TIDMAXI
RNS Number : 8293W
Axiom European Financial Debt Fd Ld
23 August 2022
23 August 2022
Axiom European Financial Debt Fund Limited
Half-Yearly Report and Unaudited Condensed Financial Statements
Axiom European Financial Debt Fund Limited ("AEFD", or the "Company"),
a closed-ended Guernsey investment fund listed on the premium
segment of the London Stock Exchange, which offers investors exposure
to a diversified portfolio covering the European banking and financials
sector subordinated debt market, today announces its Half-Yearly
Report and Unaudited Condensed Financial Statements for the six
months ended 30 June 2022.
Highlights
30 June 30 June 31 December
2022 (unaudited) 2021 (unaudited) 2021
(audited)
Published net assets GBP86,986,000 GBP94,637,000 GBP96,585,000
Published NAV per Ordinary Share
([1]) 94.70p 103.03p 105.15p
Share price 86.50p 94.00p 95.50p
Discount to Published NAV (8.66)% (8.76)% (9.18)%
(Loss)/profit for the period GBP(6,843,000) GBP10,043,000 GBP14,746,000
Dividend per share declared in
respect of the period 3.00p 3.00p 6.00p
Total return per Ordinary Share
(based on Published NAV) (7.27)% 11.49% 16.88%
Total return per Ordinary Share
(based on share price) (6.28)% 10.23% 15.34%
Ordinary Shares in issue 91,852,904 91,852,904 91,852,904
[1] These are Alternative Performance Measures. Please see note
20 for a reconciliation of the NAV per Ordinary Share of 95.03p
(31 December 2021: 105.48p) to the Published NAV per Ordinary
Share of 94.70p (31 December 2021: 105.15p).
* Total returns for the six months were - 7.27 % (H1
FY21: +11.49%)
* Despite the challenging first half, adept positioning
means the portfolio's running yield was at a record
high of 9.49% p.a. at period end
* Two quarterly dividend payments, each of 1.50p per
share, declared during the first half
* The Company expects to be able to continue to pay
quarterly dividends at the rate of 1.50p per Ordinary
Share
* Rising interest rates and a well-capitalised sector
mean the asset class remains attractive and the
Company remains ideally placed to capture market
opportunities
AEFD's Future
* The Board continues to believe that the sector
presents investors with attractive returns and that
the Company could evolve to provide attractive
returns in the future
* While key investors remain supportive, the Company
has insufficient investor demand for the current
closed-ended listed structure as a result of the
structural challenges it faces with size and
liquidity
* Consequently, the Board, together with its advisers,
is working on proposals to offer Shareholders the
choice between a cash exit at NAV (less costs,
including any portfolio realisation expenses) for
some or all of their shareholding or to continue some
or all of their investment in an open-ended vehicle
managed by Axiom Alternative Investment SARL
* The strategy of the proposed open-ended vehicle would
be similar to the current strategy employed by the
Company
* The Board's aim is for the proposals to be put to
Shareholders early in 2023
William Scott, Chairman, commented:
"The Company's returns in the first half of the year were in line
with what one would expect at this point in the interest cycle,
that is when interest rates begin to rise. We believe that a total
NAV return per share of -7.27% was a creditable performance that
was much in line with sector averages.
"The Company has declared two dividends in relation to the half-year
totalling 3.00p and the Company is on track to meet its target
of at least 6.00p for the year.
"Since we launched the fund in 2015, we have delivered total returns
of nearly 40% and we continue to believe that our sector presents
an attractive opportunity to deliver strong returns.
"Interest rates are rising, and our sector is well capitalised
so the background to our industry is positive, and the metrics
of the Company's current portfolio remain very compelling.
"So, it is with frustration that we have to concede that the vehicle
for capturing those concerns is unlikely to be the current closed-ended
investment company structure that has performed creditably and
delivered robust returns to Shareholders since 2015."
Antonio Roman, Investment Manager, said:
"The first half was always going to be challenging as the anticipated
turn of the interest cycle but the steps we took to mitigate the
impact enabled us to more fully-invest as the events unfolded.
Over the course of the first six months, the backdrop worsened
as the war in Ukraine sped up the general market declines and
interest rate rises.
"In the short term, the shortage of key commodities has seen a
sharp increase in inflationary pressures and, although on a purely
arithmetical basis that is likely to be largely transitory, it
has resulted in a further acceleration towards the normalisation
of interest rates, which have been at historic lows for over a
decade.
"We continue to see value in the subordinated debt of European
banks and insurers. With the fundamentals stand stronger than
ever, normalising interest rates and a new monetary environment,
there continues to be a conducive backdrop where central banks
protect and support financial institutions as critical links in
the transmission of their policy. The perpetually evolving dynamics
of regulations provide a welcome set of catalysts that we expect
to generate further value in our investment portfolio over the
next six months."
Enquiries to:
Axiom Alternative Investments Elysium Fund Management MHP Communications
SARL Limited Reg Hoare
David Benamou PO Box 650 Charles Hirst
Gildas Surry / Antonio 1(st) Floor, Royal Chambers
Roman St Julian's Avenue axiom@mhpc.com
Jerome Legras St Peter Port Tel: +44 7595 461
Guernsey 231
www.axiom-ai.com GY1 3JX
Tel: +44 20 3807 0670
axiom@elysiumfundman.com
Tel: +44 1481 810 100
About Axiom European Financial Debt Fund Limited:
General information
The Company is an authorised closed-ended Guernsey investment
company with registered number 61003. Its Ordinary Shares were
admitted to the premium listing segment of the FCA's Official
List and to trading on the Premium Segment on 15 October 2018
(prior to this, the Ordinary Shares traded on the SFS.
Investment objective
The investment objective of the Company is to provide Shareholders
with an attractive return, while limiting downside risk, through
investment in the following financial institution investment instruments:
* Regulatory capital instruments, being financial
instruments issued by a European financial
institution which constitute regulatory capital for
the purposes of Basel I, Basel II or Basel III or
Solvency I or Solvency II;
* Other financial institution investment instruments,
being financial instruments issued by a European
financial institution, including without limitation
senior debt, which do not constitute regulatory
capital instruments; and
* Derivative instruments, being CDOs, securitisations
or derivatives, whether funded or unfunded, linked or
referenced to regulatory capital instruments or other
financial institution investment instruments.
Investment policy
The Company seeks to invest in a diversified portfolio of financial
institution investment instruments. The Company focuses primarily
on investing in the secondary market although instruments have
been, and may also in the future be, subscribed in the primary
market where the Investment Manager, Axiom AI, identifies attractive
opportunities
In February 2022, the Directors approved a minor change to the
investment policy in respect of hedging and derivatives. The words
in brackets were added to the following sentence: "The Company
may implement other hedging and derivative strategies designed
to protect investment performance against material movements in
(but not limited to) exchange rates and to protect against credit
risk".
The Company invests its assets with the aim of spreading investment
risk.
For a more detailed description of the investment policy, please
see the Company's Prospectus, which is available on the Company's
section of the Investment Manager's website
( http://axiom-ai.com/web/data/prospectus/ENG/AEFD-prospectus-UK.pdf
).
A copy of the Company's Half-Yearly Report and Unaudited Condensed
Financial Statements for the six months ended 30 June 2022 will
shortly be available to view and download from the Company's website,
http://axiom-ai.com/web/en/axiom-european-financial-debt-fund-limited-2/
. Neither the contents of the Company's website nor the contents
of any website accessible from hyperlinks on the Company's website
(or any other website) is incorporated into or forms part of this
announcement.
The following text is extracted from the Half-Yearly Report and
Unaudited Condensed Financial Statements of the Company for the
six months ended 30 June 2022:
Chairman's Statement
The Company's returns in the first half of the year were in line
with what one would expect at this point in the interest rate
cycle, that is when interest rates begin to rise. Rising yields
mean a fall in capital values and the pace of such changes determines
whether overall returns are negative for a short time or more
muted over an extended period. Although the total NAV return per
share including dividends and net of all expenses for the six
months was -7.27%, this is a creditable performance much in line
with sector averages.
Our Investment Manager, Axiom AI correctly anticipated the turn
of the interest cycle and took steps to mitigate the impact and
allow for a more fully-invested deployment as events unfolded.
The speed of general market falls and interest rate rises have
been accelerated by the situation in Ukraine. In the short term,
the consequences of the conflict have been a shortage of certain
commodities (such as grain) and energy which have impacted on
world markets. This has meant a sharp increase in inflationary
pressures and, although on a purely arithmetical basis that is
likely to be largely transitory, has resulted in an acceleration
in the normalisation of interest rates, which one should remember
have been at historic lows since the Global Financial Crisis of
2008.
Axiom AI's adept positioning means that the Company's portfolio
now exhibits truly compelling metrics, the best in its history:
as at 30 June 2022, the portfolio running yield was 9.49% p.a.
and the yield to perpetuity (on the premise that all investments
could be and were held indefinitely), 11.90% p.a. Should issuers
exercise their call rights on the instruments we hold, returns
will be higher still at 13.94% p.a.
The six-month NAV return for Shareholders was very much in line
with sector averages but the Company's three- and five-year NAV
total returns to 30 June 2022 (19.44%(1) and 28.44%(1) respectively)
remain one of the best amongst its closed-ended investment company
peers (members of the AIC Debt - Loans & Bonds sector) whose weighted
average returns were 5.64%(1) and 11.19%(1) respectively. The
margin of outperformance is considerable and although recent drawdowns
mean that the Company is a little further behind its long-term
target of 10% p.a., our current portfolio metrics mean that we
are excited about the future return prospects in the Company's
portfolio.
Dividends
The Company continued to pay quarterly at the rate of 1.50p per
Ordinary Share and, in the absence of unforeseen events, the Board
would expect to continue to do so.
The future of the Company
When I wrote to you in March with the annual report for 2021,
I noted the original premise upon which the Company was set up
was to exploit the opportunity presented by regulatory change
forcing an industry-wide restructuring of the capital bases of
mainly banks and insurance companies, principally in the EU (which
at that time included the UK) and that the end of that window
was arriving.
The Board was (and remains) of the view that there are still attractive
returns to be found in the sectors in which the Company invests,
both in the capital instruments which form our existing strategy
and in other instruments and while the existing investment strategy
of the Company is nearing the end of its natural life, it can
be readily developed and adapted to provide attractive returns
into the future. Axiom AI already manages a range of other funds
which follow such strategies with success and which have seen
substantial inflows of investor capital over the past two or three
years. Our views on the potential returns to be achieved are therefore
shared by a substantial constituency of investors.
During the past few months, Axiom AI, on behalf of the Board,
has consulted with Shareholders representing a very substantial
majority of the Company's shares. As announced by the Company
on 18 August 2022, the Board concluded that, while the vast majority
of Shareholders share our enthusiasm for an evolution of the Company's
strategy, a substantial number are disenchanted with the size
of the Company, the lack of trading liquidity in the Company's
shares and the width of the bid/offer spread of those shares in
the market. Over much of the past year or two, a purchaser at
any given point in time, paying the published "bid" price and
later selling at the published "offer" would give up the equivalent
of an entire year's income on the trading spread - an entire year's
return, if prices remained static. Clearly, that is an unattractive
proposition for many existing and potential investors. The result
is therefore that although many larger Shareholders have indicated
that they wish to remain invested in the evolving strategy, they
would prefer to continue to do so through an open-ended structure
rather than a closed-ended investment company.
The Board has therefore concluded that there is insufficient remaining
investor demand for such a strategy expressed in the form of a
closed-ended listed vehicle such as the Company, albeit that there
is substantial potential demand in open-ended form. Even if the
Discontinuation vote due to be put to Shareholders at the 7(th)
AGM, expected to be around July 2023, failed to be approved, after
allowing Shareholders a cash exit opportunity, the continuing
Company would be sub-scale with structural costs eroding returns.
Accordingly, due to the challenges noted above, the Board intends
to offer Shareholders the option of receiving cash at NAV (less
costs, including any portfolio realisation expenses) for some
or all of their shareholding and/or to continue some or all of
their investment in an open-ended vehicle managed by Axiom AI.
That vehicle will have a similar investment strategy to that which
the Company would have proposed if it were to continue to operate
as a closed-ended listed investment company. In order to effect
the proposals, it is expected that the existing Company will be
liquidated. In order to limit future expenses, on 11 August 2022,
the Company gave the Investment Manager 12 months' protective
notice of the termination of the Investment Management Agreement.
The Board, together with Axiom AI and the Company's advisers,
is working on formal proposals to be put to Shareholders and will
make a further announcement with details in due course. The Board's
aim is for the proposals to be put to Shareholders early in 2023
and, assuming Shareholder approval is received, for the transaction
to be completed as soon as reasonably practicable thereafter.
Outlook
Rising interest rates are in general good for banks, enabling
wider spreads between lending and deposit rates. The sector is
robustly capitalised and neither a cyclical uptick in non-performing
loans nor the effective loss of equity in Russian subsidiaries
presents an existential challenge. Although inflationary concern
may be the catalyst that has triggered recent moves in policy
rates, the truth is that they would inevitably revert to more
normal levels at some point and have been at exceptionally low
levels for an unprecedentedly long period since the Global Financial
Crisis of 2008.
The background to our principal industry sector is therefore positive
and the metrics of the Company's current portfolio compelling.
Shareholders who wish to benefit from this will have the opportunity
to do so via the open-ended alternative to be put forward. It
is frustrating but understandable, for the reasons set out above,
that the vehicle for capturing those future returns is unlikely
to be the current closed-ended investment company structure.
William Scott
Chairman
22 August 2022
(1) Source: The AIC, as at 30 June 2022.
Investment Manager's Report
1- Market Commentary
January
European banks started the year on a strong footing, with rates
repricing higher, economic data coming in better than expected
and earnings beating consensus. The SX7R returned 7.37% in January
2022 vs. -3.81% for the SXXR. The yield on 5-year German bunds
climbed from -45bps to -20bps while the SubFin moved up 20bps to
125bps. US 10-year Treasuries sold-off with yields reaching 1.80%.
Inflation was becoming increasingly uncomfortable for governments
and central banks globally. Commodity markets have not softened,
lead times and backlogs were increasing, and service inflation
was starting to catch up with goods. On 26 January 2022, Jerome
Powell prepared the market for a more hawkish turn. Undeterred
by the recent volatility in global markets, he refused to rule
out the possibility of raising rates by 50bps at once or hiking
at consecutive meetings. In Europe, January inflation readings
came much higher than expected, more than offsetting base effects.
As interest rates of -50bps in the Euro area were evidently not
consistent with 5% inflation and unemployment at record lows, we
expected the ECB to revise its inflation projections upwards and
recognise at its March meeting that the conditions of the froward
guidance were met.
