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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Cqs New City High Yield Fund Limited | LSE:NCYF | London | Ordinary Share | JE00B1LZS514 | ORD NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -0.10 | -0.19% | 52.70 | 52.60 | 52.80 | 52.80 | 52.60 | 52.80 | 844,765 | 16:35:27 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Unit Inv Tr, Closed-end Mgmt | 8.37M | 3.2M | 0.0060 | 87.67 | 282.38M |
From Apr 2019 to Apr 2024
TIDMNCYF
RNS Number : 0518P
CQS New City High Yield Fund Ltd
08 October 2019
CQS NEW CITY HIGH YIELD FUND LIMITED
Annual Results Announcement
for the year ended 30 June 2019
STRATEGIC REPORT
Financial Highlights
Hot Features
Premium
Year to 30 Year to 30
Total Return* June 2019 June 2018
Net asset value 3.79% 5.82
Ordinary share price 6.71% 5.50
Capital Values 30 June 2019 30 June 2018 % change
Total assets less current
liabilities (with the
exception of the bank
loan facility) GBP261.1m GBP259.1m +0.78%
Net asset value per ordinary
share 55.19p 57.63p -4.23%
Share price (mid market) 61.00p 61.75p -1.21%
Revenue and Dividends 30 June 2019 30 June 2018 % change
Revenue earnings per ordinary
share 4.49p 4.54p -1.10%
Dividends per ordinary
share 4.45p 4.42p +0.68%
Dividend cover* 1.01x 1.00x +1.00%
Revenue reserve per ordinary
share (after recognition
of annual dividends)* 4.09p 4.25p
Dividend Yield* 7.30% 7.16%
Premium* 10.53% 7.15%
Gearing* 9.51% 10.45%
Ongoing Charges Ratio* 1.20% 1.17%
Period's High/Lows 2018/19 High 2018/19 Low
Net asset value 57.2p 52.6p
Ordinary share price (mid
market) 62.8p 55.8p
Premium/(discount) to
net asset value* 12.4% 5.1%
Dividend History Rate xd date Record date Payment date
First interim 2019 1.00p 25 October 26 October 30 November
2018 2018 2018
Second interim 1.00p 24 January 25 January 28 February
2019 2019 2019 2019
Third interim 2019 1.00p 25 April 2019 26 April 2019 31 May 2019
Fourth interim 1.45p 25 July 2019 26 July 2019 30 August
2019 2019
-------------------- ------ -------------- -------------- -------------
Total 4.45p
-------------------- ------ -------------- -------------- -------------
First interim 2018 0.99p 26 October 27 October 30 November
2017 2017 2017
Second interim 0.99p 25 January 26 January 28 February
2018 2018 2018 2018
Third interim 2018 0.99p 26 April 2018 27 April 2018 31 May 2018
Fourth interim 1.45p 26 July 2018 27 July 2018 31 August
2018 2018
-------------------- ------ -------------- -------------- -------------
Total 4.42p
-------------------- ------ -------------- -------------- -------------
* A glossary of the terms, including alternative performance measures, used can be found in the Annual Report and Financial Statements.
STATEMENT FROM THE CHAIR
Highlights
-- Net asset value total return of 3.79%. -- Ordinary share price total return of 6.71%.
-- Dividend yield of 7.30%, based on dividends at an annualised rate of 4.45 pence and a share price of 61.0 pence as at 30 June 2019.
-- Ordinary share price at a premium of 10.53% as at 30 June 2019. -- GBP12.6 million of equity raised during the year to 30 June 2019.
Investment and Share Price Performance
The period of subdued performance that I spoke of when I wrote to you at the interim stage of our financial year subsequently reversed and the year ending 30 June 2019 covered by this annual report saw a net asset value total return of 3.79% for the Company's portfolio and a share price total return for the same period of 6.71%. The Company's shares have continued to trade at a premium to their net asset value and as at 30 June 2019 this stood at 10.53%, up from the 7.15% premium at the start of the review period. The average premium over the year to 30 June 2019 was 6.49% and over three years 5.55%.
There has been no let up in major news flow against which the Company's investment portfolio has been managed. In the UK, Brexit negotiations have dragged on, whilst abroad, expectations that US interest rates would be cut were felt during the period under review even though the cut actually happened in July. Add to this mix ongoing tensions around the imposition of US / China trade tariffs and there was plenty for Ian Francis, your Investment Manager, to grapple with. He discusses the year in more detail in his review.
Earnings and Dividends
The Company's revenue earnings per share were 4.49 pence per share for the year, 1.10% lower than the 4.54 pence earned in the same period last year whilst still covering the dividends paid per share.
The Company declared three interim dividends of 1.00 pence per share in respect of the period, and a final one of 1.45 pence per share. The aggregate payment of 4.45 pence per share represents a 0.68% increase on the 4.42 pence paid last year. Based on an annualised rate of 4.45 pence and a share price of 61.00 pence as at 30 June 2019, this represents an attractive dividend yield of 7.30%. The same annual dividend with a share price of 59.20 pence at the time of writing, equates to a dividend yield of 7.52%.
The Board pays close attention to dividends and, since its launch in 2007, dividends paid by the Company have increased every year. This is illustrated by the graph on the inside front cover.
Gearing
In December 2018 the Company replaced its existing one year GBP30 million Scotiabank loan facility with a new two year GBP35 million facility with the same bank at a current all-in rate of 2.01%. With the exception of its term, the facility is comparable to the one that it replaced. GBP28 million was drawn down at 30 June 2019 and the Company had an effective gearing ratio of 9.51%.
Share Issuance
The market continues to attach a premium rating to your Company's shares, allowing us to issue new shares in a gradual manner and only when your Investment Manager is confident he can invest the additional funds favourably. GBP12.6 million was raised from new and existing shareholders during the review period, with 21.4 million ordinary shares issued from the block listing facility. A further GBP1.9 million has been raised since 30 June 2019. As well as a modest increase in net asset value from any issue of shares, the Board expects that over time existing shareholders may benefit from lower ongoing charges (as a proportion of the Company's assets) and greater liquidity in the Company's shares, all other things being equal.
Management Arrangements and Management Fee
On 18 September 2019 the Company entered into a new Investment Management Agreement to appoint CQS (UK) LLP ("CQS") as its Investment Manager. Under the previous agreement, which has been terminated, the Investment Manager, CQS Cayman Limited Partnership had, with the agreement of the Board, delegated that function to CQS.
I am pleased to advise that our Investment Manager, has agreed a new, lower fee schedule for your Company. With effect from 18 September 2019, the management fee includes a tier of 0.60% per annum for Adjusted Total Assets greater than GBP300 million. The existing tier of 0.80% per annum for Total Assets up to GBP200 million remains in place and the tier of 0.70% per annum is now for Total Assets between GBP200 million and GBP300 million.
Board Changes
As described in the interim report, I took over the Chair on 14 December 2018, half way through the period under review, and once again, on behalf of shareholders, the Board would like to express much appreciation to my predecessor, Jimmy West, who retired at the Annual General Meeting held on that date. Jimmy had been Chair of the Company since its launch in Jersey in January 2007, a period which saw the Company more than quadruple in size and, as mentioned above, continue to increase dividends every year. His experience and dedication to the Company will be missed.
Administration Changes
Again as described in the interim report, our Company Secretary and Jersey administrators, R&H Fund Services (Jersey) Limited, informed us in December 2018 that they were terminating their agreement with your Company as they wish to exclude relationships where they only provide some, but not all, of the administrative functions.
Following a thorough selection process, the Board has chosen BNP Paribas Securities Services S.C.A. Jersey Branch ("BNP") as the Company's new Company Secretary and Administrator. BNP's appointment will be effective from 15 October 2019. BNP will also replace HSBC Bank Plc as the Company's Depositary, Custodian and Banker from the same date. As well as being a cost effective move, the Board believes this will assist communication and operational efficiency by having everything under one roof.
Outlook
Brexit, US/China trade war tensions and a number of fully or partially inverted government bond yield curves are far from reassuring, while political instability, not least in the UK, is a particular concern given that markets currently seem driven, at least in the short term, as much by politics as fundamentals. As always, though, uncertainty also provides investment opportunities. In this context, the 35 years' investment experience of our lead Investment Manager, Ian "Franco" Francis, together with his proven long-term track record, is an invaluable asset, reinforcing the 'strength through diversity' that continues to characterise your Company's investment portfolio.
Caroline Hitch
7 October 2019
INVESTMENT MANAGER'S REVIEW
Another year, another Brexit dominated news agenda in the UK. Despite losing any number of Westminster votes on her Brexit deal, Theresa May managed to cling onto power until finally resigning as leader of the Conservative party in May 2019. We now have a new Prime Minister in the shape of Boris Johnson to try and steer the country ahead with an impending EU exit date of 31 October.
The UK economy has been very weak for most of the last 12 months. There was a pick-up in manufacturing activity in the first quarter of 2019 as companies stockpiled ahead of the earlier end of March Brexit date, but as that tide has gone out, the economy has become more exposed to the uncertainties caused by Brexit and global trade wars. Manufacturing, Construction, the Service Industry and Consumers desperately want some certainty to plan ahead. Sterling has continued to weaken against major currencies and the retail and consumer sectors continue to have a tough time.
In Europe, the steady growth we have seen in previous years has been replaced by slowing or no growth and companies have been cutting back on hiring as a sense of pessimism grips the Continent. The traditional powerhouses of Europe are all experiencing problems with low growth and falling manufacturing orders sitting alongside political uncertainty and the US /China trade war, with the associated risk that President Trump gets tough on European trade, further hitting, in particular, the German manufacturers. Towards the end of our financial year there was a changing of the guard at the European commission with new Commission, Council and ECB Presidents being appointed. They have the onerous task of stimulating growth and dealing with the recalcitrant UK.
Although the United States continued to power ahead economically over the last 12 months (despite the US Government being shut for a record 35 days at the start of the year), we have seen some recent signs that the US economy may be starting to cool down. Trade wars in the shape of actual and implied tariffs against China appear to be having real effects on the US economy and the threat of slowing growth has prompted the Federal Reserve to start cutting US interest rates. President Trump has continued to lambast the Fed for (in his opinion) raising rates too soon and then not cutting them swiftly enough. In our opinion he is trying to deflect the real reason behind the slowdown, the trade war with China.
Shareholders may have read that almost a third of all bonds in the world are now trading at negative interest rates. This is caused by many investors being worried about falls in global growth leading to recession and opting to stay extremely safe by investing in mainly highly rated Government debt and happy to take the small loss implied by such rates. It is a worrying sign as inverted yield curves have been the forerunner of most recessions. Another risk is that without higher interest rates to drive investment in real assets, both Europe and the USA might enter a "liquidity trap" environment, like Japan, whereby it becomes very difficult to stimulate growth.
