners
Ordinary Shares issued 21 10,051
Share issue costs (391)
Dividends paid 6 (4,949)
------------
At 31 December 2018 76,976
------------
There were no other comprehensive income items in the year.
The accompanying notes form an integral part of these financial
statements.
Statement of Financial Position
as at 31 December 2018
As at As at
Note 31 December 31 December
2018 2017
GBP'000 GBP'000
Assets
Investments in capital instruments
at fair value through profit or 15,
loss 19 81,341 72,113
Other investment at fair value through 15,
profit or loss 19 3,050 2,345
Collateral accounts for derivative
financial instruments at fair value
through profit or loss 16,18 8,922 3,143
Derivative financial assets at fair
value through profit or loss 18 2,574 2,046
Other receivables and prepayments 17 2,088 672
Cash and cash equivalents 2,612 16,808
------------ ------------
Total assets 100,587 97,127
------------ ------------
Current liabilities
Derivative financial liabilities
at fair value through profit or
loss 18 (21,284) (6,958)
Short positions covered by sale
and repurchase agreements 15 (1,451) (838)
Other payables and accruals 20 (710) (718)
Bank overdrafts (166) (9,249)
------------ ------------
Total liabilities (23,611) (17,763)
------------ ------------
Net assets 76,976 79,364
------------ ------------
Share capital and reserves
Share capital 21 - -
Distributable reserves 76,976 79,364
------------ ------------
Total equity holders' funds 76,976 79,364
------------ ------------
Net asset value per Ordinary Share:
basic and diluted 22 90.08p 104.43p
These financial statements were approved by the Board of Directors
on 3 April 2019 and were signed on its behalf by:
William Scott John Renouf
Chairman Director
3 April 2019 3 April 2019
The accompanying notes on form an integral part of these financial
statements.
Statement of Cash Flows
for the year ended 31 December 2018
Year ended Year ended
31 December 31 December
Note 2018 2017
GBP'000 GBP'000
Cash flows from operating activities
Net (loss)/profit before taxation (7,099) 9,776
Adjustments for:
Foreign exchange movements (875) 501
Total investment losses/(gains) at fair
value through profit or loss 12,019 (8,389)
Cash flows relating to financial instruments:
Payment (to)/from collateral accounts
for derivative financial instruments 16 (5,780) 1,408
Purchase of investments at fair value
through profit or loss 15 (73,722) (129,089)
Sale of investments at fair value through
profit or loss 15 55,752 108,075
Premiums received from selling credit
default swap agreements 18 1,332 1,877
Premiums paid on buying credit default
swap agreements 18 (476) (1,838)
Purchase of foreign currency derivatives 18 (287,992) (189,706)
Close-out of foreign currency derivatives 18 287,555 190,792
Purchase of bond futures 18 (5,390) (1,906)
Sale of bond futures 18 4,656 1,954
Proceeds from sale and repurchase agreements 18 102,999 38,670
Payments to open reverse sale and repurchase
agreements 18 (10,035) (893)
Payments for closure of sale and repurchase
agreements 18 (92,398) (32,367)
Proceeds from closure of reverse sale
and repurchase agreements 18 8,537 -
Opening of short positions 15 5,912 835
Closure of short positions 15 (5,023) -
------------ ------------
Net cash outflow from operating activities
before working capital changes (10,028) (10,300)
(Increase)/decrease in other receivables
and prepayments (664) 153
(Decrease)/increase in other payables
and accruals (31) 470
Taxation paid 13 - (33)
------------ ------------
Net cash outflow from operating activities (10,723) (9,710)
Cash flows from financing activities
Proceeds from issue of Ordinary Shares 10,051 15,989
Share issue costs paid 23 (368) (624)
Dividends paid 6 (4,948) (3,747)
------------ ------------
Net cash inflow from financing activities 4,735 11,618
------------ ------------
(Decrease)/increase in cash and cash
equivalents (5,988) 1,908
Cash and cash equivalents brought forward 7,559 6,152
Effect of foreign exchange on cash and
cash equivalents 875 (501)
------------ ------------
Cash and cash equivalents carried forward
* 2,446 7,559
------------ ------------
Supplemental disclosure of cash flow
information
Cash paid during the year for interest (930) (1,252)
Cash received during the year for interest 5,319 4,667
Cash received during the year for dividends 289 39
* Cash and cash equivalents at the year end includes bank overdrafts
that are repayable on demand and form an integral part of the
Company's cash management.
The accompanying notes form an integral part of these financial
statements.
Notes to the Financial Statements
for the year ended 31 December 2018
1. General information
The Company was incorporated as an authorised closed-ended investment
Company, under the Companies (Guernsey) Law, 2008 on 7 October
2015 with registered number 61003. Its Ordinary Shares were admitted
to trading on the Premium Segment of the main market of the London
Stock Exchange and to the premium listing segment of the FCA's
Official List on 15 October 2018 (prior to this, the Ordinary
Shares traded on the SFS of the London Stock Exchange).
Investment objective
The investment objective of the Company is to provide Shareholders
with an attractive return, while limiting downside risk, through
investment in the following financial institution investment instruments:
* Regulatory Capital Instruments, being financial
instruments issued by a European financial
institution which constitute regulatory capital for
the purposes of Basel I, Basel II or Basel III or
Solvency I or Solvency II;
* Other financial institution investment instruments,
being financial instruments issued by a European
financial institution, including without limitation
senior debt, which do not constitute Regulatory
Capital Instruments; and
* Derivative Instruments, being CDOs, securitisations
or derivatives, whether funded or unfunded, linked or
referenced to Regulatory Capital Instruments or Other
financial institution investment instruments.
Investment policy
The Company seeks to invest in a diversified portfolio of financial
institution investment instruments. The Company will focus primarily
on investing in the secondary market although instruments may
also be subscribed in the primary market where the Investment
Manager, Axiom, identifies attractive opportunities.
The Company will invest its assets with the aim of spreading investment
risk.
2. Statement of compliance
a) Basis of preparation
These financial statements present the results of the Company
for the year ended 31 December 2018. The comparative figures stated
were for the year ended 31 December 2017. These financial statements
have been prepared in accordance with International Financial
Reporting Standards ("IFRS"), as adopted by the European Union.
b) Going concern
After making reasonable enquiries, and assessing all data relating
to the Company's liquidity, including its cash resources, income
stream and Level 1 investments, the Directors have a reasonable
expectation that the Company has adequate resources to continue
in operational existence for the foreseeable future and do not
consider there to be any threat to the going concern status of
the Company. Therefore, the financial statements have been prepared
on a going concern basis.
c) Basis of measurement
The financial statements have been prepared on a historical cost
basis, except for certain financial instruments, which are measured
at fair value through profit or loss.
d) Use of estimates and judgements
The preparation of financial statements in conformity with IFRS
requires management to make judgements, estimates and assumptions
that affect the application of policies and the reported amounts
of assets and liabilities, income and expenses. The estimates
and associated assumptions are based on historical experience
and various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis of making
judgements about carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the
period in which the estimate is revised, if the revision affects
only that period, or in the period of the revision and future
periods, if the revision affects both current and future periods.
Judgements made by management in the application of IFRS that
have a significant effect on the financial statements and estimates
with a significant risk of material adjustment are discussed in
note 4.
3. Significant accounting policies
a) Income and expenses
Bank interest, capital instrument income and credit default swap
income is recognised on an accruals basis.
Dividend income is recognised when the right to receive payment
is established. Capital instrument income comprises bond interest
and dividend income.
All expenses are recognised on an accruals basis. All of the Company's
expenses (with the exception of share issue costs, which are charged
directly to the distributable reserve) are charged through the
Statement of Comprehensive Income in the period in which they
are incurred.
b) Foreign currency
Foreign currency transactions are translated into Sterling using
the exchange rates prevailing at the dates of the transactions.
Foreign exchange gains and losses resulting from the settlement
of such transactions and from the translation at period-end exchange
rates of monetary assets and liabilities denominated in foreign
currencies are recognised in the Statement of Comprehensive Income.
The exchange rates used by the Company as at 31 December 2018
were GBP1/EUR1.1122, GBP1/US$1.2754, GBP1/DKK8.3033, GBP1/CA$1.7403
and GBP1/SGD11.2920 (2017: GBP1/EUR1.1260, GBP1/US$1.3513, GBP1/DKK8.3828
and GBP1/CA$1.6985).
c) Taxation
The Directors intend to conduct the Company's affairs such that
the Company continues to qualify for exemption from Guernsey taxation.
Investment income is recorded gross of applicable taxes and any
tax expenses are recognised through the Statement of Comprehensive
Income as incurred.
d) Financial assets and liabilities
The financial assets and liabilities of the Company are investments
at fair value through profit or loss, collateral accounts for
derivative financial instruments, cash and cash equivalents, other
receivables, derivative financial instruments and other payables.
