TIDMAXI
RNS Number : 7754T
Axiom European Financial Debt Fd Ld
22 March 2023
22 March 2023
Axiom European Financial Debt Fund Limited
("Axiom" or the "Company")
Annual Financial Report
For the year ended 31 December 2022
A robust performance in a challenging market - Reassuring outlook
and positive start to 2023
Axiom European Financial Debt Fund Limited, a closed-ended Guernsey
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 Annual Financial Report for the year
ended 31 December 2022.
Highlights ([1])
31 December 31 December
2022 2021
Published net assets GBP84,901,000 GBP96,585,000
Published NAV per Ordinary Share ([1]) 92.43p 105.15p
Share price 84.00p 95.50p
Discount to Published NAV (9.12)% (9.18)%
(Loss/)/profit for the year GBP(6,172,000) GBP14,746,000
Dividend per share declared in respect
of the year 6.00p 6.00p
Total (loss)/return per Ordinary Share
(based on the Published NAV) (6.39)% 16.88%
Total (loss)/return per Ordinary Share
(based on share price) (5.76)% 15.34%
Ordinary Shares in issue at year end 91,852,904 91,852,904
[1] These are Alternative Performance Measures. Please see note
22 for a reconciliation of the NAV per Ordinary Share of 92.76p
(2021: 105.48p) to the Published NAV per Ordinary Share of
92.43p (2021: 105.15p).
Financial Highlights
* Total returns for the 12 months were -6.39% (FY21:
16.88%), reflecting the challenging market conditions
during 2022 with rising inflation and interest rates
* Positive NAV return per share in the second half of
0.77%, partly clawing back first half deficit
* Four quarterly dividend payments, each of 1.50p per
share, declared during the year bringing the total
dividend declared for the period to 6.00p
Outlook
* Our asset class and sector remains attractive in
light of rising interest rates which are in general
good for the European banking and financials sector
* Encouraging start for 2023 with positive returns in
January and February reflecting solid sector results
season to date
Update on AEFD's Future
* The Board continues to believe that the sector and
Company present investors with attractive returns
* However, as stated at the half-year, the Board has
concluded that there is insufficient investor demand
for the current closed-ended listed structure
* The Company's advisers are currently working on
proposals that will be published shortly and put to
shareholders at a general meeting in May 2023 in
regards to the future of the of the Company
William Scott, Chairman, commented:
"The Company's portfolio generated a positive NAV return per
share, including dividends and net of all expenses, over the
second half of the year, partly clawing back the first half deficit.
Given the volatile market conditions that saw a period of sharply
rising short-term rates and long-term yields, we believe this
is a creditable result.
"The outlook for our strategy is now more positive. Rising interest
rates are in general good for banks, enabling wider spreads between
lending and deposit rates and we have seen robust performances
from banks as they have reported their results. Returns on equity
have been strong, interest margins widened, and non-performing
loans have remained at low levels.
"We look forward with renewed optimism for the market in regulatory
capital instruments issued by financial institutions in which
we operate and where, through the open-ended rollover option,
continuing shareholders can benefit from the application of our
Investment Manager's specialist skills to a rich opportunity
set which is not easily accessible to more generalist managers."
Antonio Roman, Investment Manager, said:
"Last year will be remembered as being a particularly difficult
period for the bond market. The conjunction of global monetary
tightening and the war in Ukraine resulted in an exceptionally
fast increase in interest rates combined with a significant widening
of credit spreads.
"Despite this, European banks' fundamentals remained strong throughout
the year and as the conditions improved, their performance improved,
spreads tightened and the fund was able to claw back some of
the first half deficit during the latter part of the year.
"Although the fallout from the collapse of Silicon Valley Bank
and the situation at Credit Suisse have caused a significant
sell-off across global bank stocks, we are reassured by rapid
actions of regulators and governments to limit the impact and
by the robust solvency of the majority of European banks."
"In 2023, bank credit investors will also have to navigate the
cross-currents induced by monetary tightening but we continue
to view the Company as being well positioned to capture the many
opportunities arising from a higher interest rates environment."
Enquiries to:
Axiom Alternative Investments Elysium Fund Management MHP Communications
SARL Limited Reg Hoare
David Benamou PO Box 650 Charles Hirst
Gildas Surry 1(st) Floor, Royal Chambers
Antonio Roman St Julian's Avenue
Jerome Legras St Peter Port
Guernsey
GY1 3JX
axiom@mhpc.com
www.axiom-ai.com axiom@elysiumfundman.com Tel: +44 20 3128
Tel: +44 20 3807 0670 Tel: +44 1481 810 100 8193
A copy of the Company's Annual Report and Financial Statements
for the year ended 31 December 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.
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.
Proposals for the liquidation of the Company
The Board will shortly put forward proposals for the liquidation
of the Company, including the ability for Shareholders to receive
shares, in respect of their holdings of the Company's Ordinary
Shares, in a new open-ended fund managed by the same management
team and with a similar investment mandate to the Company. The
Board believes that these proposals will provide continuity for
those Shareholders in terms of exposure to a strategy similar
to the one currently pursued by the Company and under the same
management team. The New Fund, AUFC, which will be a new Compartment
of Axiom Lux SICAV, an established Luxembourg SICAV that is registered
as a UCITS with the Luxembourg financial regulator, the Commission
de Surveillance du Secteur Financier, will be open-ended with
daily liquidity. The proposals will also include a mechanism for
those Shareholders who do not wish to continue their investment
to achieve a cash exit.
Further details of the Proposals for the implementation of the
Scheme will be described in the Circular, which, when finalised,
will be made available on the Company's section of the Investment
Manager's website
(https://axiom-ai.com/web/en/axiom-european-financial-debt-fund-limited-2/).
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 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://www.axiom-ai.com/web/data/prospectus/ENG/AEFD-prospectus-UK.pdf
).
The following text is extracted from the Annual Report and Financial
Statements of the Company for the year ended 31 December 2022:
Strategic Report
Chairman's Statement
The Company's portfolio generated a positive NAV return per share
(based on the Published NAV) including dividends and net of all
expenses of 0.77% over the second half of the year, partly clawing
back the first half deficit to give a net negative result of 6.39%
for 2022 as a whole (2021: +16.88%).
When I wrote to you with our 2022 Half Year results in August,
I noted that the Company's returns in the first half of the year
had been line with what one would expect at that point in the
interest cycle, that is when interest rates begin to rise. The
normalisation of interest rates after the decade-plus long period
of extremely low interest rates post the Global Financial Crisis
of 2008 has continued apace to the point where we and the wider
markets can now anticipate the imminent ending of that process
even if we cannot be definitive as to exactly when or at what
level. Further, different countries and blocs with their own currencies
will reach their individual equilibrium points at different times.
The nature of markets is to anticipate the future and the various
markets in bonds are no exception and therefore, in general, have
now adjusted to the new normal levels of yield and the pattern
of positive returns largely from coupon payments is beginning
to reassert itself. For a strategy such as ours, the added value
from active portfolio management is also coming to the fore again
as markets stabilised in the final quarter of 2022.
Further details on the development of key market events and activity
in the portfolio are given in the Investment Manager's Report.
Up to the end of 2021, our three-year NAV return was +39.09% or
+11.63% p.a. The negative result for 2022 has consequently brought
the four-year figures to +30.9% and +6.96% p.a. While this is
behind our long-term target of +10% p.a., net of operating expenses,
it is a creditable result in the context of including a period
of sharply rising short-term rates and long-term yields.
In aggregate, the Company reported a net loss for the year ended
31 December 2022 of GBP6.17 million (2021: profit of GBP14.75
million), representing a loss per Ordinary Share of 6.72p (2021:
earnings of 16.05p) and the Company's NAV at 31 December 2022
was GBP85.20 million (92.76p per Ordinary Share) (2021: GBP96.88
million, 105.48p per Ordinary Share). Over the full year, the
share price discount to NAV remained broadly steady at 9.12% at
the end of 2022 (2021: 9.18%).
Dividends
As in prior years, the Company declared four dividends each of
1.50p per Ordinary Share in relation to the year: one was declared
after the balance sheet date and was paid on 24 February 2023
to Shareholders on the register at 3 February 2023. During the
period, actual payments of 6.00p were made, being the May, August
and November dividends of 1.50p each and the 1.50p dividend in
respect of the period ended 31 December 2021, which was paid on
25 February 2022.
Proposals for the future of the Company
When I wrote to you with our Half Year results in August 2022,
I reported that the conclusion of our consultation with Shareholders
was that while many larger Shareholders wished to remain invested
in an evolved strategy reflecting the changing opportunity set
since the launch of the Company, they would prefer to do so through
an open-ended structure rather than a closed-ended investment
company. The Board's conclusion remains 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.
Our advisers are currently working on proposals anticipated to
be published shortly and put to Shareholders at a general meeting.
In broad terms, these are designed to give those who wish to continue
in the evolved strategy the opportunity to do so via an open-ended
vehicle and those who do not, a cash exit. The existing Company
will consequently be liquidated.
Outlook
The outlook for our strategy is positive. Rising interest rates
are in general good for banks, enabling wider spreads between
lending and deposit rates and we have seen robust performances
from banks as they have reported their results. Returns on equity
have been strong, interest margins widened, and non-performing
loans have remained at low levels.
The background to our principal industry sector as a whole therefore
remains positive.
Of course, what is true for the industry in general is not necessarily
true for all participants and sharply rising interest rates have
exposed weaknesses at some institutions while others have exhibited
their own idiosyncrasies, provoking a nervous depositor base to
withdraw funds in classic bank runs and we have seen several high-profile
examples in recent weeks, including one in our own universe of
European banks, Credit Suisse. Although Credit Suisse was one
of our panel of prime brokers, we had no counterparty exposure
outstanding at the year-end nor any subsequently and in any event
no customer has suffered losses as a result of its near-collapse.
The same cannot be said for the AT1 bonds of Credit Suisse which
have been wiped out by regulatory fiat as part of the transaction
which has reportedly placed a $3.25 billion value on the Credit
Suisse equity. This appears to a very strange decision in that
it reverses the established order of insolvency whereby ordinary
shareholders bear the first tranche of losses. This may yet have
unintended consequences and set a dangerous precedent. As at the
time of writing, the market is still digesting this news. Non-Swiss
regulators, being the Single Resolution Board, the European Banking
Authority, ECB Banking Supervision and the Bank of England have
moved swiftly to give clarity to the markets that they will continue
to follow the established hierarchy of capital instruments and
the absorption of losses in a resolution or insolvency intervention.
We had a small exposure of approximately 1% of NAV at the year
end to Credit Suisse AT1 bonds. While we have suffered a loss
of that capital, it is to be expected from time to time that such
things will happen even in carefully-managed portfolios.
Inflation is still elevated but appears to have reached a steady
level and may soon fall back quite sharply as the pre-Ukrainian
war price index levels drop out of the trailing 12-month comparison.
The immediate danger to that trajectory is the extent to which
this past consumer price inflation becomes baked into future inflation
through significant current wage settlements, understandable as
those are given the margin by which inflation has outstripped
wages over the past year and the consequent erosion of living
standards for workers. This may lead to interest rates remaining
higher for longer than would otherwise be the case.
We look forward with renewed optimism for opportunities in the
market in regulatory capital instruments issued by financial institutions
in which we operate and where, through the open-ended rollover
option, continuing shareholders can benefit from the application
of our Investment Manager's specialist skills to a rich opportunity
set which is not easily accessible to more generalist managers.
William Scott
Chairman
21 March 2023
Investment Manager's Report
1- Market developments
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 Société
Générale, 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.
July
Risk assets rallied in July as company earnings and economic activity
surprised to the upside, especially in Europe. The Subfin index
tightened by 45 bps to close the month at 204 bps. STOXX Europe
companies reported revenues and earnings respectively 4% and 5%
higher than expected. Within the European banking sector, revenues
were 5% higher and earnings 30% higher. The SX7R ended the month
at 1.66% vs. 7.74% for the SXXR.
Bank earnings were boosted by solid growth in lending volumes
and expanding margins as higher interest rates started to flow
through the P&L. 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. Trading was
strong in macro products and equities. Capital markets 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 designed to contain
excessive widening in sovereign spreads. The tool was approved
unanimously, has infinite capacity (no limit on the amount of
securities purchased) and is only constrained by indicative conditions,
giving the ECB unprecedented market and therefore, political power.
A new time-limited banking tax is being discussed in Spain. If
voted, it should take away close to 10% of Spanish banks' 2022
and 2023 earnings, assuming extra costs are not passed on to customers.
It is not clear yet what the position of regulators will be on
this tax, as banks are typically required by the EBA to reflect
the cost of taxes in their lending margins. Similar measures are
discussed in the Czech Republic.
August
August was a hectic month for markets as inflation and energy
remained at the forefront of investors' concerns. Hawkish central
banks sent bonds lower with Bund yields touching 1.54%, 10Y gilts
at 2.80% and 10Y USTs at 3.19%. The Subfin and Xover ended the
month wider at 240 bps and 588 bps, respectively. Banks outperformed
the market, with the SX7R returning -1.1% vs. -5.1% for the SXXR.