Your portfolio is mainly invested in the High Yield Corporate Bond market. This was negatively affected by the weakness we saw in global equity markets at the end of 2018, but has since recovered and is offering attractive opportunities to investors.
The number of portfolio companies seeking to repay their higher yielding bonds and replace them with lower yielding paper has declined this year, with the result that investment activity has been muted as we have remained invested in our favoured companies. New holdings in the top ten over the year were Euronav, (last year's number 11 holding) the largest quoted tanker company in the world, and Wittur International, a manufacturer of lift equipment.
As always we continue to maintain a diversified portfolio across a range of sectors and have a good proportion of the portfolio in non-sterling currencies which can act as a hedge against a possible Brexit Sterling collapse. We also favour shorter duration bonds; that is bonds that will repay within a two to three year timetable as we try to hedge against possible interest rate rises. Although the outlook for economic growth looks difficult we have navigated through these waters before and remain confident we can find suitable investments that meet our income objectives without increasing the risk we always take in when investing in the high yield universe.
Over the year the Total Return for your Company in net asset value terms was 3.79% and the closing yield on the share price was 7.30%.
Ian "Franco" Francis
New City Investment Managers
7 October 2019
CLASSIFICATION OF INVESTMENT PORTFOLIO
By Currency 2019 Total 2018 Total investments
investments %
%
------------------------------- ------------- -----------------------
Sterling 73 73
US dollar 19 19
Euro 7 5
Australian dollar - 1
Swedish krona - 1
Norwegian krone 1 1
------------------------------- ------------- -----------------------
Total investments 100 100
------------------------------- ------------- -----------------------
By Asset Class 2019 Total 2018 Total investments
investments %
%
Bonds 80 84
Equity shares 17 13
Convertible Bonds 3 3
------------------------------- ------------- -----------------------
Total investments 100 100
------------------------------- ------------- -----------------------
By Quotation 2019 Total 2018 Total investments
investments %
%
Listed/Quoted on a recognised
investment exchange 95.9 96.6
Unquoted 4.1 3.4
------------------------------- ------------- -----------------------
Total investments 100.0 100.0
------------------------------- ------------- -----------------------
CLASSIFICATION OF INVESTMENT PORTFOLIO BY SECTOR
2019 2018
As at 30 June % of total investments % of total investments
-------------------- ------------------------ ------------------------
Oil & Gas 7.1 6.5
Basic Materials 2.9 3.0
Industrials 14.5 7.6
Consumer Goods 7.2 10.3
Consumer Services 11.0 13.7
Healthcare - 0.2
Telecommunications 0.9 3.2
Utilities - -
Financials 55.8 53.4
Technology 0.6 2.1
-------------------- ------------------------ ------------------------
Total Investments 100.0 100.0
-------------------- ------------------------ ------------------------
INVESTMENT PORTFOLIO
as at 30 June 2019
Company Sector Valuation Total
GBP'000 Investments
%
Punch Taverns Finance Restaurants &
7.75% 30/12/2025 Bars 10,424 4.1
Perform Group Financing
8.5% 15/11/2020 Financial 9,338 3.7
CYBG 8% VAR PERP Banks 8,709 3.4
Shawbrook Group 7.875%
VAR PERP Financial 8,365 3.3
Galaxy Finco Ltd 7.875%
15/11/2021 Insurance 7,494 3.0
Matalan Finance 9.5% 31/01/2024 Consumer goods 6,323 2.5
Rea Finance 8.75% 31/08/2020 Food Products 6,275 2.5
Wittur Intl 8.5% 15/02/2023 Industrials 6,000 2.4
Euronav Luxembourg SA
7.5% 31/05/2022 Transport 6,031 2.4
Barclays Bank 7% VAR PERP Banks 5,933 2.3
---------------------------------- -------------------------- -------------- ------------
Top ten investments 74,892 29.6
-------------------------------------------------------------- -------------- ------------
Onesavings Bank Plc 9.125%
VAR PERP Banks 5,847 2.3
Garfunkelux Holdco 11%
01/11/2023 Insurance 5,493 2.2
Partnership Life Assurance
9.5% 24/03/2025 Insurance 5,252 2.1
Just Group VAR PERP Insurance 5,122 2.0
Bracken Midco One 8.875%
15/10/2023 Financial 4,910 1.9
Virgin Money 8.75% VAR
PERP Banks 4,615 1.8
Ardonagh Midco Three Plc
8.375% 15/07/2023 Financial 4,477 1.8
JRP Group Plc 9% 26/10/2026 Financial 4,574 1.8
Hertz Corp 7.375% 15/01/2021 Consumer services 4,319 1.7
Hurricane Energy Plc Convertible
7.5% 24/07/2022 Oil & Gas 4,406 1.7
---------------------------------- -------------------------- -------------- ------------
Top twenty investments 123,907 48.9
-------------------------------------------------------------- -------------- ------------
Balfour Beatty PREF 9.675%
01/07/2020 Construction 4,285 1.7
Aldermore Group 11.875%
VAR PERP Banks 4,137 1.6
American Tanker Inc 9.25%
22/02/2022 Oil & Gas 3,949 1.6
Tizir Ltd 9.5% 19/07/2022 Mining 3,675 1.5
Stobart Finance 2.75%
Convertible 08/05/2024 Transport 3,745 1.5
Doric Nimrod Air Three Industrials 3,729 1.5
Permanent TSB 8.625% VAR
PERP Banks 3,502 1.4
Gran Colombia Gold Corp
8.25% 30/04/2024 Basic materials 3,373 1.3
PizzaExpress Financing Restaurants &
8.625% 01/08/2022 Bars 3,159 1.2
Raven Russia Limited 12%
PREF Real Estate 3,383 1.3
---------------------------------- -------------------------- -------------- ------------
Top thirty investments 160,844 63.5
-------------------------------------------------------------- -------------- ------------
Deutsche Bank 7.125% VAR
PERP Banks 3,290 1.3
Aggre Micro 8% 17/10/2036 Industrials 3,267 1.3
Phoenix Group Holdings
5.75% VAR PERP Insurance 3,232 1.3
VPC Speciality Lending
Investments Financial 3,249 1.3
Unique Pub Finance 7.395% Restaurants &
28/03/2024 Bars 3,214 1.3
Bombardier Inc 7.5% 15/03/2025 Industrials 3,142 1.2
LBG 7.875% VAR PERP Banks 3,140 1.2
Channel Islands Property
Fund Real Estate 3,000 1.2
SQN Secured Income Fund Financial 2,935 1.2
Nationwide Building Society
10.25% VAR PERP Banks 2,809 1.1
---------------------------------- -------------------------- -------------- ------------
Top forty investments 192,122 75.9
-------------------------------------------------------------- -------------- ------------
Rea Holdings PREF Food Products 2,701 1.1
RM Secured Direct Lending Financial 2,500 1.0
Oilflow SPV 1 DAC 12%
13/01/2022 Oil & Gas 2,457 1.0
Borealis Finance 7.5%
16/11/2022 Financial 2,274 0.9
New Look Secured Issuer
12% 02/05/2024 Consumer goods 2,210 0.9
HDL Debenture 10.375%
31/07/2023 Real Estate 2,167 0.9
Euronav Financial 2,192 0.9
Lloyds Banking Group 7.625%
VAR PERP Banks 2,131 0.8
Aggre Micro 8% 17/10/2036 Industrials 2,000 0.8
Shamaran Petroleum Corp
12% 05/07/2023 Oil & Gas 1,875 0.7
---------------------------------- ------------------------------- --------- --------------
Top fifty investments 214,629 84.9
-------------------------------------------------------------- --- --------- --------------
Oaknorth Bank Variable
01/06/2028 Banks 1,970 0.8
Garfunkelux Holdco 3 SA
8.5% 01/11/2022 Insurance 1,887 0.7
Yew Grove REIT Real Estate 1,790 0.7
SB Holdco FRN 13/07/2022 Retail 1,739 0.7
JPI Media Group Senior
Notes Media 1,731 0.7
Diversified Gas & Oil Oil & Gas 1,690 0.7
Barclays Plc 7.875% VAR
PERP Banks 1,588 0.6
Regional REIT Real Estate 1,592 0.6
Otiga Group FRN 08/07/2022 Consumer services 1,578 0.6
Bluewater Holding BV 10%
28/11/23 Industrials 1,564 0.6
---------------------------------- ------------------------------- --------- --------------
Top sixty investments 231,758 91.6
-------------------------------------------------------------- --- --------- --------------
Oro Negro 7.5% 24/01/2019 Drill Rigs 1,537 0.6
Floatel International
9% 11/04/2024 Oil Services 1,396 0.6
Palace Capital Real Estate 1,403 0.6
Veritas US Inc 7.5% 01/02/2023 Technology 1,264 0.5
Altice Financing SA 7.5%
15/05/2026 Telecommunications 1,181 0.5
Tufton Oceanic Assets Financial 1,032 0.4
Altice SA 7.75% 15/05/2022 Telecommunications 994 0.4
Navigator Holdings 7.75%
10/02/2021 Shipping 943 0.4
Croma Security Solutions Security Services 924 0.3
DB Cont Capital Trust
V 8.05% PREF Banks 728 0.2
---------------------------------- ------------------------------- --------- --------------
Top seventy investments 243,160 96.1
-------------------------------------------------------------- --- --------- --------------
Other investments (33) 9,874 3.9
-------------------------------------------------------------- --- --------- --------------
Total investments 253,034 100.0
-------------------------------------------------------------- --- --------- --------------
Notes:
CV - Convertible Bond CLN - Convertible Loan
Note
FRN - Floating Rate Note PREF - Preference Shares
PERP - Perpetual REIT - Real Estate Investment
Trust
VAR - Variable
TOP TEN LARGET HOLDINGS
Valuation Valuation
30 June (Depreciation)/ 30 June
2018 Purchases Sales Appreciation 2019
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Punch Taverns Finance
7.75% 30/12/2025
A public house operator
in the United Kingdom. 9,663 983 - (222) 10,424
Perform Group Financing
8.5% 15/11/2020
A global company
distributing multimedia
digital sports information. 7,612 1,734 - (8) 9,338
CYBG 8% Variable
Perpetual
A British banking
company concentrating
on UK Retail and
SME regional banking
services. 7,997 1,007 - (295) 8,709
Shawbrook Group 7.875%
Variable Perpetual
A British multinational
banking and financial
services company. 6,024 1,867 - 474 8,365
Galaxy Finco Ltd
7.875% 15/11/2021*
A specialist provider
of warranties for
consumer electric
products. 7,505 - - (11) 7,494
Matalan Finance 9.5%
31/01/2024
Owner and operator
of Matalan stores. 6,187 - 136 6,323
Rea Finance 8.75%
31/08/2020
Cultivator of oil
palms and production
of crude palm oil
and palm products. 6,867 - (592) 6,275
Wittur Intl 8.5%
15/02/2023
A manufacturer of
lift equipment 4,090 1,799 - 111 6,000
Euronav Luxembourg
SA 7.5% 31/05.2022
An international
shipping enterprise
focussing on crude
oil transport. 5,735 - - 296 6,031
Barclays Bank 7%
Variable Perpetual
A British multinational
banking and financial
services company. 6,009 - - (76) 5,933
------------------------------ ---------- ---------- --------- ---------------- ----------
67,689 7,390 - (187) 74,892
------------------------------ ---------- ---------- --------- ---------------- ----------
* Galaxy Finco is the holding company for Domestic and General Insurance
STRATEGIC REVIEW
Introduction
This review is part of a Strategic Report being presented by the Company and is designed to provide information primarily about the Company's business and results for the year ended 30 June 2019. It should be read in conjunction with the Statement from the Chair and the Investment Manager's Review, which give a detailed review of the investment activities for the year and look to the future.