In Italy, the re-election of President Mattarella was taken positively
by risk assets. Mario Draghi would be able to continue his work
on the allocation of pandemic funds and structural reforms. Though
non-establishment parties were leading in the polls, political
volatility was expected to be pushed back to 2023. In the meantime,
the flexibility of PEPP reinvestments was expected to provide a
put for periphery spreads. In international news, the fluid situation
at the Ukrainian borders and raising concerns about Taiwan were
sources of spikes in volatility.
On the M&A front, Soci été G éné rale announced
the acquisition of LeasePlan for EUR5 billion. The deal would create
a dominant player in the auto leasing business in Europe. Though
the price tag was slightly higher than expected, the capital impact
was relatively limited for Soci été G éné rale
and cost synergies could surprise positively.
The start of the earnings season was encouraging. Deutsche Bank
reported results 10% ahead of consensus and announced a buyback,
which was not widely expected and was interpreted as a sign of
the ECB's satisfaction with Deutsche's turn-around plan execution.
UBS beat expectations by 13% and unveiled a strategy plan focused
on capital return commitments and operating jaws. Sabadell and
Bankinter also surprised positively.
February
The war in Ukraine drove risk assets lower in February 2022. The
SubFin widened by 35bps to 152bps over the month. As of 4 March
2022, the SX7R suffered a 28% drawdown from its February 2022 peak.
The loss was especially acute for banks deemed to be more sensitive
to Russia: RBI lost 55% of its market value, while Soci été
G éné rale, Erste Bank and UniCredit posted losses close
to 40%. This was quite a significant move: in a typical recession
(the Tech bubble, the 2011-12 Eurozone crisis or the Covid-19 crisis
for instance), bank equities' drawdowns tended to be around 40
to 45%.
Several elements were likely to have contributed to the price action:
i. Direct losses from Russian exposures;
ii. Possible losses stemming from legal uncertainty, settlement
risk and unusual price action on Russian markets;
iii. The macroeconomic impact of the war in Ukraine and sanctions
against Russia, from growth to inflation and rates; and
iv. Higher risk premia linked to a possible extension of the conflict
outside of Russia and Ukraine.
We believe that the fourth factor explained most of the movement
while the first and second factors were less significant.
a. Some early press reports have pointed to frightening possible
Russian losses for European banks (as high as EUR100 billion).
They ignored the fact that the exposure was largely sitting within
local subsidiaries that were bankruptcy remote in the context of
banking groups. The maximum total loss for the group would be the
equity invested along with potential intra-group debt (which was
typically very small). As an example, though Société
Générale had a EUR18 billion exposure to Russia, the
bulk of it (EUR15 billion) was located in its Russian subsidiary
Rosbank. If Rosbank became insolvent or was seized by Russian authorities,
Société Générale group would only lose 50bps
of CET1 capital. They would still be well above regulatory requirements
and their ability to distribute dividends would remain intact.
For the sector in general, we would price a total CET1 impact of
less than 30bps and a loss of future profits of not much more than
1%.
b. The speed and extent of the sanctions imposed on the Russian
financial system was unprecedented. Some banks were cut off from
Swift, correspondent relationships were banned, some assets were
frozen, transactions with the Central Bank were only authorised
if related to energy payments, etc. This created unprecedented
price action on Russian markets and significant operational and
legal risks for banks. It was impossible to predict the size of
the losses that would arise from trapped collateral, settlement
or gap risk. As of March 2022, we could only assume that banks
would have been limiting leverage on Russian assets and using leading
international custodians. The Swift ban was only operational from
26 March 2022, leaving banks time to adapt. Our base case was that
we would not see any major impact from this side.
c. The main macroeconomic impact of the war in Ukraine was expected
to materialise through commodities and supply chains. There were
legitimate fears that higher commodity prices would slow growth.
In 2020 and 2021, the EU had annual energy trade deficits of respectively
EUR160 billion and EUR275 billion. In 2010-2014, when energy prices
were around current levels (Brent at USD120), the deficit was EUR400
billion. A return to these levels would represent a GDP drag of
0.8%. It was worth noting that the majority of gas imports were
based on long-term contracts, and that the current gas curve was
very backward-dated (2025 gas futures were up less than 20% since
the start of 2022). Exports to Russia would also be affected: in
2021, the EU exported circa EUR80 billion of goods and circa EUR20
billion of services to Russia. If those were halved, it would represent
an additional 0.3% drag on GDP. Food prices were also going up,
but the EU was a net exporter. In total, the annualised GDP impact
for the EU was likely to be around 1% with an uncertainty range
of 0.7%-1.5%.
However, there were several mitigants: the conflict was likely
to drag on for months, but not years; consensus of real GDP growth
for the EU was above 4% for 2022 before the start of the war -
growth was still highly likely to be above 2% despite very high
energy prices; higher energy prices would be partly subsidised
by governments, reducing the impact on purchasing powers for consumers;
Germany had fully abandoned its hawkish fiscal stance, reinforcing
the fiscal impulse and increasing flexibility for periphery governments;
and the EU was more united, paving the way for a closer banking
union and more fiscal integration.
The impact on rates was more subtle. In the immediate future, there
would be some delay to the normalisation agenda as central banks
waited for clarity on the economic impact of the crisis. But in
the medium-term, the sheer pressure of inflationary forces combined
with lavish fiscal policies would make rate hikes unavoidable.
d. The first three factors do not explain why bank equities suffered
close to two-thirds of their typical recession drawdown. We believed
investors feared that the conflict would extend beyond Ukraine
and Russia. China could have decided to attack Taiwan. Russia could
have decided to go beyond Ukraine; in a worst case scenario, a
war between NATO and Russia could be inadvertently triggered. There
were also scenarios of possible widespread consequences from damages
to key nuclear infrastructure. The unexpected move of Putin pushed
"rational" investors to review their working assumption of a mostly
stable geopolitical environment. To be clear, we did not think
that the conflict would escalate outside of Ukraine. Signs from
China were relatively encouraging. However, we believed that the
unthinkable would continue to be priced until a resolution of the
Ukrainian war was in sight or the geopolitical stage had stabilised.
We were conscious that the higher risk premia would not dissipate
quickly and that the market would need signs of stabilisation.
We expected the conflict to drag on for weeks or months and would
not be surprised to see Putin move against Transnistria. However
we had a strong core bullish bias in the medium-term and could
have progressively added risk in March 2022 on strong headline
moves.
March
Risk assets took respite in a fall of implied volatility towards
the end of the month as the Ukrainian conflict appeared to stay
geographically contained. Russian gas and oil exports were more
resilient than expected, which limited the increase in energy prices.
High inflation readings fuelled fears that hawkish central banks
could trigger a recession in their attempt to slow demand at a
time when real incomes were already suffering from elevated imported
prices. The SubFin ended the month slightly better by 10bps. The
VIX settled 10 points lower at 20. The European bank indices SX7T
and SX7R returned respectively -3.01% and -2.11% vs. +1.00% for
the SXXR.
The latest EBA risk dashboard highlighted the soundness of the
European banking sector. NPLs reached a new low of 2.0% while CET1
remained elevated at an average of 15.4%. ROE stabilised at levels
higher than in the pre-pandemic period. Regulators were reassuring
about the first-round impact of the Ukrainian conflict, noting
that a default of all Russian exposures would not be a capital
event for the sector and confirming that dividends and buybacks
could be continued. However, they also stressed that second-round
effects, such as reduced growth, increased compliance costs and
higher risk premia could negatively impact profitability.
Inferring from past recessions, we estimated that a 1-point reduction
in the real GDP growth outlook could lower earnings expectations
for the banking sector by about as much as 8%, with 5% coming from
higher provisions for loan losses, and the rest divided between
lower fees and lower loan growth. However, this would be more than
compensated by higher interest rates, with the sectors' results
sensitivity to a 100bps parallel move being around 25%. In addition,
new guaranteed loan programs and increased fiscal spending overall
were likely to reduce provisioning needs and provide a boost to
loan growth. As such, we found the 13% underperformance of the
SX7R versus the broader European market since mid-February 2022
difficult to reconcile with Bund yields climbing from 30bps to
55bps over the period. The consensus of 2022 earnings expectations
of sell-side analysts were revised down by only 3% since mid-February,
with ROE expectations for the SX7E remaining above 8%, while the
sector was trading at only 55% of book value.
We understood the concerns regarding inflation and the future path
of real growth. There were downside risks ahead: high energy prices
would hurt real income; rich real estate valuations could be tested
by rising mortgage rates, resulting in lower perceived wealth and
balance sheet quality; and central banks could have been required
to tighten aggressively into a recession if inflation did not settle
down. However, we believed the balance of risks was to the upside:
consumers had barely started to tap into their excess savings;
high government spending was still irrigating the European economy
and protecting vulnerable businesses; though manufacturing was
operating above potential, less energy-intensive services were
still operating below potential, offering significant real growth
prospects as economies reopened; the labour market was still reasonably
elastic, with more people continuing to join the workforce without
unsustainable increases in wages; and inflation expectations were
not unanchored.
April
April 2022 was another down month for risk assets. Stocks were
led lower by the technology sector and cyclicals. The SXXP returned
-0.57% while the SX7P and SX7E respectively ended the month at
-2.08% and -3.40%. The SubFin widened to 195bps. Amid higher long-term
inflation expectations, Germany and US 10-year yields respectively
climbed above 0.9% and 2.9%.
In defiance of the prevailing pessimistic mood, European banks
had an excellent start to the reporting season. On aggregate, revenues
were 7% higher than expected - the strongest positive surprise
in years - while earnings were 25% better. On a year-on-year basis,
revenues grew by more than 8%. Net interest income was supported
by dynamic lending book growth and stable or increasing margins.
Costs were in line overall, which came as a relief in the current
environment. There was no evidence of deterioration in asset quality:
NPLs continued to decrease, and defaults remained significantly
below average. Banks nonetheless took precautionary provisions
in light of geopolitical and monetary policy risks. Capital ratios
took a transitory hit from mark-to-market losses in bonds not accounted
at cost.
As analysts revised their expectations for the year upwards, the
sector kept trading at depressed levels. The SX7E was valued at
6.7x next year earnings (and 5.9x 2023 earnings), which contrasted
with a median level of 9.0x and a maximum of 12x over the last
decade. Only twice was the P/E lower: in the middle of the 2011/2012
Eurozone crisis and at the onset of the pandemic. Why the disconnect
between fundamentals and valuations?
Two sets of developments were unsettling markets: on the one hand,
higher commodity and supply chain costs were eroding purchasing
power and consumer confidence (the Putin and Xi Jinping risk):
on the other hand, the risk of a wage-rent-inflation loop could
have driven central bankers to slam the brakes on growth by raising
rates to contractionary levels (the Bullard and Knot risk).
Though uncertainty was high (the prime example was the possibility
of Russia cutting gas supply), our central scenario remained more
optimistic versus the consensus: we saw a progressive improvement
in commodity and supply conditions as extraction and production
capacities were rebuilt; we saw growth in services sustaining employment
and spending trends; and we saw central banks not willing to risk
a contractionary spiral to fight inflation.
May
Risk appetite was slightly better over the month as investors pondered
record inflation against a continued expansion in global demand
and hints of easing supply chain pressures. The SubFin index closed
the month 5 bps tighter at c.185 bps. Energy and bank stocks outperformed
while retailers and media companies underperformed. The SX7R returned
+6.54% versus -0.61% for the SXXR.
Eurozone macroeconomic developments pointed to a strengthening
in the core inflation momentum:
* Core CPI increased by 0.5% MoM to an all-time high of
3.8% YoY.
* Fiscal packages aimed at protecting discretionary
income against energy and food prices are being
broadly adopted, fueling demand-pull core inflation.
* Negotiated wages climbed to a 10-year high of 2.8%.
* Growth in bank loans increased to 5.3% YoY (vs. a
pre-pandemic 5Y average of c. 2.5%).
Recession risk remained hotly debated amid unusually high demand
and supply shocks. Despite the current commodity squeeze, we see
two consecutive quarters of negative growth in the Eurozone as
unlikely in 2022:
* Higher import prices are financed by fiscal deficits.
The Euro area is heading for deficits of 4.6% and
3.1% in 2022 and 2023. The bloc is having a hard time
departing from pandemic stimulus: in fact, between
2016 and 2019, the average deficit was below 1%. In
contrast, a combined USD125 brent and EUR90/Mwh gas
shock represents an estimated 2.2% GDP shock versus
pre-pandemic levels (where they were trading closer
to USD65 and EUR25/Mwh).
* The reopening effect has not fully played out. May
Eurozone activity surveys reported the highest
increase in employment over the past decade as well
as strong investment trends. The supply side is
ramping up productive capacity, feeding a positive
loop. Countries with tight labour markets, such as
the UK, are much less likely to enjoy the benefits of
a rising workforce and therefore the most likely to
suffer from stagflation.
* The resolve of the ECB in its fight against inflation
is questionable. The shift in rate hikes expectations,
though spectacular, has lagged increases in forward
inflation markets - and is very far off from changes
in realised core inflation. Presently, inflation is
liquidating aggregate debt at record pace and Bund
20y / 10y real rates are still below -1%. As such, we
believe talks of a recession induced by higher rates
in the Eurozone to be premature.
That said, headline GDP should matter less than usual for banks.
Traditionally, recessions are bad for banks because they are associated
with: a. deleveraging; and b. rising defaults due to a negative
investment / final demand loop. This is not the current set-up.
Loan growth is actually accelerating to a record pace and hiring
is strong. In an economy where labour markets are supported by
the need to rebuild domestic energy, food and supply chain security,
though living standards are likely to fall, defaults may not rise
as much as suggested by headline growth.
The outlook for banks' earnings is encouraging:
* Consensus EPS expectations for 2022 and 2023 for the
SX7P are now back at their highest year-to- date,
erasing the Ukraine-Russia war losses.
* NII expectations should continue to climb as analysts
update their models with the latest rate market
levels - at this time, analysts are still lagging the
Eurozone rates market by c. 50-75bps.
* Analysts' assumptions for future loan losses are on
the conservative side. They are forecast to be above
the 2017-2019 average in spite of the Covid-19
precautionary provisions and default trends
signalling the opposite so far.
* Nominal cost trends are likely to be slightly worse
than expected, though C/I ratios should be better
than expected.
On the regulatory front, the Basel Committee is allegedly considering
treating the Eurozone as one bloc for the calculation of the GSIB
buffers. Though practical implications are limited for now, it
is a new step towards more fungibility of capital and liquidity
within the area. In other news, the Italian government is working
on the renewal of the state guarantees on NPL transactions. The
new scheme would provide for a state guarantee of 85-95%, while
the senior note minimum rating should be BBB+ (one notch higher).