Derivative financial instruments, including credit default swap
agreements, foreign currency forward contracts, bond future contracts
and sale and repurchase agreements are recognised initially, and
are subsequently measured at, fair value. Sale and repurchase
agreements are recognised at fair value through profit or loss
as they are generally not held to maturity and so are held for
trading. Derivative financial instruments are classified as assets
when their fair value is positive or as liabilities when their
fair value is negative. Derivative assets and liabilities arising
from different transactions are offset only if the transactions
are with the same counterparty, a legal right of offset exists,
and the parties intend to settle the cash flows on a net basis.
These financial instruments are classified at fair value through
profit or loss upon initial recognition on the basis that they
are part of a group of financial assets which are managed and
have their performance evaluated on a fair value basis, in accordance
with investment strategies and risk management of the Company.
Recognition
The Company recognises a financial asset or a financial liability
when, and only when, it becomes a party to the contractual provisions
of the instrument. Purchases and sales of financial assets that
require delivery of assets within the time frame generally established
by regulation or convention in the marketplace are recognised
on the trade date, i.e. the date that the Company commits to purchase
or sell the asset.
Derecognition
A financial asset (or, where applicable, a part of a financial
asset or part of a group of similar assets) is derecognised where:
* The rights to receive cash flows from the asset have
expired; or
* The Company has transferred its rights to receive
cash flows from the asset or has assumed an
obligation to pay the received cash flows in full
without material delay to a third party under a
"pass-through" arrangement; and
* Either: (a) the Company has transferred substantially
all the risks and rewards of the asset; or (b) the
Company has neither transferred nor retained
substantially all the risks and rewards of the asset,
but has transferred control of the asset.
When the Company has transferred its rights to receive cash flows
from an asset (or has entered into a pass-through arrangement)
and has neither transferred nor retained substantially all the
risks and rewards of the asset nor transferred control of the
asset, the asset is recognised to the extent of the Company's
continuing involvement in the asset.
The Company derecognises a financial liability when the obligation
under the liability is discharged, cancelled or expires.
Initial measurement
Financial assets and financial liabilities at fair value through
profit or loss are recorded in the Statement of Financial Position
at fair value. All transaction costs for such instruments are
recognised directly in the Statement of Comprehensive Income.
Subsequent measurement
After initial measurement, the Company measures financial assets
which are classified at fair value through profit or loss, at
fair value. Subsequent changes in the fair value of those financial
instruments are recorded in net gain or loss on financial assets
and liabilities at fair value through profit or loss. Interest
and dividends earned or paid on these instruments are recorded
separately in interest income or expense and dividend income or
expense.
Net gain or loss on financial assets and financial liabilities
at fair value through profit or loss
The Company records its transactions in investments and the related
revenue and expenses on a trade date basis. Unrealised gains and
losses comprise changes in the fair value of financial instruments
at the period end. These gains and losses represent the difference
between an instrument's initial carrying amount and disposal amount,
or cash payment on, or receipts from derivative contracts.
Offsetting of financial instruments
Financial assets and financial liabilities are reported net by
counterparty in the Statement of Financial Position, provided
that a legal right of offset exists, and is not offset by collateral
pledged to or received from counterparties.
e) Offsetting of derivative assets and liabilities
IFRS 7, Financial Instruments: Disclosures, requires an entity
to disclose information about offsetting rights and related arrangements.
The disclosures in note 18 provide users with information to evaluate
the effect of netting arrangements on the Company's financial
position. The disclosures are required for all recognised financial
instruments that could be offset in accordance with International
Accounting Standard ("IAS") 32, Financial Instruments Presentation.
The disclosures also apply to recognised financial instruments
that are subject to an enforceable master netting agreement or
similar agreement, irrespective of whether these are offset in
accordance with IAS 32.
f) Collateral accounts for derivative financial instruments at
fair value through profit or loss
Collateral accounts for derivative financial instruments at fair
value through profit or loss comprise cash balances held at the
Company's depositary and the Company's clearing brokers and cash
collateral pledged to counterparties related to derivative contracts.
Cash that is related to securities sold, not yet purchased, is
restricted until the securities are purchased. Financial instruments
held within the margin account consist of cash received from brokers
to collateralise the Company's derivative contracts and amounts
transferred from the Company's bank account.
g) Receivables and prepayments
Receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market.
The Company includes in this category other short-term receivables.
h) Cash and cash equivalents
Cash in hand and in banks and short-term deposits which are held
to maturity are carried at cost. Cash and cash equivalents are
defined as cash in hand, demand deposits and short-term, highly
liquid investments readily convertible to known amounts of cash
and subject to insignificant risk of changes in value.
i) Payables and accruals
Trade and other payables are carried at payment or settlement
amounts. When payables are received in currencies other than the
reporting currency, they are carried forward, translated at the
rate prevailing at the year end date.
j) Share capital
Ordinary Shares are classified as equity. Incremental costs directly
attributable to the issue of Ordinary Shares are recognised as
a deduction from equity.
When share capital recognised as equity is repurchased, the amount
of the consideration paid, which includes directly attributable
costs, is recognised as a deduction from equity. Repurchased shares
that are classified as Treasury Shares are presented as a deduction
from equity. When Treasury Shares are sold or subsequently reissued,
the amount received is recognised as an increase in equity and
the resulting surplus or deficit is transferred to/from retained
earnings.
Funds received from the issue of Ordinary Shares are allocated
to share capital, to the extent that they relate to the nominal
value of the Ordinary Shares, with any excess being allocated
to distributable reserves.
k) Distributable reserves
All income and expenses, foreign exchange gains and losses and
investment gains and losses of the Company are allocated to the
distributable reserve.
l) NAV per share and earnings per share
The NAV per share disclosed on the face of the Statement of Financial
Position is calculated by dividing the net assets by the number
of Ordinary Shares in issue at the year end.
Earnings per share is calculated by dividing the earnings for
the year by the weighted average number of Ordinary Shares in
issue during the year.
m) Changes in accounting policy and disclosures
Except for the implementation of IFRS 9, Financial Instruments
and IFRS 15, Revenue from Contracts with Customers, the accounting
policies adopted are consistent with those of the previous financial
period. The adoption of these accounting standards did not have
any effect on the Company's Statement of Financial Position or
equity.
Impact of adoption of IFRS 9
The Company adopted IFRS 9 with effect from 1 January 2018. IFRS
9 replaces IAS 39: Financial Instruments: Recognition and Measurement
and introduces new requirements for classification and measurement,
impairment and hedge accounting. IFRS 9 is not applicable to items
that had already been derecognised at 1 January 2018, the date
of initial application.
The Company has assessed the classification of financial instruments
as at the date of initial application and has applied such classification
retrospectively. Based on that assessment all financial assets
previously held at fair value continue to be measured at fair
value.
The classification and measurement requirements of IFRS 9 have
been adopted retrospectively as of the date of initial application
on 1 January 2018, however, the Company has chosen to take advantage
of the option not to restate comparatives. Therefore, the 2017
figures are presented and measured under IAS 39.
In line with the characteristics of the Company's financial instruments
as well as its approach to their management, the Company neither
revoked nor made any new designations on the date of initial application.
IFRS 9 has not resulted in changes in the carrying amount of the
Company's financial instruments due to changes in measurement
categories. All financial instruments that were classified at
fair value through profit or loss under IAS 39 are still classified
at fair value through profit or loss under IFRS 9.
Classification - Policy effective from 1 January 2018 (IFRS 9)
In accordance with IFRS 9, the Company classifies its financial
assets and financial liabilities at initial recognition into the
categories of financial assets and financial liabilities as discussed
below.
In applying that classification, a financial asset or financial
liability is considered to be held for trading if:
(a) It is acquired or incurred principally for the purpose of
selling or repurchasing it in the near term; or
(b) On initial recognition, it is part of a portfolio of identified
financial instruments that are managed together and for which,
there is evidence of a recent actual pattern of short-term profit-taking;
or
(c) It is a derivative (except for a derivative that is a financial
guarantee contract or a designated and effective hedging instrument).
Financial assets
The Company classifies its financial assets as subsequently measured
at amortised cost or measured at fair value through profit or
loss on the basis of both:
* The business model for managing the financial assets;
and
* The contractual cash flow characteristics of the
financial asset.
A financial asset is measured at fair value through profit or
loss if:
(a) Its contractual terms do not give rise to cash flows on specified
dates that are solely payments of principal interest ("SPPI")
on the principal amount outstanding; or
(b) It is not held within a business model whose objective is
either to collect contractual cash flows, or to both collect contractual
cash flows and sell; or
(c) At initial recognition, it is irrevocably designated as measured
at fair value through profit or loss when doing so eliminates
or significantly reduces a measurement or recognition inconsistency
that would otherwise arise from measuring assets or liabilities
or recognising the gains and losses on them on different bases.
The Company includes in this category:
* Instruments held for trading. This category includes
equity instruments and debt instruments which are
acquired principally for the purpose of generating a
profit from short-term fluctuations in price. This
category also includes derivative contracts.
* Debt instruments. These include investments that are
held under a business model to manage them on a fair
value basis for investment income and fair value
gains.