Investment Policy
The Company invests predominantly in fixed income securities, including, but not limited to, preference shares, loan stocks, corporate bonds (convertible and/or redeemable) and government stocks. The Company also invests in equities and other income-yielding securities.
Exposure to higher yielding securities may also be obtained by investing in other closed-end investment companies and open-ended collective investment schemes.
There are no defined limits on securities and accordingly the Company may invest up to 100 per cent of total assets in any particular type of security.
There are no defined limits on countries, size or sectors, therefore the Company may invest in companies regardless of country, size or sector and, accordingly, the Company's portfolio is constructed without reference to the composition of any Stock Market index or benchmark.
The Company may, but is not obliged to, invest in derivatives, financial instruments, money market instruments and currencies for the purpose of efficient portfolio management.
The Company may acquire securities that are unlisted or unquoted at the time of investment but which are about to be convertible, at the option of the Company, into securities which are listed or traded on a stock exchange. The Company may continue to hold securities that cease to be listed or traded if the Investment Manager considers this appropriate. The Board has established a maximum investment limit in this regard of 10 per cent (calculated at the time of any relevant investment) of the Company's total assets. In addition, the Company may invest up to 10 per cent (calculated at the time of any relevant investment) of its total assets in other securities that are neither listed or traded at the time of investment.
The Company will not invest more than 10 per cent (calculated at the time of any relevant investment) of its total assets in other collective investment undertakings (open-ended or closed-end).
The Board has established a maximum investment limit whereby, at the time of investment, the Company may not invest more than 5 per cent of its total investments in the same investee company.
The Company uses gearing and the Board has set a current limit that gearing will not exceed 25 per cent of shareholders' funds at the time of borrowing. This limit is reviewed from time to time by the Board.
The Investment Manager expects that the Company's assets will normally be fully invested. However, during periods in which changes in economic circumstances, market conditions or other factors so warrant, the Company may reduce its exposure to securities and increase its positions in cash, money market instruments and derivative instruments in order to seek protection from Stock Market falls or volatility.
Investment Approach
Investments are typically made in securities which the Investment Manager has identified as undervalued by the market and which it believes will generate above average income returns relative to their risk, thereby also generating the scope for capital appreciation. In particular, the Investment Manager seeks to generate capital growth by exploiting the opportunities presented by the fluctuating yield base of the market and from redemptions, conversions, reconstructions and take-overs.
Principal Risks and Uncertainties and Risk Mitigation
Risks are inherent in the investment process, but it is important that their nature and magnitude are understood so that risks, particularly those which the Company does not wish to take, can be identified and either avoided or controlled. The Board has established a detailed framework of the key risks that the business is exposed to, with associated policies and processes devised to mitigate or manage those risks. The principal risks and mitigating factors faced by the Company are set out below.
Investment and strategy risk The Board is responsible for deciding the investment strategy to fulfil the Company's objectives and monitoring the performance of the Investment Manager. Inadvisable strategy, including country and sector allocation, stock selection and the use of gearing could all lead to poor returns for shareholders. To manage this risk the Board requires the Investment Manager to provide an explanation of significant stock selection decisions and the rationale for the composition of the investment portfolio at each Board meeting, when gearing levels are also reviewed. The Board monitors the spread of investments to ensure that it is adequate to minimise the risk associated with particular countries or factors specific to particular sectors. The Investment Manager also provides the Board and shareholders with monthly factsheets which include an investment commentary.
Market risk The Company's assets consist principally of listed fixed interest securities and its greatest risks are in consequence market related, with exposure to ordinary movements in the prices of the Company's investments and the loss that the Company might suffer through holding investments in the face of negative market movements. The Board seeks to mitigate this risk through the processes described in the paragraph above, monitoring the implementation and results of the investment process with the Investment Manager.
Financial risk The Company's investment activities expose it to a variety of financial risks that include market price risk, foreign currency risk, interest rate risk, liquidity risk and credit risk. Further details of these risks and the ways in which they are managed are disclosed in notes 16 to 21 of the financial statements.
Earnings and dividend risk The earnings that underpin the amount of dividends declared and future dividend growth are generated by the Company's underlying portfolio. Fluctuations in earnings resulting from changes to the underlying portfolio or changes in the tax treatment of the dividends or interest received by the Company could reduce the level of dividends received by shareholders. The Board monitors and manages this risk by considering detailed income forecasts prepared by the Investment Manager and Company Secretary at each Board meeting and when the quarterly dividends are declared.
Operational risk The Company relies upon the services provided by third parties and is reliant on the control systems of the Investment Manager and the Company's other service providers. The security and/or maintenance of, inter alia, the Company's assets, dealing and settlement procedures, and accounting records depend on the effective operation of these systems. These are regularly tested and monitored and are reported on at each Board meeting. An internal control report, which includes an assessment of risks, together with the procedures to mitigate such risks, is prepared by the Company Secretary and by Maitland Administration Services (Scotland) Limited, whose systems and processes the Company relies upon. These are reviewed by the Audit and Risk Committee, as a minimum, once a year. CQS (UK) LLP delivers a risk based internal audit plan which covers different areas of its operations that are subject to internal audit, including front, middle and infrastructure audits. Any areas of concern relevant to the Company are discussed with the Audit and Risk Committee when it meets. The Depository and Custodian, HSBC Bank plc, produces an internal control report each year which is reviewed by its auditor and gives assurance regarding the effective operation of controls. This is reviewed by the Audit and Risk Committee.
Gearing risk A fall in the value of the underlying investments could adversely affect the value of the Company's investment portfolio by the impact of gearing. It could also result in a breach of loan covenants. The Board sets the gearing limits. Gearing levels and compliance with loan covenants are monitored monthly by the Investment Manager and by the Board at regular Board meetings. Gearing will not exceed 25 per cent of shareholders' funds at the time of borrowing.
Key person dependency Performance of the Company may be negatively affected by a change in the fund management team within the Investment Manager. Prior to 18 September 2019, the Company delegated the management of the fund management team to New City Investment Managers. Whilst the lead fund manager was responsible for day to day portfolio management, an Investment Committee within New City Investment Managers also decided key stock selection. The Management Engagement Committee of the Company reviews the performance of the Investment Manager annually. Further details of the change of Investment Manager are provided in Note 24.
Regulatory risk The breach of regulatory rules could lead to a suspension of the Company's stock exchange listing or financial penalties. The Company Secretary and UK Administrator monitor the Company's compliance with the Listing Rules of the UK Listing Authority. Compliance with the Listing Rules is reviewed by the Directors at each Board meeting.
Political risk Political developments are closely monitored and considered by the Board. The Board has noted the results of the UK referendum on continuing membership of the European Union. Whilst there is considerable uncertainty at present, the Board will continue to monitor developments as they occur and assess the potential consequences for the Company's future activities.
Viability Statement
In accordance with the provisions of the UK Corporate Governance Code, the Directors have assessed the viability of the Company over a period longer than the 12 months required by the 'Going Concern' provision (this provision is detailed below). The Board conducted this viability review for a period of three years. The Board continues to consider that this period reflects the long term objectives of the Company, being a Company with no fixed life, whilst taking into account the impact of uncertainties in the markets.
The Directors do not expect there to be any significant change to the current principal risks facing the Company nor to the adequacy of the controls in place to mitigate those risks. Furthermore, the Directors do not envisage any change in strategy which would prevent the Company from operating over the three year period. This is based on the assumption that there are no significant changes in market conditions or the tax and regulatory environment that could not reasonably have been forseen. The Board also considers the annual continuation vote should not be a factor to affect the three year period given the strong demand seen for the Company's shares.
In making this statement the Board: (i) considered the continuation vote to be proposed at the Annual General Meeting which the Board considers will be voted in favour of by shareholders; and (ii) carried out a robust assessment of the principal risks facing the Company. These risks and their mitigations are set out earlier in the Strategic Report.
The principal risks identified as most relevant to the assessment of the viability of the Company were those relating to potential under-performance of the portfolio and its effect on the ability to pay dividends. When assessing these risks the Directors have considered the risks and uncertainties facing the Company in severe but reasonable scenarios, taking into account the controls in place and mitigating actions that could be taken.
When considering the risk of under-performance, the Board carried out a series of stress tests including in particular the effects of any substantial future falls in investment value on the ability to re-pay and re-negotiate borrowings, potential breaches of loan covenants and the maintenance of dividend payments.
The Board considered the Company's portfolio and concluded that the diverse nature of investments held gives stability and liquidity along with flexibility to be able to react positively to market and political forces outwith the Board's control.
The Board also considered the impact of potential regulatory change and the controls in place surrounding significant third party providers, including the fund manager.
The Board also noted the low liquidity risk in the portfolio.
The Scotiabank loan facility is due to expire on 18 December 2020. It is anticipated a new facility on comparable terms will be negotiated prior to this date.
Based on the Company's processes for monitoring revenue and costs, with the use of frequent revenue forecasts, and the Manager's compliance with the investment objective and policies, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for a period of three years from the date of approval of this Report.
Going Concern
The Company does not have a fixed winding-up date and, therefore, unless shareholders vote to wind-up the Company, shareholders will only be able to realise their investment through the market.
At each Annual General Meeting of the Company, shareholders are given the opportunity to vote on an ordinary resolution to continue the Company as an investment company. If any such resolution is not passed, the Board will put forward proposals at an extraordinary general meeting to liquidate or otherwise reconstruct or reorganise the Company. Given the performance of the Company, input from the Company's major shareholder and its broker, the Board considers it likely that shareholders will vote in favour of continuation at the forthcoming Annual General Meeting.