June
Risk Markets sold-off in June as investors grew increasingly concerned
over the risk of central banks tightening in a recession. CDS indices
in Europe and the US are starting to price stressed economic conditions,
with implied high-yield default rates in the high single digits,
well above current trends. The Xover and SubFin indices respectively
closed the month around 600 bps (+ c.155 bps) and 250 bps (+c.65
bps). M/m core inflation stabilized at high levels in Europe and
the US. The SX7R returned -9.11% vs. -7.09% for the SXXR.
Fundamentals remain solid. Bank lending accelerated to 5.8% in
May, up from 5.3% in April and 4.8% in March, as credit demand
followed strong nominal GDP. High-yield and leveraged loans annualised
default rates were around 75 bps in June, well below their historical
average of about 3%. The latest EBA data was also comforting for
the banking sector: non-performing and forborne loan ratios reduced
further on average to 1.9%.
Supervisors started to adopt a more prudent tone. The SSM asked
banks to add a Russian gas embargo stress test in their capital
planning, and there is a risk that the ECB may require buybacks
to be more spread out over time, rather than smaller. We note that
Intesa received ECB approval to carry its share buyback programme
at the end of the month.
2- Company Activity
January
In Midcap Origination, the Company took part in the inaugural RT1
issuance from offshore life insurance specialist Utmost. It also
came back into eSure RT1s. The Company took advantage of the sell-off
in Metro Bank T2s post the withdrawal of M&A rumours to build a
small position. Finally, it increased its exposure to My Money
Bank T2s.
In Liquid Relative Value, the Company bought some Santander retail
legacy bonds, with the expectation that they would be redeemed
at par at the next call date.
February
In Liquid Relative Value, the Company closed its short position
on Soci été Générale long-dated T2s. It bought
DPB CMS following the sell-off in discos.
In Midcap Origination, the Company participated in Chesnara's inaugural
T2. It also bought Quintet's AT1s. The Company took gains on Fidelidade
T2s.
March
In Midcap Origination, the Company took part in the new Co-Operative
Bank senior HoldCo issue in GBP at a 6% coupon.
In Liquid Relative Value, it bought some RBI 2022 T2s in CHF.
In Restructuring, the Company opened a position in a Bank of Cyprus
2031 T2, which offered a yield to call of around 9%.
April
In Liquid Relative Value, the Company took a position in La Banque
Postale 3% AT1s as a play on French spreads. It added to its position
in BCP both in AT1s and T2s.
In Midcap Origination, the Company divested from Leeds' PIBS to
reduce its overall exposure to fixed perpetual instruments.
May
In Liquid Relative Value, the Company slightly increased our exposure
to BCP and opened a position in La Banque Postale, while we closed
our RBI holdings.
In Restructuring, the Company added to Piraeus and sold our GamaLife
Tier 2s. In MidCap Origination, we reduced our exposure to Coop
Bank.
June
In Liquid Relative Value, the Company bought Intesa AT1s at a low
cash price and opened a position into Credit Suisse low-trigger
AT1s. We participated in the new Credito Emiliano Tier 2 issue.
We added to Quintet Private Bank.
In MidCap Origination, the Company took part in an inaugural AT1
issue from the commodity broker Marex at a 13.25% coupon.
3- Portfolio (as at 30 June 2022)
Strategy allocation (as a
% of total net assets)*
Liquid Relative Value 13.6%
Less Liquid Relative
Value 16.3%
Restructuring 27.0%
Special Situations 3.9%
Midcap Origination 44.2%
Denomination (as a % of total
net assets)*
EUR 54.1%
GBP 48.0%
USD 2.9%
Portfolio Breakdown (as a % of total net assets)*
By securities external By country
rating
BBB 6.8% UK 47.9%
BB 25.9% France 9.3%
B 23.1% Portugal 7.8%
Below B 3.3% Italy 6.8%
NR 45.9% Ireland 5.9%
Germany 5.8%
By maturity Greece 4.0%
<1 year 5.6% Netherlands 3.6%
1-3 40.6% Austria 3.3%
3-5 26.1% Denmark 2.7%
5-7 3.6% Spain 2.2%
7-10 2.4% Luxembourg 1.8%
>10 26.7% Sweden 1.6%
Switzerland 1.2%
By subordination Canada 1.1%
Additional Tier 1 39.5%
Legacy Tier 1 27.3%
Tier 2 25.5%
Senior 11.8%
Equity 0.1%
* Splits adjusted for single assets
(1) Based on the Published NAV.
4- Company metrics (as at 30 June 2022)
Share price (mid) (GB pence) 86.50
NAV per share (daily) (GB
pence) 94.70
Dividends paid over last
12 months (GB pence) 6.00
Shares in issue 91,852,904
Market capitalisation (GBP
mn) 79.45
Total net assets (GBP mn) 86.98
Premium / (Discount) (8.66)%
============================= ==========
Portfolio information 30 June 2022 31 December 30 June 2021
2021
Modified duration 5.16 3.08 4.87
Sensitivity to credit 7.20 5.56 5.64
Positions 92 84 80
Average price at end
of the month (1) 100.00 113.62 109.27
Running yield (GBP) 9.49% 5.95% 6.11%
Yield to perpetuity (GBP)
(2) 11.90% 6.23% 7.03%
Yield to call (GBP) (3) 13.94% 6.70% 7.06%
Gross assets 117.3% 112.7% 114.6%
Net gearing 111.2% 108.4% 107.6%
Investments / Published
net assets 106.6% 95.7% 101.6%
Cash 4.6% 7.3% 6.0%
Collateral 6.2% 4.2% 7.0%
Net Repo / Published
net assets 14.0% 5.3% 12.6%
CDS / Published net assets 26.7% 32.9% 76.6%
=========================== ============ =========== ============
Net Return(4)1 month 3 months(6) 6 months(6) 1 year(6) 3 years(5) Since launch(5)
======= =========== =========== ========= ========== ===============
-4.15% -5.88% -7.27% -2.61% 6.08% 5.42%
Monthly performance
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
% % % % % % % % % % % % %
2015 0.19 -1.48 -1.29
2016 -4.02 -4.59 3.57 1.16 2.62 -1.97 2.83 1.69 -0.21 2.06 -1.60 1.91 3.10
2017 2.67 0.93 1.12 2.01 1.72 -1.41 1.86 0.58 1.76 2.72 1.31 0.23 16.14
2018 3.12 -0.70 -1.95 1.14 -5.84 -0.72 1.60 -1.26 2.43 -1.54 -2.68 -1.44 -8.00
2019 3.36 2.30 0.29 2.53 -1.58 2.29 0.30 0.75 0.97 2.22 1.77 1.12 16.98
2020 1.99 -0.87 -19.95 5.24 3.68 4.27 1.90 1.88 -0.32 0.53 5.03 1.48 1.73
2021 -0.16 3.78 2.45 2.15 1.65 1.27 0.83 1.19 1.97 0.18 -0.45 1.23 16.87
2022 0.33 -1.80 0.03 -0.85 -0.95 -4.15 -7.27
(1) Bonds only. (2) The yield to perpetuity is the yield of the portfolio
converted in GBP with the hypothesis that securities are not reimbursed
and kept to perpetuity. (3) The yield to call is the yield of the portfolio
converted in GBP at the anticipated reimbursement date of the bonds.
(4) Past performance does not guarantee future results. (5) Annualised
performance, dividends reinvested. (6) Performance with dividends reinvested.
5- Outlook
Risk assets rallied in July as company earnings and economic activity
surprised to the upside, especially in Europe. Within the European banking
sector, revenues were 5% higher and earnings 30% higher. Bank earnings
were boosted by solid growth in lending volumes and expanding margins
as higher interest rates started to flow through their net interest
income. Asset quality was benign as defaults remained low. Costs were
broadly in-line, though were guided to creep higher. Commissions were
more mixed: transaction and lending commissions were boosted by the
pick-up in activity while investment commissions suffered from lower
flows and customer engagement. In investment banking, trading was strong
in macro products and equities while capital markets revenues remained
very weak. In aggregate, European banks posted very strong earnings,
with a number of banks printing their highest quarterly net income ever.
On the macro front, the ECB enacted the end of the negative interest
rates era while introducing a new policy tool "Transmission Protection
Instrument" designed to contain excessive widening in sovereign spreads.
The tool was approved unanimously by the Governing Council, has no ex-ante
capacity limit and is only constrained by indicative conditions in the
ECB's own discretion, giving the monetary policy unprecedented market
power and therefore, political discretion.
Meanwhile, the regulatory transition continues to unfold. In June, the
Bank of England published its 2022 Resolvability Assessment Framework
highlighting firm-specific assessment of the eight major UK banks. The
EBA also published a report highlighting the significant efforts by
issuers in calling, repurchasing and modifying their legacy instruments,
while indicating that further actions are still ongoing or under considerations,
"with call options planned to be exercised in the course of 2022 or
later on". In July, the PRA in the UK discussed in a speech how capital
buffers can be used and released in times of stress and what could be
done to improve them. Coincidentally, a UK bank just announced on 1
August a tender for cash on 7 legacy instruments.
For the above reasons, we continue to see value in the subordinated
debt of European banks and insurers. While the fundamentals stand stronger
than ever, the new monetary environment continues to provide a conducive
backdrop where central banks protect and support financial institutions
as critical links in the transmission of their policy. The perpetually
evolving dynamics of regulations provide a welcome set of catalysts
that we expect to generate further value in our investment portfolio
over the next six months.
Gildas Surry Antonio Roman
Axiom Alternative Investments SARL Axiom Alternative Investments SARL
22 August 2022 22 August 2022
Principal Risks
Risk is inherent in the Company's activities, but it is managed
through an ongoing process of identifying and assessing risks
and ensuring that appropriate controls are in place. The key risks
faced by the Company, are set out below:
* macroeconomic risk;
* investment risk;
* counterparty risk;
* credit risk;
* share price risk;
* regulatory risk; and
* reputational risk.
Further details of each of these risks and how they are mitigated
are discussed in the Principal Risks section of the Strategic
Report within the Company's Annual Report for the year ended 31
December 2021. The Board believes that these risks are applicable
to the six month period ended 30 June 2022 and the remaining six
months of the current financial year.
The Covid-19 pandemic was considered to be a risk to the global
economy when the 31 December 2021 Strategic Report was released
although it was diminishing in severity due to the successful
vaccine roll-out, and it is expected that the risk to the Company
from it will continue to decrease throughout 2022.
When the 31 December 2021 Strategic Report was released, Russia's
invasion of Ukraine was a new emerging risk to the global economy.
European and global banks in general were very strongly capitalised
as at the end of 2021 and they have limited direct exposure to
Russian credit risk and there is no evidence of meaningful stress
in the financial markets. The military and political situation
will no doubt continue to develop and as a consequence there may
well be further price volatility in some instruments, but absent
unexpected catastrophic tail risk events, the effects on the Company's
portfolio are not expected to be significant.
The Investment Manager continues to monitor the effect on issuers
of investment instruments to ensure that the Company is as well-placed
as it can be to maintain its objective and to exploit the opportunities
that the evolving situations will continue to present. As a result,
the operations of the Company are and will be kept under constant
review to ensure the Company's liquid resources will be sufficient
to cover any working capital requirements.
On behalf of the Board.
William Scott
Chairman
22 August 2022
Statement of Directors' Responsibilities
The Directors are responsible for preparing the unaudited half-yearly
report and condensed financial statements, which have not been
audited or reviewed by an independent auditor, and which include
the Chairman's Statement, Investment Manager's Report and Statement
of Principal Risks and Uncertainties) together with the unaudited
interim financial statements are required to:
* prepare the unaudited half-yearly financial
statements in accordance with DTR 4.2.4R and
International Accounting Standard 34, Interim
Financial Reporting, as adopted by the United
Kingdom;
* include a fair review of the information required by
DTR 4.2.7R, being important events that have occurred
during the period and their impact on the unaudited
half-yearly report and condensed financial statements
and a description of the principal risks and
uncertainties for the remaining six months of the
financial year; and
* include a fair review of information required by DTR
4.2.8R, being related party transactions that have
taken place during the period which have had a
material effect on the financial position or
performance of the Company.
The Directors confirm that the unaudited half-yearly report and
condensed financial statements comply with the above requirements.
On behalf of the Board.
William Scott
Chairman
22 August 2022
Unaudited Condensed Statement of Comprehensive Income
for the six months ended 30 June 2022
Period from Period from
1 January 1 January
2022 to 30 2021 to 30
June 2022 June 2021
Note (unaudited) (unaudited)
GBP'000 GBP'000
Income
Capital instrument income 2,823 2,600
Credit default swap income 335 417
Bank interest receivable 12 3
------------ ------------
Total income 3,170 3,020
------------ ------------
Investment gains and losses on investments
held at fair value through profit or
loss
Realised gains on disposal of capital
instruments and other investments 13 902 4,998
Movement in unrealised (losses)/gains
on capital instruments and other investments 13 (9,224) 1,504
Realised gains on derivative financial
instruments 16 1,158 2,268
Movement in unrealised losses on derivative
financial instruments 16 (2,029) (51)
------------ ------------
Total investment gains and losses (9,193) 8,719
------------ ------------
Expenses
Investment management fee 8a (378) (435)
Loss on foreign currency (72) (595)
Administration fee 8b (70) (65)
Interest payable and similar charges 9 (66) (13)
Directors' fees 8f (47) (47)
Other expenses 10 (187) (135)
Performance fee 8a - (406)
------------ ------------
Total expenses (820) (1,696)
------------ ------------
(Loss)/profit for the period attributable
to the Owners of the Company (6,843) 10,043
------------ ------------
(Loss)/earnings per Ordinary Share -
basic and diluted 12 (7.45)p 10.93p
------------ ------------
All of the items in the above statement are derived from continuing
operations.
The Company does not have any income and expenses that are not
included in the profit for the period. Therefore, the profit for
the period is also the total comprehensive income for the period.
The accompanying notes form an integral part of these unaudited
condensed half-yearly financial statements.
These financial statements are unaudited and are not the Company's
statutory financial statements.
Unaudited Condensed Statement of Changes in Equity
for the six months ended 30 June 2022
Period from 1 January Period from 1 January
2022 to 30 June 2022 (unaudited) 2021 to 30 June 2021 (unaudited)
Distributable Performance Total Distributable Performance Total
reserves fee reserve reserves fee reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 2022 96,585 298 96,883 87,350 - 87,350
(Loss)/profit for
the period (6,843) - (6,843) 10,043 - 10,043
Contributions by
and distributions
to Owners
Dividends paid (note
6) (2,756) - (2,756) (2,756) - (2,756)
------------ ------------ ------------ ------------ ------------ ------------
At 30 June 2022 86,986 298 87,284 94,637 - 94,637
------------ ------------ ------------ ------------ ------------ ------------
The share capital has not been presented separately in the above
Unaudited Condensed Statement of Changes in Equity as the Ordinary
Shares have no par value, and hence the share capital is GBPnil.
