TIDMTORO
RNS Number : 5931C
Chenavari Toro Income Fund Limited
23 January 2018
Chenavari Toro Income Fund Limited
(Formerly Toro Limited)
(a closed-ended investment company limited by shares
incorporated under the laws of
Guernsey with registered number 59940)
Audited Annual Financial Statements
For the year ended 30 September 2017
Potential investors are "qualified eligible persons" and
"Non-United States Persons" within the meaning of the US Commodity
Futures Trading Commission Regulation 4.7.
Chenavari Credit Partners LLP (the "Portfolio Manager") is
registered as a commodity pool operator ("CPO") with the Commodity
Futures Trading Commission (the "CFTC") and is a member of the
National Futures Association ("NFA") in such capacity under the
U.S. Commodity Exchange Act, as amended ("CEA"). With respect to
the Company, the Portfolio Manager has claimed an exemption
pursuant to CFTC Rule 4.7 for relief from certain disclosure,
reporting and recordkeeping requirements applicable to a registered
CPO. Such exemption provides that certain disclosures specified in
section 4.22 (c) and (d) of the regulation are not in its Audited
Annual Financial Statements and Annual Report.
Contents
Commodity Exchange Affirmation Statement
Highlights for the year ended 30 September 2017
Corporate Summary
General Information
Chairman's Statement
Portfolio Manager's Report
Board of Directors
Disclosure of Directorships
Report of the Directors
Corporate Governance Report
Statement of Principal Risks and Uncertainties
Audit Committee Report
Directors' Remuneration Report
Statement of Directors' Responsibilities
Independent Auditor's Report
Statement of Comprehensive Income
Statement of Financial Position
Statement of Changes in Equity
Statement of Cash Flows
Condensed Schedule of Investments
Notes to the Financial Statements
Appendix 1
AIFMD Disclosures (unaudited)
FORWARD-LOOKING STATEMENTS
This annual report includes statements that are, or may be
considered, "forward-looking statements". These forward-looking
statements can be identified by the use of forward-looking
terminology, including the terms "believes", "estimates",
"anticipates", "plans", "expects", "targets", "aims", "intends",
"may", "will", "can", "can achieve", "would" or "should" or, in
each case, their negative or other variations or comparable
terminology. These forward-looking statements include all matters
that are not historical facts. They appear in a number of places
throughout this annual report, including in the Chairman's
Statement. They include statements regarding the intentions,
beliefs or expectations of the Company or the Portfolio Manager
concerning, among other things, the investment objectives and
investment policies, financing strategies, investment performance,
results of operation, financial condition, liquidity prospects,
dividend policy and targeted dividend levels of the Company, the
development of its financing strategies and the development of the
markets in which it, directly and through special purpose vehicles,
will invest in and issue securities and other instruments. By their
nature, forward-looking statements involve risks and uncertainties
because they relate to events and depend on circumstances that may
or may not occur in the future. Forward-looking statements are not
guarantees of future performance. The Company's actual investment
performance, results of operations, financial condition, liquidity,
dividend policy and dividend payments and the development of its
financing strategies may differ materially from the impression
created by the forward-looking statements contained in this
document. In addition, even if the investment performance, results
of operations, financial condition, liquidity, dividend policy and
dividend payments of the Company and the development of its
financing strategies are consistent with the forward-looking
statements contained in this document, those results or
developments may not be indicative of results or developments in
subsequent periods. Important factors that may cause differences
include, but are not limited to: changes in economic conditions
generally and in the structured finance and credit markets
particularly; fluctuations in interest and currency exchange rates,
as well as the degree of success of the Company's hedging
strategies in relation to such changes and fluctuations; changes in
the liquidity or volatility of the markets for the Company's
investments; declines in the value or quality of the collateral
supporting many of the Company's investments; legislative and
regulatory changes and judicial interpretations; changes in
taxation; the Company's continued ability to invest its cash in
suitable investments on a timely basis; the availability and cost
of capital for future investments; the availability of suitable
financing; the continued provision of services by the Portfolio
Manager and the Portfolio Manager's ability to attract and retain
suitably qualified personnel; and competition within the markets
relevant to the Company. These forward-looking statements speak
only as at the date of this annual report. Subject to its legal and
regulatory obligations, the Company expressly disclaims any
obligations to update or revise any forward-looking statement
(whether attributed to it or any other person) contained herein to
reflect any change in expectations with regard thereto or any
change in events, conditions or circumstances on which any
statement is based. The Company qualifies all such forward-looking
statements by these cautionary statements.