After making enquiries of the Investment Manager, and having considered the Company's investment objective, nature of the investment portfolio, loan facility and expenditure projections, the Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason, and in light of the Company's strong investment record, the Directors continue to adopt the going concern basis in preparing the financial statements, notwithstanding that the Company is subject to an annual continuation vote as described above.
Performance Measurement and Key Performance Indicators (KPIs)
The Board uses a number of performance measures to monitor and assess the Company's success in meeting its objectives and to measure its progress and performance. The key performance indicators are as follows:
-- Dividend Yield and Dividend Cover
It is intended that the Company will pay four quarterly dividends each year and accordingly the Board reviews the Company's dividend yield and dividend cover on a quarterly basis. During the year dividends amounting to 4.45 pence per ordinary share were declared (2018: 4.42 pence).
-- Total Return
The Board reviews the Company's Net Asset Value ("NAV") total return and Share Price total return on a quarterly basis.
-- Discount/premium to NAV
At each Board meeting, the Board monitors the level of the Company's discount/premium to NAV at which its shares trade. During the year the premium at which the shares traded increased from 7.15% as at 30 June 2018 to 10.53% as at 30 June 2019. The Company publishes a NAV per share figure on a daily basis through the official newswire of the London Stock Exchange.
-- Revenue Earnings and Dividends per share
The Board reviews a revenue forecast on a quarterly basis to determine the quarterly dividend.
-- Ongoing Charges
The ongoing charges ratio represents the Company's management fee and all other operating expenses incurred by the Company expressed as a percentage of the average shareholders' funds over the year. The Board regularly reviews the ongoing charges and monitors all Company expenses. The ongoing charges ratio for the year ended 30 June 2019 was 1.20% (2018: 1.17%).
The Board measures the Company's performance by reviewing the KPIs against their expectations of performance from their knowledge of the industry sector.
These KPIs fall within the definition of 'Alternative Performance Measures' (APMs) under guidance issued by the European Securities and Markets Authority. Additional information explaining how these are calculated is set out in the Glossary in the Annual Report and Financial Statements.
Social, Community, Human Rights, Employee Responsibilities and Environmental Policy
The Directors recognise that their first duty is to act in the best financial interests of the Company's shareholders and to achieve good financial returns against acceptable levels of risk, in accordance with the objectives of the Company.
In asking the Company's Investment Manager to deliver against these objectives, they have also requested that the Investment Manager take into account the broader social, ethical and environmental issues of companies within the Company's portfolio, acknowledging that companies failing to manage these issues adequately run a long term risk to the sustainability of their businesses.
More specifically, they expect companies to demonstrate ethical conduct, effective management of their stakeholder relationships, responsible management and mitigation of social and environmental impacts, as well as due regard for wider societal issues.
As an investment company with its current structure, the Company has no direct social, community, human rights, employee or environmental responsibilities of its own. As a consequence, this report contains no further information on the effectiveness of these policies.
Greenhouse Gas Emissions
The Company has no Greenhouse Gas Emissions to report from its operations for the year ended 30 June 2019 and prior year, nor does it have responsibility for any other emissions producing sources (including those within the underlying investment portfolio).
Board Diversity
At 30 June 2019 there were three male and two female Directors, on the Board meeting the requirements of the Hampton-Alexander review, for 33% of women on the Board. The Company has no employees and is not required to report further on gender diversity.
By Order of the Board
Caroline Hitch
7 October 2019
STATEMENT OF DIRECTORS' RESONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND FINANCIAL STATEMENTS
The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the EU and applicable law.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing these financial statements, the Directors are required to:
-- select suitable accounting policies and then apply them consistently; -- make judgements and estimates that are reasonable, relevant and reliable;
-- state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements;
-- assess the Company's ability to continue as a going concern, disclosing, as applicable, matters relating to going concern; and
-- use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with Companies (Jersey) Law, 1991. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other
irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. The financial statements are published on the www.ncim.co.uk website, which is a website maintained by the Company's Investment Manager. Legislation in Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the annual financial report.
We confirm that to the best of our knowledge:
-- the financial statements, prepared in accordance with IFRS as adopted by the EU, give a true and fair and balanced view of the assets, liabilities, financial position and profit or loss of the Company; and
-- the Strategic Report and Directors' report include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that the Company faces.
We consider the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
On behalf of the Board
Caroline Hitch
Director
7 October 2019
INCOME STATEMENT
For the year ended 30 June 2019
Year ended Year ended
30 June 2019 30 June 2018
Revenue Capital Total Revenue Capital Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------- ----- ------- -------- -------- ------- ------- -------
Capital gains/(losses)
on investments
Losses on investments 9 - (10,195) (10,195) - (5,449) (5,449)
Exchange gains - 127 127 - 220 220
Revenue
Income 2 21,024 - 21,024 20,033 - 20,033
-------------------------- ----- ------- -------- -------- ------- ------- -------
21,024 (10,068) 10,956 20,033 (5,229) 14,804
-------------------------- ----- ------- -------- -------- ------- ------- -------
Expenses
Investment management
fee 3 (1,490) (496) (1,986) (1,478) (493) (1,971)
Other expenses 4 (716) (99) (815) (656) (192) (848)
-------------------------- ----- ------- -------- -------- ------- ------- -------
Total expenses (2,206) (595) (2,801) (2,134) (685) (2,819)
-------------------------- ----- ------- -------- -------- ------- ------- -------
Profit/(loss) before
finance costs and
taxation 18,818 (10,663) 8,155 17,899 (5,914) 11,985
Finance costs
Interest receivable 11 - 11 5 - 5
Interest payable and
similar charges 5 (390) (131) (521) (282) (94) (376)
-------------------------- ----- ------- -------- -------- ------- ------- -------
Profit/(loss) before
taxation 18,439 (10,794) 7,645 17,622 (6,008) 11,614
Irrecoverable withholding
tax 6 (76) - (76) (137) - (137)
-------------------------- ----- ------- -------- -------- ------- ------- -------
Profit/(loss) after
taxation 18,363 (10,794) 7,569 17,485 (6,008) 11,477
Earnings per ordinary
share (pence) 8 4.49 (2.64) 1.85 4.54 (1.56) 2.98
-------------------------- ----- ------- -------- -------- ------- ------- -------
The total column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with IFRS (refer to note 1). The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.
There is no other comprehensive income as all income is recorded in the Income Statement above.
All revenue and capital items in the above statement are derived from continuing operations.
No operations were acquired or discontinued in the year.
The accompanying notes are an integral part of these financial statements.
BALANCE SHEET
as at 30 June 2019
As at 30 June As at 30 June
2019 2018
Notes GBP'000 GBP'000
------------------------ ----- ------------- -------------
Non-Current assets
Investments held
at fair value 9 253,034 253,081
------------------------ ----- ------------- -------------
Current assets
Debtors and other
receivables 10 4,186 4,298
Cash at bank 5,837 3,850
------------------------ ----- ------------- -------------
10,023 8,148
------------------------ ----- ------------- -------------
Total assets 263,057 261,229
------------------------ ----- ------------- -------------
Current liabilities
Bank loan 11 (28,000) (28,000)
Brokers and other
payables 12 (1,930) (2,161)
------------------------ ----- ------------- -------------
Total liabilities (29,930) (30,161)
------------------------ ----- ------------- -------------
Net assets 233,127 231,068
------------------------ ----- ------------- -------------
Stated capital and
reserves
Stated capital account 13 191,007 178,424 Special distributable reserve 50,385 50,385 Capital reserve (25,559) (14,765) Revenue reserve 17,294 17,024 ------------------------ ----- ------------- ------------- Equity shareholders' funds 233,127 231,068 ------------------------ ----- ------------- ------------- Net asset value per ordinary share (pence) 15 55.19p 57.63p ------------------------ ----- ------------- -------------
The financial statements were approved by the Board of Directors and authorised for issue on 7 October 2019 and were signed on its behalf by:
Caroline Hitch
Chair
The accompanying notes are an integral part of these financial statements.
STATEMENT OF CHANGES IN EQUITY
For the year ended 30 June 2019
Stated Special
capital distributable Capital Revenue
account* reserves reserve* reserve Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------- ----- ----------- --------------- ------------- ---------- --------
At 1 July 2018 178,424 50,385 (14,765) 17,024 231,068
Total comprehensive income
for the year:
Profit for the year - - (10,794) 18,363 7,569
Transactions with owners
recognised
directly in equity:
Dividends paid 7 - - - (18,093) (18,093)
Net proceeds from issue
of shares 13 12,583 - - - 12,583
--------------------------- ----- ----------- --------------- ------------- ---------- --------
At 30 June 2019 191,007 50,385 (25,559) 17,294 233,127
--------------------------- ----- ----------- --------------- ------------- ---------- --------
For the year ended 30 June 2018
Stated Special
capital distributable Capital Revenue
account* reserves reserve* reserve Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------- ----- ------------- --------------- ------------- ---------- --------
At 1 July 2017 159,647 50,385 (8,757) 16,400 217,675
Total comprehensive income
for the year:
Profit for the year - - (6,008) 17,485 11,477
Transactions with owners
recognised
directly in equity:
Dividends paid 7 - - - (16,861) (16,861)
Net proceeds from issue
of shares 13 18,777 - - - 18,777
--------------------------- ----- ------------- --------------- ------------- ---------- --------
At 30 June 2018 178,424 50,385 (14,765) 17,024 231,068
--------------------------- ----- ------------- --------------- ------------- ---------- --------
The accompanying notes in the Annual Report and Financial Statements are an integral part of these financial statements.
* Following a change in Jersey Company Law effective 27 June 2008, dividends can be paid out of any capital account of the Company subject to certain solvency restrictions. However, it is the Company's policy to account for revenue items and pay dividends, drawing where necessary from a separate revenue reserve.
++ The balance on the special distributable reserve of GBP50,385,000 (2018: GBP50,385,000) is treated as distributable profits available to be used for all purposes permitted by Jersey Company Law including the buying back of ordinary shares, the payment of dividends and the payment of preliminary expenses.
The balance on the revenue reserve of GBP17,294,000 (2018: GBP17,024,000) is available for paying dividends.