The Performance fee reserve is also distributable.
The accompanying notes form an integral part of these unaudited
condensed half-yearly financial statements.
These financial statements are unaudited and are not the Company's
statutory financial statements.
Unaudited Condensed Statement of Financial Position
as at 30 June 2022
As at As at
30 June 31 December
2022 2021 (audited)
Note (unaudited)
GBP'000 GBP'000
Assets
Investments in capital instruments 13,
at fair value through profit or loss 17 89,542 85,449
Other investments at fair value through 13,
profit or loss 17 1,758 4,874
Derivative financial assets at fair 16,
value through profit or loss 17 37 4,506
Other receivables and prepayments 15 1,635 2,143
Collateral accounts for derivative
financial instruments at fair value 14,
through profit or loss 16 5,381 4,119
Cash and cash equivalents 4,009 7,713
------------ ------------
Total assets 102,362 108,804
------------ ------------
Current liabilities
Derivative financial liabilities 16,
at fair value through profit or loss 17 (14,314) (6,555)
Other payables and accruals 18 (764) (649)
Short position(s) covered by reverse 13,
sale and repurchase agreements 17 - (3,932)
Collateral accounts for derivative
financial instruments at fair value 14,
through profit or loss 16 - (92)
Bank overdrafts - (693)
------------ ------------
Total liabilities (15,078) (11,921)
------------ ------------
Net assets 87,284 96,883
------------ ------------
Share capital and reserves
Share capital 19 - -
Distributable reserves 86,986 96,585
Performance fee reserve 298 298
------------ ------------
Total equity holders' funds 87,284 96,883
------------ ------------
Net asset value per Ordinary Share:
basic and diluted 20 95.03p 105.48p
These unaudited condensed half-yearly financial statements were
approved by the Board of Directors on 22 August 2022 and were
signed on its behalf by:
William Scott John Renouf
Chairman Director
22 August 2022 22 August 2022
The accompanying notes form an integral part of these unaudited
condensed half-yearly financial statements.
These financial statements are unaudited and are not the Company's
statutory financial statements.
Unaudited Condensed Statement of Cash Flows
for the six months ended 30 June 2022
Period Period from
from 1 January 1 January
2022 to 2021 to 30
30 June June 2021
2022 (unaudited)
Note (unaudited)
GBP'000 GBP'000
Cash flows from operating activities
Net (loss)/profit before taxation (6,843) 10,043
Adjustments for:
Foreign exchange movements 72 595
Total investment losses/(gains) at fair
value through profit or loss 9,193 (8,719)
Capital instrument income (2,823) (2,600)
CDS income (335) (417)
Interest on sale and repurchase agreements 44 (9)
Performance fee reserve - -
Cash flows relating to financial instruments:
Payment to collateral accounts for derivative
financial instruments 14 (1,355) (1,082)
Purchase of investments at fair value
through profit or loss (21,317) (57,686)
Sale of investments at fair value through
profit or loss 12,541 57,880
Premiums received from selling credit
default swap agreements 16 - 274
Premiums paid on buying credit default
swap agreements 16 - (83)
Purchase of foreign currency derivatives 16 (97,105) (89,754)
Close-out of foreign currency derivatives 16 96,954 92,111
Purchase of bond futures 16 (929) -
Sale of bond futures 16 2,287 -
Proceeds from sale and repurchase agreements 16 14,641 19,378
Payments to open reverse sale and repurchase 16
agreements - -
Payments for closure of sale and repurchase
agreements 16 (8,665) (19,232)
Proceeds from closure of reverse sale
and repurchase agreements 16 4,175 3,898
Opening of short position(s) - -
Closure of short position(s) (3,429) (1,932)
Cash paid during the period for interest (1,122) (1,078)
Cash received during the period for interest 3,967 4,188
Cash received during the period for dividends 218 180
------------ ------------
Net cash inflow from operating activities
before working capital changes 169 5,955
Increase in other receivables and prepayments (11) (15)
(Decrease)/increase in other payables
and accruals (341) 473
------------ ------------
Net cash (outflow)/inflow from operating
activities (183) 6,413
Cash flows from financing activities
Dividends paid 6 (2,756) (2,756)
------------ ------------
Net cash outflow from financing activities (2,756) (2,756)
------------ ------------
(Decrease)/increase in cash and cash
equivalents * (2,939) 3,657
------------ ------------
Unaudited Condensed Statement of Cash Flows (continued)
for the six months ended 30 June 2022
Period from Period from
1 January 1 January
2022 to 30 2021 to 30
June 2022 June 2021
(unaudited) (unaudited)
GBP'000 GBP'000
Cash and cash equivalents brought forward 7,020 2,647
(Decrease)/increase in cash and cash
equivalents (2,939) 3,657
Effect of foreign exchange on cash and
cash equivalents (72) (595)
------------ ------------
Cash and cash equivalents carried forward
* 4,009 5,709
------------ ------------
* Cash and cash equivalents at the start of the period and at the
period end includes bank overdrafts that are repayable on demand
and form an integral part of the Company's cash management.
The accompanying notes form an integral part of these unaudited
condensed half-yearly financial statements.
These financial statements are unaudited and are not the Company's
statutory financial statements.
Notes to the Unaudited Condensed Half-Yearly Financial
Statements
for the six months ended 30 June 2022
1. General information
The Company was incorporated as an authorised closed-ended investment
Company, under the Law on 7 October 2015 with registered number
61003. Its Ordinary Shares were admitted to trading on the Premium
Segment and to the premium listing segment of the FCA's Official
List on 15 October 2018 (prior to this, the Ordinary Shares traded
on the SFS).
Investment objective
The investment objective of the Company is to provide Shareholders
with an attractive return, while limiting downside risk, through
investment in the following financial institution investment instruments:
* Regulatory Capital Instruments, being financial
instruments issued by a European financial
institution which constitute regulatory capital for
the purposes of Basel I, Basel II or Basel III or
Solvency I or Solvency II;
* Other financial institution investment instruments,
being financial instruments issued by a European
financial institution, including without limitation
senior debt, which do not constitute Regulatory
Capital Instruments; and
* Derivative Instruments, being CDOs, securitisations
or derivatives, whether funded or unfunded, linked or
referenced to Regulatory Capital Instruments or Other
financial institution investment instruments.
Investment policy
The Company seeks to invest in a diversified portfolio of financial
institution investment instruments. The Company focuses primarily
on investing in the secondary market although instruments may
also be subscribed in the primary market where the Investment
Manager, Axiom, identifies attractive opportunities.
In February 2022, the Directors approved a minor change to the
investment policy in respect of hedging and derivatives. The words
in brackets were added to the following sentence: "The Company
may implement other hedging and derivative strategies designed
to protect investment performance against material movements in
(but not limited to) exchange rates and to protect against credit
risk".
The Company invests its assets with the aim of spreading investment
risk.
2. Statement of compliance
a) Basis of preparation
These unaudited condensed half-yearly financial statements present
the results of the Company for the six months ended 30 June 2022.
These unaudited condensed half-yearly financial statements have
been prepared in accordance with the DTR and IAS 34, Interim Financial
Reporting, as adopted by the United Kingdom.
The unaudited condensed half-yearly financial statements for the
period ended 30 June 2022 have not been audited or reviewed by
the Company's auditors and do not constitute statutory financial
statements. They have been prepared on the same basis as the Company's
annual financial statements.
These unaudited condensed half-yearly financial statements were
authorised for issuance by the Board of Directors on 22 August
2022.
b) Going concern
After making reasonable enquiries, and assessing all data relating
to the Company's liquidity, including its cash resources, income
stream and Level 1 investments, the Directors have a reasonable
expectation that the Company has adequate resources to continue
in operational existence for the foreseeable future. It is the
intention of the Board to offer Shareholders the option of receiving
cash at NAV (less costs, including any portfolio realisation expenses)
for some or all of their shareholding and/or to continue some
or all of their investment in an open-ended vehicle managed by
Axiom AI. The Board, together with Axiom AI and the Company's
advisers, is working on formal proposals to be put to Shareholders
and will make a further announcement with details in due course.
The Board's aim is for the proposals to be put to Shareholders
early in 2023 and, assuming Shareholder approval is received,
for the transaction to be completed as soon as reasonably practicable
thereafter. In order to effect the proposals, it is expected that
the existing Company will be liquidated. However, as this is an
early stage of the development of the formal proposals process
for which the outcome is not yet certain, and as the Board does
not consider there to be any other threat to the going concern
status of the Company the unaudited condensed half-yearly financial
statements have been prepared on a going concern basis.
c) Basis of measurement
These unaudited condensed half-yearly financial statements have
been prepared on a historical cost basis, except for certain financial
instruments, which are measured at fair value through profit or
loss.
d) Use of estimates and judgements
The preparation of financial statements in conformity with IFRS
requires management to make judgements, estimates and assumptions
that affect the application of policies and the reported amounts
of assets and liabilities, income and expenses.
Judgements made by management in the application of IFRS that
have a significant effect on the unaudited condensed half-yearly
financial statements and estimates with a significant risk of
material adjustment are discussed in note 4.
3. Significant accounting policies
a) Income and expenses
Bank interest, bond income and credit default swap income is recognised
on a time-proportionate basis.
Dividend income is recognised when the right to receive payment
is established. Capital instrument income comprises bond interest
and dividend income. Revenue from fixed interest securities is
recognised on an effective interest rate basis. Accrued interest
purchased and sold on interest bearing securities is excluded
from the capital cost of these securities and dealt with as part
of the revenue of the Company.
All expenses are recognised on an accruals basis. All of the Company's
expenses (with the exception of share issue costs, which are charged
directly to the distributable reserve) are charged through the
Statement of Comprehensive Income in the period in which they
are incurred.
b) Foreign currency
Foreign currency transactions are translated into Sterling using
the exchange rates prevailing at the dates of the transactions.
Foreign exchange gains and losses resulting from the settlement
of such transactions and from the translation at period-end exchange
rates of monetary assets and liabilities denominated in foreign
currencies are recognised in the Statement of Comprehensive Income.
The exchange rates used by the Company as at 30 June 2022 were
GBP1/EUR1.1617, GBP1/US$1.2179, GBP1/DKK8.6398, GBP1/CA$1.5678,
GBP1/SGD1.6935 and GBP1/CHF1.1632 (31 December 2021: GBP1/EUR1.1895,
GBP1/US$1.3528, GBP1/DKK8.8479, GBP1/CA$1.7096 and GBP1/SGD1.8249;
the CHF rate was not applicable).
c) Taxation
Investment income is recorded gross of applicable taxes and any
tax expenses are recognised through the Statement of Comprehensive
Income as incurred.
d) Financial assets and liabilities
The financial assets and liabilities of the Company are investments
in capital instruments at fair value through profit or loss, other
investments at fair value through profit or loss, collateral accounts
for derivative financial instruments, cash and cash equivalents,
other receivables, derivative financial instruments and other
payables.
In accordance with IFRS 9, the Company classifies its financial
assets and financial liabilities at initial recognition into the
categories of financial assets and financial liabilities as discussed
below.
In applying that classification, a financial asset or financial
liability is considered to be held for trading if:
* It is acquired or incurred principally for the
purpose of selling or repurchasing in the near term;
or
* On initial recognition, it is part of a portfolio of
identified financial instruments that are managed
together and for which, there is evidence of a recent
actual pattern of short-term profit-taking; or
* It is a derivative (except for a derivative that is a
financial guarantee contract or a designated and
effective hedging instrument).
Financial assets
The Company classifies its financial assets as subsequently measured
at amortised cost or measured at fair value through profit or
loss on the basis of both:
* The business model for managing the financial assets;
and
* The contractual cash flow characteristics of the
financial asset.
A financial asset is measured at fair value through profit or
loss if:
* Its contractual terms do not give rise to cash flows
on specified dates that are SPPI on the principal
outstanding amount; or
* It is not held within a business model whose
objective is either to collect contractual cash flows,
or to both collect contractual cash flows and sell;
or
* At initial recognition, it is irrevocably designated
as measured at fair value through profit or loss when
doing so eliminates or significantly reduces a
measurement or recognition inconsistency that would
otherwise arise from measuring assets or liabilities
or recognising the gains and losses on them on
different bases.
The Company includes in this category:
* Instruments held for trading. This category includes
equity instruments and debt instruments which are
acquired principally for the purpose of generating a
profit from short-term fluctuations in price. This
category also includes derivative financial assets at
fair value through profit or loss.
* Debt instruments. These include investments that are
held under a business model to manage them on a fair
value basis for investment income and fair value
gains.
Financial liabilities
A financial liability is measured at fair value through profit
or loss if it meets the definition of held for trading.
The Company includes in this category, derivative contracts in
a liability position and equity and debt instruments sold short
since they are classified as held for trading.
Derivative financial instruments, including credit default swap
agreements, foreign currency forward contracts, bond future contracts
and sale and repurchase agreements are recognised initially, and
are subsequently measured at, fair value. Sale and repurchase
agreements are recognised at fair value through profit or loss
as they are generally not held to maturity but incurred principally
for the purpose of repurchasing in the near term and on initial
recognition are part of a portfolio of identified financial instruments
that are managed together and for which there is evidence of a
recent actual pattern of short-term profit taking. Derivative
financial instruments are classified as assets when their fair
value is positive or as liabilities when their fair value is negative.
Derivative assets and liabilities arising from different transactions
are offset only if the transactions are with the same counterparty,
a legal right of offset exists, and the parties intend to settle
the cash flows on a net basis.
These financial instruments are classified at fair value through
profit or loss upon initial recognition on the basis that they
are part of a group of financial assets which are managed and
have their performance evaluated on a fair value basis, in accordance
with investment strategies and risk management of the Company.
Recognition
The Company recognises a financial asset or a financial liability
when, and only when, it becomes a party to the contractual provisions
of the instrument. Purchases and sales of financial assets that
require delivery of assets within the time frame generally established
by regulation or convention in the marketplace are recognised
on the trade date, i.e. the date that the Company commits to purchase
or sell the asset.
Derecognition
A financial asset (or, where applicable, a part of a financial
asset or part of a group of similar assets) is derecognised where:
* The rights to receive cash flows from the asset have
expired; or
* The Company has transferred its rights to receive
cash flows from the asset or has assumed an
obligation to pay the received cash flows in full
without material delay to a third party under a
"pass-through" arrangement; and
* Either (a) the Company has transferred substantially
all the risks and rewards of the asset, or (b) the
Company has neither transferred nor retained
substantially all the risks and rewards of the asset,
but has transferred control of the asset.