Newsflow was dominated by energy supply risks as Russia announced
a full stop to NS1. This brings total Russian gas cuts to 80%
of pre-invasion flows. Should Russia stop all exports, simulations
show that further demand cuts would be necessary in case of a
cold winter. The size of household and business support programs
announced to date in the EU equals c. 2.5% of GDP (3.5% in Greece,
3% in Italy and 2% in Germany).
Bank analysts continued to restrike their earnings expectations
higher as sensitivity to interest rates and strong lending outweighed
salary inflation and a more prudent credit losses outlook. Price
/ book ratios at 0.5x are consistent with an average deflationary
recession being priced in. While the typical recession knocks
out 40% of bank earnings, our pessimistic scenario only sees a
15% impact with inflation and rates supporting revenues. As such,
we believe earnings resilience should provide support at these
levels. Q3 results could be a catalyst for a rally should energy
concerns not worsen.
On the primary front, August was one of the busiest months in
recent memory, with significant new issues volume across the cap
structure. Banks are adopting a more economic approach to redemptions.
Volksbank Wien announced that it will not exercise the call on
its T2 note. This is the second T2 extension this year after Deutsche
Pfandbriefbank.
September
September saw FX and interest rate volatility add to already elevated
risk premia across European assets. Gilts were especially erratic,
with 10Y rates moving by over 100 bps in a single day. The Subfin
and the Xover closed the month at 286 bps and 650 bps respectively.
The SXXR returned -6.43% versus -4.65% for the SX7R.
The market backdrop remains difficult to navigate as instability
in key benchmarks makes a fertile ground for fear mongering, speculative
attacks and negative feedback loops. During the UK mini-budget
episode, a legitimate initial move in sterling and rates was precipitated
by pension funds having to fire-sell their long duration holdings
due to the inadequate liquidity of their asset-liability management
strategies. Elsewhere, unsubstantiated rumors about Credit Suisse
being insolvent triggered a short-lived panic that sent their
AT1s 15 points lower and revived fears of a "Lehman moment" in
Europe.
Despite all the noise, fundamentals remain bullish for European
banks. We expect Q3 and Q4 results to reflect the continued expansion
of volumes and margins as well as low and stable default rates.
Tighter monetary policy is boosting net interest margins, and
ample capital and funding buffers are supporting lending volumes,
while strong job markets and accommodative fiscal policies are
keeping defaults very low. Market volatility has remained a source
of profits for most trading floors.
October
Risk assets rallied in October as central banks were seen to favour
smaller interest rate hikes going forward. The Subfin tightened
as of 31/1/0/2022 by over 50 bps to close the month at 213 bps.
The SX7R returned +8.39% vs. +6.35% for the SXXR.
Economic data painted a picture of soft growth and entrenched
inflation. Annualized Q/Q GDP growth for the third quarter came
at +2.6% in the US and +0.9% in the EU. Despite poor consumer
and business sentiment, job creations remained robust on both
sides of the Atlantic. EU October inflation numbers surprised
to the upside, due to energy, food and industrial goods. Prices
of services showed a notable deceleration.
European bank earnings have been strong with little signs of asset
quality deterioration. Future guidance was optimistic, with the
exception of UK banks which have pre-emptively built up larger
reserves. On aggregate, revenues came up 5% higher than analyst
expectations, driven by strong net interest income and trading,
while earnings came 20% better. Compared to last year, revenues
and earnings were resp. 13% and 20% higher. Banks that showed
inferior cost control underperformed.
In other news, the ECB took actions on TLTRO, removing the arbitrage
for banks as expected. Remuneration of excess reserves was not
mentioned, which is encouraging. Asian markets have seen a plunge
in the valuation of AT1s and perpetual insurance securities after
the Australian regulator warned against non-economic calls and
a South Korean insurer skipped a call.
November
Risk assets rallied in November as inflation showed signs of easing
and the Fed appeared more concerned about the risk of overtightening.
The Subfin ended the month 36 bps tighter at 184bps. The SX7R
returned 9.14% versus 6.89% for the SXXR.
The macroeconomic outlook remained hotly debated as leading indicators
kept sending confusing signals on the strength of nominal demand.
On the one hand, rate sensitive sectors are starting to show signs
of weakness, with manufacturing surveys, the housing market and
layoffs in the technology sector pointing to a recession. On the
other hand, continuing wage pressures and labour market strength,
along with high cash buffers, allow consumer spending to keep
growing in real terms despite rock bottom saving rates. Banks'
lending capacity, boosted by public sector guarantees, continues
to fuel high credit creation, though at a declining pace. The
need to reinvest in supply chains, clean energy and sovereignty
is also driving higher capital spending, a feature that is usually
not associated with recessions.
In bank specific news, Credit Suisse published another profit
warning outlining strong outflows in the Asian wealth management
division in October. However, the CEO later explained that outflows
started to reverse in November. HM Treasury released the response
to its Solvency II consultation, recommending a 65% decrease in
the risk margin for life insurers and a 30% reduction for non-life
insurance companies, along with a broadening of the eligible asset
universe for the Matching Adjustment mechanism. AIB disclosed
improved medium-term targets for 2024 - RoTE >13%, CET1 >13.5%
and a c. 50% cost income ratio.
In credit, BCP was the latest issuer to decide not to call its
T2 notes; however, the bank offered an exchange of the old bond
into a new T2 (similar transactions were proposed by Banca Ifis
and Shawbrook recently). Nationwide indicated its intention to
carry CCDS buybacks.
December
Banks outperformed the market in December as economic data surprised
to the upside while central banks guided to more rate hikes than
anticipated. The SX7R returned +0.08% vs -3.38% for the SXXR.
The Subfin closed 10 basis points tighter at 174 bps. Rates sold
off vigorously, with Bunds and 10Y Treasuries ending the month
at 2.55% and 3.87%, respectively.
The ECB raised rates 50 bps as expected and set initial parameters
for QT with reinvestments to fall by EUR15bn per month from March
2023. Mrs. Lagarde shocked the market by explicitly committing
to further 50 bps rate hikes. As a result, the implied peak rate
climbed from 3% to 3.5%. In his press conference, Chairman Powell
focused on the labour market, emphasizing the high number of vacancies
and strong wage pressures. The final surprise came from the BoJ,
which raised its Yield Curve Control cap on 10Y JGBs from +25bps
to +50bps.
Monetary data pointed to slowing but still dynamic bank lending
in the Euro area. Credit growth to non-financials corporations
remained strong at 8.4% YoY, slightly lower than the 8.9% in the
previous two months. Among the major countries, Ireland, Greece,
Germany, Austria and Finland all saw double digit growth rates.
For households, the growth was little changed at 4.1% from 4.2%
in October. Month-on-month, total customer deposits were unchanged
(higher term deposits offsetting lower sight deposits) while loan
volumes were slightly up.
On the regulatory front, the UK is preparing a review of the ring
fencing rules as a post-Brexit plan to reduce the burden on smaller
lenders. The EBA published the results of its Risk Assessment
Report: it noted elevated but declining levels of capital and
liquidity, improving profitability and low NPL ratios. It warned
against potential IT risks and highlighted the rising level of
Stage 2 assets.
In bank specific news, HSBC announced that it had agreed to sell
its Canadian business to RBC for a cash consideration of CAD 13.5bn
(an impressive price of 2.5x P/B). The bank said it expected to
distribute most of the surplus generated through exceptional dividends
or buybacks but would also consider organic growth and investment
opportunities. Moody's upgraded the Co-operative Bank's ratings
from B1 to Ba3. The upgrade reflects the improving profitability
and the higher capital buffers. UBS announced the redemption of
its $2bn 5% 23P AT1 on its first call date. NatWest announced
the redemption of legacy NWG 11.5 Perp at the make-whole level.
There was GBP31mn left outstanding and NatWest will take a P&L
charge of c.GBP45mn on the transaction. Standard Chartered consent
solicitation for modifying the reference rate from LIBOR to SOFR
on its 7.014% and 6.409% preference shares failed to reach the
75% approval threshold.
2- Investment Objective and Strategy
The Company is a closed-ended fund investing in liabilities issued
by European financial institutions, predominantly legacy T1s,
T2s, and AT1s across five sub-strategies:
* Liquid Relative Value: instruments issued by large
and strong quality institutions, with significant
liquidity. These can be purchased on either primary
or secondary markets.
* Less Liquid Relative Value: instruments issued by
large and strong quality institutions, with limited
liquidity due to past tenders or complex features
(secondary market).
* Restructuring: instruments issued by institutions in
preparation or implementation of a restructuring
process (secondary market).
* Special Situations: instruments issued by entities in
run-off, under a merger process or split between
several entities (secondary market).
* Midcap Origination: instruments issued by small
institutions or small subsidiaries of larger
institutions (primary market).
3- Company activity
January
In 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.
July
In Liquid Relative Value, we added Athora and RBI to our AT1 positions.
In Midcap Origination, we slightly increased our investment in
eSure.
August
In Liquid Relative Value, we reduced the Company's exposure to
Intesa and Credito Emiliano while we
opened a position in Virgin Money 8.25% AT1s.
In Midcap Origination, we sold some Banca di Asti AT1s.
September
In Midcap Origination, we bought Sainsbury Bank, Bank of Cyprus
and Banco Popolare di Adige Tier 2s.
In Restructuring, we sold Piraeus Bank Tier 2s and bought Cajamar
senior bonds.
In Liquid Relative Value, we opened a position in the National
Bank of Greece Tier 2s. We closed our Danske and BNP CDS contracts.
In Illiquid Relative Value, we reduced our holdings of RSA and
Benefact prefs.
October
In Liquid Relative Value, we purchased low cash price AT1s from
issuers such as Sabadell, Unicredit, Deutsche Bank and Deutsche
Pfandbriefbank.
In Midcap Origination, we took part in the new Permanent TSB 13.25%
AT1 issue. We added to Marex 13.25% AT1. We sold Jupiter T2s and
Quintet AT1s.
In Illiquid Relative Value, we trimmed our holdings of Lloyds,
Bank of Ireland, RSA and Santander preference shares.
November
In Midcap origination and Restructuring, we trimmed our positions
in a number of names, such as Banca di Asti, International Personal
Finance, Co-op bank and Shawbrook.
In Illiquid Relative Value, we reduced preference share holdings.
In Liquid Relative Value, we bought Banco BPM, Pfandbrief Bank,
Credit Suisse and Provident.
December
In Liquid Relative Value, we bought Barclays, Virgin Money, Socgen,
Intesa and Volksbank Wien AT1s.
In Midcap Origination, we bought Permanent TSB Tier 2s. We reduced
Shawbrook, My Money Bank, Piraeus, the Co-Operative Bank, OneSavings,
International Personal Finance and NIBC.
In Illiquid Relative Value, we sold Lloyds, Bank of Ireland and
Newcastle Building Societies.
4- Portfolio (as at 31 December 2022)
[chart]
5- Company metrics (as at 31 December 2022)
Share price (mid) (GB pence) 84.00
Published NAV per share (daily)
(GB pence) 92.43
Dividends paid over last
12 months (GB pence) 6.00
Shares in issue 91,852,904
Market capitalisation (GBP
mn) 77.16
Total Published Net Assets
(GBP mn) 84.90
Premium / (Discount) (9.12)%
=================================== ==========
Portfolio information (APM) 31 December 31 December
2022 2021
Modified duration 3.21 3.08
Sensitivity to credit 6.23 5.56
Positions 83 84
Average price at end of the
month (1) 91.02 113.62
Running yield (GBP) 9.29% 5.95%
Yield to perpetuity (GBP)
(2) 12.15% 6.23%
Yield to call (GBP) (3) 13.68% 6.70%
Gross assets 102.4% 112.7%
Net gearing 97.5% 108.4%
Investments / Published net
assets 95.4% 95.7%
Cash 2.2% 7.3%
Collateral 4.9% 4.2%
Net Repo / Published net
assets 0.0% 5.3%
CDS / Published net assets 28.7% 32.9%
============================ =========== ===========
Net Return(4, 7)
1 month 3 months(6) 6 months(6) 1 year(6) 3 years(5) Since launch(5)
0.60% 3.56% 1.03% -6.32% 3.97% 5.18%
======= =========== =========== ========== ========== ===============
[chart]
(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. (7) Data
is from Bloomberg so may differ slightly to Company records.
6- NAV evolution(1)
[chart]
(1) Based on the Published NAV.
7- Outlook
2022 will be remembered as the year when the bond market crashed.
The conjunction of global monetary tightening and the war in Ukraine
resulted in an exceptionally fast increase in interest rates combined
with a significant widening of credit spreads. Bund yields increased
from -0.18% to 2.56% while the spread on the Xover index doubled.
Axiom European Financial Debt returned -6.32% vs. -12.89% for
the Ice Bofa Coco AT1 Index and -12.46% for the Tier 2 Ice Bofa
Index.
European banks' fundamentals remained strong throughout the year.
The average CET1 oscillated around 15% as higher capital generation
compensated for the increase in shareholder distributions. The
stock of non-performing loans was stable and the average NPL ratio
reached a new low of 1.8%. Banks took precautionary provisions
and downgraded some assets in light of elevated macro risks. The
average LCR ratio stayed around its post-GFC highs i.e. 160%.