CASH FLOW STATEMENT
For the year ended 30 June 2019
Notes Year ended Year ended
30 June 30 June 2018
2019 GBP'000
GBP'000
-------------------------------- --------- -------------- ----------------------
Operating activities
Profit before finance cost
and taxation 8,155 11,985
Losses on investments 10,195 5,449
Effective interest adjustment
to cost (464) (837)
Exchange gains (127) (220)
(Decrease)/increase in
other receivables 112 (283)
Increase/(decrease) in
other payables 5 (10)
-------------------------------- --------- -------------- ----------------------
Net cash inflow from operating
activities
before interest and taxation 17,876 16,084
Irrecoverable withholding
tax paid (76) (137)
-------------------------------- --------- -------------- ----------------------
Net cash inflow from operating
activities 17,800 15,947
-------------------------------- --------- -------------- ----------------------
Investing activities
Purchases of investments (51,035) (78,028)
Sales of investments 41,115 54,335
-------------------------------- --------- -------------- ----------------------
Net cash outflow from investing
activities (9,920) (23,693)
-------------------------------- --------- -------------- ----------------------
Financing
Equity dividends paid 7 (18,093) (16,861)
Drawdown of bank loan facility - 3,000
Loan interest paid (510) (371)
Issue of ordinary shares 13 12,583 18,777
-------------------------------- --------- -------------- ----------------------
Net cash (outflow)/inflow
from financing (6,020) 4,545
-------------------------------- --------- -------------- ----------------------
Increase/(decrease) in
cash and cash equivalents 1,860 (3,201)
-------------------------------- --------- -------------- ----------------------
Cash and cash equivalents
at the start of the year 3,850 6,831
Cashflow 1,860 (3,201)
Bank overdraft movement - -
Exchange gains 127 220
-------------------------------- --------- -------------- ----------------------
Cash and cash equivalents
at the end of the year 5,837 3,850
-------------------------------- --------- -------------- ----------------------
The accompanying notes in the Annual Report and Financial Statements are an integral part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS
1 Accounting Policies
(a) Basis of accounting
These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union and in accordance with the guidance set out in the Statement of Recommended Practice ("SORP"): Financial Statements of Investment Trust Companies and Venture Capital Trusts issued by the AIC in November 2014 and updated in January 2017 and March 2018 with consequential amendments. Notwithstanding that CQS New City High Yield Fund Limited (the "Company") is not an investment trust company, given the purpose of the Company and certain similar characteristics, the Company has chosen to follow the guidance set out in the SORP where it is consistent with the requirements of IFRS.
The functional and reporting currency of the Company is pounds sterling because that is the primary economic environment in which the Company operates. The notes and financial statements are presented in pounds sterling and are rounded to the nearest thousand except where otherwise indicated.
The financial statements of the Company have been prepared on a going concern basis, on the assumption the continuation vote is passed by Shareholders at the forthcoming Annual General Meeting. Given the strong demand seen for the Company's shares the Directors are confident the continuation vote will be passed.
The financial statements have been prepared on the historical cost basis, except that investments are stated at fair value and categorised as financial assets at fair value through profit or loss.
Accounting Developments
The following standards were adopted during the financial year.
International Financial Reporting Standards
IFRS 9 Classification and measurement of financial assets after initial recognition
IFRS 15 Revenue from contracts with customers
The Directors consider that IFRS 9 and IFRS 15 have not had any material impact on the financial position or performance of the Company.
IFRS 9 did not have any material impact on the Company's financial statements as presented for the current year as, under IFRS 9, the Company continues to manage and account for the financial instruments held at fair value as it has done in the past. IFRS 15 did not have any material impact on the Company's financial statements as presented for the current year as the overwhelming majority of the Company's revenue consists of income from investment which is outside the scope of IFRS 15.
The following accounting standards and their amendments were in issue at the year end but will not be in effect until after this financial year.
International Financial Reporting Effective date* Standards IFRS 3 Business Combinations 1 January 2020** (amendment) IFRS 16 Leases 1 January 2019 International Accounting Standards IAS 28 Investments in Associates 1 January 2019 and Joint Ventures (Amendments relating to long term interests in associates or joint venture) IFRIC Interpretations IFRIC 23 Uncertainty over Income Tax Treatments 1 January 2019 Annual improvements to IFRS 2015-2017 Cycle 1 January 2019
*Years beginning on or after
**Not yet endorsed for use in the EU
The Directors do not expect that the adoption of other standards listed above will have a material impact on the financial statements of the Company in future periods.
Critical accounting estimates and judgements
The preparation of the financial statements necessarily requires the exercise of judgement both in application of accounting policies which are set out below and in the selection of assumptions used in the calculation of estimates. These estimates and judgements are reviewed on an ongoing basis and are continually evaluated based on historical experience and other factors. However, actual results may differ from these estimates.
The valuation of investments involves estimation and judgements. The major part of the investment portfolio is valued by reference to listed/quoted prices, however the portfolio also comprises investment securities which are thinly traded. Such investments are best valued by reference to current market price lists provided by an independent broker. The Directors may overlay such prices with situation specific adjustments including (a) taking a second independent opinion on a specific investment, or (ii) reducing the value to a net present value, to reflect the likely time to be taken to realise a stock which the Company is actively looking to sell. The outturn is reflected in the valuations of investments as set out in Note 22 to the financial statements.
There were no other significant accounting estimates or significant judgements in the current or previous year.
A summary of the principal accounting policies which have been applied to all periods presented in these financial statements is set out below.
(b) Investments
Investments which comprise equity shares, convertible bonds and fixed income securities, are classified as held at fair value through profit or loss as the investments are managed and their performance evaluated on a fair value basis in accordance with the Company's investment strategy and this is also the basis on which information about investments is provided internally to the Board.
Purchases or sales of investments are recognised/derecognised on the date the Company trades the investments. On initial recognition investments are classified as fair value through profit or loss with any resultant gain or loss, including any gain or loss arising from a change in exchange rates, recognised in the Income Statement. For listed securities this is either the bid price or last traded price, depending on the convention of the exchange on which the investment is listed, adjusted for accrued income where it is reflected in the market price.
Investments which are not listed or where trading in the securities of an investee company is suspended are valued at the Board's estimate of fair value in accordance with International Private Equity and Venture Capital (IPEV) valuation guidance. Unquoted investments are valued by the Directors on the basis of all the information available to them at the time of valuation. This includes a review of the financial and trading information of the Company, covenant compliance, ability to pay the interest due and cash held. For convertible bonds this also includes consideration of their discounted cash flows and underlying equity value based on information provided by the Investment Manager.
(c) Income
Dividends receivable on equity shares (including preference shares) are recognised as income on the date that the related investments are marked ex-dividend. Dividends receivable on equity shares where no ex-dividend date is quoted are recognised as income when the Company's right to receive payment is established.
Dividends from overseas companies are shown gross of any non-recoverable withholding taxes which are disclosed separately in the Income Statement.
Fixed returns on non-equity shares and debt securities (including preference shares) are recognised on a time apportioned basis so as to reflect the effective interest rate on those instruments. Other returns on non-equity shares are recognised when the right to the return is established.
Income from deposit interest is recognised on an accruals basis.
Where the Company has elected to receive its dividends in the form of additional shares rather than cash, an amount equal to the cash dividend is recognised as income. Any excess in the value of the shares received over the amount of the cash dividend is recognised in the capital reserve.
(d) Expenses, including finance charges
All expenses are accounted for on an accruals basis. Expenses are charged through the revenue account except as follows:
- expenses which are incidental to the acquisition of an investment are charged to the capital reserve.
- expenses which are incidental to the disposal of an investment charged to the capital reserve;
- the Company charges 25 per cent of investment management fees and interest costs to capital, in line with the Board's expected long term return in the form of capital gains and income respectively from the investment portfolio of the Company. For further details refer to notes 3 and 5;
- expenses incurred in connection with the maintenance or enhancement of the value of the investments or for the long term benefit of the Company are charged to capital; and
- the tax charge of the Company consists solely of withholding tax suffered on income from investments deducted at source.
(e) Foreign currencies
Transactions denominated in foreign currencies are recorded in the functional currency at actual exchange rates at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the period end are reported in sterling at the rates of exchange prevailing at the period end. Any gain or loss arising from a change in exchange rates subsequent to the date of a transaction is included as an exchange gain or loss in the Income Statement.
(f) Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and bank overdrafts.
(g) Bank borrowings
Interest bearing bank loans are recorded at amortised cost.
(h) Reserves
(a) Capital reserve. Following a change in Jersey Company law effective 27 June 2008, dividends can be paid out of any capital account of the Company subject to certain solvency restrictions. It is the Company's policy however to account for revenue items and pay dividends through a separate revenue reserve. The following are accounted for in the Capital reserve:
- gains and losses on the realisation of investments;
- realised and unrealised exchange differences of a capital nature;
- expenses and finance costs charged in accordance with the policies above; and
- increases and decreases in the valuation of investments held at the period end.
(b) Special distributable reserve. This reserve is treated as distributable profits available to be used for all purposes permitted by Jersey company law including the buying back of ordinary shares, the payment of dividends (see note 7) and the payment of preliminary expenses.
(c) Revenue reserve. The net profit/(loss) arising in the revenue column of the income statement is added to or deducted from this reserve and is available for paying dividends.
(i) Treasury shares
When the Company purchases its Ordinary shares to be held in treasury, the amount of the consideration paid, which includes directly attributable costs is recognised as a deduction from the stated capital account. When these shares are sold subsequently, the amount received is recognised as an increase in equity, and the resulting surplus or deficit on the transaction is transferred to or from the stated capital account.
(j) Segmental information
No segmented reporting is provided as the Directors, as the Chief Operator Decision Maker (with advice from the Investment Manager), are of the opinion that the Company is engaged in a single segment of business of investing in debt and, to a significantly lesser extent, equity securities.
2 Income
2019 2018
GBP'000 GBP'000
------------------------------ -------- --------
Income from investments*
UK Dividend income 1,552 1,175
UK Interest on fixed interest
securities 12,764 14,559
Overseas divided income 52 969
Overseas interest in fixed
interest securities 6,656 3,330
------------------------------ -------- --------
Total income 21,024 20,033
------------------------------ -------- --------
Income from investments
Quoted 19,929 19,773
Unquoted 1,095 260
------------------------------ -------- --------
21,024 20,033
------------------------------ -------- --------
*All investment income arises on investments valued at fair value through profit or loss.
Fixed interest securities include both fixed and floating rate securities.
3. Investment Management Fee
2019 2019 2019 2018 2018 2018
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------- --------- --------- --------- --------- --------- ---------
Investment
management
fee 1,490 496 1,986 1,478 493 1,971
------------- --------- --------- --------- --------- --------- ---------
The Company's Investment Manager is CQS Cayman Limited Partnership ("CQS") which in turn has delegated this function to New City Investment Managers ("NCIM"). The contract between the Company and CQS may be terminated by either party giving not less than 12 months' notice of termination. CQS receives a basic monthly fee at the rate of 0.8 per cent per annum of the Company's total assets (less current liabilities other than bank borrowings), payable in arrears up to and including GBP200,000,000 and 0.7 per cent per annum above this. The balance due to CQS for management fees at the year end was GBP165,000 (2018: GBP169,000). With effect from 18 September 2019 there was a change in the management fee. Details are provided in Note 24.
Investment management fees have been allocated 25 per cent to capital and 75 per cent to revenue.