Commodity Exchange Affirmation Statement
Commodity Exchange Affirmation Statement Required by the
Commodity Exchange Act, Regulation --4.7(b)(3)(i).
I, Loic Fery, hereby affirm that, to the best of my knowledge
and belief, the information contained in this Annual Report and
Audited Annual Financial Statements is accurate and complete.
Loic Fery
Chief Executive Officer and representative of the Managing
Member of Chenavari Credit Partners LLP, Commodity Pool Operator of
the Company.
22 January 2018
Highlights for the year ended 30 September 2017 (the "Year")
-- The NAV total return for the Year (with dividends reinvested)
was 8.92% and the share price total return (with dividends
reinvested) was 10.75% (2016: 3.27% and -15.23% respectively).
-- During the Year, the Company's net asset value (NAV) per
Ordinary Share ("Share") increased by 2.54% (2016: -4.10%) to close
at 99.85 cents (2016: 97.38 cents).
-- Dividends of 6.75 cents per Share were declared with respect
to the Year, of which 4.75 cents per Share (and an additional 1.25
cents per Share relating to the previous financial year) were paid
during the Year, with a final dividend of 2 cents per Share paid on
1 December 2017.
-- The Company's mid-market share price increased by 3.29%
during the year to close at 86.25 cents at 30 September 2017 (2016:
83.5 cents), representing a discount to NAV of 13.62 % (2015: 14.26
%).
-- The profit of the Company for the Year was EUR23.8 million
(2016: EUR11.2 million), or 7.04 cents per Share (2016: 3.09 cents
per share), taking into account recognition of the following
significant items:
o total net income of EUR33.2 million
o total operating expenses of EUR9.2 million.
-- At 30 September 2017, the NAV was EUR324.3 million, and its
free cash holdings were EUR66.8 million.
-- During the Year, the Company repurchased 38,343,396 Shares
via multiple Share Repurchases and at 30 September 2017 the Company
had 324,803,047 Shares in issue with 36,646,953 held in
treasury.
Corporate Summary
For the year ended 30 September 2017
The Company
Chenavari Toro Income Fund Limited (formerly Toro Limited) (the
"Company") is a closed-ended Collective Investment Scheme
registered pursuant to The Protection of Investors (Bailiwick of
Guernsey) Law, 1987, as amended (the "Law") and the Registered
Collective Investment Scheme Rules 2008 issued by the Guernsey
Financial Services Commission (the "Commission"). The Company's
Ordinary Shares (the "Shares") were admitted to trading on the
Specialist Fund Segment ("SFS") of the London Stock Exchange and
The International Stock Exchange (formerly Channel Islands Security
Exchange Authority Limited) ("TISE") on 8 May 2015.
Investment objective and policy
The investment objective of the Company is to deliver an
absolute return from investing and trading in Asset Backed
Securities ("ABS") and other structured credit investments in
liquid markets, and investing directly or indirectly in asset
backed transactions including, without limitation, through the
origination of credit portfolios.
Target returns and dividend policy
On the basis of market conditions as at the date of the
prospectus (28 April 2015), and whilst not forming part of its
investment objective or investment policy, the Company will target
(i) a NAV total return (including dividend payments) of 12 to 15
per cent per annum over three to five years once the Company is
fully invested. From May 2017, the Company's dividend target was
increased from 5 cents to 8 cents per annum payable quarterly in
March, June, September and December of each year. Relative to this
target return, dividends of 6.75 cents per Share were declared with
respect to the Year.
Asset Values
At 30 September 2017, the Company's NAV was EUR324.3 million
(2016: EUR352 million), with the NAV per share amounting to 99.85
cents (2016: 97.38 cents). The Company publishes its NAV on a
monthly basis. The NAV is calculated as the Company's assets at
fair value less liabilities, measured in accordance with
International Financial Reporting Standards ("IFRS").
Duration
The Company has an indefinite life.
Website
The Company's website address is
http://www.chenavaritoroincomefund.com/
Listing Information
The Company's Shares are admitted to trading on the SFS and
TISE.
The ISIN number of the Euro Shares is GG00BWBSDM98 and the SEDOL
is BWBSDM9.