Banks' profits climbed. The increase in interest rates generally
allowed banks to boost commercial deposit margins while the high
level of economic activity supported commissions. The estimated
next fiscal year ROE on the Stoxx Europe 600 Index jumped above
10% for the first time in more than a decade.
In 2023, bank credit investors will have to navigate the many
cross-currents induced by monetary tightening. On the one hand,
elevated interest rates allow banks to earn sizable margins on
their retail and transactional funding; continued fiscal spending
and tight labour markets are supporting asset quality. On the
other hand, QT is slowly increasing funding costs and pressuring
global asset prices, resulting in lower collateral valuations.
The Company intends to take advantage of the higher carry available
on the bank fixed income market while keeping a prudent duration,
credit and liquidity profile.
Gildas Surry Antonio Roman
Axiom Alternative Investments Axiom Alternative Investments
SARL SARL
21 March 2023 21 March 2023
Investment Portfolio as at 31 December 2022
GBP'000 % of
NAV
Investments in capital instruments at fair value
through profit or loss
Bonds
West Bromwich Building Society 4.500% Perp (Var) 3,266 3.83
Ulster Bank Ireland DAC 11.750% Perp 3,030 3.56
Co-Operative Bank Finance PLC 9.500% 04/25/29 (Var) 2,430 2.85
Intesa Sanpaolo SpA 7.75% Perp (Var) 2,147 2.52
eSure Group PLC 6.000% Perp (Var) 2,030 2.38
Volksbank Wien AG 7.750% Perp (Var) 2,026 2.38
Barclays PLC 6.375% Perp (VAR) 2,024 2.38
Promontia MMB SASu 8.000% Perp (Var) 1,839 2.16
Shawbrook Group 12.103% 12/08/27 Perp (Var) 1,757 2.06
Novo Banco SA 8.500% 07/06/28 (Var) 1,688 1.98
Nottingham Building Society 7.875% Perp 1,669 1.96
International Personal Finance PLC 9.750% 11/12/25 1,507 1.77
Promontia MMB SASU 5.250% 10/15/41 (Var) 1,479 1.74
AnaCap Financial Europe SA 5.000% 08/01/24 (Var) 1,389 1.63
Lifetri Groep BV 5.250% 06/01/32 (Var) 1,355 1.59
IKB Funding Trust I 1.087% Perp (Var) 1,317 1.55
Cassa di Risparmio di Asti SpA 9.250% Perp (Var) 1,299 1.52
OSB Group PLC 6.000% Perp (Var) 1,286 1.51
Saxo Bank A/S 8.125% Perp (Var) 1,279 1.50
Coventry Building Society 12.125% Perp 1,176 1.38
Bank of Cyprus Holdings PLC 6.625% 10/23/31 (Var) 1,131 1.33
Brit Insurance Holdings Ltd 3.661% Perp (Var) 1,060 1.24
Oldenburgische Landesbank AG 6.000% Perp (Var) 1,049 1.23
Chesnara PLC 4.750% 08/04/32 1,031 1.21
Bracken MidCo1 PLC 6.750% 11/01/27 1,013 1.19
DDM Debt AB 9.000% 04/19/26 989 1.16
NIBC Bank NV 6.000% Perp (Var) 981 1.15
UnipolSai Assicurazioni SpA 6.375% Perp (Var) 965 1.13
Banco Comercial Portugues SA 9.250% Perp (Var) 934 1.10
Marex Group PLC 13.25% Perp (Var) 927 1.09
Piraeus Financial Holdings SA 8.750% Perp (Var) 920 1.08
Credit Suisse Group AG 6.25% Perpetual Bond 916 1.07
Saxo Bank A/S 5.500% 07/03/29 916 1.07
Banca Pop Alto Adige 9.000% 09/09/2032 (Var) 908 1.07
Investec PLC 6.750% Perp (Var) 907 1.06
Virgin Money UK plc 8.25% Perp 06/17/27 906 1.06
Utmost Group PLC 6.125% Perp (Var) 897 1.05
La Banque Postale SA 3.000% Perp (Var) 891 1.05
Amissima Vita SpA 7.000% 08/16/31 (Var) 890 1.05
Buoni Poliennali del tes 1.600% 11/22/28 (Fixed) 876 1.03
Athora Netherlands NV 7.0% Perp 06/19/25 870 1.02
Piraeus Bank SA 3.875% 11/03/27 (Var) 862 1.01
Skipton Building Society 12.875% Perp 846 0.99
Banco Comercial Portugues SA 3.871% 03/27/30 842 0.99
Societe Generale 8.00% Perp (Var) 834 0.98
Deut Pfandbriefbank AG 5.75% 04/28/23 Perp (Var) 812 0.95
Metro Bank PLC 9.500% 10/08/25 (Var) 797 0.94
National Bank Greece SA 8.25% 07/18/29 (Fix to Var) 793 0.93
Banco BPM SPA 7.000% 04/12/27 (Var) 782 0.92
BNP Paribas SA Perp (Var) 743 0.87
Kommunalkredit Austria AG 6.500% Perp (Var) 739 0.87
Novo Banco SA 3.500% 07/23/24 (Var) 675 0.79
Deutsche Bank AG 4.625% 10/30/27 Perp (Var) 675 0.79
TSB Group Holdings PLC 7.875% Perp (Var) 647 0.76
Standard Chartered 4.315860% Perp 01/12/2049 641 0.75
Deutsche Postbank Funding Trust I 0.390% Perp (Var) 635 0.74
Aareal Bank AG 6.849% Perp (Var) 629 0.74
Banco de Credito Social Cooperativo SA 8.000% 09/22/26
(Var) 624 0.73
Banco De Sabadell SA 5.75% Perp (Var) 618 0.73
Raiffeisen Bank Intl 6.00% Perp 06/15/26 579 0.68
Banco Comercial Portugues SA 4.000% 05/17/32 (Var) 563 0.66
BNP Paribas SA 0.000% Perp (Var) 549 0.64
Caixa Economica Montepio Geral 5.000% Perp (Var) 534 0.63
GNB Cia de Securos de Vida SA 3.102% Perp (Var) 532 0.62
Abanca Corp Bancaire SA 7.500% Perp (Var) 524 0.62
Banco de Credito Social Cooperativo SA 5.250% 11/27/31
(Var) 522 0.61
Sainsburys Bank 10.500% 03/12/2033 (Var) 515 0.60
National Westminster Bank PLC 11.500% Perp Series
BR 482 0.57
Louvre Bidco SAS 5.375% 09/30/24 (Var) 480 0.56
Provident Financial 8.875% 01/13/32 (Var) 447 0.52
BAWAG Group AG 5.125% Perp (Var) 440 0.52
Piraeus Bank SA 9.750% 06/26/24 (Var) 433 0.51
Unicaja Banco SA 4.875% Perp (Var) 386 0.45
Permanent TSB Group 13.25% (Var) 287 0.34
Ecology Building Society 9.625% Perp (Var) 258 0.30
Mitsubishi UFJ Investor Services & Banking Luxembourg
SA 4.013% 12/15/50 (Var) 171 0.20
National Westminster Bank PLC 11.500% Perp Series
RG 147 0.17
Banco Popular Espanol SA 8.000% 07/29/21 - -
Banco Popular Espanol SA 8.250% 10/19/21 - -
Popular Capital SA 6.000% Perp - -
------------ ------------
77,013 90.39
Other capital instruments
Bank of Ireland 12.625% Perp 722 0.85
------------ ------------
722 0.85
------------ ------------
Total investments in capital instruments at fair
value through profit or loss 77,735 91.24
GBP'000 % of
NAV
Derivative financial assets at fair value through
profit or loss
GBP/USD foreign currency forward 260 0.30
------------ ------------
Derivative financial assets at fair value through
profit or loss 260 0.30
Derivative financial liabilities at fair value
through profit or loss
GBP/EUR foreign currency forward (461) (0.54)
Subfin CDSI S35 5Y SW CDS 12/20/22 (427) (0.50)
Subfin CDSI S38 5Y CDS 12/20/27 (426) (0.50)
------------ ------------
Derivative financial liabilities at fair value through
profit or loss (1,314) (1.54)
Related party fund investments
Axiom Alternative Liquid Rates Z Cap Scv 1,836 2.16
------------ ------------
Related party fund investments 1,836 2.16
Other assets and liabilities
Collateral accounts for derivative financial instruments
at fair value through profit or loss 4,164 4.88
Cash and cash equivalents 3,941 4.62
Other receivables and prepayments 1,473 1.73
Bank overdrafts (2,234) (2.62)
Other payables and accruals (661) (0.78)
------------ ------------
Other assets and liabilities 6,683 7.84
------------ ------------
Net assets (as reported in these financial statements
(see note 22)) 85,200 100.00
------------ ------------
Principal Risks and Uncertainties
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 Board
evaluates the Company's principal risks on an ongoing basis, and
continuously assesses for future risks that could have a potential
impact. During the year, the Board and the Investment Manager
had ongoing discussions and reviews to consider the current, emerging,
and potential risks of the Company. The discussions generated
insights into a range of emerging and potential risks and has
helped to focus attention on additional areas for monitoring by
the Board and the Investment Manager. The Company's risk register
is reviewed by the Board, including the assessment of future risks
that may arise.
The Board has carried out a robust assessment of the Company's
emerging and principal risks and the key risks faced by the Company,
along with controls employed to mitigate those risks. These have
not substantially changed in the last year and are set out below.
Proposals for the liquidation of the Company
The Board is putting forward proposals for the liquidation of
the Company. If Shareholders vote in favour of the Proposals,
the Company will be liquidated.
Further details of the Proposals for the implementation of the
Scheme will be described in the Circular, which, when finalised,
will be made available on the Company's section of the Investment
Manager's website
(https://axiom-ai.com/web/en/axiom-european-financial-debt-fund-limited-2/).
Macroeconomic risk
Adverse changes affecting the global financial markets and economy
as a whole, and in particular European financial debt markets,
may have a material negative impact on the performance of the
Company's investments. In addition, the Company's non-Pounds Sterling
investments may be affected by fluctuations in currency exchange
rates. Prices of financial and derivative instruments in which
the Company invests are subject to significant volatility due
to market risk.
The Company may use derivatives, including options, short market
indices, CDS, and others, to mitigate market-related downside
risk, but the Company is not committed to maintaining market hedges
at any time.
The Company has a systematic hedging policy with respect to currency
risk. Subject only to the availability of suitable arrangements,
the assets denominated in currencies other than Pounds Sterling
are hedged by the Company (to a certain extent) by using currency
forward agreements to buy or sell a specified amount of Pounds
Sterling on a particular date in the future.
Historically, FX hedging has undermined many closed-ended investment
funds, as a result of sharp movements in the FX rates leaving
large hedging losses which could not be met as assets were illiquid
and banks were under severe balance sheet strain and could not
offer forbearance on facilities in breach. The Company is exposed
to FX hedging risks (see note 24) but this risk is mitigated by
the following: - Based on the worst case scenario observed in
monthly spot movements in the past 10 years, our worst case expected
hedging loss on expiry would be 4.00% of NAV; - Our portfolio
trading liquidity is such that it would take one day, in normal
circumstances, to liquidate sufficient assets to meet such an
anticipated worst case loss; and - In "stressed" markets, we estimate
it would take one day to raise such liquidity.
Russian Invasion of Ukraine
Russia's invasion of Ukraine and resulting international sanctions
on Russia are believed to have already caused substantial economic
damage to that country, which is likely to worsen the longer the
sanctions are in place, and has had a wider global effect on the
supply and prices of certain commodities and consequently on inflation
and general economic growth of the global economy. The effects
will vary from country to country, depending, for example, on
their dependence on Russian energy supplies, particularly gas,
which cannot be so easily transported and substituted as oil.
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.
Investment risk
There are certain risks associated with the Company's investment
activities that are largely a result of the Company's investment
policy (e.g. a portfolio concentrated on European financial debt)
and certain investment techniques which are inherently risky (e.g.
short selling).
There are numerous risks associated with having a concentrated
portfolio and the primary risk management tool used by the Company
is the extensive research performed by the Investment Manager
prior to investment, along with the ongoing monitoring of a position
once held in the Company's portfolio. The Board reviews portfolio
concentration and receives a detailed overview of the portfolio
positions quarterly, and more frequently if necessary.
Counterparty risk
The Company has credit and operational risk exposure to its counterparties
which will require it to post collateral to support its obligations
in connection with forwards and other derivative instruments.
Cash pending investment or held on deposit will also be held with
counterparties. The insolvency of a counterparty would result
in a loss to the Company which could be material.
In order to mitigate this risk the Company seeks to trade only
with reputable counterparties that the Investment Manager believes
to be creditworthy. The Investment Manager negotiates its ISDA
agreements to include bilateral collateral agreements. In addition,
cash held is only with financial institutions with short term
credit ratings of A-1 (Standard & Poor's) or P-1 (Moody's) or
better.
Exposure to counterparties is monitored by the Investment Manager
and reported to the Board each quarter.
Credit risk
The Company may use leverage to meet its investment objectives.
The Company will also use forward contracts to hedge its non-Pounds
Sterling assets. In order to do this, it will need to have in
place credit lines with one or more financial institutions. Due
to market conditions or other factors, credit lines may be withdrawn
and it might not be possible to put in place alternative arrangements.