Financial liabilities
A financial liability is measured at fair value through profit
or loss if it meets the definition of held for trading.
The Company includes in this category, derivative contracts in
a liability position and equity and debt instruments sold short
since they are classified as held for trading.
Classification - Policy effective before 1 January 2018 (IAS 39)
The Company classified its financial assets and financial liabilities
at initial recognition into the following categories, in accordance
with IAS 39.
Financial assets and liabilities at fair value through profit
or loss
The category of financial assets and liabilities at fair value
through profit or loss is sub-divided into:
* Financial assets and liabilities held for trading:
financial assets are classified as held for trading
if they are acquired for the purpose of selling
and/or repurchasing in the near term. This category
includes equity instruments, debt instruments and
derivatives. These assets are acquired principally
for the purpose of generating a profit from
short-term fluctuations in price. All derivatives and
liabilities from short sales of financial instruments
are classified as held for trading. The Company's
policy is not to apply hedge accounting.
* Financial instruments designated as at fair value
through profit or loss upon initial recognition:
these include investment in subsidiaries and
investment in associates and debentures. These
financial assets and liabilities are designated upon
initial recognition on the basis that they are part
of a group of financial assets that are managed and
have their performance evaluated on a fair value
basis, in accordance with risk management and
investment strategies of the Company.
Receivables
Receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market.
The Company includes in this category collateral on derivatives
and other short-term receivables.
Other financial liabilities
This category includes all financial liabilities, other than those
classified at fair value through profit or loss. The Company includes
in this category collateral on derivatives and other short-term
payables.
n) Accounting standards issued but not yet effective
The International Accounting Standards Board ("IASB") has issued/revised
a number of relevant standards with an effective date after the
date of these financial statements. Any standards that are not
deemed relevant to the operations of the Company have been excluded.
The Directors have chosen not to early adopt these standards and
interpretations and they do not anticipate that they would have
a material impact on the Company's financial statements in the
period of initial application.
Effective date
IAS 12 Income Taxes (amendments resulting from 1 January 2019
Annual Improvements 2015-2017 Cycle (income
tax consequences of dividends))
IAS 23 Borrowing Costs (amendments resulting 1 January 2019
from Annual Improvements 2015-2017 Cycle
(borrowing costs eligible for capitalisation))
IFRIC Uncertainty over Income Tax Treatments 1 January 2019
23
4. Use of judgements and estimates
The preparation of the Company's financial statements requires
the Directors to make judgements, estimates and assumptions that
affect the reported amounts recognised in the financial statements
and disclosure of contingent liabilities. However, uncertainty
about these assumptions and estimates could result in outcomes
that could require a material adjustment to the carrying amount
of the asset or liability in future periods.
Judgements
In the process of applying the Company's accounting policies,
management has made the following judgement which had a significant
effect on the amounts recognised in the financial statements:
i) Determination of functional currency
The performance of the Company is measured and reported to investors
in Sterling. Although the majority of the Company's underlying
assets are held in currencies other than Sterling, because the
Company's capital is raised in Sterling, expenses are paid in
Sterling and the Company hedges substantially all of its foreign
currency risk back to Sterling, the Directors consider Sterling
to be the Company's functional currency.
The Directors do not consider there to be any other judgements
which have had a significant impact on the financial statements.
Estimates and assumptions
The Company based its assumptions and estimates on parameters
available when the financial statements were approved. However,
existing circumstances and assumptions about future developments
may change due to market changes or circumstances arising beyond
the control of the Company. Such changes are reflected in the
assumptions when they occur.
i) Valuation of financial assets and liabilities
The Company uses the expertise of the Investment Manager to assess
the prices of investments at the valuation date. The majority
of the prices can be independently verified with reference to
external data sources, however a minority of investments cannot
be verified by reference to an external source and the Investment
Manager secures an independent valuation with reference to the
latest prices traded within the market place. These independent
valuations take the form of quotes from brokers.
For further information on the assumptions and inputs used to
fair value the financial instruments, please see note 19.
5. Segmental reporting
In accordance with IFRS 8, Operating Segments, it is mandatory
for the Company to present and disclose segmental information
based on the internal reports that are regularly reviewed by the
Board in order to assess each segment's performance.
Management information for the Company as a whole is provided
internally for decision making purposes. The Company does compartmentalise
different investments in order to monitor compliance with investment
restrictions, however the performance of these allocations does
not drive the investment decision process. The Directors' decisions
are based on a single integrated investment strategy and the Company's
performance is evaluated on an overall basis. Therefore, the Directors
are of the opinion that the Company is engaged in a single economic
segment of business for all decision making purposes. The financial
results of this segment are equivalent to the results of the Company
as a whole.
6. Dividends
As set out in the Prospectus, the Company intends to distribute
all of its income from investments, net of expenses, by way of
dividends on a quarterly basis. The Company may retain income
for distribution in a subsequent quarter to that in which it arises
in order to smooth dividend amounts or for the purposes of efficient
cash management.
The Company has declared the following dividends during the year
ended 31 December 2018:
Total dividend declared Amount per Ordinary
in respect of earnings Share
GBP'000
Dividends declared and paid
in the year 4,948 6.00p
Less, dividend declared in
respect of the prior year that
was paid in 2018 (1,140) (1.50)p
Add, dividend declared out
of the profits of the year
but paid after the year end: 1,282 1.50p
------------ ------------
Dividends declared in respect
of the year 5,090 6.00p
------------ ------------
The Company declared the following dividends during the year ended
31 December 2017:
Total dividend declared Amount per Ordinary
in respect of earnings Share
GBP'000
Dividends declared and paid
in the year 3,747 6.15p
Less, dividend declared in
respect of the prior period
that was paid in 2017 (1,005) (1.65)p
Add, dividend declared out
of the profits of the year
but paid after the period end:
17 January 2018 23 February 2018 1,140 1.50p
------------ ------------
Dividends declared in respect
of the year 3,882 6.00p
------------ ------------
In accordance with IFRS, dividends are only provided for when
they become a contractual liability of the Company. Therefore,
during the year a total of GBP4,948,000 (2017: GBP3,747,000) was
incurred in respect of dividends, none of which was outstanding
at the reporting date. The fourth dividend declared out of the
profits for the year of GBP1,282,000 had not been provided for
at 31 December 2018 as, in accordance with IFRS, it was not deemed
to be a liability of the Company at that date.
7. Related parties
Details of the relationships between the Company and its related
parties, being the Investment Manager and the Directors, are disclosed
in notes 8a and 8f.
Details of the relationships between the Company and its other
advisors and service providers (the Administrator, the Broker,
the Registrar and the Depositary) are also disclosed in note 8.
As at 31 December 2018, the Company had holdings in the following
investments which were managed by the Investment Manager:
31 December 2018 31 December 2017
Holding Cost Value Holding Cost Value
GBP'000 GBP'000 GBP'000 GBP'000
Axiom Contingent Capital - Class
E 3,119 3,134 3,050 - - -
Axiom Premium Multi Strategies - - - 1,739 2,146 2,345
During the year, the Company purchased: 3,110 units in Axiom Long
Short - Class C for GBP2,880,000; 1,000 units in Axiom Equity
- Class C for GBP758,000; and 3,119 units in Axiom Contingent
Capital - Class E for GBP3,134,000.
During the year, the Company sold 1,739 units in Axiom Premium
Multi Strategies for GBP2,315,000, realising a gain of GBP168,000
(2017: GBPnil). The Company also sold 3,110 units in Axiom Long
Short - Class C for GBP2,562,000 realising a loss of GBP318,000.
In addition, the Company sold 1,000 units in Axiom Equity - Class
C for GBP560,000 realising a loss of GBP198,000.
During the year ended 31 December 2017, the Company: purchased
1,739 units in Axiom Premium Multi Strategies for GBP2,146,000;
sold 2,000 units in Axiom Contingent Capital for GBP1,985,000,
realising a gain of GBP526,000; and sold 740 units in Axiom Equity
- Class C for GBP545,000, generating a realised gain of GBP125,000.
The Directors are not aware of any ultimate controlling party.
8. Key contracts
a) Investment Manager
The Company has entered into an Investment Management Agreement
with Axiom under which the Company receives investment advice
and management services.
Management fee
Under the terms of the Investment Management Agreement, a management
fee is paid to the Investment Manager quarterly in arrears. The
quarterly fee is calculated by reference to the following sliding
scale:
i. where NAV is less than or equal to GBP250 million, 1% per annum
of NAV;
ii. where NAV is greater than GBP250 million but less than or
equal to GBP500 million, 1% per annum of NAV on the first GBP250
million and 0.8% per annum of NAV on the balance; and
iii. where NAV is greater than GBP500 million, 0.8% per annum
of NAV, in each case, plus applicable VAT.