The closing price of the Shares quoted on the SFS at 30
September 2017 was 86.25 cents per Share.
The average closing price of the Shares over the Year was 85.79
cents per Share.
General Information
Directors Registered Office
Frederic Hervouet (Non-executive
Chairman) Old Bank Chambers
John Whittle (Non-executive director) La Grande Rue
Roberto Silvotti (Non-executive director) St Martin's
Guernsey
GY4 6RT
Portfolio Manager AIFM
Carne Global AIFM Solutions (C.I.)
Chenavari Credit Partners LLP Limited
80 Victoria Street Channel House
London Green Street
SW1E 5JL St. Helier
Jersey
JE2 4UH
Corporate Broker Registrar
Fidante Partners Europe Limited,
trading as Fidante Capital Link Asset Services
1 Tudor Street Mont Crevelt House
London Bulwer Avenue
EC4Y 0AH St Sampson
Guernsey
GY2 4LH
Solicitors to the Company (as to Advocates to the Company (as
English law) to Guernsey law)
Gowling WLG (UK) LLP Mourant Ozannes
4 More London Riverside 1 Le Marchant Street
London St Peter Port
SE1 2AU Guernsey
GY1 4HP
Administrator and Company Secretary Custodian and Principal Bankers
Estera Administration Limited (formerly
Morgan Sharpe Administration Limited
) J.P. Morgan Chase Bank N.A
Old Bank Chambers Jersey Branch
La Grande Rue J.P. Morgan House
St Martin's Grenville Street
Guernsey St Helier
GY4 6RT Jersey
JE4 8QH
Sub-Administrator Auditor
Quintillion Limited Deloitte LLP
24-26 City Quay P.O. Box 137
Dublin 2 Regency Court
Ireland Glategny Esplanade
D02 NY19 St. Peter Port
Guernsey
GY1 3HW
Chairman's Statement
Dear Shareholder,
On behalf of the Board, I am delighted to present Chenavari Toro
Income Fund's Annual Report and Audited Financial Statements for
the Year ended 30 September 2017.
Financial Performance
We have seen a robust financial performance for the year, with
the Company's NAV total return for the year (dividends reinvested)
being 8.92%. The share price total return of 10.75% for the Year
exceeded the NAV total return, resulting in a somewhat narrower
discount at the year end of 13.62%, compared to 14.26% at the
beginning of the year. This share price performance was facilitated
by improving NAV performance share repurchases during the Year and
the increase in the dividend target to 8 cents per annum, announced
in May 2017. At the end of the year, the NAV per share and share
price stood at 99.85 and 86.25 cents respectively, compared to
97.38 and 83.50 cents at the beginning.
The Company's performance was largely driven by trading gains,
carry and price appreciation within our Public Asset-Backed
Security Strategy. This strategy saw the highest level of trading
activity over the year as the Portfolio Manager sought to rebalance
the Portfolio towards the Private Asset Backed Finance and Direct
Origination strategies.
For further details on the financial performance of the Company
please refer to the Portfolio Manager's Report on pages 9-15.
Dividends
During the Year, the Company declared dividends of 6.75 cents in
total, comprising two dividends of 2 cents, one dividend of 1.5
cents and one dividend of 1.25 cents. On 12 May 2017, the Company
announced a new dividend target of 8 cents per annum per Share. We
took this decision after careful consideration of our assets, the
progressive rebalancing of the portfolio towards private
Asset-Backed Finance and Direct Origination strategies, and
anticipated cash-flows under reasonable base case scenarios. Given
low inflation and minimal returns on cash and near-cash assets, the
Directors consider the 2017 dividend and the new dividend target
very respectable on a risk adjusted basis, for an investment
company with low correlation to financial markets.
Marketing and discount control
During the Year, the Directors and Investment Manager have
sought to enhance the Company's market profile and transparency in
a number of ways. The primary aim of these initiatives is to make
the Company attractive to new investors, whose demand is expected
to be more effective than the buyback alone in narrowing the
discount to Net Asset Value at which Shares trade.
Quarterly investor calls hosted by the Investment Manager have
been introduced with the opportunity for questions to be asked at
the end. I encourage all investors to participate in these calls.
The Company's marketing materials, including the website and
monthly factsheets, have also been developed and simplified.
Finally, but importantly, the target annual dividend has been
increased to differentiate the Company and demonstrate the
portfolio's return potential.