As such, the ability to meet the Company's investment objective
and/or hedging strategy may not be met. The Investment Manager
monitors the use of credit lines and reports to the Board each
quarter.
Share price risk
The Company is exposed to the risk that its shares may trade at
a significant discount to NAV or that the market in the shares
will be illiquid. To mitigate this risk the Company increased
the frequency of the publication of its NAV to daily and has retained
the Broker to maintain regular contact with existing and potential
shareholders. The Board monitors the trading activity of the shares
on a regular basis and addresses the premium/discount to NAV at
its regular quarterly meetings.
From 1 January 2022 to 31 December 2022, the Company's shares
traded at an average discount to NAV of 9.19% (2021: 9.14% discount
to NAV). At the year end, the shares traded at a 9.12% discount
to Published NAV (2021: 9.18% discount). The level of discount
had not improved over the year, which is part of the reason for
putting forward the Proposals to liquidate the Company - as detailed
in the Circular, which, when finalised, will be made available
on the Company's section of the Investment Manager's website (
https://axiom-ai.com/web/en/axiom-european-financial-debt-fund-limited-2/
).
Regulatory risk
Changes in laws or regulations, or a failure to comply with these,
could have a detrimental impact on the Company's operations. Prior
to initiating a position, the Investment Manager considers any
possible legal and regulatory issues that could impact the investment
and the Company. The Company's advisers and service providers
monitor regulatory changes on an ongoing basis, and the Board
is apprised of any regulatory inquiries and material regulatory
developments on a quarterly basis.
Reputational risk
Reputational damage to the Company or the Investment Manager as
a result of negative publicity could adversely affect the Company.
To address this risk, the Company has engaged a public relations
firm to monitor media coverage and actively engage with media
sources as necessary. The Board also receives updates from the
Broker and the Investment Manager on a quarterly basis and considers
measures to address concerns as they arise.
Environmental, Employee, Social and Community Issues
As an investment company, the Company does not have any employees
or physical property, and most of its activities are performed
by other organisations. Therefore, the Company does not combust
fuel and does not have any greenhouse gas emissions to report
from its operations, nor does it have direct responsibility for
any other emission producing sources.
ESG Policy
The Board believes that all companies have a duty to consider
their impact on the community and the environment. As an investment
company, the Company does not have any employees and all of its
day-today activities are delegated to third party service providers.
The Directors, together with the Company's key service providers,
the Administrator, Company Secretary and external auditor are
all based in Guernsey and Board meetings are held in Guernsey,
thus negating the need for long commutes or flights to/from Board
meetings, and thereby minimising the negative environmental impact
of travel to/from Board meetings.
When making investment decisions, the Investment Manager uses
three main mechanisms to integrate ESG criteria:
* Its in-house database and tools dedicated to ESG, as
described in its ESG policy which is available on
their website
https://axiom-ai.com/web/en/responsible-investing/ );
* Engagement with management or investor relations
teams to get additional information; and
* Information published in annual reports or other
regulatory filings (such as TCFD or sustainability
reports).
Axiom AI's Investment Committee is ultimately responsible for
the progress of ESG integration by the investment teams, under
the supervision of Axiom AI's Executive Committee.
In addition to the ESG policy, Axiom AI maintains an exclusion
list. Investments in securities issued by a firm on that exclusion
list are prohibited. If a name is added to the exclusion list
and the securities are already in the portfolios, the portfolio
manager must divest the securities, in a way that is not harmful
to holders (no fire sale). The list is mainly based on the lists
established by recognised key players, such as the Norwegian government
pension fund. The list was introduced in order to formalise the
Investment Manager's desire not to invest in any company engaged
in activities that do not correspond to our values and our requirements
in terms of sustainable development. Companies can be excluded,
for example because they produce controversial weapons, such as
the ones covered by the Ottawa and Oslo Conventions (anti-personnel
mines, cluster munitions). This list is regularly reviewed and
amended.
Gender Diversity
The Board of Directors of the Company currently comprises three
male Directors. Further information in relation to the Board's
policy on diversity can be found in the Directors' Remuneration
Report.
Key Performance Indicators
The Board uses the following KPIs to help assess the Company's
performance against its objectives. Further information regarding
the Company's performance is provided in the Chairman's Statement
and the Investment Manager's Report.
Dividends per Ordinary Share
As set out in the Prospectus, the Company intends to distribute
all of its income from investments, net of expenses, by way of
dividends on a quarterly basis. The Company may retain income
for distribution in a subsequent quarter to that in which it arises
in order to smooth dividend amounts or for the purposes of efficient
cash management.
The Company announced dividends of GBP5,511,000 (6.00p per Ordinary
Share) for the year ended 31 December 2022 (2021: GBP5,511,000,
6.00p per Ordinary Share) (see note 6 for further details). The
Company has met the 6.00p dividend per share target each year
since inception and expects to continue to be able to pay out
dividends of this level in the future, until the Liquidation of
the Company.
NAV and total return
In line with the Prospectus, the Company has been targeting a
net total return on invested capital of approximately 10% p.a.
over a seven year period.
The Company incurred a total loss of -6.39% in the year ended
31 December 2022 (2021: achieved a total return of +16.88%). The
total return from inception to 31 December 2022 was 4.35% p.a.,
which is below the long-term target return of 10% p.a. net of
operating expenses. The future rate of return and dividends cannot
be guaranteed, especially in light of the impending vote on the
liquidation of the Company.
The Board regularly monitors the premium/discount of the price
of the Ordinary Shares to the NAV per share. Should the discount
of share price to NAV become unacceptable to the Board, the Company
may buy back some of its shares. However, this is unlikely to
occur in the immediate future, given the Proposals for the liquidation
of the Company.
At 31 December 2022 the share price was 84.00p (2021: 95.50p),
a 9.12% discount to the Published NAV (2021: 9.18% discount).
Promoting the Success of the Company
The following disclosure outlines how the Directors have had regard
to the matters set out in Section 172(1)(a) to (f) of the Companies
Act 2006. Although, as a Guernsey company, the Company is not
required to directly comply with the Companies Act 2006, Section
172 is considered as a requirement of the AIC Code with which
the Company complies (see the Corporate Governance Report (in
the Annual Report and Financial Statements) for further details).
The Board considers the needs of a number of stakeholders when
considering the long-term future of the Company. The key stakeholders
with which the Board liaised during the year ended 31 December
2022 were Shareholders and key service providers.
Shareholders
The Company's significant Shareholders at the year end can be
found in the Directors' Report (in the Annual Report and Financial
Statements).
When making principal decisions it is considered imperative to
analyse the views of the Company's investors, to ensure that there
may continue to be a supply of capital enabling the Company to
continue to expand its shareholder base, realise its potential
for growth and achieve its long-term investment objective. Indeed,
it was engagement with investors that led the Board to put forward
the Proposals for the implementation of the Scheme.
The KPIs, detailed above, have been considered on an ongoing basis
as part of the Board's decision making process.
Details of how the Directors communicate with Shareholders can
be found in the Corporate Governance Report (in the Annual Report
and Financial Statements).
During the year, the Board and its advisers engaged with the investors
with respect to determining proposals for the future of the Company,
as disclosed in the Chairman's Statement.
The only other engagement with investors in the year was routine
regarding strategy and performance.
Key service providers
Details of the Company's key service providers can be found in
the material contracts section of the Directors' Report (in the
Annual Report and Financial Statements).
The key service providers, including the Investment Manager, are
fundamental to the Company's ability to continue in the same state
as any changes could disrupt the expected timeliness of information
provided to the markets. In turn this would be likely to have
a detrimental impact on the Company's reputation. Reputational
risk is discussed further in the Principal Risks and Uncertainties.
The Board considers the performance of the Investment Manager
to be imperative to the success of the Company and therefore reviews
the performance of the Investment Manager at each Board meeting
and conducts a more formal review of all service providers on
an annual basis. The Investment Manager and Administrator provide
the Board with documentation for consideration at the meetings
to assist with their review of performance and the Investment
Manager also provides a verbal report to the Board. The Directors
raise any queries they have at these meetings with the Investment
Manager to help to ensure the successful implementation of the
investment objective and success of the Company.
The Board has continuous access to all of the Company's key service
providers and has open two-way communication with them. Key aspects
of discussion with these service providers, other than those regarding
Company performance and strategy, were in respect of fees payable
to these providers.
Following these discussions, no fee arrangements were amended
in the year ended 31 December 2022. However, protective notice
was served on all key service providers due to the Proposals for
the implementation of the Scheme . CACEIS refused to accept the
protective notice but the Board noted CACEIS's three month notice
period and that the fee was immaterial.
William Scott
Chairman
21 March 2023
Statement of Comprehensive Income
for the year ended 31 December 2022
Year ended Year ended
31 December 31 December
Note 2022 2021
GBP'000 GBP'000
Income
Capital instrument income 6,084 5,180
Credit default swap income 713 1,107
Bank interest receivable 73 5
------------ ------------
Total income 6,870 6,292
------------ ------------
Investment gains and losses on investments
held at fair value through profit
or loss
Realised (losses)/gains on disposal
of capital instruments and other investments 15 (2,716) 8,269
Movement in unrealised losses on capital
instruments and other investments 15 (9,358) (986)
Realised gains on derivative financial
instruments 18 971 5,223
Movement in unrealised losses on derivative
financial instruments 18 (579) (1,294)
------------ ------------
Total investment gains and losses (11,682) 11,212
------------ ------------
Expenses
Gains/(losses) on foreign currency 552 (721)
Other expenses 12 (784) (296)
Investment management fee 8a (744) (866)
Interest payable and similar charges 11 (150) (52)
Administration fee 8b (139) (132)
Directors' fees 8f (95) (95)
Performance fee 8a - (596)
------------ ------------
Total expenses (1,360) (2,758)
------------ ------------
(Loss)/profit for the year attributable
to the Owners of the Company (6,172) 14,746
------------ ------------
(Loss)/earnings per Ordinary Share:
basic and diluted 14 (6.72)p 16.05p
------------ ------------
The Company does not have any income or expenses that are not
included in profit for the year. Therefore, the loss for the year
is also the total comprehensive loss for the year.
The accompanying notes form an integral part of these financial
statements.
Statement of Changes in Equity
for the year ended 31 December 2022
Distributable Performance
Note reserves fee reserve Total
GBP'000 GBP'000 GBP'000
Opening balance at 1 January
2021 87,350 - 87,350
Profit for the year ended
31 December 2021 14,746 - 14,746
50% Performance fee payable
in Shares 8a - 298 298
Contributions by and distributions
to Owners
Dividends paid 6 (5,511) - (5,511)
------------ ------------ ------------
At 31 December 2021 96,585 298 96,883
Loss for the year ended 31
December 2022 (6,172) (6,172)
Contributions by and distributions
to Owners
Dividends paid 6 (5,511) - (5,511)
------------ ------------ ------------
At 31 December 2022 84,902 298 85,200
------------ ------------ ------------
The share capital has not been presented separately in the above
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 financial
statements.
Statement of Financial Position
as at 31 December 2022
As at As at
Note 31 December 31 December
2022 2021
GBP'000 GBP'000
Current assets
Investments in capital instruments
at fair value through profit or 15,
loss 19 77,735 85,449
Cash and cash equivalents 3,356 7,713
Other investments at fair value 15,
through profit or loss 19 1,836 4,874
Derivative financial assets at fair
value through profit or loss 18 260 4,506
Collateral accounts for derivative
financial instruments at fair value
through profit or loss 16,18 4,164 4,119
Other receivables and prepayments 17 2,058 2,143
------------ ------------
Total assets 89,409 108,804
------------ ------------
Current liabilities
Derivative financial liabilities
at fair value through profit or
loss 18 (1,314) (6,555)
Bank overdrafts (2,234) (693)
Other payables and accruals 20 (661) (649)
Short position(s) covered by reverse 15,
sale and repurchase agreements 19 - (3,932)
Collateral accounts for derivative
financial instruments at fair value
through profit or loss 16,18 - (92)
------------ ------------
Total liabilities (4,209) (11,921)
------------ ------------
Net assets 85,200 96,883
------------ ------------
Share capital and reserves
Share capital 21 - -
Distributable reserves 84,902 96,585
Performance fee reserve 298 298
------------ ------------
Total equity holders' funds 85,200 96,883
------------ ------------
Net asset value per Ordinary Share:
basic and diluted 22 92.76p 105.48p
These financial statements were approved by the Board of Directors
on 21 March 2023 and were signed on its behalf by:
William Scott John Renouf
Chairman Director
21 March 2023 21 March 2023
The accompanying notes form an integral part of these financial
statements.