4. Other Expenses
2019 Revenue 2019 2019 2018 2018 2018
GBP'000 Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------- ------------------- -------- ------------ ------------------------- -------- --------
Secretarial and
administration
fees 168 - 168 167 - 167
Directors' fees 158 - 158 158 - 158
Auditors' remuneration
for:
- audit services 36 - 36 22 - 22
Broker fees 39 - 39 30 - 30
Printing 16 - 16 15 - 15
Bank and custody charges 53 - 53 54 - 54
Registrars' fees 31 - 31 32 - 32
Depositary fees 50 - 50 60 - 60
Legal & professional
fees 62 - 62 13 - 13
Other 103 99 202 105 192 297
-------------------------- ------------------- -------- ------------ ------------------------- -------- --------
716 99 815 656 192 848
-------------------------- ------------------- -------- ------------ ------------------------- -------- --------
The Company has an agreement with R&H Fund Services (Jersey) Limited ("R&H") to provide company secretarial services to the Company.
As part of the Company's administration arrangements, the accounting, valuation, UK compliance oversight and certain other administrative services are delegated by the Administrator to Maitland Administration Services (Scotland) Limited (MASS) ("UK Administrator"). During the year, the UK Administrator was entitled to a fixed fee of GBP130,000 per annum and a variable fee of 0.01 per cent per annum of the Company's total assets (less current liabilities excluding any bank borrowings) in excess of GBP200 million. The Administration Agreement may be terminated by either party giving to the other not less than 12 months' notice.
With effect from 15 October 2019, BNP Paribas Securities Services S.C.A. Jersey Branch ("BNP") will be appointed as the Company Secretary and Administrator. Further details are provided in Note 24, Subsequent Events.
The total fees paid under these agreements were GBP33,000 (2018: GBP33,000) to R&H and GBP135,000 (2018: GBP134,000) to MASS. There was GBP8,000 fees due to R&H at the year end (2018: GBP7,500).
The remuneration of the Chair, the highest paid Director, remained unchanged during the year under review at GBP37,500 (2018: GBP37,500). Further details are provided in the Directors' Remuneration Report in the Annual Report and Financial Statements.
No pension contributions were payable in respect of any of the Directors.
The Company does not have any employees.
5. Interest Payable and Similar Charges
2019 2019 2019 2018 2018 2018
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------- --------- --------- --------- --------- --------- ---------
Bank Loan 390 131 521 282 94 376
----------- --------- --------- --------- --------- --------- ---------
Interest payable on the bank loan (see note 11) has been allocated 25 per cent to capital and 75 per cent to revenue.
6. Taxation
The taxation charge for the year is comprised of:
2019 2019 2019 2018 2018 2018
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------- --------- --------- --------- --------- --------- ---------
Irrecoverable
withholding
tax suffered 76 - 76 137 - 137
--------------- --------- --------- --------- --------- --------- ---------
The taxation on profit differs from the theoretical expense that would apply on the Company's profit before taxation using the applicable tax rate in Jersey of zero per cent (2018: 0%) as follows:
2019 2018
GBP'000 GBP'000
---------------------------------------------- -------- --------
Profit on ordinary activities before taxation 7,645 11,614
---------------------------------------------- -------- --------
Theoretical tax expense at zero per cent - -
(2018: 0%)
Effects of:
Foreign withholding tax 76 137
---------------------------------------------- -------- --------
Current year revenue tax charge 76 137
---------------------------------------------- -------- --------
7. Dividends
2019 2018
Payment Revenue Revenue
date GBP'000 GBP'000
Amounts recognised as distributions
to equity holders in the
year:
Dividends in respect of the
year ended 30 June 2018
Fourth interim of 1.45p (2017: 31 August
1.45p) per ordinary share 2018 5,814 5,392
Dividends in respect of the
year ended 30 June 2019
- First interim of 1.0p (2018: 30 November
0.99p) per ordinary share 2018 4,045 3,736
- Second interim of 1.0p
(2018: 0.99p) per ordinary 28 February
share 2019 4,065 3,854
- Third interim of 1.0p (2018:
0.99p) per ordinary share 31 May 2019 4,169 3,879
------------------------------------- ------------- -------- --------
18,093 16,861
--------------------------------------------------- -------- --------
Distributions to equity holders
after the year end:
Dividends in respect of the
year ended 30 June 2019
- Fourth interim of 1.45p 30 August
per ordinary share 2019 6,147 -
Dividends in respect of the
year ended 30 June 2018
- Fourth interim of 1.45p 31 August
per ordinary share 2018 - 5,814
In accordance with IFRS dividends paid to the Company's shareholders are recognised when they become payable, consequently the fourth interim dividend has not been included as a liability in these financial statements and will be recognised in the period in which it is paid.
8. Earnings per Ordinary Share
2019 2019 2019 2018 2018 2018
Revenue Capital Total Revenue Capital Total
pence pence pence pence pence pence
----------------- --------- --------- ------- --------- --------- -------
Earnings per
ordinary share 4.49p (2.64)p 1.85p 4.54p (1.56)p 2.98p
----------------- --------- --------- ------- --------- --------- -------
The revenue earnings per ordinary share is based on the net profit after taxation of GBP18,363,000 (2018: GBP17,485,000) and on 408,895,008 (2018: 385,436,978) ordinary shares, being the weighted average number of ordinary shares in issue during the year.
The capital earnings per ordinary share is based on a net capital loss of GBP10,794,000 (2018: net capital loss of GBP6,008,000) and on 408,895,008 (2018: 385,436,978) ordinary shares, being the weighted average number of ordinary shares in issue during the year.
9. Investments
All investments are valued at fair value through profit or loss. Gains or losses arising from changes in the fair value of investments are included in the Income Statement.
2019 2018
GBP'000 GBP'000
------------------------------------------ -------- --------
Investments listed/quoted on a recognised
investment exchange 242,644 243,756
Unquoted investments 10,390 9,325
------------------------------------------ -------- --------
253,034 253,081
------------------------------------------ -------- --------
Equity shares 33,725 33,477
Fixed income securities 211,158 215,661
Convertible bonds 8,151 3,943
------------------------------------------ -------- --------
253,034 253,081
------------------------------------------ -------- --------
2019 2018
GBP'000 GBP'000
------------------------------------------- -------- --------
Opening book cost 277,850 254,954
Opening fair value adjustment (24,769) (22,857)
------------------------------------------- -------- --------
Opening valuation 253,081 232,097
Purchases at cost 50,799 79,931
Sales proceeds (41,115) (54,335)
Realised losses on sales (7,001) (3,537)
Effective interest adjustment to book cost 464 837
Net unrealised losses (3,194) (1,912)
------------------------------------------- -------- --------
Closing valuation 253,034 253,081
------------------------------------------- -------- --------
Closing book cost 280,997 277,850
Closing fair value adjustment (27,963) (24,769)
------------------------------------------- -------- --------
Closing valuation 253,034 253,081
------------------------------------------- -------- --------
During the year the Company incurred brokerage costs of GBP12,000
(2018 - GBP8,000) on the purchase of and GBP11,000 (2018 -
GBP6,000) on the sale of investments
Losses on investments 2019 2018
GBP'000 GBP'000
------------------------------------------- -------- --------
Realised losses (7,001) (3,537)
Net unrealised losses (3,194) (1,912)
------------------------------------------- -------- --------
Losses on investments (10,195) (5,449)
------------------------------------------- -------- --------
Rating of fixed income securities 2019 2018
% %
------------------------------------- ------ ---------
BB+ - 1.1
BB 0.4 -
BB- 5.9 2.5
B+ 21.8 9.0
B 12.8 4.4
B- 12.5 9.0
CCC+ - 9.2
CCC - 6.3
CCC- 0.3 4.2
Not rated 46.3 54.3
------------------------------------- ------ ------
100.0 100.0
------------------------------------- ------ ------
Source: S&P and Moodys (lowest ratings
The percentage above represents the value of fixed interest investments of GBP211 million included in the Balance Sheet which are exposed to credit and counterparty risk by credit rating.
10 Debtors and Other Receivables
2019 2018
GBP'000 GBP'000
---------------------------------- -------- --------
Income receivable from shares and
securities 4,182 4,278
Prepayments and other debtors 4 20
---------------------------------- -------- --------
4,186 4,298
---------------------------------- -------- --------
11 Bank Loan Facility
2019 2018
GBP'000 GBP'000
---------------------------------- -------- --------
Bank loan facility 28,000 28,000
---------------------------------- -------- --------
The Company has a short term unsecured loan facility with Scotiabank Europe Plc ("Scotiabank"). The facility is due to expire on 18 December 2020 after which it is anticipated the Company will take out a new facility on comparable terms.
As at the year end the unsecured loan facility had a limit of GBP35 million of which GBP28 million was drawn down at the year end at an interest rate of 1.88796%.
The current loan facility was renewed on 18 December 2018 on the same terms as applied to the previous facility. During the year the covenants of the loan facility have been meet. The following are the covenants for the facility:
-- the borrower shall not permit the adjusted asset coverage to be less than 4 to 1
-- the borrower shall not permit the net asset value to be less than GBP95,000,000 at any time
-- the borrower shall maintain an additional adjusted asset coverage of at least 1.5 to 1 at all times
-- the loan facility is rolled over every three months and can be cancelled at any time
Reconciliation of Bank Loan Facility (exluding interest)
At 30 Currency At 30
June 2018 Cash flow Movements June 2019
GBP'000 GBP'000 GBP'000 GBP'000
--------------- ----------- ---------- ----------- -----------
Bank facility 28.000 - - 28.000
--------------- ----------- ---------- ----------- -----------
12. Brokers and Other Payables
2019 2018
GBP'000 GBP'000
------------------------------- ------- -------
Amounts due to brokers 1,667 1,903
Interest on bank loan facility 16 14
Other creditors 247 244
-------------------------------- ------- -------
1,930 2,161
------------------------------- ------- -------
13. Stated Capital Account
Authorised
The authorised share capital of the Company is represented by an unlimited number of ordinary shares of no par value.