Although the name of the Company was changed to Chenavari Toro
Income Fund Limited after the end of the year we are reporting on
here, I feel it is pertinent to note this change was made to more
accurately reflect the characteristics of the Company as an
investment proposition. The Board believes that the new name of
will ensure that the Company's income characteristics and
relationship to Chenavari Credit Partners are more immediately
recognisable.
The Company has witnessed some transition in its share register.
Shares have flowed from some original investors that can be
described as private or family offices to a number of new
investment and wealth managers. On behalf of the Board of Chenavari
Toro Income Fund I want to thank longstanding shareholders for
their support and to welcome new shareholders, and particularly
those institutions and private wealth managers that have seen the
merits of investing in structured credit markets and asset backed
transactions through ownership of shares in the Company.
Nevertheless, the Board is disappointed that the Shares continue
to trade at a material discount to Net Asset Value, noting that the
discount has widened since the end of the Year, and that the
buyback programme initiated at the beginning of the Year was not
more effective in addressing this. During the Year, from October
2016 to May 2017, the Company spent EUR32.9 million acquiring
38,343,396 Shares at a weighted average discount to prevailing NAV
of 12.6%. The Shares acquired were held in treasury, some of which
were used to satisfy part of the performance fee payment to the
Investment Manager and, since the Year end, to satisfy elections
for scrip dividends.
Chairman's Statement (continued)
Marketing and discount control (continued)
The Company will continue to seek the authority of Shareholders
to repurchase Shares in the market, and to obtain the related
waivers under Rule 9 of The City Code on Takeovers and Mergers, as
explained on page 21. However, we do not expect to resume Share
repurchases in the short term, until we believe that such
repurchases will be effective in lastingly addressing the discount.
The Board believes that a precondition to effective Share
repurchases is the participation of other investors, alongside the
Company, in acquiring Shares in reasonable size. Therefore, the
Board's efforts in relation to discount control will continue to
focus on marketing the Company and communicating its attractions as
an investment in the alternative credit sector to develop such new
investors, but all options are kept under review.
Investment Portfolio and Outlook
The Investment Manager's report following this Statement gives
considerable detail on the affairs of the Company and as with last
year I will confine my comments to commenting on strategy.
Historically, exposure to Public Asset-Backed Securities has
been the largest part of our Portfolio. Over the course of 2017,
however we chose to increase the Company's allocation to the
Private Asset Backed Finance and Direct Origination strategies.
These are strategies which the Portfolio Manager believe will
generate higher gross returns.
The ongoing rotation out of Public Asset- Backed Securities
should increase our gross interest income to over 10% and overall
yield to 14% in 2018 as indicated in the Portfolio Manager Report
(page 15) though market uncertainties may intervene and these
figures do not represent forecasts. The Portfolio Manager
anticipates that our Portfolio will reach the following allocation
in December 2018: 20% Public Asset- Backed Securities, 25% Private
Asset Backed Finance and 50% Direct Origination.
For further details on the portfolio composition and investment
outlook please refer to the Portfolio Manager's Report on pages
9-15
Frederic Hervouet
Non-executive Chairman
22 January 2018
Portfolio Manager's Report
Performance
During the year, Chenavari Toro Income Fund Limited recorded an
NAV total return of 8.92% during the Year, dividends
reinvested.
During the Year, the Company made a net profit of EUR23.8
million and distributed dividends of EUR20.2 million, EUR4.4
million of which related to the year ended 30 September 2016.
Additionally the fund completed share repurchases totalling EUR32.9
million. The Company's total equity was therefore EUR324.3
million.
The month-on-month NAV performance since inception was the
following (with dividends reinvested at NAV):
Year YTD Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
------ ------ ------- ------- ------ ------ ------ ------- ------- ------- ------ ------ ------ ------
2015 4.53% 2.06% 0.15% 0.45% 0.64% 0.28% 0.02% 0.52% 0.34%
2016 3.86% -0.34% -2.44% 0.69% 0.92% 0.95% -0.04% 0.29% 1.13% 1.23% 0.54% 0.67% 0.24%
2017 7.36% 1.41% 0.88% 1.21% 0.56% 0.30% 1.49% 0.28% 0.49% 0.51%
Since inception, the Company has paid the following
dividends:
Period ending Dividend (cents
per Share)
30 September 2015
(1 dividend) 2.00
30 September 2016
(4 dividends) 6.50
30 September 2017
(4 dividends) 6.75
In relation to the Year, the Company declared dividends
totalling 6.75 cents per Share. From May 2017, the dividend target
increased to a minimum of 8 cents per annum. Dividend payments in
the Year totalled 6 cents per Share as the dividend for the period
ending 30 September 2016 (relating to the previous financial year)
was paid in the Year and the dividend for the period ending 30
September 2017 was paid after the end of the Year.