Statement of Cash Flows
for the year ended 31 December 2022
Year ended Year ended
31 December 31 December
Note 2022 2021
GBP'000 GBP'000
Cash flows from operating activities
Net (loss)/profit (6,172) 14,746
Adjustments for:
Foreign exchange movements (552) 721
Total investment losses/(gains) at fair
value through profit or loss 11,682 (11,212)
Capital instrument income (6,084) (5,180)
CDS income (713) (1,107)
Interest on sale and repurchase agreements 90 (2)
Performance fee reserve - 298
Cash flows relating to financial instruments:
Payment (to)/from collateral accounts
for derivative financial instruments 16 (137) 1,538
Purchase of investments at fair value
through profit or loss (38,911) (87,768)
Sale of investments at fair value through
profit or loss 37,537 90,710
Premiums received from selling credit
default swap agreements 18 1,584 274
Premiums paid on buying credit default
swap agreements 18 - (83)
Purchase of foreign currency derivatives 18 (197,420) (185,824)
Close-out of foreign currency derivatives 18 195,378 189,680
Purchase of bond futures 18 (929) (4,234)
Sale of bond futures 18 2,805 4,977
Proceeds from sale and repurchase agreements 18 18,156 20,821
Payments to open reverse sale and repurchase
agreements 18 - (4,166)
Payments for closure of sale and repurchase
agreements 18 (24,350) (26,437)
Proceeds from closure of reverse sale
and repurchase agreements 18 4,175 3,898
Opening of short position(s) - 3,844
Closure of short position(s) (3,418) (1,932)
Cash paid during the year for interest (1,937) (1,404)
Cash received during the year for interest 7,897 7,751
Cash received during the year for dividends 346 363
------------ ------------
Net cash (outflow)/inflow from operating
activities before working capital changes (388) 10,272
Decrease/(increase) in other receivables
and prepayments 6 (3)
Increase in other payables and accruals 28 336
------------ ------------
Net cash (outflow)/inflow from operating
activities (354) 10,605
Cash flows from financing activities
Dividends paid 6 (5,511) (5,511)
------------ ------------
Net cash outflow from financing activities (5,511) (5,511)
------------ ------------
(Decrease)/increase in cash and cash
equivalents (6,450) 5,094
Cash and cash equivalents brought forward 7,020 2,647
Effect of foreign exchange on cash and
cash equivalents 552 (721)
------------ ------------
Cash and cash equivalents carried forward
* 1,122 7,020
------------ ------------
* Cash and cash equivalents, represented by:
Cash and cash equivalents 3,356 7,713
Bank overdrafts (2,234) (693)
------------ ------------
1,122 7,020
------------ ------------
The accompanying notes form an integral part of these financial
statements.
Notes to the Financial Statements
for the year ended 31 December 2022
1. General information
The Company is domiciled in Guernsey and was incorporated in Guernsey
on 7 October 2015 as an authorised closed-ended investment Company,
under the Companies (Guernsey) Law, 2008 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).
Proposals for the liquidation of the Company
The Board will shortly put forward proposals for the liquidation
of the Company, including the ability for Shareholders to receive
shares, in respect of their holdings of the Company's Ordinary
Shares, in a new open-ended fund managed by the same management
team and with a similar investment mandate to the Company. The
Board believes that these proposals will provide continuity for
those Shareholders in terms of exposure to a strategy similar
to the one currently pursued by the Company and under the same
management team. The New Fund, AUFC, which will be a new Compartment
of Axiom Lux SICAV, an established Luxembourg SICAV that is registered
as a UCITS with the Luxembourg financial regulator, the Commission
de Surveillance du Secteur Financier, will be open-ended with
daily liquidity. The proposals will also include a mechanism for
those Shareholders who do not wish to continue their investment
to achieve a cash exit.
Further details of the Proposals for the implementation of the
Scheme will be described in the Circular, which, when finalised,
will be made available on the Company's section of the Investment
Manager's website
(https://axiom-ai.com/web/en/axiom-european-financial-debt-fund-limited-2/).
Investment objective
The investment objective of the Company is detailed in the Annual
Report and Financial Statements.
Investment policy
The investment policy of the Company is detailed in the Annual
Report and Financial Statements.
2. Statement of compliance
a) Basis of preparation
These financial statements present the results of the Company
for the year ended 31 December 2022. The comparative figures stated
were for the year ended 31 December 2021. These financial statements
have been prepared in accordance with UK-adopted international
accounting standards.
These financial statements are presented in Sterling, which is
also the Company's functional currency (please see notes 3b and
4 for further details). All amounts are rounded to the nearest
thousand.
b) Non-going concern
After undertaking prudent and robust enquiries, and assessing
all data relating to the Company's liquidity, the Directors have
a reasonable expectation that the Company would have adequate
resources to continue in operational existence for the foreseeable
future if Shareholders were to vote not to liquidate the Company.
However, it is expected that Shareholders will vote in favour
of the Proposals and that the Company will be liquidated. For
this reason, they have not adopted the going concern basis in
preparing the financial statements. The effect of this is explained
in note 4 to the financial statements.
c) Basis of measurement
The financial statements have been prepared on a historical cost
basis, except for certain financial instruments, which are measured
at fair value through profit or loss.
d) Use of estimates and judgements
The preparation of financial statements in conformity with IFRS
requires management to make judgements, estimates and assumptions
that affect the application of policies and the reported amounts
of assets and liabilities, income and expenses.
Judgements made by management in the application of IFRS that
have a significant effect on the financial statements and estimates
with a significant risk of material adjustment are discussed in
note 4.
3. Significant accounting policies
a) Income and expenses
Bank interest, capital instrument income and credit default swap
income is recognised on an accruals basis.
Dividend income is recognised when the right to receive payment
is established. Capital instrument income comprises bond interest
and dividend income. 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 and the portion of performance
fees that are deemed to be a share-based payment) are charged
through the Statement of Comprehensive Income in the period in
which they are incurred.
b) Foreign currency
Foreign currency transactions are translated into Sterling using
the exchange rates prevailing at the dates of the transactions.
Foreign exchange gains and losses resulting from the settlement
of such transactions and from the translation at period-end exchange
rates of monetary assets and liabilities denominated in foreign
currencies are recognised in the Statement of Comprehensive Income.
The exchange rates used by the Company as at 31 December 2022
were GBP1/EUR1.1287, GBP1/US$1.2083, GBP1/DKK8.3945, GBP1/CA$1.6377
and GBP1/SGD1.6185 (2021: GBP1/EUR1.1895, GBP1/US$1.3528, GBP1/DKK8.8479,
GBP1/CA$1.7096 and GBP1/SGD1.8249).
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 it 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 solely payments of
principal interest ("SPPI") on the principal amount
outstanding; 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, other payables, 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 a 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 comprise cash balances held at the
Company's depositary and the Company's clearing brokers and cash
collateral pledged to counterparties related to derivative contracts.
Cash that is related to securities sold, not yet purchased, is
restricted until the securities are purchased. Financial instruments
held within the margin account consist of cash received from brokers
to collateralise the Company's derivative contracts and amounts
transferred from the Company's bank account.
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
investment gains and losses of the Company are allocated to the
distributable reserve.
i) 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 an equity-settled share-based payment when the fee is settled.
As such, 50% of the performance fee accrual at 31 December 2021
(GBP298,000) has been allocated to the performance fee reserve
until the payment, which will be utilised to purchase the shares,
has been made. This accrual remained outstanding for payment at
31 December 2022 and was settled in full on 6 March 2023. There
is no vesting period (see note 8 a) for further details).
j) NAV per share and earnings per share
The NAV per share disclosed on the face of the Statement of Financial
Position is calculated by dividing the net assets by the number
of Ordinary Shares in issue at the year end.
Earnings per share is calculated by dividing the earnings for
the year by the weighted average number of Ordinary Shares in
issue during the year.
k) Changes in accounting policy and disclosures
The accounting policies adopted are consistent with those of the
previous financial period. 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 these accounting standards did not have any effect
on the Company's Statement of Financial Position or equity.
l) 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 do
not anticipate that they would have a material impact on the Company's
financial statements in the period of initial application.
Effective
date
IAS 1 Presentation of Financial Statements (amendments 1 January
regarding the classification of liabilities 2023
and the disclosure of accounting policies)
IAS 1 Presentation of Financial Statements (amendments 1 January
regarding the classification of debt with covenants) 2024
IAS 8 Accounting Policies, Changes in Accounting Estimates 1 January
and Errors (amendments regarding the definition 2023
of accounting estimates)
IAS 12 Income Taxes (amendments regarding deferred 1 January
tax on leases and decommissioning obligations) 2023
4. Use of judgements and estimates
The preparation of the Company's financial statements requires
the Directors to make judgements, estimates and assumptions that
affect the reported amounts recognised in the financial statements
and disclosure of contingent liabilities. 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 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
that have had a significant impact on the financial statements.
Estimates and assumptions
The Company based its reporting date assumptions and estimates
on parameters available when the financial statements were approved.
However, existing circumstances and assumptions about future developments
may change due to market changes or circumstances arising beyond
the control of the Company. Such changes are reflected in the
assumptions when they occur.
i) Valuation of financial assets and liabilities
The Company uses the expertise of the Investment Manager to assess
the prices of investments at the valuation date. The majority
of the prices can be independently verified with reference to
external data sources, however a minority of investments cannot
be verified by reference to an external source and the Investment
Manager secures an independent valuation with reference to the
latest prices traded within the market place. These independent
valuations take the form of quotes from brokers.
Credit default swap assets and liabilities are valued by the Investment
Manager using market observable inputs. Refer to note 19 for further
details.
ii) Going concern
The provision for the liquidation costs comprises the costs of
the liquidation itself. These estimated expenses of GBP10,000
are based on an estimate of what future costs will be, in accordance
with the expected timeline to wind up, and are included in the
restructuring/liquidation fees of GBP379,000 in note 12.
The preparation of the financial statements on a non-going concern
basis, instead of a going concern basis, has reduced the net assets
at 31 December 2022 by GBP10,000 (31 December 2021: GBPnil).
For further information on the assumptions and inputs used to
fair value the financial instruments, please see note 19.
5. Segmental reporting
In accordance with IFRS 8, Operating Segments, it is mandatory
for the Company to present and disclose segmental information
based on the internal reports that are regularly reviewed by the
Board in order to assess each segment's performance.
Management information for the Company as a whole is provided
internally for decision making purposes. The Company does compartmentalise
different investments in order to monitor compliance with investment
restrictions, however the performance of these allocations does
not drive the investment decision process. The Directors' decisions
are based on a single integrated investment strategy and the Company's
performance is evaluated on an overall basis. Therefore, the Directors
are of the opinion that the Company is engaged in a single economic
segment of business for all decision-making purposes 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 has declared the following dividends during the year
ended 31 December 2022:
Total dividend declared Amount per
in respect of earnings Ordinary Share
GBP'000
Dividends declared and paid
in the year 5,511 6.00p
Less , dividend declared in
respect of the prior year that
was paid in 2022 (1,378) (1.50)p
Add , dividend declared out
of the profits of the year
but paid after the year end: 1,378 1.50p
------------ ------------
Dividends declared in respect
of the year 5,511 6.00p
------------ ------------
The Company declared the following dividends during the year ended
31 December 2021:
Total dividend declared Amount per
in respect of earnings Ordinary Share
GBP'000
Dividends declared and paid
in the year 5,511 6.00p
Less , dividend declared in
respect of the prior year that
was paid in 2021 (1,378) (1.50)p
Add , dividend declared out
of the profits of the year
but paid after the year end: 1,378 1.50p
------------ ------------
Dividends declared in respect
of the year 5,511 6.00p
------------ ------------
In accordance with IFRS, dividends are only provided for when
they become a present obligation of the Company. Therefore, during
the year a total of GBP5,511,000 (2021: GBP5,511,000) was incurred
in respect of dividends, none of which was outstanding at the
reporting date. The fourth dividend declared out of the profits
for the year of GBP1,378,000 had not been provided for at 31 December
2022 (2021: GBP1,378,000) 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
advisors and service providers (the Administrator, the Broker,
the Registrar and the Depositary) are also disclosed in note 8.
As at 31 December 2022, the Company had holdings in the following
investments, which were managed by the Investment Manager:
31 December 2022 31 December 2021
Units Cost Value Units Cost Value
held held
GBP'000 GBP'000 GBP'000 GBP'000
Axiom Alternative Liquid Rates
Z Cap Scv 2,000 1,705 1,836 2,000 1,705 1,691
Axiom Global CoCo UCIT ETF
USD-hedged - - - 35 2,984 3,183
During the year, 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 year ended 31 December 2021, the Company:
* sold 10 units in Axiom Global CoCo UCIT ETF
GBP-hedged for GBP1,106,000, realising a gain of
GBP106,000;
* sold 500 units in Axiom Equity Class Z for
GBP1,035,000, realising a gain of GBP568,000; and
* purchased 2,000 units in Axiom Alternative Liquid
rates Z Cap Scv for GBP1,705,000.
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. As part of the Proposal process, the
Company served protective notice on the Investment Manager on
12 August 2022.
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 year, a total of GBP744,000 (2021: GBP866,000) was
incurred in respect of Investment Management fees, of which GBP182,000
was payable at the reporting date (2021: GBP213,000).
Under the terms of the Investment Management Agreement, if at
any time there has been any deduction from the management fee
as a result of the Quarterly Expenses Excess or Annual Expenses
Excess (a "Management Fee Deduction"), and during any subsequent
quarter:
i. all or part of the Management Fee Deduction can be paid; and/or
ii. all or part of the Management Fee Deduction Shortfall payment
can be repaid,
by the Company to the Investment Manager without:
iii. in any quarter (other than the final quarter) of any accounting
period the aggregate expenses of the Company during such quarter
exceeding an amount equal to one-quarter of 1.5% of the average
NAV of the Company during such quarter; or
iv. in the final quarter of any accounting period the aggregate
expenses of the Company during such accounting period exceeding
an amount equal to 1.5% of the average NAV of the Company during
such accounting period,
then such payment and/or repayment shall be made by the Company
to the Investment Manager as soon as is reasonably practicable.