Allotted, called up and fully-paid
Total issued share capital at 30 June Number of ordinary
2018 shares GBP'000
-------------------------------------------- ------------------- --------
400,951,858 178,424
-------------------------------------------- ------------------- --------
2,500,000 ordinary shares of no par
value alloted on 27 July 2018 at 60.40p 2,500,000 1,510
1,000,000 ordinary shares of no par
value alloted on 28 August 2018 at 60.75p 1,000,000 608
1,000,000 ordinary shares of no par
value alloted on 30 October 2018 at
58.70p 1,000,000 587
1,000,000 ordinary shares of no par
value alloted on 22 November 2018 at
58.60p 1,000,000 586
1,100,000 ordinary shares of no par
value alloted on 06 February 2019 at
56.80p 1,100,000 625
1,000,000 ordinary shares of no par
value alloted on 12 February 2019 at
57.20p 1,000,000 572
1,000,000 ordinary shares of no par
value alloted on 22 February 2019 at
57.20p 1,000,000 572
1,000,000 ordinary shares of no par
value alloted on 15 March 2019 at 57.50p 1,000,000 575
1,000,000 ordinary shares of no par
value alloted on 28 March 2019 at 57.60p 1,000,000 576
2,000,000 ordinary shares of no par
value alloted on 09 April 2019 at 58.10p 2,000,000 1,162
1,000,000 ordinary shares of no par
value alloted on 15 April 2019 at 58.80p 1,000,000 588
2,500,000 ordinary shares of no par
value alloted on 16 April 2019 at 58.80p 2,500,000 1,470
2,000,000 ordinary shares of no par
value alloted on 29 April 2019 at 59.00p 2,000,000 1,180
1,000,000 ordinary shares of no par
value alloted on 16 May 2019 at 59.40p 1,000,000 594
1,500,000 ordinary shares of no par
value alloted on 03 June 2019 at 58.80p 1,500,000 882
850,000 ordinary shares of no par value
alloted on 11 June 2019 at 58.50p 850,000 496
-------------------------------------------- ------------------- --------
422,401,858 191,007
-------------------------------------------- ------------------- --------
The balance of shares left in Treasury at the year end was nil (2018: nil shares).
On 15 May 2018, a block listing facility for 40,000,000 new shares was approved by the UK Listing Authority. This facility is used for the purposes of satisfying market demand.
Since 30 June 2019, a further 3,200,000 ordinary shares have been issued for consideration of GBP1.9 million.
Because the criteria in paragraphs 16c and 16d of IAS 32 Financial Instruments: Presentation have been met, the stated capital of the Company is classified as equity even though there is an annual continuation vote.
14 Reserves
The capital of the Company is managed in accordance with its investment policy, in pursuit of its investment objective, which is detailed in the Annual Report and Financial Statements.
On 24 May 2007, the Royal Court of the Island of Jersey confirmed that the amount standing to the credit of the Company's stated capital account be reduced by 75 per cent and was used to create the special distributable reserve in the Company's accounts. This reserve is treated as distributable profits available to be used for all purposes permitted by Jersey company law including the buying back of ordinary shares, the payment of dividends and the payment of preliminary expenses.
Capital management policies and procedures
The Company's capital management objectives are:
- to ensure that the Company will be able to continue as a going concern; and
- to maximise the capital return to its equity shareholders through an appropriate balance of equity capital and debt. The Board normally seeks to limit gearing to 25% of shareholders funds.
The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes the nature and planned level of gearing, which takes account of the Investment Manager's views on the market, and the extent to which revenue in excess of that which is required to be distributed should be retained. The Company has no externally imposed capital requirements.
The capital of the Company is managed in accordance with its investment policy detailed in the Strategic Review in the Annual Report and Financial Statements.
15. Net Asset Value per Ordinary Share
The net asset value per ordinary share and the net asset value attributable to the ordinary shares at the year end calculated in accordance with their entitlements in the Articles of Association were as follows:
Net asset value Net asset value
per share attributable attributable
------------------------- -----------------
2019 2018 2019 2018
pence pence GBP'000 GBP'000
---------------- ------------ ----------- -------- -------
Ordinary shares 55.19p 57.63p 233,127 231,068
---------------- ------------ ----------- -------- -------
The net asset value per ordinary share is based on net assets of GBP233,127,000 (2018: GBP231,068,000) and on 422,401,858 (2018: 400,951,858) ordinary shares, being the number of ordinary shares in issue at the year end.
16 Financial Instruments
The Company's financial instruments comprise its investment portfolio, cash balances, bank loan and debtors and creditors that arise directly from its operations. As an investment company, the Company holds a portfolio of financial assets and financial liabilities in pursuit of its investment objective. The Company uses flexible borrowings for short term purposes, and to seek to enhance the returns to shareholders, when considered appropriate by the Investment Manager.
Investments held (see note 9) are held at fair value. For listed/quoted securities this is either bid price or the last traded price depending on the convention of the exchange on which the investment is listed. For unlisted securities this is determined by the Board, based on estimates of fair value, mainly by using broker quotes. The fair value of other receivables cash and cash equivalent and other payables is represented by their carrying value in the Balance Sheet. These are short term financial assets and liabilities whose carrying value approximate fair value.
The main risks that the Company faces arising from its financial instruments are:
(i) market price risk, being the risk that the value of investment holdings will fluctuate as a result of changes in market prices caused by factors other than interest rate or currency rate movements;
(ii) interest rate risk, being the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates;
(iii) foreign currency risk, being the risk that the value of investment holdings, investment purchases, investment sales and income will fluctuate because of movements in currency exchange rates;
(iv) credit risk, being 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; and
(v) liquidity risk, being the risk that the bank may demand repayment of the loan and/or that the Company may not be able to liquidate quickly its investments.
The Company held the following categories of financial instruments as at 30 June 2019 all of which are held at fair value, other than the bank loan, other receivables and other payables which are held at amortised cost.
2019 2018
GBP'000 GBP'000
------------------------------- -------- --------
Financial instruments
Investment portfolio 253,034 253,081
Cash and cash equivalents 5,837 3,850
Accrued income 4,182 4,278
------------------------------- -------- --------
Financial liabilities
Amount due to brokers 1,667 1,903
Bank loan 28,000 28,000
Interest on bank loan facility 16 14
Other creditors 247 244
------------------------------- -------- --------
17 Market Price Risk
Market price risk arises mainly from uncertainty about future prices of financial instruments held.
It represents the potential loss the Company might suffer through holding market positions in the face of price movements. To mitigate the risk the Board's investment strategy is to select investments for their fundamental value. Stock selection is therefore based on disciplined accounting, market and sector analysis, with the emphasis on long term investments. An appropriate spread of investments is held in the portfolio in order to reduce both the statistical risk and the risk arising from factors specific to a country or sector. The Investment Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to consider investment strategy.
Investment and portfolio performance are discussed in the Investment Manager's Review and further information on the investment portfolio is set out in the classification of investment portfolio and classification of investment portfolio by sector. These pages do not form part of the audited financial statements.
If the investment portfolio valuation fell 5 per cent at 30 June 2019, the impact on the profit or loss and the net asset value would have been negative GBP12.6 million (2018: a fall of 5 per cent would have impacted the profit or loss and the net asset value by negative GBP12.6 million). Due to the effect of gearing, the impact on the net asset value per share would have been a decrease of 5.5 per cent (2018: decrease of 5.5 per cent). If the investment portfolio valuation rose by the same amount, the effect would have been equal and opposite. The calculations are based on the portfolio valuation at the balance sheet date and is not representative of the period as a whole, and may not be reflective of future market conditions. The Directors believe 5% is a relevant percentage based on average market volatility in recent years.
18 Interest Rate Risk
Financial assets
Bond and preference share yields, and their prices, are determined by market perception as to the appropriate level of yields given the economic background. Key determinants include economic growth prospects, inflation, the Government's fiscal position, short term interest rates and international market comparisons. The Investment Manager takes all these factors into account when making any investment decisions as well as considering the financial standing of the potential investee company.
Returns from bonds and preference shares are fixed at the time of purchase, as the fixed coupon payments are known, as are the final redemption proceeds. Consequentially, if a bond is held until its redemption date, the total return achieved is unaltered from its purchase date. However, over the life of a bond the market price at any given time will depend on the market environment at that time. Therefore, a bond sold before its redemption date is likely to have a different price to its purchase level and a profit or loss may be incurred.
Interest rate risk on fixed interest instruments is considered to be part of market price risk as disclosed in Note 17.
Floating rate
When the Company retains cash balances they are held in floating rate deposit accounts. The benchmark rate which determines the interest payments received on interest bearing cash balances is the UK bank base rate, which was 0.75 per cent at 30 June 2019 (1018: 0.75 percent).
Financial liabilities
The Company may utilise the bank loan facility to meet any liabilities due. The Company has borrowed in sterling at a variable rate of interest based on the UK bank base rate. The Board sets borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis.
If the bank base rate had increased by 0.50 per cent, the impact on the profit or loss would have been a loss of GBP111,000 (2018: GBP121,000). If the bank base rate had decreased by 0.50 per cent, the impact on the profit or loss would have been equal and opposite. The calculations are based on borrowings as at the respective balance sheet dates and are not representative of the year as a whole.
The Directors believe 0.50% is a relevant % based on observed interest rate adjustments in recent years.
At the year end, the Company had borrowings of GBP28 million from Scotiabank, details of which are contained in note 11.
Fixed rate
The Company holds fixed interest investments.
2019 2019 2019 2018 2018 2018
Weighted Weighted
averge averge
period period
Weighted for which Weighted for which
average the rate average the rate
interest is fixed interest is fixed
GBP'000 rate (%) (years) GBP'000 rate (%) (years)
---------------- -------- ---------- ----------- -------- ---------- -------------
Assets:
Fixed income
& convertible
securities 116,418 8.5 5.2 156,224 8.6 5.6
Preference
shares 11,942 9.9 n/a 15,960 8.6 n/a
---------------- -------- ---------- ----------- -------- ---------- -------------
19. Foreign Currency Risk
The Company invests in overseas securities and may hold foreign currency cash balances which give rise to currency risks. It is not the Company's policy to hedge this risk on a continuing basis but it may do so from time to time.
Foreign currency exposure at 30 June 2019 was as follows:
2019 2019 2019 2019 2018 2018 2018 2018
Investments Cash Accrued Income Total Investments Cash Accrued Income Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------- ------------ ------- --------------- ------- ------------ ------- --------------- ----------
Euro 16,978 1,760 338 19,076 11,623 - 298 11,921
Australian
dollar 491 - - 491 1,849 1 - 1,850
US dollar 47,011 20 923 47,954 49,321 1,692 860 51,873
Norwegian
krone 2,742 55 12 2,809 2,577 - 19 2,596
Canadian
dollar 1,340 5 2 1,347 638 - 3 641
Swedish
krona - - - - 1,483 - - 1,483
----------- ------------ ------- --------------- ------- ------------ ------- --------------- ----------
68,562 1,840 1,275 71,677 67,491 1,693 1,180 70,364
----------- ------------ ------- --------------- ------- ------------ ------- --------------- ----------
If the value of sterling had weakened against each of the currencies in the portfolio by 5 per cent, the impact on the profit or loss and the net asset value would have been positive GBP3.7 million (2018: positive GBP3.6 million). If the value of sterling had strengthened by the same amount the effect would have been equal and opposite. The calculations are based on the portfolio valuation and accrued income balances at the balance sheet date and are not representative of the period as a whole and may not be reflective of future market conditions. The Directors believe 5% is a relevant % based on the average market volatility in exchange rates in recent years.