When the Company has transferred its rights to receive cash flows
from an asset (or has entered into a pass-through arrangement)
and has neither transferred nor retained substantially all the
risks and rewards of the asset nor transferred control of the
asset, the asset is recognised to the extent of the Company's
continuing involvement in the asset.
The Company derecognises a financial liability when the obligation
under the liability is discharged, cancelled or expires.
Initial measurement
Financial assets and financial liabilities at fair value through
profit or loss are recorded in the Statement of Financial Position
at fair value. All transaction costs for such instruments are
recognised directly in the Statement of Comprehensive Income.
Subsequent measurement
After initial measurement, the Company measures financial assets
which are classified at fair value through profit or loss, at
fair value. Subsequent changes in the fair value of those financial
instruments are recorded in net gain or loss on financial assets
and liabilities at fair value through profit or loss. Interest
and dividends earned or paid on these instruments are recorded
separately in interest income or expense and dividend income or
expense.
Net gain or loss on financial assets and financial liabilities
at fair value through profit or loss
The Company records its transactions in investments and the related
revenue and expenses on a trade date basis. Unrealised gains and
losses comprise changes in the fair value of financial instruments
at the period end. These gains and losses represent the difference
between an instrument's initial carrying amount and disposal amount,
or cash payment on, or receipts from derivative contracts.
Offsetting of financial instruments
Financial assets and financial liabilities are reported net by
counterparty in the Statement of Financial Position, provided
that the legal right of offset exists, and is not offset by collateral
pledged to or received from counterparties.
Other receivables
Receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market.
The Company includes in this category other short-term receivables.
The Company makes use of a simplified approach in accounting for
trade and other receivables as well as contract assets and records
the loss allowance as lifetime expected credit losses. These are
the expected shortfalls in contractual cash flows, considering
the potential for default at any point during the life of the
financial instrument. In calculating, the Company uses its historical
experience to determine the expected credit losses.
e) Collateral accounts for derivative financial instruments at
fair value through profit or loss
Collateral accounts for derivative financial instruments at fair
value through profit or loss comprises cash balances held at the
Company's depositary and the Company's clearing brokers and cash
collateral pledged to counterparties related to derivative contracts.
Cash that is related to securities sold, not yet purchased, is
restricted until the securities are purchased. Financial instruments
held within the margin account consist of cash received from brokers
to collateralise the Company's derivative contracts and amounts
transferred from the Company's bank account.
f) Cash and cash equivalents
Cash in hand and in banks and short-term deposits which are held
to maturity are carried at cost. Cash and cash equivalents are
defined as cash in hand, demand deposits and short-term, highly
liquid investments readily convertible to known amounts of cash
and subject to insignificant risk of changes in value.
g) Share capital
Ordinary Shares are classified as equity. Incremental costs directly
attributable to the issue of Ordinary Shares are recognised as
a deduction from equity.
When share capital recognised as equity is repurchased, the amount
of the consideration paid, which includes directly attributable
costs, is recognised as a deduction from equity. Repurchased shares
that are classified as Treasury Shares are presented as a deduction
from equity. When Treasury Shares are sold or subsequently reissued,
the amount received is recognised as an increase in equity and
the resulting surplus or deficit is transferred to/from distributable
reserves.
Funds received from the issue of Ordinary Shares are allocated
to share capital, to the extent that they relate to the nominal
value of the Ordinary Shares, with any excess being allocated
to distributable reserves.
h) Distributable reserves
All income and expenses, foreign exchange gains and losses and
realised investment gains and losses of the Company are allocated
to the distributable reserve.
Performance fee reserve
In accordance with IFRS 2, Share-based payments, the portion of
the performance fee that is due to be settled in shares, is deemed
to be a share-based payment when the fee is settled. As such,
50% of the performance fee accrual at 31 December 2021 (GBP298,000)
was allocated to the performance fee reserve until the payment,
which will be utilised to purchase the shares, has been made.
i) NAV per share and earnings per share
The NAV per share disclosed on the face of the Statement of Financial
Position is calculated by dividing the net assets by the number
of Ordinary Shares in issue at the period end.
Earnings per share is calculated by dividing the earnings for
the period by the weighted average number of Ordinary Shares in
issue during the period.
j) Changes in accounting policy and disclosures
New and amended standards and interpretations
The accounting policies adopted are consistent with those of the
previous financial year. The Company adopted the following new
and amended relevant IFRS in the period:
IFRS Financial Instruments - amendments resulting from Annual
9 Improvements to IFRS Standards 2018-2020
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
- amendments regarding the costs to include when assessing
whether a contract is onerous
The adoption of the above standards did not have an impact on
the financial position or performance of the Company.
k) Accounting standards issued but not yet effective
The IASB has issued/revised a number of relevant standards with
an effective date after the date of these financial statements.
Any standards that are not deemed relevant to the operations of
the Company have been excluded. The Directors have chosen not
to early adopt these standards and interpretations and they expect
that they would not have a material impact on the Company's financial
statements in the period of initial application.
Effective date
IAS 1 Presentation of Financial Statements - amendments 1 January 2023
regarding the classification of liabilities
IAS 8 Accounting Policies, Changes in Accounting 1 January 2023
Estimates and Errors - amendments regarding
the definition of accounting estimates
4. Use of judgements and estimates
The preparation of the Company's unaudited condensed half-yearly
financial statements requires the Directors to make judgements,
estimates and assumptions that affect the reported amounts recognised
in the unaudited condensed half-yearly financial statements and
disclosure of contingent liabilities. The estimates and associated
assumptions are based on historical experience and various other
factors that are believed to be reasonable under the circumstances,
the results of which form the basis of making judgements about
carrying values of assets and liabilities that are not readily
apparent from other sources. However, uncertainty about these
assumptions and estimates could result in outcomes that could
require a material adjustment to the carrying amount of the asset
or liability in future periods.
The estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognised in the
period in which the estimate is revised, if the revision affects
only that period, or in the period of the revision and future
periods, if the revision affects both current and future periods.
Judgements
In the process of applying the Company's accounting policies,
management has made the following judgement which had a significant
effect on the amounts recognised in the unaudited condensed half-yearly
financial statements:
i) Determination of functional currency
The performance of the Company is measured and reported to investors
in Sterling. Although a significant proportion of the Company's
underlying assets are held in currencies other than Sterling,
because the Company's capital is raised in Sterling, expenses
are paid in Sterling and the Company hedges substantially all
of its foreign currency risk back to Sterling the Directors consider
Sterling to be the Company's functional currency.
The Directors do not consider there to be any other judgements
which have had a significant impact on the unaudited condensed
half-yearly financial statements.
Estimates and assumptions
The Company based its assumptions and estimates on parameters
available when the unaudited condensed half-yearly financial statements
were approved. However, existing circumstances and assumptions
about future developments may change due to market changes or
circumstances arising beyond the control of the Company. Such
changes are reflected in the assumptions when they occur.
i) Valuation of financial assets and liabilities
The Company uses the expertise of the Investment Manager to assess
the prices of investments at the valuation date. The majority
of the prices can be independently verified with reference to
external data sources, however a minority of investments cannot
be verified by reference to an external source and the Investment
Manager secures an independent valuation with reference to the
latest prices traded within the market place. These independent
valuations take the form of quotes from brokers.
For further information on the assumptions and inputs used to
fair value the financial instruments, please see note 17.
5. Segmental reporting
In accordance with IFRS 8, Operating Segments, it is mandatory
for the Company to present and disclose segmental information
based on the internal reports that are regularly reviewed by the
Board in order to assess each segment's performance.
Management information for the Company as a whole is provided
internally for decision making purposes. The Company does compartmentalise
different investments in order to monitor compliance with investment
restrictions, however the performance of these allocations does
not drive the investment decision process. The Directors' decisions
are based on a single integrated investment strategy and the Company's
performance is evaluated on an overall basis. Therefore, the Directors
are of the opinion that the Company is engaged in a single economic
segment of business for all decision making purposes and no segmental
reporting is required. The financial results of this segment are
equivalent to the results of the Company as a whole.
6. Dividends
As set out in the Prospectus, the Company intends to distribute
all of its income from investments, net of expenses, by way of
dividends on a quarterly basis. The Company may retain income
for distribution in a subsequent quarter to that in which it arises
in order to smooth dividend amounts or for the purposes of efficient
cash management.
The Company declared the following dividends during the period
ended 30 June 2022:
Total dividend declared
in respect of earnings Amount per Ordinary
in the period Share
Period Period Period Period
from 1 January from 1 January from 1 from 1 January
2022 to 2021 to January 2021 to
30 June 30 June 2022 to 30 June
2022 (unaudited) 2021 (unaudited) 30 June 2021 (unaudited)
2022 (unaudited)
GBP'000 GBP'000 pence Pence
Dividends declared and paid
in the period 2,756 2,756 3.00 3.00
Less, dividend declared in
respect of the prior period
that was paid in the period (1,378) (1,378) (1.50) (1.50)
Add, dividend declared out
of the profits for the period
but paid after the period
end: 1,378 1,378 1.50 1.50
------------ ------------ ------------ ------------
Dividends declared in respect
of the period 2,756 2,756 3.00 3.00
------------ ------------ ------------ ------------
In accordance with IFRS, dividends are only provided for when
they become a contractual liability of the Company. Therefore,
during the period a total of GBP2,756,000 (30 June 2021: GBP2,756,000)
was incurred in respect of dividends, none of which was outstanding
at the reporting date. The second dividend of GBP1,378,000 in
respect of the earnings during the period had not been provided
for at 30 June 2022 as, in accordance with IFRS, it was not a
liability of the Company at that date.
7. Related parties
Details of the relationships between the Company and its related
parties, being the Investment Manager and the Directors are disclosed
in notes 8a and 8f.
Details of the relationships between the Company and its other
advisers and service providers (the Administrator, the Broker,
the Registrar and the Depositary) are also disclosed in note 8.
As at 30 June 2022, the Company had holdings in the following
investments which were managed by the Investment Manager:
30 June 2022 31 December 2021
Holding Cost Value Holding Cost Value
GBP'000 GBP'000 GBP'000 GBP'000
Axiom Alternative Liquid Rates
Z Cap Scv 2,000 1,705 1,758 2,000 1,705 1,691
Axiom Global CoCo UCIT ETF
USD-hedged - - - 35 2,984 3,183
During the period, the Company:
* purchased 1,900 units in Axiom Sustainable Financial
Bonds Class Z for GBP2,130,000;
* sold 1,900 units in Axiom Sustainable Financial Bonds
Class Z for GBP2,131,000, realising a gain of
GBP1,000; and
* sold 35 units in Axiom Global CoCo UCIT ETF
USD-hedged for GBP3,120,000, realising a gain of
GBP136,000.
During the period ended 30 June 2021, the Company sold 10 units
in Axiom Global CoCo UCIT ETF GBP-hedged for GBP1,106,000, realising
a gain of GBP106,000.
The Directors are not aware of any ultimate controlling party.
8. Key contracts
a) Investment Manager
The Company has entered into an Investment Management Agreement
with Axiom AI under which the Company receives investment advice
and management services. In order to limit future expenses, on
11 August 2022, the Company gave the Investment Manager 12 months'
protective notice of the termination of the Investment Management
Agreement (see note 26).
Management fee
Under the terms of the Investment Management Agreement, a management
fee is paid to the Investment Manager quarterly in arrears. The
quarterly fee is calculated by reference to the following sliding
scale:
i. where NAV is less than or equal to GBP250 million, 1% per annum
of NAV;
ii. where NAV is greater than GBP250 million but less than or
equal to GBP500 million, 1% per annum of NAV on the first GBP250
million and 0.8% per annum of NAV on the balance; and
iii. where NAV is greater than GBP500 million, 0.8% per annum
of NAV, in each case, plus applicable VAT.
In respect of the management fee calculation above, any related
party holdings are deducted from the NAV.
If in any quarter (other than the final quarter) of any accounting
period the aggregate expenses of the Company (excluding performance
fees, interest charged on sale and repurchase agreements, bank
charges and withholding tax) during such quarter exceed an amount
equal to one-quarter of 1.5% of the average NAV of the Company
during such quarter (such amount being a "Quarterly Expenses Excess"),
then the management fee payable in respect of that quarter shall
be reduced by the amount of the Quarterly Expenses Excess, provided
that the management fee shall not be reduced to an amount that
is less than zero and no sum will be payable by the Investment
Manager to the Company in respect of the Quarterly Expenses Excess.
If in the final quarter of any accounting period the aggregate
expenses of the Company during such accounting period exceed an
amount equal to 1.5% of the average NAV of the Company during
such accounting period (such amount being an "Annual Expenses
Excess"), then the management fee payable in respect of that quarter
shall be reduced by the amount of the Annual Expenses Excess.
If such reduction would not fully eliminate the Annual Expenses
Excess (the amount of any such shortfall being a "Management Fee
Deduction Shortfall"), the Investment Manager shall pay to the
Company an amount equal to the Management Fee Deduction Shortfall
(a "Management Fee Deduction Shortfall Payment") as soon as is
reasonably practicable.
During the period, a total of GBP378,000 (30 June 2021: GBP435,000)
was incurred in respect of Investment Management fees, of which
GBP173,000 (31 December 2021: GBP213,000) was payable at the reporting
date.
Under the terms of the Investment Management Agreement, if at
any time there has been any deduction from the management fee
as a result of the Quarterly Expenses Excess or Annual Expenses
Excess (a "Management Fee Deduction"), and during any subsequent
quarter:
i. all or part of the Management Fee Deduction can be paid; and/or
ii. all or part of the Management Fee Deduction Shortfall Payment
can be repaid,
by the Company to the Investment Manager without:
iii. in any quarter (other than the final quarter) of any accounting
period the aggregate expenses of the Company during such quarter
exceeding an amount equal to one-quarter of 1.5% of the average
NAV of the Company during such quarter; or
iv. in the final quarter of any accounting period the aggregate
expenses of the Company during such accounting period exceeding
an amount equal to 1.5% of the average NAV of the Company during
such accounting period,
then such payment and/or repayment shall be made by the Company
to the Investment Manager as soon as is reasonably practicable.
The Quarterly Expenses Excess for the period was GBP47,000 (30
June 2021: GBP7,000). At 30 June 2022, the Quarterly Expenses
Excess and Annual Expenses Excess which could be payable to the
Investment Manager in future periods was GBP824,000 (31 December
2021: GBP777,000) (see note 25).
Performance fee
The Investment Manager is entitled to receive from the Company
a performance fee subject to certain performance benchmarks.
The fee is payable as a share of the Total Shareholder Return
("TSR") where TSR for this purpose is defined as:
i. the NAV (on a per share basis) at the end of the relevant accounting
period; plus
ii. the total of all dividends and other distributions made to
Shareholders since 5 November 2015 (being the date of the Company's
original admission to the SFS) divided by the number of shares
in issue during the period from 5 November 2015 to the end of
the relevant accounting period.