The Quarterly Expenses Excess and Annual Expenses Excess for the
year was GBP103,000 (2021: GBP40,000), and at 31 December 2022
the Quarterly Expenses Excess and Annual Expenses Excess, which
could be payable to the Investment Manager in future periods,
was GBP880,000 (2021: GBP777,000) (see note 27).
Performance fee
The Investment Manager is entitled to receive from the Company
a performance fee subject to certain performance benchmarks.
The fee is payable as a share of the Total Shareholder Return
("TSR") where TSR for this purpose is defined as:
i. the NAV (on a per share basis) at the end of the relevant accounting
period; plus
ii. the total of all dividends and other distributions made to
Shareholders since 5 November 2015 (being the date of the Company's
original admission to the SFS) divided by the average number of
shares in issue during the period from 5 November 2015 to the
end of the relevant accounting period.
The performance fee, if any, is equal to 15% of the TSR in excess
of a weighted average hurdle equal to a 7% per annum return. The
performance fee is subject to a high water mark. The fee, if any,
is payable annually and calculated on the basis of audited accounts
of the Company.
50% of the performance fee will be settled in cash. The balance
will be satisfied in shares, subject to certain exceptions where
settlement in shares would be prohibited by law or would result
in the Investment Manager or any person acting in concert with
it incurring an obligation to make an offer under Rule 9 of the
City Code, in which case the balance will be settled in cash.
Assuming no such requirement, the balance of the performance fee
will be settled either by the allotment to the Investment Manager
of such number of new shares credited as fully paid as is equal
to 50% of the performance fee (net of VAT) divided by the most
recent practicable NAV per share (rounded down to the nearest
whole share) or by the acquisition of shares in the market, as
required under the terms of the Investment Management Agreement.
All shares allotted to (or acquired for) the Investment Manager
in part satisfaction of the performance fee will be subject to
a lock-up until the date that is 12 months from the end of the
accounting period to which the award of such shares related. A
lock-up termination event is a disposal of shares pursuant to
a takeover or sale of the Company or where the Investment Manager
is required by law to dispose of such shares, or a termination
of the Investment Management agreement by the Company.
At 31 December 2022, a performance fee of GBP298,000 (2021: GBP596,000)
was payable by the Company in respect of the year ended 31 December
2021, of which GBPnil was payable in cash (2021: GBP298,000).
During the year, the Company paid the Investment Manager GBP298,000,
relating to the cash settlement element of the 2021 performance
fee.
The remaining performance fee payable by the Company as at 31
December 2022 (GBP298,000) was settled through the purchase of
Ordinary Shares in the market by the Investment Manager and the
Company reimbursed the Investment Manager in cash on 6 March 2023.
As such, the performance fee was allocated to the performance
fee reserve until the payment, which was utilised to purchase
the shares, was made. This treatment has resulted in an increase
to the NAV originally announced to the market on 4 January 2023
of 0.33p per Ordinary Share (see note 22).
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 an annual fee of GBP126,794 (2021: GBP121,450),
which is subject to an annual increase in line with Guernsey RPI.
In addition, the Company pays the Administrator a fee for work
undertaken in connection with the daily NAV, subject to a maximum
aggregate amount of GBP10,000 per annum.
During the year, a total of GBP139,000 (2021: GBP132,000) was
incurred in respect of Administration fees of which GBP34,000
(2021: GBP33,000) was payable at the reporting date.
As part of the Proposal process, the Company served protective
notice on the Administrator on 22 August 2022.
c) Broker
Winterflood has been appointed to act as Broker for the Company,
in consideration for which the Company pays Winterflood an annual
retainer fee of GBP35,000 per annum.
For the year to 31 December 2022, the Company incurred Broker
fees of GBP40,000 (2021: GBP37,000) of which GBP7,000 was payable
at 31 December 2022 (2021: GBP6,000).
As part of the Proposal process, the Company served protective
notice on the Broker on 10 February 2023.
d) Registrar
Link Market Services (Guernsey) Limited is Registrar of the Company.
Under the terms of the Registrar Agreement, the Registrar is entitled
to receive from the Company certain annual maintenance and activity
fees, subject to a minimum fee of GBP5,500 per annum.
During the year, a total of GBP22,000 (2021: GBP18,000) was incurred
in respect of Registrar fees, of which GBP1,000 was payable at
31 December 2022 (2021: GBP1,000).
As part of the Proposal process, the Company served protective
notice on the Registrar on 23 August 2022.
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.
As part of the Proposal process, the Company has served protective
notice on the Depositary, however, CACEIS refused to accept the
protective notice but the Board noted CACEIS's three month notice
period and that the fee was immaterial.
During the year, a total of GBP47,000 (2021: GBP37,000) was incurred
in respect of depositary fees, of which GBP26,000 was payable
at the reporting date (2021: GBP22,000).
CACEIS Bank Luxembourg is entitled to receive a monthly valuation
agent fee from the Company in respect of the provision of certain
accounting services which will, subject to a minimum monthly fee
of EUR2,500, be calculated by reference to the following tiered
sliding scale:
i. where NAV is less than or equal to EUR50 million, 0.05% per
annum of NAV;
ii. where NAV is greater than EUR50 million but less than or equal
to EUR100 million, 0.04% per annum of NAV; and
iii. where NAV is greater than EUR100 million, 0.03% per annum
of NAV, in each case, plus applicable VAT.
During the period, a total of GBP38,000 (2021: GBP43,000) was
incurred in respect of valuation agent fees paid to CACEIS Bank
Luxembourg, of which GBP7,000 was payable at 31 December 2022
(2021: GBP11,000).
f) Directors' remuneration
William Scott (Chairman) is paid GBP35,000 per annum (2021: GBP35,000),
John Renouf (Chairman of the Audit Committee) is paid GBP32,500
per annum (2021: GBP32,500), and Max Hilton is paid GBP27,500
per annum (2021: GBP27,500).
The Directors are also entitled to reimbursement of all reasonable
travelling and other expenses properly incurred in the performance
of their duties.
During the year, a total of GBP95,000 (2021: GBP95,000) was incurred
in respect of Directors' fees, none of which was payable at the
reporting date (2021: GBPnil). No bonus or pension contributions
were paid or payable on behalf of the Directors.
9. Key management and employees
Other than the Non-Executive Directors, the Company has had no
employees since its incorporation.
10. Auditor's remuneration
Grant Thornton was appointed to act as the Company's external
auditor with effect from 19 August 2020.
For the year ended 31 December 2022, total fees charged by Grant
Thornton, together with amounts accrued at 31 December 2022, amounted
to GBP48,000 (2021: GBP40,850), all of which related to audit
services. As at 31 December 2022, GBP36,000 was due to Grant Thornton
(2021: GBP21,000).
11. Interest payable and similar charges
Year ended Year ended
31 December 31 December
2022 2021
GBP'000 GBP'000
Bank interest 56 42
Commission 4 11
Interest payable on sale and repurchase
agreements 90 (1)
------------ ------------
150 52
------------ ------------
12. Other expenses
Year ended Year ended
31 December 31 December
2022 2021
GBP'000 GBP'000
Restructuring/liquidation fees 379 -
PR expenses 68 61
Audit fees (note 10) 48 41
Legal fees 48 13
Withholding tax on bond interest 48 -
Depositary fees (note 8e) 47 37
Other expenses 46 46
Broker fees (note 8c) 40 37
Valuation agent fees (note 8e) 38 43
Registrar fees (note 8d) 22 18
------------ ------------
784 296
------------ ------------
13. Taxation
The Company is exempt from taxation in Guernsey, and it is the
intention to conduct the affairs of the Company to ensure that
it continues to qualify for exempt company status for the purposes
of Guernsey taxation. The Company pays a fixed fee of GBP1,200
per annum to maintain exempt company status.
14. (Loss)/earnings per Ordinary Share
The loss per Ordinary Share of 6.72p (2021: earnings of 16.05p)
is based on a loss attributable to owners of the Company of GBP6,172,000
(2021: profit of GBP14,746,000) and on a weighted average number
of 91,852,904 (2021: 91,852,904) Ordinary Shares in issue since
1 January 2022. There are no dilutive shares and there is no difference
between the basic and diluted earnings per share.
15. Investments at fair value through profit or loss
Movements in (losses)/gains in the year
31 December 2022 31 December 2021
Unrealised Realised Total Unrealised Realised Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investments in
capital
instruments (9,392) (3,279) (12,671) (781) 7,659 6,878
Other investments (53) 137 84 (130) 674 544
Short position
covered
by reverse sale and
repurchase
agreements 87 426 513 (75) (64) (139)
------------ ------------ ------------ ------------ ------------ ------------
(9,358) (2,716) (12,074) (986) 8,269 7,283
------------ ------------ ------------ ------------ ------------ ------------
Closing valuations
31 December 31 December
2022 2021
GBP'000 GBP'000
Investments in capital instruments 77,735 85,449
Other investments 1,836 4,874
Short position(s) covered by reverse
sale and repurchase agreements - (3,932)
------------ ------------
Investments at fair value through profit
or loss 79,571 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 31 December 2022, the Company had no open sale and repurchase
agreements (2021: eight open sale and repurchase agreements, one
of which was a reverse sale and repurchase agreement) (see note
18). In 2021, the reverse sale and repurchase agreement was open
ended and was used to cover the sale of capital instruments (the
short position noted above).
The fair value of the capital instruments subject to sale and
repurchase agreements (excluding any short positions) at 31 December
2022 was nil (2021: GBP9,349,000). There were no short positions
at 31 December 2022. The fair value net of the short position
at 31 December 2021 was GBP5,417,000.
16. Collateral accounts for derivative financial instruments
at fair value through profit or loss
31 December 31 December
2022 2021
GBP'000 GBP'000
JP Morgan 2,689 3,495
Goldman Sachs International 1,200 207
CACEIS Bank France 275 305
Credit Suisse - 112
------------ ------------
4,164 4,119
CACEIS Bank France - negative balance - (92)
------------ ------------
Net balance on collateral accounts held
by brokers 4,164 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 derivatives
arrangements will be permitted to use, reuse, lend, borrow, hypothecate
or re-hypothecate such Collateral. The third parties will have
no obligation to retain an equivalent amount of similar property
in their possession and control, until such time as the Company's
obligations to the third party are satisfied. The Company has
no right to this Collateral but has the right to receive fungible,
equivalent Collateral upon the Company's satisfaction of the Company's
obligation under the derivatives.
17. Other receivables and prepayments
31 December 31 December
2022 2021
GBP'000 GBP'000
Accrued capital instrument income receivable 1,432 1,064
Due from sale of capital instruments 585 1,034
Interest due on credit default swaps 23 21
Prepayments 9 24
Bank interest receivable 9 -
------------ ------------
2,058 2,143
------------ ------------
18. Derivative financial instruments
Credit default swap agreements
A credit default swap agreement represents an agreement that one
party, the protection buyer, pays a fixed fee, the premium, in
return for a payment by the other party, the protection seller,
contingent upon a specified credit event relating to an underlying
reference asset. If a specified credit event occurs, there is
an exchange of cash flows and/or securities designed so the net
payment to the protection buyer reflects the loss incurred by
holders of the referenced obligation in the event of its default.
The ISDA establishes the nature of the credit event and such events
include bankruptcy and failure to meet payment obligations when
due.
Year ended Year ended
31 December 31 December
2022 2021
GBP'000 GBP'000
Opening balance (128) 448
Premiums received from selling credit
default swap agreements (1,584) (274)
Premiums paid on buying credit default
swap agreements - 83
Movement in unrealised losses in the
year (143) (782)
Realised gains in the year 1,001 397
------------ ------------
Outstanding liability due on credit
default swaps (854) (128)
------------ ------------
Credit default swap assets at fair value
through profit or loss - 180
Credit default swap liabilities at fair
value through profit or loss (854) (308)
------------ ------------
Outstanding liability due on credit
default swaps (854) (128)
------------ ------------
Interest paid or received on the credit default swap agreements
has been accounted for in the Statement of Comprehensive Income
as it has been incurred or received. At the year end, GBP23,000
(2021: GBP21,000) of interest on credit default swap agreements
was due to the Company.
Collateral totalling GBP3,890,000 (2021: GBP3,328,000) was held
in respect of the credit default swap agreements.
Foreign currency forwards
Foreign currency forward contracts are used for trading purposes
and are used to hedge the Company's exposure to changes in foreign
currency exchange rates on its foreign portfolio holdings. A foreign
currency forward contract is a commitment to purchase or sell
a foreign currency on a future date and at a negotiated forward
exchange rate.
Year ended Year ended
31 December 31 December
2022 2021
GBP'000 GBP'000
Opening balance 7 775
Purchase of foreign currency derivatives 197,420 185,824
Closing-out of foreign currency derivatives (195,378) (189,680)
Movement in unrealised losses in the
year (209) (768)
Realised (losses)/gains in the year (2,042) 3,856
------------ ------------
Fair value of net (liabilities)/assets
on foreign currency forwards (202) 7
------------ ------------
Foreign currency forward assets at fair
value through profit or loss 259 132
Foreign currency forward liabilities
at fair value through profit or loss (461) (125)
------------ ------------
Fair value of net (liabilities)/assets
on foreign currency forwards (202) 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.