If in any quarter (other than the final quarter) of any accounting
period the aggregate expenses of the Company (excluding management
fees, performance fees, interest charged on sale and repurchase
agreements, bank charges and withholding tax) during such quarter
exceed an amount equal to one-quarter of 1.5% of the average NAV
of the Company during such quarter (such amount being a "Quarterly
Expenses Excess"), then the management fee payable in respect
of that quarter shall be reduced by the amount of the Quarterly
Expenses Excess, provided that the management fee shall not be
reduced to an amount that is less than zero and no sum will be
payable by the Investment Manager to the Company in respect of
the Quarterly Expenses Excess.
If in the final quarter of any accounting period the aggregate
expenses of the Company during such accounting period exceed an
amount equal to 1.5% of the average NAV of the Company during
such accounting period (such amount being an "Annual Expenses
Excess"), then the management fee payable in respect of that quarter
shall be reduced by the amount of the Annual Expenses Excess.
If such reduction would not fully eliminate the Annual Expenses
Excess (the amount of any such shortfall being a "Management Fee
Deduction Shortfall"), the Investment Manager shall pay to the
Company an amount equal to the Management Fee Deduction Shortfall
(a "Management Fee Deduction Shortfall Payment") as soon as is
reasonably practicable.
During the year, a total of GBP549,000 (2017: GBP394,000) was
incurred in respect of Investment Management fees, of which GBP186,000
was payable at the reporting date (2017: GBP83,000).
Under the terms of the Investment Management Agreement, if at
any time there has been any deduction from the management fee
as a result of the Quarterly Expenses Excess or Annual Expenses
Excess (a "Management Fee Deduction"), and during any subsequent
quarter:
i. all or part of the Management Fee Deduction can be paid; and/or
ii. all or part of the Management Fee Deduction Shortfall payment
can be repaid,
by the Company to the Investment Manager without:
iii. in any quarter (other than the final quarter) of any accounting
period the aggregate expenses of the Company during such quarter
exceeding an amount equal to one-quarter of 1.5% of the average
NAV of the Company during such quarter; or
iv. in the final quarter of any accounting period the aggregate
expenses of the Company during such accounting period exceeding
an amount equal to 1.5% of the average NAV of the Company during
such accounting period,
then such payment and/or repayment shall be made by the Company
to the Investment Manager as soon as is reasonably practicable.
The Quarterly Expenses Excess and Annual Expenses Excess for the
year was GBP259,000 (2017: GBP233,000), and at 31 December 2018
the Quarterly Expenses Excess and Annual Expenses Excess which
could be payable to the Investment Manager in future periods was
GBP723,000 (2017: GBP464,000) (see note 27).
Performance fee
The Investment Manager is entitled to receive from the Company
a performance fee subject to certain performance benchmarks.
The fee is payable as a share of the Total Shareholder Return
("TSR") where TSR for this purpose is defined as:
i. the NAV (on a per share basis) at the end of the relevant accounting
period; plus
ii. the total of all dividends and other distributions made to
Shareholders since 5 November 2015 (being the date of the Company's
original admission to the SFS) divided by the average number of
shares in issue during the period from 5 November 2015 to the
end of the relevant accounting period.
The performance fee, if any, is equal to 15% of the TSR in excess
of a weighted average hurdle equal to a 7% per annum return. The
performance fee is subject to a high water mark. The fee, if any,
is payable annually and calculated on the basis of audited accounts
of the Company.
50% of the performance fee will be settled in cash. The balance
will be satisfied in shares, subject to certain exceptions where
settlement in shares would be prohibited by law or would result
in the Investment Manager or any person acting in concert with
it incurring an obligation to make an offer under Rule 9 of the
City Code, in which case the balance will be settled in cash.
Assuming no such requirement, the balance of the performance fee
will be settled either by the allotment to the Investment Manager
of such number of new shares credited as fully paid as is equal
to 50% of the performance fee (net of VAT) divided by the most
recent practicable NAV per share (rounded down to the nearest
whole share) or by the acquisition of shares in the market, as
required under the terms of the Investment Management Agreement.
All shares allotted to (or acquired for) the Investment Manager
in part satisfaction of the performance fee will be subject to
a lock-up until the date that is 12 months from the end of the
accounting period to which the award of such shares related.
At the year end a performance fee of GBPnil (2017: GBP469,000)
was payable by the Company. GBP234,000 of the GBP469,000 performance
fee for the year ended 31 December 2017 that is to be settled
in shares remained payable at the year end date. On 21 February
2019, the Company paid the Investment Manager GBP234,000, in settlement
of the 2017 performance fee, which was subsequently used to purchase
261,970 shares in the Company.
b) Administrator and Company Secretary
Elysium has been appointed by the Company to provide day to day
administration services to the Company, to calculate the NAV per
share as at the end of each calendar month and to provide company
secretarial functions required under the Law.
Under the terms of the Administration Agreement, the Administrator
is entitled to receive a fee of GBP110,000 per annum, which is
subject to an annual adjustment upwards to reflect any percentage
change in the retail prices index over the preceding year. In
addition, the Company pays the Administrator a fee for work undertaken
in connection with the daily NAV, subject to a maximum aggregate
amount of GBP10,000 per annum. The Administrator was also paid
GBP5,000 in respect of the work undertaken on the transfer of
listing and GBP33,000 in respect of the new Prospectus (2017:
new Prospectus and Supplementary Prospectus fees of GBP66,000).
The new Prospectus fees are included in share issue costs in the
Statement of Changes in Equity.
During the year, a total of GBP125,000 (2017: GBP122,000) was
incurred in respect of Administration fees of which GBP31,000
(2017: GBP31,000) was payable at the reporting date.
c) Broker
Winterflood Securities Limited ("Winterflood") was appointed to
act as Corporate Broker ("Broker") for the Company with effect
from 31 October 2017. In consideration of Winterflood agreeing
to act as Broker, the Company pays Winterflood an annual retainer
fee of GBP35,000 per annum.
Prior to Winterflood's appointment, Liberum Capital Limited ("Liberum")
had been appointed to act as Corporate Broker to the Company,
for an annual retainer fee of GBP75,000 per annum.
For the year to 31 December 2018, the Company incurred Broker
fees of GBP35,000 (2017: GBP80,000) of which GBP6,000 was payable
at the year end date (2017: GBP6,000).
In addition, Winterflood was paid GBP50,000 for its work on the
transfer of listing and GBP191,000 for its work on the placings
and new Prospectus. In the year ended 2017, Winterflood was paid
GBP97,000 for its work on the placing and Liberum was paid GBP34,000
for its work on the new Prospectus and placing. The Prospectus
and placing fees are included in share issue costs in the Statement
of Changes in Equity.
d) Registrar
Link Market Services (Guernsey) Limited is Registrar of the Company.
Under the terms of the Registrar Agreement, the Registrar is entitled
to receive from the Company certain annual maintenance and activity
fees, subject to a minimum fee of GBP5,500 per annum.
During the year, a total of GBP19,000 (2017: GBP17,000) was incurred
in respect of Registrar fees, of which GBP3,000 was payable at
31 December 2018 (2017: GBP3,000).
In addition, Link was paid GBP4,000 for its work on the General
Meeting required to effect the changes to enable the Company to
be listed on the Premium Segment.
e) Depositary
CACEIS Bank France has been appointed by the Company to provide
depositary, settlement and other associated services to the Company.
Under the terms of the Depositary Agreement, the Depositary is
entitled to receive from the Company:
i. an annual depositary fee of 0.03% of NAV, subject to a minimum
annual fee of EUR25,000;
ii. a safekeeping fee calculated using a basis point fee charge
based on the country of settlement and the value of the assets;
and
iii. an administration fee on each transaction, together with
various other payment/wire charges on outgoing payments.
During the period, a total of GBP38,000 (2017: GBP41,000) was
incurred in respect of depositary fees, of which GBP6,000 was
payable at the reporting date (2017: GBP6,000).
CACEIS Bank Luxembourg is entitled to receive a monthly valuation
agent fee from the Company in respect of the provision of certain
accounting services which will, subject to a minimum monthly fee
of EUR2,500, be calculated by reference to the following tiered
sliding scale:
i. where NAV is less than or equal to EUR50 million, 0.05% per
annum of NAV;
ii. where NAV is greater than EUR50 million but less than or equal
to EUR100 million, 0.04% per annum of NAV; and
iii. where NAV is greater than EUR100 million, 0.03% per annum
of NAV, in each case, plus applicable VAT.
During the period, a total of GBP39,000 (2017: GBP28,000) was
incurred in respect of valuation agent fees paid to CACEIS Bank
Luxembourg, of which GBP6,000 was payable at 31 December 2018
(2017: GBP6,000).
f) Directors' remuneration
William Scott (Chairman) is paid GBP35,000 per annum, John Renouf
(Chairman of the Audit Committee) is paid GBP32,500 per annum,
and Max Hilton is paid GBP27,500 per annum.
The Directors are also entitled to reimbursement of all reasonable
travelling and other expenses properly incurred in the performance
of their duties.
During the year, a total of GBP95,000 (2017: GBP95,000) was incurred
in respect of Directors' fees, none of which was payable at the
reporting date (2017: GBPnil). No bonus or pension contributions
were paid or payable on behalf of the Directors.