Portfolio breakdown
As of 30 September 2017, the Company was 78.45% invested.
The NAV allocation as of 30 September 2017 was as follows:
30 September 30 September
2017 2016
Asset class breakdown % NAV % NAV
Equity Securities 0.78% 0.05%
Bond 1.41% 0.69%
Arbitrage CDO 0.88% 18.97%
Commercial mortgage-backed security 1.92% 3.30%
Arbitrage CLO 11.31% 22.08%
Residential mortgage-backed security 6.32% 9.98%
Balance Sheet CLO 8.38% 5.31%
Consumer ABS 3.52% 4.74%
Senior Loan 1.21% 0.72%
Whole Loan 0.02% 1.53%
Mezzanine loan 0.13% -
Non-performing loan 7.45% 7.97%
Preferred equity 13.98% 5.58%
Equity 22.66% 10.18%
Repo - 0.28%
Cash, Hedges and Accruals* 20.03% 8.62%
Total 100.00% 100.00%
------------- -------------
Portfolio Manager's Report (continued)
Portfolio breakdown (continued)
The geographical breakdown of the underlying assets is as
follows:
30 September 30 September
2017 2016
Geographic breakdown % NAV % NAV
European Union 5.36% 9.66%
France 4.42% 3.09%
Germany 8.69% 7.68%
Great Britain 6.39% 15.14%
Ireland 4.55% 13.57%
Italy 2.54% 3.77%
Netherlands 5.47% 7.48%
Portugal 3.69% 2.62%
Spain 20.88% 20.15%
USA 6.01% 4.46%
Other 9.28% 3.64%
Cash and collateral* 22.72% 8.74%
Total 100.00% 100.00%
------------- -------------
* Difference relates to derivative financial assets and
liabilities included Asset class breakdown
Investment Strategy
Public ABS Strategy: The Company will opportunistically invest
or trade in primary and secondary ABS markets to seek out
opportunities that aim to unlock significant value from ABS
investments that the Portfolio Manager considers to be mispriced by
the market relative to their intrinsic value.
Private Asset Backed Finance Strategy: Through the Portfolio
Manager, the Company will leverage on the extensive relationships
it has with European Banks and retail credit firms in order to gain
access and invest in private asset backed finance transactions that
are otherwise unlisted and difficult to source.
Direct Origination Strategy: The Company will primarily invest,
on a buy-to-hold basis, in Originators of securitisation vehicles
by retaining the requisite Retention Securities in such vehicles,
pursuant to the relevant risk retention requirements in the EU or
the US. This strategy benefits from a liquidity premium and 'alpha'
by participating in the origination, as well as enhanced economics
on the retained interests, with further added value derived from
the team's sourcing and structuring capabilities. Additional
investment opportunities may also include providing warehouse
credit facilities.
Gearing
The Company may use borrowings from time to time for the purpose
of short term bridging, financing Share buy backs, repurchase
agreements with market counterparties or managing working capital
requirements, including hedging facilities. Cash borrowings can
contribute alongside other forms of leverage to increase the level
of gearing of the Company. The Company may also use gearing to
increase potential returns to Shareholders. In the past, the
Portfolio Manager has employed leverage against senior tranches of
ABS to enhance their returns, and expects it will continue to do
so, where the economic terms offered by counterparties can increase
potential returns to Shareholders.
Portfolio Manager's Report (continued)
Investment Activity
Historically, exposure to Public ABS has been the largest part
of the Company's portfolio. The intention over 2017, however, was
to increase allocation to the Private Asset Backed Finance and
Direct Origination strategies, which we believe will generate
higher gross returns. The current yield-to-maturity for the Public
ABS strategy is 9.8%, for Private Asset Backed Finance it is 13.8%
and for Direct Origination it is 18.0%. As of the Year End, the
allocation to Public ABS had decreased to 25% (from 59%) and the
Company's exposure to the Private Asset-Backed finance and Direct
Origination strategies increased to 20% and 33% respectively (up
from 14% and 16%). This rebalancing was driven by a mixture of new
investments in the two higher-yielding strategies and several
disposals within the Public ABS strategy.