Year ended Year ended
31 December 31 December
2022 2021
GBP'000 GBP'000
Opening balance (12) -
Purchase of bond futures 929 4,234
Sale of bond futures (2,805) (4,977)
Movement in unrealised gains/(losses)
in the year - (66)
Realised gains in the year 1,888 797
------------ ------------
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 Year ended
31 December 31 December
2022 2021
GBP'000 GBP'000
Opening balance (1,916) (8,304)
Opening of sale and repurchase agreements (18,156) (20,821)
Opening of reverse sale and repurchase
agreements - 4,166
Closing-out of sale and repurchase agreements 24,350 26,437
Closing-out of reverse sale and repurchase
agreements (4,175) (3,898)
Movement in unrealised (losses)/gains
in the year (227) 301
Realised gains in the year 124 203
------------ ------------
Total liabilities on sale and repurchase
agreements - (1,916)
------------ ------------
Year ended Year ended
31 December 31 December
2022 2021
GBP'000 GBP'000
Sale and repurchase assets at fair value
through profit or loss - 4,194
Sale and repurchase liabilities at fair
value through profit or loss - (6,110)
------------ ------------
Total liabilities on sale and repurchase
agreements - (1,916)
------------ ------------
Interest paid on sale and repurchase agreements has been accounted
for in the Statement of Comprehensive Income as it has been incurred.
At 31 December 2022 GBPnil (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.
Year ended Year ended
31 December 31 December
2022 2021
GBP'000 GBP'000
Opening balance - 7
Movement in unrealised gains in the
year - 22
Realised losses in the year - (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 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) as at
31 December 2022:
Effect of remaining
rights of offset
that do not meet
the criteria for
Amounts Net amount offsetting in
Gross carrying offset in presented the Statement
amount accordance in Statement of Financial Position
before with offsetting of Financial - Cash held as
offsetting criteria Position collateral Net exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Financial assets
Derivatives 260 - 260 - 260
Collateral accounts
for derivative
financial instruments
(note 16) 4,164 - 4,164 (1,128) 3,036
------------ ------------ ------------ ------------ ------------
Total assets 4,424 - 4,424 (1,128) 3,296
------------ ------------ ------------ ------------ ------------
Financial liabilities
Derivatives (1,315) - (1,315) - (1,315)
Collateral accounts
for derivative
financial instruments
(note 16) (1) - (1) - (1)
------------ ------------ ------------ ------------ ------------
Total liabilities (1,316) - (1,316) - (1,316)
------------ ------------ ------------ ------------ ------------
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) as at
31 December 2021:
Effect of remaining
rights of offset
that do not meet
the criteria for
Amounts Net amount offsetting in
Gross carrying offset in presented the Statement
amount accordance in Statement of Financial Position
before with offsetting of Financial - Cash held as
offsetting criteria Position collateral Net exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Financial assets
Derivatives 4,506 - 4,506 (3,932) 574
Collateral accounts
for derivative
financial instruments
(note 16) 4,119 - 4,119 (320) 3,799
------------ ------------ ------------ ------------ ------------
Total assets 8,625 - 8,625 (4,252) 4,373
------------ ------------ ------------ ------------ ------------
Financial liabilities
Derivatives (6,555) - (6,555) 5,727 (828)
Collateral accounts
for derivative
financial instruments
(note 16) (92) - (92) - (92)
------------ ------------ ------------ ------------ ------------
Total liabilities (6,647) - (6,647) 5,727 (920)
------------ ------------ ------------ ------------ ------------
19. Fair value of financial instruments at fair value through
profit or loss
The following table shows financial instruments recognised at
fair value, analysed between those whose fair value is based on:
* Quoted prices in active markets for identical assets
or liabilities (Level 1);
* Those involving inputs other than quoted prices
included in Level 1 that are observable for the asset
or liability, either directly (as prices) or
indirectly (derived from prices) (Level 2); and
* Those with inputs for the asset or liability that are
not based on observable market data (unobservable
inputs) (Level 3).
At 31 December 2022, 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
Traded/listed capital instruments at
fair value through profit or loss 77,735 - - 77,735
Other investments at fair value through
profit or loss (note 7) 1,836 - - 1,836
Credit default swap liabilities (note
18) - (853) - (853)
Other derivative financial assets - 260 - 260
Other derivative financial liabilities - (461) - (461)
------------ ------------ ------------ ------------
79,571 (1,054) - 78,517
------------ ------------ ------------ ------------
At 31 December 2021, 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
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 18) - 180 - 180
Credit default swap liabilities (note
18) - (308) - (308)
Other derivative financial assets - 4,326 - 4,326
Other derivative financial liabilities (12) (6,223) - (6,235)
Short position 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 value of the other investments are
based on the market price 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 Company used a 20% correlation parameter when valuing the
credit default swap agreements at 31 December 2022. The Investment
Manager believes this to be conservative as the underlying basket
on the instrument is made up of only financial companies which
would have a higher correlation as they are of the same sector.
It is estimated that a 10% increase in the correlation factor
for the credit default swap agreement subject to valuation by
reference to the underlying basket would increase the Company's
valuation by approximately GBP35,000 to GBP62,000.
The fair values of other derivative financial assets and liabilities
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 valued using the relevant options prices curve.
Transfers between levels
Transfers between levels during the year are determined and deemed
to have occurred at each financial reporting date. There were
no investments classified as Level 3 during the year, and no transfers
between levels in the year. See notes 15, 16 and 18 for movements
in instruments held at fair value through profit or loss.
20. Other payables and accruals
31 December 31 December
2022 2021
GBP'000 GBP'000
Restructuring related fees 356 -
Investment management fee (note 8a) 182 213
Audit fees (note 10) 36 21
Administration fee (note 8b) 34 33
Depositary fees (note 8e) 26 22
Other accruals 12 13
Valuation agent fees (note 8e) 7 11
Broker fee (note 8c) 7 6
Registrar fees (note 8d) 1 1
Performance fee (note 8a) - 298
Accrued interest payable on capital
instrument short position(s) - 17
Share issue costs - 14
------------ ------------
661 649
------------ ------------
21. Share capital
31 December 2022 31 December 2021
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 -
------------ ------------ ------------ ------------
The Ordinary Shares carry the right to receive all dividends declared
by the Company. Shareholders are entitled to all dividends paid
by the Company and, on a winding up, provided the Company has
satisfied all of its liabilities, the Shareholders are entitled
to all of the surplus assets of the Company. Shareholders will
be entitled to attend and vote at all general meetings of the
Company and, on a poll, will be entitled to one vote for each
Ordinary Share held.
22. NAV per Ordinary Share
The NAV per Ordinary Share is based on the net assets attributable
to owners of the Company of GBP85,200,000 (2021: GBP96,883,000),
and on 91,852,904 (2021: 91,852,904) Ordinary Shares in issue
at the year end.
The NAV of 92.76p (2021: 105.48p) per Ordinary Share disclosed
in these financial statements is 0.33p (2021: 0.33p) higher than
the NAV of 92.43p (2021: 105.15p) per Ordinary Share announced
on 4 January 2023 (2021: 5 January 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).
23. Changes in liabilities arising from financing activities
The Company did not raise any capital from the placing of new
shares in the year ended 31 December 2022 or 31 December 2021.
Therefore, there were no cash flows in relation to share issue
costs in 2022 or 2021.
24. Financial instruments and risk management
The Company invests its assets with the aim of spreading investment
risk.
Risk is inherent in the Company's activities, but it is managed
through a process of ongoing identification, measurement and monitoring.
The Company is exposed to market risk (which includes currency
risk, interest rate risk and price risk), credit risk and liquidity
risk from the financial instruments it holds. Risk management
procedures are in place to minimise the Company's exposure to
these financial risks, in order to create and protect Shareholder
value.
Risk management structure
The Investment Manager is responsible for identifying and controlling
risks. The Board of Directors supervises the Investment Manager
and is ultimately responsible for the overall risk management
approach within the Company.
The Company has no employees and is reliant on the performance
of third party service providers. Failure by the Investment Manager,
Administrator, Depositary, Registrar or any other third party
service provider to perform in accordance with the terms of its
appointment could have a significant detrimental impact on the
operation of the Company.
Risk concentration
Concentration indicates the relative sensitivity of the Company's
performance to developments affecting a particular industry or
geographical location. Concentrations of risk arise when a number
of financial instruments or contracts are entered into with the
same counterparty, or where a number of counterparties are engaged
in similar business activities, or activities in the same geographic
region, or have similar economic features that would cause their
ability to meet contractual obligations to be similarly affected
by changes in economic, political or other conditions. Concentrations
of liquidity risk may arise from the repayment terms of financial
liabilities, sources of borrowing facilities or reliance on a
particular market in which to realise liquid assets. Concentrations
of foreign exchange risk may arise if the Company has a significant
net open position in a single foreign currency, or aggregate net
open positions in several currencies that tend to move together.
Within the aim of maintaining a diversified investment portfolio,
and thus mitigating concentration risks, the Company has established
the following investment restriction in respect of the general
deployment of assets:
Concentration
No more than 15% of NAV, calculated at the time of investment,
will be exposed to any one financial counterparty. This limit
will increase to 20% where, in the Investment Manager's opinion
(having informed the Board in writing of such increase) the relevant
financial institution investment instrument is expected to amortise
such that, within 12 months of the date of the investment, the
expected exposure (net of any hedging costs and expenses) will
be equal to or less than 15% of NAV, calculated at the time of
the investment.
Market risk
i) Price risk
Price risk exposure arises from the uncertainty about future prices
of financial instruments held. It represents the potential loss
that the Company may suffer through holding positions in the face
of price movements. The investments in capital instruments, unlisted
open-ended funds, and bond futures at fair value through profit
or loss (notes 15, 18 and 19) are exposed to price risk and it
is not the intention to mitigate the price risk.
At 31 December 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 +/- GBP3,979,000 (2021: +/- GBP4,319,000). The
fair value of financial instruments exposed to price risk at 31
December 2022 was GBP79,571,000 (2021: GBP86,384,000).
ii) Foreign currency risk
Foreign currency risk is the risk that the value of a financial
instrument will fluctuate because of changes in foreign currency
exchange rates. Currency risk arises when future commercial transactions
and recognised assets and liabilities are denominated in a currency
that is not the Company's functional currency. The Company invests
in securities and other investments that are denominated in currencies
other than Sterling. Accordingly, the value of the Company's assets
may be affected favourably or unfavourably by fluctuations in
currency rates and therefore the Company will necessarily be subject
to foreign exchange risks.
In order to limit the exposure to foreign currency risk, the Company
entered into hedging contracts during the year. At the year end,
the Company held the following foreign currency forward contracts:
31 December 2022
Maturity date Amount to Amount to be purchased
be sold
9 February 2023 EUR51,534,000 GBP45,610,000
9 February 2023 US$6,469,000 GBP5,366,000
31 December 2021
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
At the year end a proportion of the net financial assets of the
Company were denominated in currencies other than Sterling as
follows:
Investments
at fair
value Foreign
through currency
profit Cash and forward Net
or loss Receivables cash equivalents Exposure contract exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
31 December 2022
Euro 46,979 - (2,234) 44,745 (45,610) (865)
US Dollars 4,518 2 931 5,451 (5,366) 85
Swiss Francs - - 43 43 - 43
------------ ------------ ------------ ------------ ------------ ------------
51,497 2 (1,260) 50,239 (50,976) (737)
------------ ------------ ------------ ------------ ------------ ------------
31 December 2021
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 31 December 2022, if the exchange rates had strengthened/weakened
by 5% against Sterling with all other variables remaining constant,
net assets at 31 December 2022 would have decreased/increased
by GBP37,000 (2021: GBP38,000).
iii) Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect future cash flows or the fair values
of financial instruments. The Company is exposed to risks associated
with the effects of fluctuations in the prevailing levels of market
interest rates on its financial instruments and cash flow. A large
number of the capital instruments bear interest at a fixed rate,
but capital instruments to the value of GBP62,650,000 (2021: GBP54,572,000),
cash and cash equivalents, net of overdrafts, of GBP1,122,000
(2021: GBP7,020,000) and collateral account balances of GBP4,164,000
(2021: GBP4,027,000) were the only interest-bearing financial
instruments subject to variable interest rates at 31 December
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 year would have been +/-GBP351,000 (2021: +/-GBP344,000).