The performance fee, if any, is equal to 15% of the TSR in excess
of a weighted average hurdle equal to a 7% per annum return. The
performance fee is subject to a high water mark. The fee, if any,
is payable annually and calculated on the basis of audited annual
accounts.
50% of the performance fee will be settled in cash. The balance
will be satisfied in shares, subject to certain exceptions where
settlement in shares would be prohibited by law or would result
in the Investment Manager or any person acting in concert with
it incurring an obligation to make an offer under Rule 9 of the
City Code, in which case the balance will be settled in cash.
Assuming no such requirement, the balance of the performance fee
will be settled either by the allotment to the Investment Manager
of such number of new shares credited as fully paid as is equal
to 50% of the performance fee (net of VAT) divided by the most
recent practicable NAV per share (rounded down to the nearest
whole share) or by the acquisition of shares in the market, as
required under the terms of the Investment Management Agreement.
All shares allotted to (or acquired for) the Investment Manager
in part satisfaction of the performance fee will be subject to
a lock-up until the date that is 12 months from the end of the
accounting period to which the award of such shares related.
At 30 June 2022, a performance fee of GBPnil was payable in respect
of the period then ended (31 December 2021: GBP596,000, 30 June
2021: GBP406,000). During the period, the Company paid the Investment
Manager GBP298,000, in part settlement of the 2021 performance
fee.
50% of the performance fee payable by the Company as at 31 December
2021 (GBP298,000) will be settled through the purchase or issue
of shares in the Company. As such, 50% of the performance fee
has been allocated to the performance fee reserve until the payment,
which will be utilised to purchase shares, has been made. This
treatment has resulted in an increase of 0.33p per Ordinary Share
to the NAV originally announced to the market on 4 July 2022 (see
note 20).
The Investment Manager has agreed that it will not dispose of
any Ordinary Shares issued to it in respect of the performance
fee for at least 12 months from the date of the end of the accounting
period for which they were allotted or acquired pursuant to the
payment of a performance fee.
b) Administrator and Company Secretary
Elysium has been appointed by the Company to provide day to day
administration services to the Company, to calculate the NAV per
share as at the end of each calendar month and to provide company
secretarial functions required under the Law.
Under the terms of the Administration Agreement, the Administrator
is entitled to receive a fee of GBP110,000 per annum, which is
subject to an annual adjustment upwards to reflect any percentage
change in the retail prices index over the preceding year. In
addition, the Company pays the Administrator a fee for any work
undertaken in connection with the daily NAV, subject to a maximum
aggregate amount of GBP10,000 per annum. In order to limit future
expenses, on 22 August 2022, the Company gave the Administrator
six months' protective notice of the termination of the Administration
Agreement.
During the period, a total of GBP70,000 (30 June 2021: GBP65,000)
was incurred in respect of Administration fees and GBP34,000 (31
December 2021: GBP33,000) was payable to the Administrator at
the reporting date.
c) Broker
Winterflood has been appointed to act as Broker for the Company,
for which the Company pays Winterflood an annual retainer fee
of GBP35,000 per annum.
For the period ended 30 June 2022, the Company incurred Broker
fees of GBP20,000 (30 June 2021: GBP19,000) of which GBP7,000
was payable at the period end date (31 December 2021: GBP6,000).
d) Registrar
Link Market Services (Guernsey) Limited is Registrar of the Company.
Under the terms of the Registrar Agreement, the Registrar is entitled
to receive from the Company certain annual maintenance and activity
fees, subject to a minimum fee of GBP5,500 per annum.
During the period, a total of GBP12,000 (30 June 2021: GBP10,000)
was incurred in respect of Registrar fees, of which GBP3,000 was
payable at 30 June 2022 (31 December 2021: GBP1,000).
e) Depositary
CACEIS Bank France has been appointed by the Company to provide
depositary, settlement and other associated services to the Company.
Under the terms of the Depositary Agreement, the Depositary is
entitled to receive from the Company:
i. an annual depositary fee of 0.03% of NAV, subject to a minimum
annual fee of EUR25,000;
ii. a safekeeping fee calculated using a basis point fee charge
based on the country of settlement and the value of the assets;
and
iii. an administration fee on each transaction, together with
various other payment/wire charges on outgoing payments.
During the period, a total of GBP24,000 (30 June 2021: GBP17,000)
was incurred in respect of depositary fees, and GBP14,000 (31
December 2021: GBP22,000) was payable to the Depositary at the
reporting date.
CACEIS Bank Luxembourg is entitled to receive a monthly valuation
agent fee from the Company in respect of the provision of certain
accounting services which will, subject to a minimum monthly fee
of EUR2,500, be calculated by reference to the following tiered
sliding scale:
i. where NAV is less than or equal to EUR50 million, 0.05% per
annum of NAV;
ii. where NAV is greater than EUR50 million but less than or equal
to EUR100 million, 0.04% per annum of NAV; and
iii. where NAV is greater than EUR100 million, 0.03% per annum
of NAV, in each case, plus applicable VAT.
During the period, a total of GBP21,000 (30 June 2021: GBP22,000)
was incurred in respect of fees paid to CACEIS Bank Luxembourg,
of which GBP11,000 was payable at 30 June 2022 (31 December 2021:
GBP11,000).
f) Directors' remuneration
William Scott (Chairman) is paid GBP35,000 per annum, John Renouf
(Chairman of the Audit Committee) is paid GBP32,500 per annum,
and Max Hilton is paid GBP27,500 per annum.
The Directors are also entitled to reimbursement of all reasonable
travelling and other expenses properly incurred in the performance
of their duties.
During the period, a total of GBP47,000 (30 June 2021: GBP47,000)
was incurred in respect of Directors' fees, of which GBPnil (31
December 2021: GBPnil) was payable at the reporting date. No bonus
or pension contributions were paid or payable on behalf of the
Directors.
9. Interest payable and similar charges
Period from Period from
1 January 1 January
2022 to 30 2021 to 30
June 2022 June 2021
(unaudited) (unaudited)
GBP'000 GBP'000
Bank interest 18 22
Commission 4 -
Interest payable on sale and repurchase
agreements 44 (9)
------------ ------------
66 13
------------ ------------
10. Other expenses
Period from Period from
1 January 1 January
2022 to 30 2021 to 30
June 2022 June 2021
(unaudited) (unaudited)
GBP'000 GBP'000
PR expenses 32 30
Legal fees 27 -
Depositary fees (note 8e) 24 17
Valuation agent fees (note 8e) 21 22
Audit fees 21 18
Broker fees (note 8c) 20 19
Registrar fees (note 8d) 12 10
Other expenses 30 19
------------ ------------
187 135
------------ ------------
11. Taxation
The Company is exempt from taxation in Guernsey, and it is the
intention to conduct the affairs of the Company to ensure that
it continues to qualify for exempt company status for the purposes
of Guernsey taxation. The Company pays a fixed fee of GBP1,200
per annum to maintain exempt company status.
12. (Loss)/earnings per Ordinary Share
The loss per Ordinary Share of 7.45p (30 June 2021: earnings of
10.93p) is based on a loss attributable to owners of the Company
of GBP6,843,000 (30 June 2021: profit of GBP10,043,000) and on
a weighted average number of 91,852,904 (30 June 2021: 91,852,904)
Ordinary Shares in issue since 1 January 2022. There is no difference
between the basic and diluted loss per share.
13. Investments at fair value through profit or loss
Movements in gains/(losses) in the period
30 June 2022 (unaudited) 30 June 2021 (unaudited)
Unrealised Realised Total Unrealised Realised Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investments in capital
instruments (9,178) 338 (8,840) 1,272 4,955 6,227
Other investments (133) 138 5 220 106 326
Short position(s) covered
by reverse sale and
repurchase agreements 87 426 513 12 (63) (51)
------------ ------------ --------- ------------ ---------- ------------
(9,224) 902 (8,322) 1,504 4,998 6,502
------------ ------------ --------- ------------ ---------- ------------
Closing valuations
31 December
2021
30 June 2022
(unaudited) (audited)
GBP'000 GBP'000
Investments in capital instruments 89,542 85,449
Other investments 1,758 4,874
Short position(s) covered by reverse
sale and repurchase agreements - (3,932)
------------ ------------
Investments at fair value through profit
or loss 91,300 86,391
------------ ------------
Investments in capital instruments at fair value through profit
or loss comprise mainly of investments in bonds, and also preference
shares, structured notes and other securities that have a similar
income profile to that of bonds. The other investments at fair
value through profit or loss consist of investments in open ended
funds managed by the Investment Manager (see note 7) to obtain
diversified exposure on bank equities.
As at 30 June 2022, the Company had ten (31 December 2021: eight)
open sale and repurchase agreements, and no (31 December 2021:
one) reverse sale and repurchase agreements (see note 16). The
previously held reverse sale and repurchase agreements were open
ended and were used to cover the sale of capital instruments (the
short positions noted above).
The fair value of the capital instruments subject to sale and
repurchase agreements (excluding the short position(s)) at 30
June 2022 was GBP15,503,000 (31 December 2021: GBP9,349,000).
The fair value net of the short position(s) as at 31 December
2021 was GBP5,417,000.
14. Collateral accounts for derivative financial instruments
at fair value through profit or loss
30 June 2022 31 December
(unaudited) 2021
(audited)
GBP'000 GBP'000
JP Morgan 4,127 3,495
CACEIS Bank France 1,024 305
Goldman Sachs International 230 207
Credit Suisse - 112
------------ ------------
5,381 4,119
CACEIS Bank France - negative balance - (92)
------------ ------------
Net balance on collateral accounts held
by brokers 5,381 4,027
------------ ------------
With respect to derivatives, the Company pledges cash and/or other
liquid securities ("Collateral") to third parties as initial margin
and as variation margin. Collateral may be transferred either
to the third party or to an unaffiliated custodian for the benefit
of the third party. In the case where Collateral is transferred
to the third party, the third party pursuant to these derivative
arrangements will be permitted to use, reuse, lend, borrow, hypothecate
or re-hypothecate such Collateral. The third parties will have
no obligation to retain an equivalent amount of similar property
in their possession and control, until such time as the Company's
obligations to the third party are satisfied. The Company has
no right to this Collateral but has the right to receive fungible,
equivalent Collateral upon the Company's satisfaction of the Company's
obligation in respect of the derivatives.
15. Other receivables and prepayments
30 June 31 December
2022 (unaudited) 2021
(audited)
GBP'000 GBP'000
Accrued capital instrument income receivable 1,580 1,064
Interest due on credit default swaps 18 21
Prepayments 35 24
Interest due on collateral account 2 -
Due from sale of capital instrument - 1,034
------------ ------------
1,635 2,143
------------ ------------
16. Derivative financial instruments
Credit default swap agreements
A credit default swap agreement represents an agreement that one
party, the protection buyer, pays a fixed fee, the premium, in
return for a payment by the other party, the protection seller,
contingent upon a specified credit event relating to an underlying
reference asset. If a specified credit event occurs, there is
an exchange of cash flows and/or securities designed so the net
payment to the protection buyer reflects the loss incurred by
holders of the referenced obligation in the event of its default.
The ISDA establishes the nature of the credit event and such events
include bankruptcy and failure to meet payment obligations when
due.
Year ended
31 December
2021
Period Period
from 1 from 1
January January
2022 to 2021 to
30 June 30 June
2022 (unaudited) 2021 (unaudited) (audited)
GBP'000 GBP'000 GBP'000
Opening balance (128) 448 448
Premiums received from selling credit
default swap agreements - (274) (274)
Premiums paid on buying credit default
swap agreements - 83 83
Movement in unrealised losses in the
period (1,088) (353) (782)
Realised losses in the period (13) (57) 397
------------ ------------ ------------
Outstanding liabilities due on credit
default swaps (1,229) (153) (128)
------------ ------------ ------------
Credit default swap assets at fair
value through profit or loss 37 330 180
Credit default swap liabilities at
fair value through profit or loss (1,266) (483) (308)
------------ ------------ ------------
Outstanding liabilities due on credit
default swaps (1,229) (153) (128)
------------ ------------ ------------
Interest paid or received on the credit default swap agreements
has been accounted for in the Unaudited Condensed Statement of
Comprehensive Income as it has been incurred or received. At the
period end, GBP18,000 (31 December 2021: GBP20,000) of interest
on credit default swap agreements was due to the Company.
Collateral totalling GBP3,860,000 (31 December 2021: GBP3,328,000)
was held in respect of the credit default swap agreements.
Foreign currency forwards
Foreign currency forward contracts are used to hedge the Company's
exposure to changes in foreign currency exchange rates on its
foreign portfolio holdings. A foreign currency forward contract
is a commitment to purchase or sell a foreign currency on a future
date and at a negotiated forward exchange rate.
Period Period
from 1 from 1
January January
2022 to 2021 to
30 June 30 June
2022 (unaudited) 2021 (unaudited)
Year ended
31 December
2021
(audited)
GBP'000 GBP'000 GBP'000
Opening balance 7 775 775
Purchase of foreign currency derivatives 97,105 89,754 185,824
Closing-out of foreign currency derivatives (96,954) (92,111) (189,680)
Movement in unrealised losses in the
period (833) (104) (768)
Realised (losses)/gains in the period (151) 2,357 3,856
------------ ------------ ------------
Net (liabilities)/assets on foreign
currency forwards (826) 671 7
------------ ------------ ------------
Foreign currency forward assets at
fair value through profit or loss - 688 132
Foreign currency forward liabilities
at fair value through profit or loss (826) (17) (125)
------------ ------------ ------------
Net (liabilities)/assets on foreign
currency forwards (826) 671 7
------------ ------------ ------------
Bond futures
A bond future contract involves a commitment by the Company to
purchase or sell bond futures for a predetermined price, with
payment and delivery of the bond future at a predetermined future
date.
Period Period
from 1 from 1
January January
2022 to 2021 to
30 June 30 June
2022 (unaudited) 2021 (unaudited)
Year ended
31 December
2021
(audited)
GBP'000 GBP'000 GBP'000
Opening balance (12) - -
Purchase of bond futures 929 - 4,234
Sale of bond futures (2,287) - (4,977)
Movement in unrealised losses in the
period 59 - (66)
Realised gains in the period 1,311 - 797
------------ ------------ ------------
Balance payable on bond futures - - (12)
------------ ------------ ------------
Bond future assets at fair value through
profit or loss - - -
Bond future liabilities at fair value
through profit or loss - - (12)
------------ ------------ ------------
Balance payable on bond futures - - (12)
------------ ------------ ------------
Sale and repurchase agreements
Under the terms of a sale and repurchase agreement one party in
the agreement acts as a borrower of cash, using a security held
as collateral, and the other party in the agreement acts as a
lender of cash. Almost any security may be employed in the sale
and repurchase agreement. Interest is paid by the borrower for
the benefit of having funds to use until a specified date on which
the effective loan needs to be repaid.