9. Key management and employees
Other than the Non-Executive Directors, the Company has had no
employees since its incorporation.
10. Auditor's remuneration
For the year ended 31 December 2018, fees charged by EY, together
with amounts accrued at 31 December 2018, amounted to GBP53,000
(2017: GBP139,000). Of this, GBP24,000 (2018 fee: GBP36,000, less
2017 over accrual: GBP12,000 (note 12)) (2017: GBP61,000) related
to audit services, GBP9,000 related to transfer of listing work
and GBP20,000 (included in Share issue costs) related to reporting
accountant and tax work on the renewal of the Prospectus (2017:
GBP78,000 for reporting accountant and tax work on the renewal
of the Prospectus). As at 31 December 2018, GBP36,000 (2017: GBP35,000)
was due to EY.
11. Interest payable and similar charges
Year ended Year ended
31 December 31 December
2018 2017
GBP'000 GBP'000
Interest payable on sale and repurchase
agreements 77 5
Bank interest 100 (2)
Commission 3 1
------------ ------------
180 4
------------ ------------
12. Other expenses
Year ended Year ended
31 December 31 December
2018 2017
GBP'000 GBP'000
Other expenses 54 20
PR expenses 39 47
Valuation agent fees 39 28
Depositary fees (note 8e) 38 41
Broker fees (note 8c) 35 80
Audit fees (note 10) 24 61
Legal fees 21 24
Registrar fees (note 8d) 19 17
------------ ------------
269 318
------------ ------------
13. Taxation
The Company is exempt from taxation in Guernsey, and it is the
intention to conduct the affairs of the Company to ensure that
it continues to qualify for exempt company status for the purposes
of Guernsey taxation. The Company pays a fixed fee of GBP1,200
per annum to maintain exempt company status.
14. Loss per Ordinary Share
The loss per Ordinary Share of 8.48p (2017: earnings of 15.88p)
is based on a loss attributable to owners of the Company of GBP7,099,000
(2017: profit of GBP9,743,000) and on a weighted average number
of 83,724,996 (2017: 61,343,602) Ordinary Shares in issue since
1 January 2018. There is no difference between the basic and diluted
loss per share.
15. Investments at fair value through profit or loss
Year ended Year ended
31 December 31 December
2018 2017
GBP'000 GBP'000
Investments in capital instruments
Opening balance 72,113 49,145
Additions in the year 66,951 126,942
Sales in the year (51,068) (108,075)
Movement in unrealised (losses)/gains
in the year (7,686) 250
Realised gains in the year 1,031 3,851
------------ ------------
Closing valuation 81,341 72,113
------------ ------------
Other investments
Opening balance 2,345 -
Additions in the year 6,771 2,147
Sales in the year (5,436) -
Movement in unrealised (losses)/gains
in the year (283) 198
Realised losses in the year (347) -
------------ ------------
Closing valuation 3,050 2,345
------------ ------------
Short positions covered by sale and
repurchase agreements
Opening balance (838) -
Sales in the year (5,912) (838)
Purchases in the year 5,023 -
Movement in unrealised gains in the
year 109 -
Realised gains in the year 167 -
------------ ------------
Closing valuation (1,451) (838)
------------ ------------
Total
Opening balance 73,620 49,145
Additions in the year 78,745 129,089
Sales in the year (62,416) (108,913)
Movement in unrealised (losses)/gains
in the year (7,860) 448
Realised gains in the year 851 3,851
------------ ------------
Closing valuation 82,940 73,620
------------ ------------
Investments in capital instruments at fair value through profit
or loss comprise mainly of investments in bonds, and also preference
shares, structured notes and other securities that have a similar
income profile to that of bonds. The other investment at fair
value through profit or loss consists of an investment in an open
ended fund managed by the Investment Manager (see note 7) to obtain
diversified exposure on bank equities.
As at 31 December 2018, the Company had ten (2017: four) open
sale and repurchase agreements, including two (2017: one) reverse
sale and repurchase agreement (see note 18). The reverse sale
and repurchase agreements are open ended and were used to cover
the sale of capital instruments (the short positions noted above).
The fair value of the capital instruments subject to sale and
repurchase agreements (excluding the short positions) at 31 December
2018 was GBP18,628,000 (2017: GBP7,234,000). The fair value net
of the short positions was GBP17,177,000 (2017: GBP6,395,000).
16. Collateral accounts for derivative financial instruments at
fair value through profit or loss
31 December 31 December
2018 2017
GBP'000 GBP'000
JP Morgan 6,290 1,370
Goldman Sachs International 1,819 1,066
Credit Suisse 616 598
CACEIS Bank France 197 109
------------ ------------
Total collateral held by brokers 8,922 3,143
------------ ------------
With respect to derivatives, the Company pledges cash and/or other
liquid securities ("Collateral") to third parties as initial margin
and as variation margin. Collateral may be transferred either
to the third party or to an unaffiliated custodian for the benefit
of the third party. In the case where Collateral is transferred
to the third party, the third party pursuant to these derivatives
arrangements will be permitted to use, reuse, lend, borrow, hypothecate
or re-hypothecate such Collateral. The third parties will have
no obligation to retain an equivalent amount of similar property
in their possession and control, until such time as the Company's
obligations to the third party are satisfied. The Company has
no right to this Collateral but has the right to receive fungible,
equivalent Collateral upon the Company's satisfaction of the Company's
obligation under the derivatives.
17. Other receivables and prepayments
31 December 31 December
2018 2017
GBP'000 GBP'000
Accrued capital instrument income receivable 1,286 634
Due from sale of capital instrument 758 -
Interest due on credit default swaps 24 22
Prepayments 13 9
Interest due on collateral held by brokers 7 7
------------ ------------
2,088 672
------------ ------------
18. Derivative financial instruments
Credit default swap agreements
A credit default swap agreement represents an agreement that one
party, the protection buyer, pays a fixed fee, the premium, in
return for a payment by the other party, the protection seller,
contingent upon a specified credit event relating to an underlying
reference asset. If a specified credit event occurs, there is
an exchange of cash flows and/or securities designed so the net
payment to the protection buyer reflects the loss incurred by
holders of the referenced obligation in the event of its default.
The International Swaps and Derivatives Association ("ISDA") establishes
the nature of the credit event and such events include bankruptcy
and failure to meet payment obligations when due.
Year ended Year ended
31 December 31 December
2018 2017
GBP'000 GBP'000
Opening balance 915 (2,238)
Premiums received from selling credit
default swap agreements (1,332) (1,877)
Premiums paid on buying credit default
swap agreements 476 1,838
Movement in unrealised (losses)/gains
in the year (2,693) 2,100
Realised gains in the year 215 1,092
------------ ------------
Outstanding (liability)/asset due on
credit default swaps (2,419) 915
------------ ------------
Credit default swap assets at fair value
through profit or loss 184 1,093
Credit default swap liabilities at fair
value through profit or loss (2,603) (178)
------------ ------------
Outstanding (liability)/asset due on
credit default swaps (2,419) 915
------------ ------------
Interest paid or received on the credit default swap agreements
has been accounted for in the Statement of Comprehensive Income
as it has been incurred or received. At the year end, GBP24,000
(2017: GBP22,000) of interest on credit default swap agreements
was due to the Company.
Collateral totalling GBP8,205,000 (2017: GBP3,034,000) was held
in respect of the credit default swap agreements.
Foreign currency forwards
Foreign currency forward contracts are used for trading purposes
and are used to hedge the Company's exposure to changes in foreign
currency exchange rates on its foreign portfolio holdings. A foreign
currency forward contract is a commitment to purchase or sell
a foreign currency on a future date and at a negotiated forward
exchange rate.
Year ended Year ended
31 December 31 December
2018 2017
GBP'000 GBP'000
Opening balance (390) (190)
Purchase of foreign currency derivatives 287,992 189,706
Closing-out of foreign currency derivatives (287,555) (190,792)
Movement in unrealised losses in the
year (939) (200)
Realised (losses)/gains in the year (437) 1,086
------------ ------------
Net liabilities on foreign currency
forwards (1,329) (390)
------------ ------------
Foreign currency forward assets at fair
value through profit or loss - 54
Foreign currency forward liabilities
at fair value through profit or loss (1,329) (444)
------------ ------------
Net liabilities on foreign currency
forwards (1,329) (390)
------------ ------------
Bond futures
A bond future contract involves a commitment by the Company to
purchase or sell bond futures for a predetermined price, with
payment and delivery of the bond future at a predetermined future
date.