Fixed Variable Non-interest
interest interest bearing Total
31 December 2022 GBP'000 GBP'000 GBP'000 GBP'000
Financial assets
Investments at fair value through
profit or loss 11,754 62,650 5,167 79,571
Cash and cash equivalents - 3,356 - 3,356
Collateral accounts for derivative
financial instruments at fair
value through profit or loss - 4,164 - 4,164
Derivative financial assets
at fair value through profit
or loss - - 260 260
Other receivables - - 2,058 2,058
------------ ------------ ------------ ------------
Total financial assets 11,754 70,170 7,485 89,409
------------ ------------ ------------ ------------
Financial liabilities
Bank overdrafts - (2,234) - (2,234)
Derivative financial liabilities
at fair value through profit
or loss (853) - (461) (1,314)
Other payables and accruals - - (661) (661)
------------ ------------ ------------ ------------
Total financial liabilities (853) (2,234) (1,122) (4,209)
------------ ------------ ------------ ------------
Total interest sensitivity
gap 10,901 67,936 6,363 85,200
------------ ------------ ------------ ------------
Fixed Variable Non-interest
interest interest bearing Total
31 December 2021 GBP'000 GBP'000 GBP'000 GBP'000
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 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 GBP16,921,000 (2021:
GBP35,751,000) at 31 December 2022 would increase/decrease by
+/-GBP272,000 (0.34%) (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 31 December 2022, credit risk arose principally from investment
in capital instruments of GBP77,735,000 (2021: GBP85,449,000),
cash and cash equivalents of GBP3,356,000 (2021: GBP7,713,000),
balances held as collateral for derivative financial instruments
at fair value through profit or loss of GBP4,164,000 (2021: GBP4,119,000),
foreign currency forward assets of GBP260,000 (2021: assets of
GBP132,000) and investments in sale and repurchase assets of GBPnil
(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 31 December 2022, the capital instrument rating
profile of the portfolio was as follows:
31 December 31 December
2022 2021
Percentage Percentage
BBB 2.80 7.93
BB 34.54 19.34
B 23.60 16.90
Below B 3.20 9.89
No rating 35.86 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) or better to protect against counterparty failure.
The Company may implement hedging and derivative strategies designed
to protect against credit risk. Such strategies may include (but
are not limited to) credit default swaps and will only be entered
into when they are available in a timely manner and on terms acceptable
to the Company. The Company may also bear risks that could otherwise
be hedged where it is considered appropriate. There can be no
certainty as to the efficacy of hedging transactions.
Due to the Company's investment in credit default swap agreements,
the Company is exposed to additional credit risk as a result of
possible counterparty failure. The Company has entered into ISDA
contracts with Credit Suisse (A-), JP Morgan (A+) and Goldman
Sachs (A+) (2021: all rated A+ with Standard & Poor's). At 31
December 2022, the overall net exposure to these counterparties
was 4.56% (2021: 3.62%) of NAV. The collateral held at each counterparty
is disclosed in note 16.
Liquidity risk
Liquidity risk is defined as the risk that the Company will encounter
difficulties in realising assets or otherwise raising funds to
meet financial commitments. The principal liquidity risk is contained
in unmatched liabilities. The liquidity risk at 31 December 2022
was low since the ratio of cash and cash equivalents (net of overdrafts)
to unmatched liabilities was 3:1 (2021: 11:1).
In addition, the Company diversifies the liquidity risk through
investment in capital instruments with a variety of maturity dates,
as follows:
31 December 31 December
2022 2021
Percentage Percentage
Less than 1 year 1.48 15.99
1 to 3 years 33.28 26.88
3 to 5 years 30.82 24.75
5 to 7 years 7.91 1.59
7 to 10 years 9.53 2.92
More than 10 years 16.98 27.87
------------ ------------
100.00 100.00
------------ ------------
As at 31 December 2022, the Company's liquidity profile was such
that 74.5% of capital instruments were realisable within one day
(2021: 63.6%), 20.1% was realisable between two days and one week
(2021: 32.3%) and 5.4% was realisable between eight days and one
month (2021: 4.1%).
As at the year end, the Company's liabilities fell due as follows:
31 December 31 December
2022 2021
Percentage Percentage
1 to 3 months 60.40 71.52
3 to 6 months 18.04 -
6 to 12 months - -
1 to 3 years ([1]) - 28.48
3 to 5 years 21.56 -
------------ ------------
100.00 100.00
------------ ------------
This classification assumes that derivative liabilities are
([1]) held to maturity. However, they have been included as current
liabilities in the Statement of Financial Position as they are
not always held to maturity but are 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.
25. Capital management policy and procedures
The Company's capital management objectives are:
* to ensure that it will be able to meet its
liabilities as they fall due; and
* to maximise its total return primarily through the
capital appreciation of its investments.
Pursuant to the Company's Articles of Incorporation, the Company
may borrow money in any manner. However, the Board has determined
that the Company should borrow no more than 20% of direct investments.
The Company uses sale and repurchase agreements to increase the
gearing of the Company. As at 31 December 2022 the Company had
no open sale and repurchase agreements (2021: eight open sale
and repurchase agreements, one of which was a reverse sale and
repurchase agreement, committing the Company to make a total repayment
of GBP6,110,000 post the year end). As a result of the reverse
sale and repurchase agreement(s) held by the Company as at 31
December 2021, the Company was due to receive GBP4,194,000 after
the year end.
The raising of capital through the placing of shares forms part
of the capital management policy. See note 21 for details of the
Ordinary Shares issued since incorporation.
As disclosed in the Statement of Financial Position, at 31 December
2022 the total equity holders' funds were GBP85,200,000 (2021:
GBP96,883,000).
25. Capital commitments
The Company holds a number of derivative financial instruments,
which, by their very nature, give rise to capital commitments
post 31 December 2022. These are as follows:
* At 31 December 2022, the Company had sold two (2021:
six) credit default swap agreements for a total of
GBP316,000 (2021: GBP457,000), each receiving
quarterly interest. The exposure of the Company in
relation to these agreements at the year end date was
GBP853,000 (2021: GBP86,000). Collateral of
GBP3,890,000 for these agreements was held at 31
December 2022 (2021: GBP3,328,000).
* At 31 December 2022, the Company had committed to two
foreign currency forward contracts dated 9 February
2023 to buy GBP50,774,000 (2021: two foreign currency
forward contracts dated 27 January 2022 to buy
GBP45,834,000). At 31 December 2022, the Company
could have effected the same trades and purchased
GBP50,976,000 (2021: GBP45,827,000), giving rise to a
loss of GBP202,000 (2021: gain of GBP7,000).
* At 31 December 2022, the Company held no (2021: six
(this excludes the one open reverse sale and
repurchase agreement)) open sale and repurchase
agreements (2021: committing the Company to make a
total repayment of GBP6,310,000).
26. 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 GBP880,000 at 31 December
2022 (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 GBP880,000 (2021: GBP777,000)
Expenses Excess to become payable within the foreseeable future,
the Company's NAV would have to increase considerably from the
31 December 2022 NAV. 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.
27. Events after the financial reporting date
On 25 January 2023, the Company declared a dividend of 1.50p per
Ordinary Share relating to the period from 1 January 2022 to 31
December 2022, which (in accordance with IFRS) was not provided
for at 31 December 2022, out of the retained profits as at 31
December 2022 (note 6). This dividend was paid on 24 February
2023.
The Board will shortly put forward proposals for the liquidation
of the Company, including the ability for Shareholders to receive
shares, in respect of their holdings of the Company's Ordinary
Shares, in a new open-ended fund managed by the same management
team and with a similar investment mandate to the Company. The
Board believes that these proposals will provide continuity for
those Shareholders in terms of exposure to a strategy similar
to the one currently pursued by the Company and under the same
management team. The New Fund, AUFC, which will be a new Compartment
of Axiom Lux SICAV, an established Luxembourg SICAV that is registered
as a UCITS with the Luxembourg financial regulator, the Commission
de Surveillance du Secteur Financier, will be open-ended with
daily liquidity. The proposals will also include a mechanism for
those Shareholders who do not wish to continue their investment
to achieve a cash exit.
Further details of the Proposals for the implementation of the
Scheme will be described in the Circular, which, when finalised,
will be made available on the Company's section of the Investment
Manager's website
(https://axiom-ai.com/web/en/axiom-european-financial-debt-fund-limited-2/).
Glossary
Defined terms
Administrator Elysium
AGM Annual General Meeting
AIB Allied Irish Bank
AIC Association of Investment Companies
AIC Code AIC Code of Corporate Governance
AIF Alternative Investment Fund
AIFM Alternative Investment Fund Manager
AIFMD Alternative Investment Fund Managers Directive
APM Alternative Performance Measures
AT1 Additional T1
Axiom AI Axiom Alternative Investments Sarl
BACA Bank Austria UniCredit
BBVA Banco Bilbao Vizcaya Argentaria
Broker Corporate Broker
BRRD II Bank Recovery and Resolution Directive II
CDS Credit Default Swap
CET1 Common Equity T1
CFO Chief Financial Officer
CIB Cash In Bank
CMS Constant Maturity Swap
Committees The Company's Audit Committee, Management Engagement
Committee and Nomination and Remuneration Committee
Company Axiom European Financial Debt Fund Limited
COO Chief Operating Officer
CPI Consumer Price Index
CRR Capital Requirements Regulation
CSAM Credit Suisse Asset Management
CVA Credit Valuation Adjustment
EBA European Banking Authority
EC European Commission
ECB European Central Bank
Elysium Elysium Fund Management Limited
ESG Environmental, Social and Governance
FCA The Financial Conduct Authority
Fed Federal Reserve System
FICC Fixed Income Clearing Corporation
FX Foreign exchange
GDP Gross Domestic Product
GFSC Guernsey Financial Services Commission
Grant Thornton Grant Thornton Limited
IASB International Accounting Standards Board
IFRS UK-adopted international accounting standards
IG Investment Grade
Investment Manager Axiom AI
IPO Initial Public Offering
ISDA International Swaps and Derivatives Association
KID Key Information Document
KPIs Key Performance Indicators
Law Companies (Guernsey) Law, 2008
LSE London Stock Exchange
M&A Mergers and Acquisitions
MIFIR Markets in Financial Instruments Regulation
MREL Minimum Requirement for own funds and Eligible
Liabilities
NAV Net asset value
New Fund or AUFC Axiom Unconstrained Financial Credit, a newly
established Compartment of Axiom Lux SICAV
NPL Non-Performing Loan
P&C Property and Casualty
PIBS Permanent Interest Bearing Shares
POI Law The Protection of Investors (Bailiwick of Guernsey)
Law, 2020
PRA Prudential Regulatory Authority
Premium Segment The Premium Segment of the Main Market of the
LSE
Proposals Proposals for the implementation of the Scheme
as described in the Circular
Published NAV The NAV published on the LSE on 4 January 2023,
prior to the adjustments required for these
financial statements under IAS 2 (see note
22)
Published net assets The net assets used to calculate the Published
NAV, prior to the adjustments required for
these financial statements under IAS 2 (see
note 22)
RT1 Restricted T1
Scheme The proposed scheme of reconstruction pursuant
to which the Company will be placed into voluntary
liquidation and the Transfer will be effected
SFDR Sustainability-related disclosures in the financial
services sector
SFS The Specialist Fund Segment of the LSE
SME Small and Medium-sized Entities
SPAC Special Purpose Acquisition Company
SPPI Solely payments of principal interest
SPV Special Purpose Vehicle
SREP Supervisory Review and Evaluation Process
SubFin Markit iTraxx Europe Subordinated Financial
Index
SX7R STOXX Europe 600 Banks Index
SXXR STOXX Europe 600 Index
T1 Tier 1
T2 Tier 2
TBV Total Book Value
TCFD Task Force on Climate-Related Financial Disclosures
TISE The International Stock Exchange
TLTRO Targeted Longer-Term Refinancing Operations
TMO Taux Moyen des Obligations
Transfer The proposed transfer of substantially all
of the assets of the Company to the New Fund
in exchange for the issue by the New Fund of
the Issue Shares to Shareholders pursuant to
the Transfer Agreement, as further described
in the Circular
TRIM Targeted Review of Internal Models
UK-adopted international International Accounting Standards, International
accounting standards Financial Reporting Standards and interpretations
issued by the International Financial Reporting
Standards Interpretations Committee, as adopted
by the UK
UK Code UK Corporate Governance Code 2018
Winterflood Winterflood Securities Limited
Alternative Performance Measures
Cash (%) Total cash held, including overdrafts, expressed
as a percentage of Published net assets.
Collateral (%) Total collateral held, including negative balances,
expressed as a percentage of Published net
assets.
Gross assets (%) Total assets, expressed as a percentage of
Published net assets.
Modified duration The percentage impact on the fair value of
investments of a 100bps increase in risk free
rates.
Net gearing Total assets, less collateral, expressed as
a percentage of Published net assets.
Published NAV / Published Please see the Glossary.
net assets
Running yield Expected annualised coupons, expressed as a
percentage of the fair value of investments.
Sensitivity to credit The percentage impact on the fair value of
investments of a 100bps increase in credit
spreads.
Share price premium/discount The amount by which the Ordinary Share price
is higher/lower than the Published NAV per
Ordinary Share, expressed as a percentage of
the Published NAV per Ordinary Share.
Total return per Total return per Ordinary Share has been calculated
Ordinary Share by comparing the NAV or share price, as applicable,
at the start of the year with the NAV or share
price, as applicable, plus dividends paid,
at the year end, assuming that dividends are
reinvested.
Yield to call The yield of the portfolio, converted into
GBP at the anticipated reimbursement date of
the bonds.
Yield to perpetuity The yield of the portfolio, converted into
GBP, with the hypothesis that securities are
not reimbursed and kept to perpetuity.
-- ENDS --
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FR NKDBNFBKDKNB
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March 22, 2023 03:00 ET (07:00 GMT)
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