When a transfer of assets that are not derecognised in their entirety
does not result in derecognition, it is viewed as a secured financing
transaction, with any consideration received resulting in a corresponding
liability. The Company is not entitled to use these financial
assets for any other purposes.
Under the sale and repurchase agreements, the Company may sell
securities subject to a commitment to repurchase them. The securities
are retained on the balance sheet as the Company retains substantially
all the risks and rewards of ownership. The consideration received
is accounted for as a financial liability at fair value through
profit or loss.
Year ended
31 December
2021
Period Period
from 1 from 1
January January
2022 to 2021 to
30 June 30 June
2022 (unaudited) 2021 (unaudited) (audited)
GBP'000 GBP'000 GBP'000
Opening balance (1,916) (8,304) (8,304)
Opening of sale and repurchase agreements (14,641) (19,378) (20,821)
Opening of reverse sale and repurchase
agreements - - 4,166
Closing-out of sale and repurchase
agreements 8,665 19,231 26,437
Closing-out of reverse sale and
repurchase agreements (4,175) (3,898) (3,898)
Movement in unrealised (losses)/gains
in the period (166) 385 301
Realised gains/(losses) in the period 11 (3) 203
------------ ------------ ------------
Total liabilities on sale and repurchase
agreements (12,222) (11,967) (1,916)
------------ ------------ ------------
Sale and repurchase assets at fair
value through profit or loss - - 4,194
Sale and repurchase liabilities
at fair value through profit or
loss (12,222) (11,967) (6,110)
------------ ------------ ------------
Total liabilities on sale and repurchase
agreements (12,222) (11,967) (1,916)
------------ ------------ ------------
Interest paid on sale and repurchase agreements has been accounted
for in the Unaudited Condensed Statement of Comprehensive Income
as it has been incurred. At 30 June 2022 GBPnil (31 December 2021:
GBPnil) interest on sale and repurchase agreements was payable
by the Company.
Options
An option offers the buyer the opportunity to buy or sell an underlying
asset at a stated price within a specified timeframe.
Period Period
from 1 from 1
January January
2022 to 2021 to Year ended
30 June 30 June 31 December
2022 (unaudited) 2021 (unaudited) 2021
(audited)
GBP'000 GBP'000 GBP'000
Opening balance - 7 7
Opening of options - - -
Closure of options - - -
Movement in unrealised losses in the
period - 22 22
Realised losses in the period - (29) (29)
------------ ------------ ------------
Balance receivable on options - - -
------------ ------------ ------------
Option assets at fair value through
profit or loss - - -
Option liabilities at fair value through
profit or loss - - -
------------ ------------ ------------
Balance receivable on options - - -
------------ ------------ ------------
Offsetting of derivative financial instruments
The Company presents the fair value of its derivative assets and
liabilities on a gross basis, no such assets or liabilities have
been offset in the Unaudited Condensed Statement of Financial
Position. Certain derivative financial instruments are subject
to enforceable master netting arrangements, such as ISDA master
netting agreements, or similar agreements that cover similar financial
instruments.
The similar agreements include derivative clearing agreements,
global master repurchase agreements, global master securities
lending agreements, and any related rights to financial collateral.
The similar financial instruments and transactions include derivatives,
sale and repurchase agreements, reverse sale and repurchase agreements,
securities borrowing, and securities lending agreements.
The Company's agreements allow for offsetting following an event
of default, but not in the ordinary course of business, and the
Company does not intend to settle these transactions on a net
basis or settle the assets and liabilities on a simultaneous basis.
The table below sets out the carrying amounts of recognised capital
instruments and short position(s) which could be offset under
the applicable derivative agreements (as described above):
Effect of remaining
rights of offset
that do not
Net amount meet the criteria
Amounts presented for offsetting
Gross offset in Unaudited in the Unaudited
carrying in accordance Condensed Condensed Statement
amount with Statement of Financial
before offsetting of Financial Position - Cash
offsetting criteria Position held as collateral Net exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
30 June 2022 (unaudited)
Financial
assets
Derivatives
(note 16) 37 - 37 - 37
Collateral
accounts
for
derivative
financial
instruments
(note 14) 5,381 - 5,381 (2,091) 3,290
------------ ------------ ------------ ------------ ------------
Total assets 5,418 - 5,418 (2,091) 3,327
------------ ------------ ------------ ------------ ------------
Financial
liabilities
Derivatives
(note 16) (14,314) - (14,314) 10,128 (4,186)
Collateral
accounts
for derivative
financial
instruments
(note 14) - - - - -
------------ ------------ ------------ ------------ ------------
Total
liabilities (14,314) - (14,314) 10,128 (4,186)
------------ ------------ ------------ ------------ ------------
31 December 2021 (audited)
Financial
assets
Derivatives
(note 16) 4,506 - 4,506 (3,932) 574
Collateral
accounts
for
derivative
financial
instruments
(note 14) 4,119 - 4,119 (320) 3,799
------------ ------------ ------------ ------------ ------------
Total assets 8,625 - 8,625 (4,252) 4,373
------------ ------------ ------------ ------------ ------------
Financial
liabilities
Derivatives
(note 16) (6,555) - (6,555) 5,727 (828)
Collateral
accounts
for
derivative
financial
instruments
(note 14) (92) - (92) - (92)
------------ ------------ ------------ ------------ ------------
Total
liabilities (6,647) - (6,647) 5,727 (920)
------------ ------------ ------------ ------------ ------------
17. Fair value of financial instruments at fair value through
profit or loss
The following table shows financial instruments recognised at
fair value, analysed between those whose fair value is based on:
* Quoted prices in active markets for identical assets
or liabilities (Level 1);
* Those involving inputs other than quoted prices
included in Level 1 that are observable for the asset
or liability, either directly (as prices) or
indirectly (derived from prices) (Level 2); and
* Those with inputs for the asset or liability that are
not based on observable market data (unobservable
inputs) (Level 3).
At the period end, the financial assets and liabilities designated
at fair value through profit or loss were as follows:
Level Level Level Total
1 2 3
GBP'000 GBP'000 GBP'000 GBP'000
30 June 2022 (unaudited)
Traded/listed capital instruments at
fair value through profit or loss 89,054 488 - 89,542
Other investments at fair value through
profit or loss (note 7) 1,758 - - 1,758
Credit default swap assets (note 16) - 37 - 37
Credit default swap liabilities (note
16) - (1,266) - (1,266)
Other derivative financial liabilities - (13,048) - (13,048)
------------ ------------ ------------ ------------
90,812 (13,789) - 77,023
------------ ------------ ------------ ------------
31 December 2021 (audited)
Traded/listed capital instruments at
fair value through profit or loss 85.208 241 - 85,449
Other investments at fair value through
profit or loss (note 7) 4,874 - - 4,874
Credit default swap assets (note 16) - 180 - 180
Credit default swap liabilities (note
16) - (308) - (308)
Other derivative financial assets - 4,326 - 4,326
Other derivative financial liabilities (12) (6,223) - (6,235)
Short positions covered by sale and
repurchase agreements - (3,932) - (3,932)
------------ ------------ ------------ ------------
90,070 (5,716) - 84,354
------------ ------------ ------------ ------------
Level 1 financial instruments include listed capital instruments
at fair value through profit or loss, unlisted open ended funds
and bond future contracts which have been valued at fair value
by reference to quoted prices in active markets. No unobservable
inputs were included in determining the fair value of these investments
and, as such, alternative carrying values for ranges of unobservable
inputs have not been provided.
Level 2 financial instruments include broker quoted bonds, credit
default swap agreements, foreign currency forward contracts, sale
and repurchase agreements and options. Each of these financial
investments are valued by the Investment Manager using market
observable inputs. The fair values of the other investments are
based on the market prices of the underlying securities.
The model used by the Company to fair value credit default swap
agreements prices a credit default swap as a function of its schedule,
deal spread, notional value, credit default swap curve and yield
curve. The key assumptions employed in the model include: constant
recovery as a fraction of par, piecewise constant risk neutral
hazard rates and default events being statistically independent
of changes in the default-free yield curve.
The fair values of the derivative financial instruments are based
on the forward foreign exchange rate curve.
The sale and repurchase agreements have been valued by reference
to the notional amount, expiration dates and rates prevailing
at the valuation date.
The options were previously valued using the relevant options
prices curve.
Transfers between levels
Transfers between levels during the period are determined and
deemed to have occurred at each financial reporting date. There
were no investments classified as Level 3 during the period, and
no transfers between levels in the period. See notes 13, 14 and
16 for movements in instruments held at fair value through profit
or loss.
18. Other payables and accruals
30 June 31 December
2022 (unaudited) 2021
(audited)
GBP'000 GBP'000
Due on purchase of capital instruments 473 -
Investment management fee (note 8a) 173 213
Administration fee (note 8b) 34 33
Audit fees 21 21
Other accruals 14 13
Share issue costs 14 14
Depositary fees (note 8e) 14 22
Valuation agent fees (note 8e) 11 11
Broker fee (note 8c) 7 6
Registrar fee (note 8d) 3 1
Performance fee (note 8a) - 298
Accrued interest payable on capital instrument
short position(s) - 17
------------ ------------
764 649
------------ ------------
19. Share capital
30 June 2022 31 December 2021 (audited)
(unaudited)
Number GBP'000 Number GBP'000
Authorised:
Ordinary shares of no par
value Unlimited - Unlimited -
------------ ------------ ------------ ------------
Allotted, called up and fully
paid:
Ordinary Shares of no par
value 91,852,904 - 91,852,904 -
------------ ------------ ------------ ------------
Issued share capital
Number of
shares
------------
Shares in issue as at 30 June
2021, 31 December 2021, 30 June
2022 and 22 August 2022 91,852,904
------------
The Ordinary Shares carry the right to receive all dividends declared
by the Company. Shareholders are entitled to all dividends paid
by the Company and, on a winding up, provided the Company has
satisfied all of its liabilities, the Shareholders are entitled
to all of the surplus assets of the Company. Shareholders will
be entitled to attend and vote at all general meetings of the
Company and, on a poll, will be entitled to one vote for each
Ordinary Share held.
20. Net asset value per Ordinary Share
The NAV per Ordinary Share is based on the net assets attributable
to owners of the Company of GBP87,284,000 (31 December 2021: GBP96,883,000),
and on 91,852,904 (31 December 2021: 91,852,904) Ordinary Shares
in issue at the period end.
The NAV of 95.03p (31 December 2021: 105.48p) per Ordinary Share
disclosed in these financial statements is 0.33p higher (31 December:
0.33p higher) than the NAV of 94.70p (31 December 2021: 105.15p)
per Ordinary Share announced on 4 July 2022 as a result of 50%
of the accrued performance fee, which is due to be settled through
the purchase of shares in the Company, being allocated to the
performance fee reserve (see note 8a for further details of the
performance fee).
21. Changes in liabilities arising from financing activities
The Company did not raise any capital from the placing of new
shares in the period. At the period end GBP14,000 (31 December
2021: GBP14,000) of share issue costs in relation to previous
placings were outstanding, resulting in cash flows in relation
to share issue costs in the period of GBPnil (30 June 2021: GBPnil).
22. Financial instruments and risk management
The Company invests its assets with the aim of spreading investment
risk.
Risk is inherent in the Company's activities, but it is managed
through a process of ongoing identification, measurement and monitoring.
The Company is exposed to market risk (which includes currency
risk, interest rate risk and price risk), credit risk and liquidity
risk from the financial instruments it holds. Risk management
procedures are in place to minimise the Company's exposure to
these financial risks, in order to create and protect Shareholder
value.
Risk management structure
The Investment Manager is responsible for identifying and controlling
risks. The Board of Directors supervises the Investment Manager
and is ultimately responsible for the overall risk management
approach within the Company.
The Company has no employees and is reliant on the performance
of third party service providers. Failure by the Investment Manager,
Administrator, Depositary, Registrar or any other third party
service provider to perform in accordance with the terms of its
appointment could have a significant detrimental impact on the
operation of the Company.
Risk concentration
Concentration indicates the relative sensitivity of the Company's
performance to developments affecting a particular issuer, industry
or geographical location. Concentrations of risk arise when a
number of financial instruments or contracts are entered into
with the same counterparty, or where a number of counterparties
are engaged in similar business activities, or activities in the
same geographic region, or have similar economic features that
would cause their ability to meet contractual obligations to be
similarly affected by changes in economic, political or other
conditions. Concentrations of liquidity risk may arise from the
repayment terms of financial liabilities, sources of borrowing
facilities or reliance on a particular market in which to realise
liquid assets. Concentrations of foreign exchange risk may arise
if the Company has a significant net open position in a single
foreign currency, or aggregate net open position in several currencies
that tend to move together.
Within the aim of maintaining a diversified investment portfolio,
and thus mitigating concentration risks, the Company has established
the following investment restriction in respect of the general
deployment of assets:
Concentration
No more than 15% of NAV, calculated at the time of investments,
will be exposed to any one financial counterparty. This limit
will increase to 20% where, in the Investment Manager's opinion
(having informed the Board in writing of such increase) the relevant
financial institution investment instrument is expected to amortise
such that, within 12 months of the date of the investment, the
expected exposure (net of any hedging costs and expenses) will
be equal to or less than 15% of NAV, calculated at the time of
the investment.
Market risk
i) Price risk
Price risk exposure arises from the uncertainty about future prices
of financial instruments held. It represents the potential loss
that the Company may suffer through holding positions in the face
of price movements. The investments in capital instruments, unlisted
open ended funds and bond futures at fair value through profit
or loss (see notes 13, 16 and 17) are exposed to price risk and
it is not the intention to mitigate the price risk.
At 30 June 2022, if the valuation of these investments at fair
value through profit or loss had moved by 5% with all other variables
remaining constant, the change in net assets would amount to approximately
+/- GBP4,565,000 (31 December 2021: GBP4,319,000). The fair value
of financial instruments exposed to price risk at 30 June 2022
was GBP91,299,000 (31 December 2021: GBP86,380,000).
ii) Foreign currency risk
Foreign currency risk is the risk that the value of a financial
instrument will fluctuate because of changes in foreign currency
exchange rates. Currency risk arises when future commercial transactions
and recognised assets and liabilities are denominated in a currency
that is not the Company's functional currency. The Company invests
in securities and other investments that are denominated in currencies
other than Sterling. Accordingly, the value of the Company's assets
may be affected favourably or unfavourably by fluctuations in
currency rates and therefore the Company will necessarily be subject
to foreign exchange risks.