Year ended Year ended
31 December 31 December
2018 2017
GBP'000 GBP'000
Opening balance 5 9
Purchase of bond futures 5,390 1,906
Sale of bond futures (4,656) (1,954)
Movement in unrealised (losses)/gains
in the year (138) 50
Realised losses in the year (608) (6)
------------ ------------
Balance (payable)/receivable on bond
futures (7) 5
------------ ------------
Bond future assets at fair value through
profit or loss 4 5
Bond future liabilities at fair value
through profit or loss (11) -
------------ ------------
Balance (payable)/receivable on bond
futures (7) 5
------------ ------------
Sale and repurchase agreements
Under the terms of a sale and repurchase agreement one party in
the agreement acts as a borrower of cash, using a security held
as collateral, and the other party in the agreement acts as a
lender of cash. Almost any security may be employed in the sale
and repurchase agreement. Interest is paid by the borrower for
the benefit of having funds to use until a specified date on which
the effective loan needs to be repaid.
Year ended Year ended
31 December 31 December
2018 2017
GBP'000 GBP'000
Opening balance (5,442) -
Opening of sale and repurchase agreements (102,999) (38,670)
Opening of reverse sale and repurchase
agreements 10,035 893
Closing-out of sale and repurchase agreements 92,398 32,367
Closing-out of reverse sale and repurchase
agreements (8,537) -
Movement in unrealised (losses)/gains
in the year (353) 5
Realised losses in the year (57) (37)
------------ ------------
Total liabilities on sale and repurchase
agreements (14,955) (5,442)
------------ ------------
Sale and repurchase assets at fair value
through profit or loss 2,386 894
Sale and repurchase liabilities at fair
value through profit or loss (17,341) (6,336)
------------ ------------
Total liabilities on sale and repurchase
agreements (14,955) (5,442)
------------ ------------
Interest paid on sale and repurchase agreements has been accounted
for in the Statement of Comprehensive Income as it has been incurred.
At 31 December 2018 GBP6,000 (2017: GBP5,000) interest on sale
and repurchase agreements was payable by the Company.
Offsetting of derivative financial instruments
The Company presents the fair value of its derivative assets and
liabilities on a gross basis, no such assets or liabilities have
been offset in the Statement of Financial Position. Certain derivative
financial instruments are subject to enforceable master netting
arrangements, such as ISDA master netting agreements, or similar
agreements that cover similar financial instruments.
The similar agreements include derivative clearing agreements,
global master repurchase agreements, global master securities
lending agreements, and any related rights to financial collateral.
The similar financial instruments and transactions include derivatives,
sale and repurchase agreements, reverse sale and repurchase agreements,
securities borrowing, and securities lending agreements.
The Company's agreements allow for offsetting following an event
of default, but not in the ordinary course of business, and the
Company does not intend to settle these transactions on a net
basis or settle the assets and liabilities on a simultaneous basis.
The table below sets out the carrying amounts of recognised financial
assets and liabilities that are subject to the above arrangements:
Effect of remaining
rights of offset
that do not meet
the criteria for
Gross Amounts Net amount offsetting in
carrying offset in presented the Statement
amount accordance in Statement of Financial Position
before with offsetting of Financial - Cash held as
offsetting criteria Position collateral Net exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
31 December
2018
Financial assets
Derivatives 2,574 - 2,574 - 2,574
Collateral accounts
for derivative
financial instruments
(note 16) 8,922 - 8,922 (2,799) 6,123
------------ ------------ ------------ ------------ ------------
Total assets 11,496 - 11,496 (2,799) 8,697
------------ ------------ ------------ ------------ ------------
Financial liabilities
Derivatives (21,284) - (21,284) 2,799 (18,485)
------------ ------------ ------------ ------------ ------------
Total liabilities (21,284) - (21,284) 2,799 (18,485)
------------ ------------ ------------ ------------ ------------
31 December
2017
Financial assets
Derivatives 2,046 - 2,046 - 2,046
Collateral accounts
for derivative
financial instruments
(note 16) 3,143 - 3,143 (287) 2,856
------------ ------------ ------------ ------------ ------------
Total assets 5,189 - 5,189 (287) 4,902
------------ ------------ ------------ ------------ ------------
Financial liabilities
Derivatives (6,958) - (6,958) 287 (6,671)
------------ ------------ ------------ ------------ ------------
Total liabilities (6,958) - (6,958) 287 (6,671)
------------ ------------ ------------ ------------ ------------
19. Fair value of financial instruments at fair value through
profit or loss
The following table shows financial instruments recognised at
fair value, analysed between those whose fair value is based on:
* Quoted prices in active markets for identical assets
or liabilities (Level 1);
* Those involving inputs other than quoted prices
included in Level 1 that are observable for the asset
or liability, either directly (as prices) or
indirectly (derived from prices) (Level 2); and
* Those with inputs for the asset or liability that are
not based on observable market data (unobservable
inputs) (Level 3).
At 31 December 2018, the financial assets and liabilities designated
at fair value through profit or loss were as follows:
Level Level Level Total
1 2 3
GBP'000 GBP'000 GBP'000 GBP'000
31 December 2018
Traded/listed capital instruments at
fair value through profit or loss 74,001 7,340 - 81,341
Other investments at fair value through
profit or loss (note 7) 3,050 - - 3,050
Credit default swap assets - 184 - 184
Credit default swap liabilities - (2,603) - (2,603)
Derivative financial assets 4 2,386 - 2,390
Derivative financial liabilities (11) (18,670) - (18,681)
Short positions covered by sale and
repurchase agreements - (1,451) - (1,451)
------------ ------------ ------------ ------------
77,044 (12,814) - 64,230
------------ ------------ ------------ ------------
31 December 2017
Traded/listed capital instruments at
fair value through profit or loss 69,620 2,493 - 72,113
Other investments at fair value through
profit or loss (note 7) 2,345 - - 2,345
Credit default swap assets - 1,093 - 1,093
Credit default swap liabilities - (178) - (178)
Derivative financial assets 5 948 - 953
Derivative financial liabilities - (6,780) - (6,780)
Short position covered by sale and repurchase
agreement - (838) - (838)
------------ ------------ ------------ ------------
71,970 (3,262) - 68,708
------------ ------------ ------------ ------------
Level 1 financial instruments include listed capital instruments
at fair value through profit or loss, an unlisted open ended fund
and bond future contracts, which have been valued at fair value
by reference to quoted prices in active markets. No unobservable
inputs were included in determining the fair value of these investments
and, as such, alternative carrying values for ranges of unobservable
inputs have not been provided.
Level 2 financial instruments include broker quoted bonds, credit
default swap agreements, foreign currency forward contracts and
sale and repurchase agreements. Each of these financial investments
are valued by the Investment Manager using market observable inputs.
The fair value of these securities may be based on, but are not
limited to, the following inputs: market price of the underlying
securities; notional amount; expiration date; fixed and floating
interest rates; payment schedules; and/or dividends declared.
The model used by the Company to fair value credit default swap
agreements prices a credit default swap as a function of its schedule,
deal spread, notional value, credit default swap curve and yield
curve. The key assumptions employed in the model include: constant
recovery as a fraction of par, piecewise constant risk neutral
hazard rates and default events being statistically independent
of changes in the default-free yield curve.
The fair values of the derivative financial instruments are based
on the forward foreign exchange rate curve.
Transfers between levels
Transfers between levels during the year are determined and deemed
to have occurred at each financial reporting date. There were
no investments classified as Level 3 during the year, and no transfers
between levels in the year. See notes 15, 16 and 18 for movements
in instruments held at fair value through profit or loss.
20. Other payables and accruals
31 December 31 December
2018 2017
GBP'000 GBP'000
Performance fee (note 8a) 234 469
Investment management fee (note 8a) 186 83
Share issue costs 79 56
Transfer of listing fees 60 -
Accrued interest payable on capital
instrument short positions 43 8
Audit fees (note 10) 36 35
Administration fee (note 8b) 31 31
Other accruals 14 10
Depositary fees (note 8e) 6 6
Valuation agent fees (note 8e) 6 6
Broker fee (note 8c) 6 6
Interest payable on sale and repurchase
agreements (note 18) 6 5
Registrar fees (note 8d) 3 3
------------ ------------
710 718
------------ ------------
21. Share capital
31 December 2018 31 December 2017
Number GBP'000 Number GBP'000
Authorised:
Ordinary shares of no
par value Unlimited - Unlimited -
------------ ------------ ------------ ------------
Allotted, called up and
fully paid:
Ordinary Shares of no
par value 85,452,024 - 75,999,351 -
------------ ------------ ------------ ------------
Issued share capital
Price per Gross proceeds
Number of shares share GBP'000
Shares in issue as at 31 December
2016 60,930,764
21 December 2017 15,068,587 106.11p 15,989
------------
Shares in issue as at 31 December
2017 75,999,351
13 February 2018 8,229,174 107.50p 8,846
15 August 2018 1,223,499 98.50p 1,205
------------
Shares in issue as at 31 December
2018 85,452,024
4 February 2019 6,400,880 92.81p 5,941
------------
Shares in issue as at 3 April
2019 91,852,904
------------
The Ordinary Shares carry the right to receive all dividends declared
by the Company. Shareholders are entitled to all dividends paid
by the Company and, on a winding up, provided the Company has
satisfied all of its liabilities, the Shareholders are entitled
to all of the surplus assets of the Company. Shareholders will
be entitled to attend and vote at all general meetings of the
Company and, on a poll, will be entitled to one vote for each
Ordinary Share held.