20 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. The Investment Manager has in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis. The carrying amounts of financial assets best represents the maximum risk exposure at the balance sheet date.
At the reporting date, the Company's financial assets exposed to credit risk amounted to the following:
2019 2018
GBP'000 GBP'000
------------------------------------------ -------- --------
Fixed income securities 211,158 215,661
Convertible bonds 8,151 3,943
Cash and cash equivalents 5,837 3,850
Interest, dividends and other receivables 4,182 4,278
------------------------------------------ -------- --------
229,328 227,732
------------------------------------------ -------- --------
Credit risk on fixed income securities and convertible bonds instruments is considered to be part of market price risk as disclosed in note 17.
Credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the acceptable credit quality of the brokers used. The Board monitors the quality of service provided by the brokers used to further mitigate this risk.
The cash held by the Company and most of the assets of the Company are held by HSBC Bank Plc ('HSBC'), the Company's custodian which is rated as A1 based on Moody's ratings. New Look Senior Notes are held by the brokers, Lucid. These are valued at nil and therefore there is no significant credit risk exposure to the Company in respect of these notes. JPI Media Senior Notes are held by JPI Media with a overall value of GBP2 million and therefore not material credit risk to the Company. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to the cash and securities held by the custodian to be delayed or limited. The Board monitors the Company's risk by reviewing the custodian's internal control reports.
Should the credit quality or the financial position of HSBC deteriorate significantly the Investment Manager will move the cash holdings to another bank.
There were no contingencies, guarantees or financial commitments outstanding at the balance sheet date.
21. Liquidity Risk
The Company's financial instruments include investments in unquoted investments which are not traded in an organised public market and which generally may be illiquid. As a result, the Company may not be able to liquidate these investments at an amount close to their fair value.
The Company's listed securities are considered to be readily realisable.
At the reporting date, the Company's investments were categorised
as follows:
2019 2018
GBP'000 GBP'000
------------------------------------------------------- --------- ---------
Listed/Quoted on a recognised investment
exchange 242,644 243,756
Unquoted 10,390 9,325
------------------------------------------------------- --------- ---------
Total investments 253,034 253,081
------------------------------------------------------- --------- ---------
The Company's liquidity risk is managed on an ongoing basis by the Investment Manager in accordance with policies and procedures in place as described in the Directors' Report. The Company's overall liquidity risks are monitored on a quarterly basis by the Board.
The Company maintains sufficient cash, has a short term bank loan facility and readily realisable securities to pay accounts payable and accrued expenses. The Company also maintains sufficient cash and readily realisable securities to meet any demand repayment on its overdraft facility.
All the Company's financial liabilities are due in one year or less.
22. Fair Value Hierarchy
International Financial Reporting Standard ("IFRS") 13 Fair Value Measurement requires an analysis of investments valued at fair value based on the reliability and significance of information used to measure their fair value. The level is determined by the lowest (that is the least reliable or independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:
-- Level 1 - investments quoted in an active market;
-- Level 2 - investments whose fair value is based directly on observable current market prices or indirectly being derived from market prices;
-- Level 3 - investments whose fair value is determined using a valuation technique based on assumptions that are not supported by observable current market prices or based on observable market data.
Transfers in and out of the levels have been deemed to have occurred at the end of the reporting period.
Level Level Level Total
1 2 3 GBP'000
Financial assets at fair value GBP'000 GBP'000 GBP'000
------------------------------- -------- -------- -------- --------
Fixed income securities - 193,043 9,856 202,899
Equity shares 40,991 459 534 41,984
Convertible bonds - 8,151 - 8,151
------------------------------- -------- -------- -------- --------
As at 30 June 2019 40,991 201,653 10,390 253,034
------------------------------- -------- -------- -------- --------
Level Level Level
1 2 3 Total
Financial assets at fair value GBP'000 GBP'000 GBP'000 GBP'000
------------------------------- -------- -------- -------- --------
Fixed income securities 9,324 197,761 8,576 215,661
Equity shares 28,603 4,147 727 33,477
Convertible bonds - 3,921 22 3,943
------------------------------- -------- -------- -------- --------
As at 30 June 2018 37,927 205,829 9,325 253,081
------------------------------- -------- -------- -------- --------
If the market value of the Level 3 investments fell by 5 per cent, the impact on the profit or loss and the net asset value would have been negative GBP0.52 million (2018: negative GBP0.47 million). If the value of the Level 3 investments rose by the same amount, the effect would have been equal and opposite.
IFRS 13 requires disclosure, by class of financial instrument, if the effect of changing one or more input to reasonably possible alternative assumptions would result in a significant change to the fair value measurement. The information used in determination of the fair value of Level 3 investments is chosen with reference to the specific underlying circumstances and position of the investee company. On that basis the Board believe that the impact of changing one or more of the inputs to reasonably possible alternative assumptions would not change the fair value significantly. The following shows a reconciliation from the beginning to the end of the year for fair value measurements in Level 3 of the fair value hierarchy.
2019 2018
Level 3 Financial Assets GBP'000 GBP'000
-------------------------------- -------- --------
Opening valuation 9,325 1.935
Purchases and corporate actions 4,817 4,773
Sales (28) -
Unrealised losses (558) (70)
Transfers out of level 3 (3,166) (2,251)
Transfers in to level 3 - 4,938
-------------------------------- -------- --------
10,390 9,325
-------------------------------- -------- --------
The fair value of Level 3 financial assets has been determined by reference to valuation techniques described in note 1(b) of these financial statements. The Level 3 investments at the year end are:
2019 2018
GBP'000 GBP'000
Aggre Micro 8% 17/10/2036 3,267 (1) 3,432 (1)
Aggre Micro 8% 17/10/2036 Series MAY2 2,000 (1) -
Oaknorth Bank Variable 01/06/2028 1,970 (1) 1,980 (1)
JPI Media Group Senior Notes (Facility
B) 1,731 (1) -
JPI Media Group Super Senior Notes
(Facility A) 644 (1) -
Oro SG PTE Ltd 12% 08/07/2020 244 (1) -
Fara Holdco Limited NPV 336 (1) 715 (3)
JPI Media Group Equity 198 (1) -
Others - 3,198 (2)
10,390 9,325
(1) Single broker quote, low liquidity
(2) In default
(3) Model pricing
Aggre Micro 8% 17/10/2036; Aggre Micro 8% 17/10/2036 Series MAY2; Oaknorth Bank Variable 01/06/2028; JPI Media Group Equity and JPI Media Group Senior Notes ( Facility B) have all been valued using a single broker to determine their Fair Value.
Fara Holdco Limited NPV has been valued using indicative trade prices from a broker to determine its Fair Value.
JPI Media Group Super Senior Notes (Facility A) has been valued at par value due to the lack of information in the market for this security but taking into account the information for the other two instruments from the same company.
Oro SG PTE Ltd 12% 08/07/2019 has been valued at par due to the lack of information, as there was only one price source which was deemed not reliable given its illiquid position.
During the year no instruments were transferred into Level 3.
Gran Colombia Gold 8.25% 30/04/2024 amounting GBP2,172,000, Rea Holdings 7.5% 30/06/2024 amounting GBP760,000 and Oceanteam FRN 02/05/2022 amounting GBP223,000 moved out of Level 3 to Level 2 due to an increase in observable valuation data.
During the year two securities Channel Island Property Fund and Crown Security Solutions Group totalling GBP3,924,000 were reclassified from level 2 to level 1 due to increase in trading activity.
Also two securities Motors Liquidation Trust and General Motors 10/07/2019 totalling GBP11,000 were reclassified from level 3 to level 1 due to the security being trading.
Investments valued using stock market active prices are disclosed as Level 1 and this is the case for the quoted equity investments that the Company holds. Securities in Level 2 are priced using evaluated prices from a third party vendor, together with a price comparison made to evaluated secondary and tertiary third party sources, including broker quotes and benchmarks. As a result, these investments are disclosed as Level 2 - recognising that the fair values of these investments are not as visible as quoted investments and their higher inherent pricing risk.
Investments included as Level 3 are priced using a valuation technique reviewed by the Board taking into account, where appropriate, latest dealing prices, broker statements, valuation information and other relevant factors.
23 Transaction with the Manager and Related Parties
The Board of Directors ("the Board") are considered related parties.
All transactions with related parties are carried out at an arms length basis.
There are no other transactions with the Board other than aggregated remuneration for services as Directors as disclosed in the Directors' Remuneration Report in the Annual Report and Financial Statements and as set out in note 4 to the financial statements. The beneficial interests of the Directors in the shares of the Company are disclosed in the Directors' Remuneration Report in the Annual Report and Financial Statements. There are no outstanding balances to the Board at the year end.
Details of the fee arrangement with the Investment Manager is included within the Directors' Report under the heading Management and Management Fees and is disclosed in note 3.
24. Subsequent Events
Share Issues
Following the year end the Company undertook a further three issues of shares issuing, in total, an additional 3,200,000 ordinary shares of no par value for total consideration of GBP1.9 million. As at the date of this report the issued share capital of the Company was 425,601,858 ordinary share of no par value.
Amendment to the Investment Management Agreement and Fee Arrangements
Under the terms of the investment advisory agreement dated 22 July 2014, and a novation agreement dated 1 October 2015, the Company appointed CQS Cayman Limited Partnership as its Investment Manager and CQS Cayman Limited Partnership, with the agreement of the Board, delegated that function to CQS (UK) LLP.
With effect from 18 September 2019 the Company entered into a new Investment Management Agreement to appoint CQS (UK) LLP Limited as its Investment Manager and the previous investment advisory agreement with CQS Cayman Limited partnership terminated.
The Management Fee
With effect from 18 September 2019 the management fee which had previously been charged at a rate of 0.80% per annum on the Company's Adjusted Total Assets up to GBP200 million and 0.70% per annum thereafter was amended to being charged at a rate of 0.80% per annum on the Company's Adjusted Total Assets up to GBP200 million, 0.70% per annum on Assets in excess of GBP200 million, and up and including GBP300 million, and 0.60% per annum thereafter. The payment of the management fee monthly in arrears remains unchanged.
Distribution
The fourth interim dividend of 1.45 pence per share was announced on 17 July 2019 and paid on 30 August 2019 to shareholders on the register on 26 July 2019, having an ex-dividend date of 25 July 2019.
Administration Changes
With effect from 15 October 2019, BNP Paribas Securities Services S.C.A. Jersey Branch ("BNP") will be appointed as the Company Secretary and Administrator to the Company. BNP will also replace HSBC Bank Plc as the Company's Depositary, Custodian and Banker from the same date.
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
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