In order to limit the exposure to foreign currency risk, the Company
entered into hedging contracts during the period. At the period
end, the Company held the following foreign currency forward contracts:
30 June 2022 (unaudited)
Maturity date Amount to Amount to be purchased
be sold
5 August 2022 EUR53,822,000 GBP45,719,000
5 August 2022 US$6,086,000 GBP4,881,000
31 December 2021 (audited)
Maturity date Amount to Amount to be purchased
be sold
27 January 2022 EUR47,498,000 GBP40,124,000
27 January 2022 US$7,887,000 GBP5,711,000
As at the period end a proportion of the net financial assets
of the Company were denominated in currencies other than Sterling,
as follows:
Investments
at fair Foreign
value through currency
profit or Cash and forward
loss Receivables cash equivalents Exposure contracts Net exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
30 June 2022 (unaudited)
Euro 41,950 1,015 457 43,422 (46,428) (3,006)
US Dollars 2,694 14 2,084 4,792 (4,997) (205)
Swiss Francs - - 41 41 - 41
------------ ------------ ------------ ------------ ------------ ------------
44,644 1,029 2,582 48,255 (51,425) (3,170)
------------ ------------ ------------ ------------ ------------ ------------
31 December 2021 (audited)
Euro 40,361 1,593 (693) 41,261 (39,991) 1,270
US Dollars 4,952 11 371 5,334 (5,835) (501)
------------ ------------ ------------ ------------ ------------ ------------
45,313 1,604 (322) 46,595 (45,826) 769
------------ ------------ ------------ ------------ ------------ ------------
Other future foreign exchange hedging contracts may be employed,
such as currency swap agreements, futures contracts and options.
There can be no certainty as to the efficacy of any hedging transactions.
At 30 June 2022, if the exchange rates had strengthened/weakened
by 5% against Sterling with all other variables remaining constant,
net assets at 30 June 2022 would have decreased/increased by GBP159,000
(31 December 2021: GBP38,000).
ii) Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect future cash flows or the fair values
of financial instruments. The Company is exposed to risks associated
with the effects of fluctuations in the prevailing levels of market
interest rates on its financial instruments and cash flow. A large
number of the capital instruments bear interest at a fixed rate,
but capital instruments to the value of GBP64,613,000 (31 December
2021: GBP54,572,000), cash and cash equivalents, net of overdrafts,
of GBP4,009,000 (31 December 2021: GBP7,020,000), collateral account
balances of GBP5,381,000 (31 December 2021: GBP4,027,000) and
short position(s) of GBPnil (31 December 2021: GBPnil) were the
only interest-bearing financial instruments subject to variable
interest rates at 30 June 2022. Therefore, if interest rates had
increased/decreased by 50 basis points, with all other variables
remaining constant, the change in the value of interest cash flows
of these assets in the period would have been GBP377,000 (31 December
2021: +/- GBP344,000).
Fixed Variable Non-interest
interest interest bearing Total
30 June 2022 (unaudited) GBP'000 GBP'000 GBP'000 GBP'000
Financial assets
Investments at fair value through
profit or loss 17,306 64,613 9,381 91,300
Cash and cash equivalents - 4,009 - 4,009
Collateral accounts for derivative
financial instruments at fair value
through profit or loss - 5,381 - 5,381
Derivative financial assets at fair
value through profit or loss 37 - - 37
Other receivables - - 1,635 1,635
----------- ------------ ------------ ------------
Total financial assets 17,343 74,003 11,016 102,362
------------ ------------ ------------ ------------
Financial liabilities
Derivative financial liabilities
at fair value through profit or loss (13,488) - (826) (14,314)
Other payables and accruals - - (764) (764)
Bank overdrafts - - - -
Collateral accounts for derivative
financial instruments at fair value
through profit or loss - - - -
----------- ------------ ------------ ------------
Total financial liabilities (13,488) - (1,590) (15,078)
------------ ------------ ------------ ------------
Total interest sensitivity gap 3,855 74,003 9,426 87,284
----------- ------------ ------------ ------------
31 December 2021 (audited)
Financial assets
Investments at fair value through
profit or loss 18,363 54,572 17,388 90,323
Cash and cash equivalents - 7,713 - 7,713
Collateral accounts for derivative
financial instruments at fair value
through profit or loss - 4,119 - 4,119
Derivative financial assets at fair
value through profit or loss 4,374 - 132 4,506
Other receivables - - 2,143 2,143
----------- ------------ ------------ ------------
Total financial assets 22,737 66,404 19,663 108,804
----------- ------------ ------------ ------------
Financial liabilities
Bank overdrafts - (693) - (693)
Collateral accounts for derivative
financial instruments at fair value
through profit or loss - (92) - (92)
Derivative financial liabilities
at fair value through profit or loss (6,418) - (137) (6,555)
Short position(s) covered by sale
and repurchase agreements - (3,932) - (3,932)
Other payables and accruals - - (649) (649)
----------- ------------ ------------ ------------
Total financial liabilities (6,418) (4,717) (786) (11,921)
----------- ------------ ------------ ------------
Total interest sensitivity gap 16,319 61,687 18,877 96,883
----------- ------------ ------------ ------------
It is estimated that the fair value of the fixed interest and
non-interest bearing capital instruments of GBP26,687,000 (31
December 2021: GBP35,751,000) at 30 June 2022 would increase/decrease
by +/-GBP689,000 (0.75%) (31 December 2021: +/-GBP551,000 (0.61%))
if interest rates were to change by 50 basis points.
The Investment Manager manages the Company's exposure to interest
rate risk, paying heed to prevailing interest rates and economic
conditions, market expectations and its own views as to likely
movements in interest rates.
Although it has not done so to date, the Company may implement
hedging and derivative strategies designed to protect investment
performance against material movements in interest rates. Such
strategies may include (but are not limited to) interest rate
swaps and will only be entered into when they are available in
a timely manner and on terms acceptable to the Company. The Company
may also bear risks that could otherwise be hedged where it is
considered appropriate. There can be no certainty as to the efficacy
of any hedging transactions.
Credit risk
Credit risk is the risk that a counterparty to a financial instrument
will fail to discharge an obligation or commitment that it has
entered into with the Company, resulting in a financial loss to
the Company.
At 30 June 2022, credit risk arose principally from investment
in capital instruments of GBP89,542,000 (31 December 2021: GBP85,449,000),
cash and cash equivalents of GBP4,009,000 (31 December 2021: GBP7,713,000),
balances held as collateral for derivative financial instruments
at fair value through profit or loss of GBP5,381,000 (31 December
2021: GBP4,119,000) and investments in sale and repurchase assets
of GBPnil (31 December 2021: GBP4,194,000). The Company seeks
to trade only with reputable counterparties that the Investment
Manager believes to be creditworthy. The credit rating of cash
and collateral counterparties is sufficient that no expected credit
loss or provision for impairment is considered necessary.
The Investment Manager manages the Company's credit risk by investing
in a diverse portfolio of capital instruments, in line with the
Prospectus. At 30 June 2022, the capital instrument rating profile
of the portfolio was as follows:
30 June 31 December
2022 2021
(unaudited) (audited)
Percentage Percentage
BBB 6.48 7.93
BB 24.67 19.34
B 21.99 16.90
Below B 3.15 9.89
No rating 43.71 45.94
------------ ------------
100.00 100.00
------------ ------------
The investments without a credit rating correspond to issuers
that are not rated by an external rating agency. Although no external
rating is available, the Investment Manager considers and internally
rates the credit risk of these investments, along with all other
investments. The internal risk score is based on the Investment
Manager's fundamental view (stress test, macro outlook, solvency,
liquidity risk, business mix, and other relevant factors) and
is determined by the Investment Manager's risk committee. The
risk grades are mapped to an external Baseline Credit Assessment,
and any discrepancy of more than two notches is monitored closely.
The cash pending investment may be held without limit with a financial
institution with a credit rating of A-1 (Standard & Poor's) or
P-1 (Moody's) to protect against counterparty failure.
The Company may implement hedging and derivative strategies designed
to protect against credit risk. Such strategies may include (but
are not limited to) credit default swaps and will only be entered
into when they are available in a timely manner and on terms acceptable
to the Company. The Company may also bear risks that could otherwise
be hedged where it is considered appropriate. There can be no
certainty to the efficacy of hedging transactions.
Due to the Company's investment in credit default swap agreements
the Company is exposed to additional credit risk as a result of
possible counterparty failure. The Company has entered into ISDA
contracts with Credit Suisse, JP Morgan and Goldman Sachs. JP
Morgan and Goldman Sachs are rated A+, whilst Credit Suisse's
credit rating was downgraded in the period to BBB. At 30 June
2022, the overall net exposure to these counterparties was 4.47%
of NAV (31 December 2021: 3.62%). The collateral held at each
counterparty is disclosed in note 14.
Liquidity risk
Liquidity risk is defined as the risk that the Company will encounter
difficulties in realising assets or otherwise raising funds to
meet financial commitments. The principal liquidity risk is contained
in unmatched liabilities. The liquidity risk at 30 June 2022 was
very low since the ratio of cash and cash equivalents (net of
overdrafts) to unmatched liabilities was 5:1 (31 December 2021:
11:1).
In addition, the Company diversifies the liquidity risk through
investment in capital instruments with a variety of maturity dates,
as follows:
30 June 31 December
2022 2021
(unaudited) (audited)
Percentage Percentage
Less than 1 year 5.32 15.99
1 to 3 years 38.70 26.88
3 to 5 years 24.85 24.75
5 to 7 years 3.42 1.59
7 to 10 years 2.30 2.92
More than 10 years 25.41 27.87
------------ ------------
100.00 100.00
------------ ------------
As at 30 June 2022, the Company's liquidity profile was such that
69.7% of investments were realisable within one day (31 December
2021: 63.6%), 25.5% was realisable between two days and one week
(31 December 2021: 32.3%) and 4.8% was realisable between eight
days and one month (31 December 2021: 4.1%).
As at 30 June 2022, the Company's liabilities fell due as follows:
30 June 31 December
2022 2021
(unaudited) (audited)
Percentage Percentage
0 to 3 months 56.74 71.52
3 to 6 months 41.65 -
6 to 12 months 0.98 -
1 to 3 years 0.63 28.48
------------ ------------
100.00 100.00
------------ ------------
23. Capital management policy and procedures
The Company's capital management objectives are:
* to ensure that it will be able to meet its
liabilities as they fall due; and
* to maximise its total return primarily through the
capital appreciation of its investments.
Pursuant to the Company's Articles of Incorporation, the Company
may borrow money in any manner. However, the Board has determined
that the Company should borrow no more than 20% of direct investments.
The Company uses sale and repurchase agreements to manage the
gearing of the Company. As at 30 June 2022 the Company had ten
(31 December 2021: eight) open sale and repurchase agreements,
none (31 December 2021: one) of which were reverse sale and repurchase
agreements, committing the Company to make a total repayment of
GBP12,222,000 post the period end (31 December 2021: GBP6,110,000).
As a result of the reverse sale and repurchase agreements, the
Company was due to receive GBPnil after the period end (31 December
2021: GBP4,194,000).
The raising of capital through the placing programme forms part
of the capital management policy. See note 19 for details of the
Ordinary Shares issued since incorporation.
As disclosed in the Unaudited Condensed Statement of Financial
Position, at 30 June 2022, the total equity holders' funds were
GBP87,284,000 (31 December 2021: GBP96,883,000).
24. Capital commitments
The Company holds a number of derivative financial instruments
which, by their very nature, give rise to capital commitments
post 30 June 2022. These are as follows:
* At the period end, the Company had sold four credit
default swap agreements for a total of GBP470,000,
each receiving quarterly interest (31 December 2021:
five agreements for GBP457,000). The fair value of
these agreements at the period end date was
GBP(1,198,000) (31 December 2021: GBP86,000).
Collateral of GBP3,860,000 for these agreements was
held at 30 June 2022 (31 December 2021:
GBP3,328,000).
* At the period end the Company had committed to two
(31 December 2021: two) foreign currency forward
contracts dated 5 August 2022 (see note 22), giving
rise to a total loss of GBP826,000 (31 December 2021:
gain of GBP7,000).
* At the period end, the Company held ten open sale and
repurchase agreements (31 December 2021: seven,
excluding the one reverse sale and repurchase
agreement) committing the Company to make a total
repayment of GBP12,222,000 (31 December 2021:
GBP6,310,000).
25. Contingent assets and contingent liabilities
In line with the terms of the Investment Management Agreement,
as detailed in note 8a, should the Company's NAV reach a level
at which the TER reduced to less than 1.5% of the average NAV
in a future accounting period then the Quarterly Expenses Excess
and Annual Expenses Excess totalling GBP824,000 at 30 June 2022
(31 December 2021: GBP777,000) would become payable to the Investment
Manager, to the extent that the total expenses including any repayment
did not exceed 1.5% of the average NAV for that period.
For a significant amount of the GBP824,000 (31 December 2021:
GBP777,000) Expenses Excess to become payable within the foreseeable
future, the NAV would have to increase considerably. The Directors
consider that it is possible, but not probable, that an increase
in the NAV leading to a significant payment of the Expenses Excess
will be achieved in the foreseeable future. Accordingly, the possible
payment to the Investment Manager has been treated as a contingent
liability in the financial statements.
There were no other contingent assets or contingent liabilities
in existence at the year end.
26. Events after the financial reporting date
On 25 July 2022, the Company declared a dividend of 1.50p per
Ordinary Share for the period from 1 April 2022 to 30 June 2022,
out of the profits for the period ended 30 June 2022, which (in
accordance with IFRS) was not provided for at 30 June 2022 (see
note 6). This dividend will be paid on 26 August 2022.
The Company announced on 18 August 2022 that the Board has determined
that it would not be in Shareholders' best interests to continue
the Company in its present form and intends to put forward alternative
proposals to offer Shareholders the option of receiving cash at
NAV (less costs, including any portfolio realisation expenses)
for some or all of their shareholding and/or to continue some
or all of their investment in an open-ended vehicle managed by
Axiom AI. That vehicle will have a similar investment strategy
to that which the Company would have proposed if it were to continue
to operate as a closed-ended listed investment company. In order
to effect the proposals, it is expected that the existing Company
will be liquidated. In order to limit future expenses, on 11 August
2022, the Company gave the Investment Manager 12 months' protective
notice of the termination of the Investment Management Agreement.
The Board, together with Axiom AI and the Company's advisers,
is working on formal proposals to be put to Shareholders and will
make a further announcement with details in due course. The Board's
aim is for the proposals to be put to Shareholders early in 2023
and, assuming Shareholder approval is received, for the transaction
to be completed as soon as reasonably practicable thereafter.
-- ENDS --
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IR QLLFLLVLFBBF
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