22. Net asset value per Ordinary Share
The net asset value per Ordinary Share is based on the net assets
attributable to owners of the Company of GBP76,976,000 (2017:
GBP79,364,000), and on 85,452,024 (2017: 75,999,351) Ordinary
Shares in issue at the year end.
23. Changes in liabilities arising from financing activities
During the year the Company raised GBP10,052,000 (2017: GBP15,989,000)
through the placing of 9,452,673 (2017: 15,068,587) new Ordinary
Shares of no par value. Share issue costs of GBP391,000 (2017:
GBP631,000) were incurred in relation to the placings, and at
the year end GBP79,000 (2017: GBP56,000) of the issue costs were
outstanding, resulting in cash flows in relation to share issue
costs in the year of GBP368,000 (2017: GBP624,000).
24. Financial instruments and risk management
The Company invests its assets with the aim of spreading investment
risk.
Risk is inherent in the Company's activities, but it is managed
through a process of ongoing identification, measurement and monitoring.
The Company is exposed to market risk (which includes currency
risk, interest rate risk and price risk), credit risk and liquidity
risk from the financial instruments it holds. Risk management
procedures are in place to minimise the Company's exposure to
these financial risks, in order to create and protect Shareholder
value.
Risk management structure
The Investment Manager is responsible for identifying and controlling
risks. The Board of Directors supervises the Investment Manager
and is ultimately responsible for the overall risk management
approach within the Company.
The Company has no employees and is reliant on the performance
of third party service providers. Failure by the Investment Manager,
Administrator, Depositary, Registrar or any other third party
service provider to perform in accordance with the terms of its
appointment could have a significant detrimental impact on the
operation of the Company.
The market in which the Company participates is competitive and
rapidly changing.
Risk concentration
Concentration indicates the relative sensitivity of the Company's
performance to developments affecting a particular industry or
geographical location. Concentrations of risk arise when a number
of financial instruments or contracts are entered into with the
same counterparty, or where a number of counterparties are engaged
in similar business activities, or activities in the same geographic
region, or have similar economic features that would cause their
ability to meet contractual obligations to be similarly affected
by changes in economic, political or other conditions. Concentrations
of liquidity risk may arise from the repayment terms of financial
liabilities, sources of borrowing facilities or reliance on a
particular market in which to realise liquid assets. Concentrations
of foreign exchange risk may arise if the Company has a significant
net open position in a single foreign currency, or aggregate net
open position in several currencies that tend to move together.
Within the aim of maintaining a diversified investment portfolio,
and thus mitigating concentration risks, the Company has established
the following investment restriction in respect of the general
deployment of assets:
Concentration
No more than 15% of NAV, calculated at the time of investment,
will be exposed to any one financial counterparty. This limit
will increase to 20% where, in the Investment Manager's opinion
(having informed the Board in writing of such increase) the relevant
financial institution investment instrument is expected to amortise
such that, within 12 months of the date of the investment, the
expected exposure (net of any hedging costs and expenses) will
be equal to or less than 15% of NAV, calculated at the time of
the investment.
Market risk
i) Price risk
Price risk exposure arises from the uncertainty about future prices
of financial instruments held. It represents the potential loss
that the Company may suffer through holding positions in the face
of price movements. The investments in capital instruments, an
unlisted open ended fund, and bond futures at fair value through
profit or loss (notes 15, 18 and 19) are exposed to price risk
and it is not the intention to mitigate the price risk.
At 31 December 2018, if the valuation of these investments at
fair value through profit or loss had moved by 5% with all other
variables remaining constant, the change in net assets would amount
to approximately +/- GBP4,147,000 (2017: +/- GBP3,681,000). The
fair value of financial instruments exposed to price risk at 31
December 2018 was GBP82,940,000 (2017: GBP73,625,000).
ii) Foreign currency risk
Foreign currency risk is the risk that the value of a financial
instrument will fluctuate because of changes in foreign currency
exchange rates. Currency risk arises when future commercial transactions
and recognised assets and liabilities are denominated in a currency
that is not the Company's functional currency. The Company invests
in securities and other investments that are denominated in currencies
other than Sterling. Accordingly, the value of the Company's assets
may be affected favourably or unfavourably by fluctuations in
currency rates and therefore the Company will necessarily be subject
to foreign exchange risks.
In order to limit the exposure to foreign currency risk, the Company
entered into hedging contracts during the year. At the year end,
the Company held the following foreign currency forward contracts:
31 December 2018
Maturity date Amount to be Amount to be purchased
sold
16 January 2019 EUR43,812,000 GBP38,405,000
16 January 2019 US$9,523,000 GBP7,197,000
16 January 2019 DKK7,275,000 GBP855,000
31 December 2017
Maturity date Amount to be Amount to be purchased
sold
16 January 2018 EUR47,192,000 GBP41,546,000
16 January 2018 US$12,452,000 GBP9,292,000
At the year end a proportion of the net financial assets of the
Company were denominated in currencies other than Sterling as
follows:
Investments
at fair
value Foreign
through currency
profit Cash and forward
or loss Receivables cash equivalents Exposure contract Net exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
31 December 2018
Euro 34,408 951 2,185 37,544 (39,438) (1,894)
US Dollars 9,044 865 (166) 9,743 (7,470) 2,273
Danish Krone 856 20 - 876 (878) (2)
Canadian Dollars - - - - - -
Singaporean Dollars - - 4 4 - 4
------------ ------------ ------------ ------------ ------------ ------------
44,308 1,836 2,023 48,167 (47,786) 381
------------ ------------ ------------ ------------ ------------ ------------
Investments
at fair
value Foreign
through currency
profit Cash and forward
or loss Receivables cash equivalents Exposure contract Net exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
31 December 2017
Euro 40,980 412 (4,125) 37,267 (41,990) (4,723)
US Dollars 13,038 110 (5,123) 8,025 (9,238) (1,213)
Danish Krone - - 417 417 - 417
Canadian Dollars - - 688 688 - 688
------------ ------------ ------------ ------------ ------------ ------------
54,018 522 (8,143) 46,397 (51,228) (4,831)
------------ ------------ ------------ ------------ ------------ ------------
Other future foreign exchange hedging contracts may be employed,
such as currency swap agreements, futures contracts and options.
There can be no certainty as to the efficacy of any hedging transactions.
At 31 December 2018, if the exchange rates had strengthened/weakened
by 5% against Sterling with all other variables remaining constant,
net assets at 31 December 2018 would have decreased/increased
by GBP19,000 (2017: GBP242,000).
iii) Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect future cash flows or the fair values
of financial instruments. The Company is exposed to risks associated
with the effects of fluctuations in the prevailing levels of market
interest rates on its financial instruments and cash flow. A large
number of the capital instruments bear interest at a fixed rate,
but capital instruments to the value of GBP50,553,000 (2017: GBP43,298,000),
cash and cash equivalents, net of overdrafts, of GBP2,446,000
(2017: GBP7,559,000) and collateral account balances of GBP8,922,000
(2017: GBP3,143,000) were the only interest bearing financial
instruments subject to variable interest rates at 31 December
2018. Therefore, if interest rates had increased/decreased by
50 basis points, with all other variables remaining constant,
the change in the value of interest cash flows of these assets
in the year would have been +/-GBP351,000 (2017: +/-GBP286,000).
Variable Non-interest
Fixed interest interest bearing Total
31 December 2018 GBP'000 GBP'000 GBP'000 GBP'000
Financial assets
Investments at fair value through
profit or loss 22,145 50,553 11,693 84,391
Cash and cash equivalents - 2,612 - 2,612
Collateral accounts for derivative
financial instruments at fair
value through profit or loss - 8,922 - 8,922
Derivative financial assets
at fair value through profit
or loss 2,574 - - 2,574
Other receivables - - 1,293 1,293
------------ ------------ ------------ ------------
Total financial assets 24,719 62,087 12,986 99,792
------------ ------------ ------------ ------------
Financial liabilities
Bank overdrafts - (166) - (166)
Derivative financial liabilities
at fair value through profit
or loss (19,955) - (1,329) (21,284)
Short positions covered by sale
and repurchase agreements - (1,451) - (1,451)
Other payables and accruals - - (704) (704)
------------ ------------ ------------ ------------
Total financial liabilities (19,955) (1,617) (2,033) (23,605)
------------ ------------ ------------ ------------
Total interest sensitivity gap 4,764 60,470 10,953 76,187
------------ ------------ ------------ ------------
31 December 2017
Financial assets
Investments at fair value through
profit or loss 24,170 43,298 6,990 74,458
Cash and cash equivalents - 16,808 - 16,808
Collateral accounts for derivative
financial instruments at fair
value through profit or loss - 3,143 - 3,143
Derivative financial assets
at fair value through profit
or loss 1,987 - 59 2,046
Other receivables - - 650 650
------------ ------------ ------------ ------------
Total financial assets 26,157 63,249 7,699 97,105
------------ ------------ ------------ ------------
Financial liabilities
Bank overdrafts - (9,249) - (9,249)
Derivative financial liabilities
at fair value through profit
or loss (6,514) - (444) (6,958)
Short positions covered by sale
and repurchase agreements - - (838) (838)
Other payables and accruals - - (713) (713)
------------ ------------ ------------ ------------
Total financial liabilities (6,514) (9,249) (1,995) (17,758)
------------ ------------ ------------ ------------
Total interest sensitivity gap 19,643 54,000 5,704 79,347
------------ ------------ ------------ ------------
It is estimated that the fair value of the capital instruments
at 31 December 2018 would increase/decrease by +/-GBP277,000 (0.33%)
(2017: +/-GBP486,000 (0.65%)) if interest rates were to change
by 50 basis points.
The Investment Manager manages the Company's exposure to interest
rate risk, paying heed to prevailing interest rates and economic
conditions, market expectations and its own views as to likely
movements in interest rates.
Although it has not done so to date, the Company may implement
hedging and derivative strategies designed to protect investment
performance against material movements in interest rates. Such
strategies may include (but are not limited to) interest rate
swaps and will only be entered into when they are available, in
a timely manner, and on terms acceptable to the Company. The Company
may also bear risks that could otherwise be hedged where it is
considered appropriate. There can be no certainty as to the efficacy
of any hedging transactions.
Credit risk
Credit risk is the risk that a counterparty to a financial instrument
will fail to discharge an obligation or commitment that it has
entered into with the Company, resulting in a financial loss to
the Company.
At 31 December 2018, credit risk arose principally from investment
in capital instruments of GBP81,341,000 (2017: GBP72,113,000),
cash and cash equivalents of GBP2,612,000 (2017: GBP16,808,000),
balances held as collateral for derivative financial instruments
at fair value through profit or loss of GBP8,922,000 (2017: GBP3,143,000)
and investment in sale and repurchase assets of GBP2,386,000 (2017:
GBP894,000). The Company seeks to trade only with reputable counterparties
that the Investment Manager believes to be creditworthy.
The Investment Manager manages the Company's credit risk by investing
in a diverse portfolio of capital instruments, in line with the
Prospectus. At 31 December 2018, the capital instrument rating
profile of the portfolio was as follows:
31 December 31 December
2018 2017
Percentage Percentage
A 5.69 4.76
BBB 34.14 32.69
BB 39.14 36.74
B 14.65 13.53
Below B 6.38 4.77
No rating - 7.51
------------ ------------
100.00 100.00
------------ ------------
The cash pending investment may be held without limit with a financial
institution with a credit rating of A-1 (Standard & Poor's) or
P-1 (Moody's) to protect against counterparty failure.
The Company may implement hedging and derivative strategies designed
to protect against credit risk. Such strategies may include (but
are not limited to) credit default swaps and will only be entered
into when they are available in a timely manner and on terms acceptable
to the Company. The Company may also bear risks that could otherwise
be hedged where it is considered appropriate. There can be no
certainty as to the efficacy of hedging transactions.
Due to the Company's investment in credit default swap agreements
the Company is exposed to additional credit risk as a result of
possible counterparty failure. The Company has entered into ISDA
contracts with Credit Suisse, JP Morgan and Goldman Sachs, rated
A, A+ and A+ respectively. At 31 December 2018, the overall net
exposure to these counterparties was 11.57% (2017: 5.44%) of NAV.
The collateral held at each counterparty is disclosed in note
16.
Liquidity risk
Liquidity risk is defined as the risk that the Company will encounter
difficulties in realising assets or otherwise raising funds to
meet financial commitments. The principal liquidity risk is contained
in unmatched liabilities. The liquidity risk at 31 December 2018
was low since the ratio of cash and cash equivalents (net of overdrafts)
to unmatched liabilities was 3:1 (2017: 11:1).
In addition, the Company diversifies the liquidity risk through
investment in capital instruments with a variety of maturity dates,
as follows:
31 December 31 December
2018 2017
Percentage Percentage
Less than 1 year 4.00 1.16
1 to 3 years 24.30 13.79
3 to 5 years 38.56 51.74
5 to 7 years 15.15 6.95
7 to 10 years 8.80 11.82
More than 10 years 9.19 14.54
------------ ------------
100.00 100.00
------------ ------------
As at 31 December 2018, the Company's liquidity profile was such
that 75.1% of investments were realisable within one day (2017:
80.8%). The remaining 24.9% was realisable within one week (2017:
18.5% within one week and the final 0.7% within one month).
As at the year end, the Company's liabilities fell due as follows:
31 December 31 December
2018 2017
Percentage Percentage
1 to 3 months 43.93 86.72
3 to 6 months - -
6 to 12 months 0.61 -
1 to 3 years 10.42 -
3 to 5 years 45.04 13.28
------------ ------------
100.00 100.00
------------ ------------
25. Capital management policy and procedures
The Company's capital management objectives are:
* to ensure that it will be able to meet its
liabilities as they fall due; and
* to maximise its total return primarily through the
capital appreciation of its investments.
Pursuant to the Company's Articles of Incorporation, the Company
may borrow money in any manner. However, the Board has determined
that the Company should borrow no more than 20% of direct investments.
The Company uses sale and repurchase agreements to increase the
gearing of the Company. As at 31 December 2018 the Company had
ten open sale and repurchase agreements, two being reverse sale
and repurchase agreements, committing the Company to make a total
repayment of GBP17,341,000 post the year end (2017: GBP6,336,000).
As a result of the reverse sale and repurchase agreement the Company
was due to receive GBP2,386,000 after the year end (2017: GBP894,000).
The raising of capital through the ongoing placing programme forms
part of the capital management policy. See note 21 for details
of the Ordinary Shares issued since incorporation.
As disclosed in the Statement of Financial Position, at 31 December
2018 the total equity holders' funds were GBP76,976,000 (2017:
GBP79,364,000).
26. Capital commitments
The Company holds a number of derivative financial instruments
which, by their very nature, give rise to capital commitments
post 31 December 2018. These are as follows:
* At 31 December 2018, the Company had sold 17 (2017:
16) credit default swap agreements for a total of
GBP2,023,000 (2017: GBP1,489,000), each receiving
quarterly interest. The exposure of the Company in
relation to these agreements at the year end date was
GBP2,023,000 (2017: GBP1,489,000). Collateral of
GBP8,205,000 for these agreements was held at 31
December 2018 (2017: GBP3,034,000).
* At the year end the Company had committed to three
(2017: two) foreign currency forward contracts dated
16 January 2019 to buy GBP46,457,000 (2017:
GBP50,838,000). At 31 December 2018, the Company
could have affected the same trades and purchased
GBP47,786,000 (2017: GBP51,228,000), giving rise to a
loss of GBP1,329,000 (2017: loss of GBP390,000).
* At the year end, the Company held eight (2017: three)
open sale and repurchase agreements (this excludes
the two open reverse sale and repurchase agreements)
committing the Company to make a total repayment of
GBP17,006,000 (2017: GBP6,340,000).
* At 31 December 2017, the Company had taken a long
position maturing on 29 March 2018, committing the
Company to a purchase of a gilt future for
GBP3,109,000.
27. Contingent assets and contingent liabilities
In line with the terms of the Investment Management Agreement,
as detailed in note 8a, should the Company's NAV reach a level
at which the TER reduced to less than 1.5% of the average NAV
in a future accounting period then the Quarterly Expenses Excess
and Annual Expenses Excess totalling GBP723,000 at 31 December
2018 (2017: GBP464,000) would become payable to the Investment
Manager, to the extent that the total expenses including any repayment
did not exceed 1.5% of the average NAV for that period.
For the GBP723,000 (2017: GBP464,000) Expenses Excess to become
payable, based on the 2018 expense level, the Company's NAV would
need to increase by at least 78% from the 31 December 2018 NAV
(2017: 34% from the 31 December 2017 NAV). The Directors consider
that it is possible, but not probable, that this ratio will be
achieved in the foreseeable future. Accordingly, the possible
payment to the Investment Manager has been treated as a contingent
liability in the financial statements.
There were no other contingent assets or contingent liabilities
in existence at the year end.
28. Events after the financial reporting date
On 16 January 2019, the Company declared a dividend of 1.50p per
Ordinary Share for the period from 1 October 2018 to 31 December
2018, which (in accordance with IFRS) was not provided for at
31 December 2018, out of the profits for the year ended 31 December
2018 (note 6). This dividend was paid on 22 February 2019.
On 4 February 2019, the Company raised gross proceeds of GBP5.94
million through the placing of 6,400,880 new Ordinary Shares of
no par value. The Ordinary Shares were issued at a price of 92.81p
per new Ordinary Share.
-- ENDS --
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
FR SSMFUDFUSEEL
(END) Dow Jones Newswires
April 04, 2019 02:00 ET (06:00 GMT)
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