Public ABS
The Public ABS bucket, in which the Portfolio Manager invests in
securities that appear mispriced by the market relative to their
intrinsic value, saw the highest level of trading activity over the
year as the Portfolio Manager looked to rebalance towards the
Private Asset Backed Finance and Direct Origination strategies.
This included switching to instruments we believe offer similar
risk, if not less, yet yield higher returns. This also drove the
majority of the performance over the year as multiple positions
were sold at a premium to their mark in addition to the spread
compression witnessed in CLO 2.0 B and BB-rated tranches, where the
Portfolio Manager actively rebalanced the sub book towards CLO
2.0s. These benefit from a robust spread pick up to similarly rated
credit instruments while offering better downside credit
protection. The Portfolio Manager notably sold the largest position
(HOEF III A) at a significant premium to the mark, exiting this
entire senior tranche of CDO of ABS at a price close to the
liquidation value, thereby leaving very limited upside.
Private Asset Backed Finance
In November 2016, the Portfolio Manager completed the execution
of two deals using its extensive relationships it has with European
banks and retail credit firms to source these deals: a UK auto loan
receivables transaction (Project Sacramento) and an Irish
buy-to-let mortgage loans origination (Project Shamrock).
Anticipated gross returns at close stood at 13% and 15%,
respectively, which should allow for an increase of the overall
portfolio yield.
In the first three month of 2017, the Company also closed
Project Clove, a portfolio of re-performing Irish mortgage loans.
This portfolio of Irish residential mortgage loans was financed
with a relatively low levered loan facility which provides the
Company with an attractive equity position and a forecasted gross
return of 16% per annum under the base case scenario. The objective
of the investment strategy is to continue the active loan servicing
in order to maintain the cash flow metrics whilst benefiting from
both the strong and improving Irish macroeconomic environment and
house price appreciation.
The Company also made a new investment in the first loss tranche
of a European collateralised loan obligations (CLO) warehouse. The
CLO warehouse will be managed by a top tier European CLO manager
and will benefit from a senior lending facility provided by a large
US investment bank. The first loss investment is anticipated to
generate gross returns in the mid-teens under our base case.
Investments in both the existing Project Shamrock (buy-to-let
mortgage loans origination - Direct Origination) and SpRED (Spanish
real estate development financing - Direct Origination)
transactions were increased during the Year, highlighting the
effective expansion of these new direct lending platforms through
their respective local partners.
Direct Origination
2017 saw the successful placing of two new CLOs managed by
Chenavari :Toro European CLO 3 and Toro European CLO 4 (which was
the resetting of Toro European CLO 1). The placement of Toro
European CLO 4 achieved at the tightest execution of the Toro CLO
platform (equivalent to EUR3M+167bp) and the size was also
increased from EUR308m to EUR410m on the back of strong demand from
an enlarged institutional investor base.
The Company will retain, through its originator subsidiary, a
controlling stake in the equity of both, (equivalent to the EU risk
retention requirement), entitling the Company to a 100% rebate of
the pro-rata CLO management fees. Under our base case, the
forecasted gross returns on each of the bundled investments stand
at over 20% per annum.
Portfolio Manager's Report (continued)
Investment Outlook
For the first time in many years, we are not expecting
significant political risk in Europe to be a disruptive factor
going into 2018. In 2017, populist and extreme parties which had
become increasingly popular in recent years, failed to gain enough
votes to win power. Whether it be, Geert Wilders in the Netherland,
France's National Front, Norbert Hofer in Austria or Alternative in
Germany, these parties have not altered the European political
landscape as radically as some commentators had predicted.
With the exception of Catalonia and general uncertainty
surrounding Brexit, the only major upcoming political event is the
Italian general election expected in the spring of 2018. However,
we are not preparing for a potential wholesale change of
government, due to the recent change in the Italian electoral law
favouring a broad coalition.
The Euro area should also continue to grow and hover above 2%
next year (after GDP growth of +2.8% YoY in the third calendar
quarter of 2017) buoyed by a global recovery, improving business
and consumer confidence and an acceleration of self-sustaining
domestic demand. Unemployment rate in the Eurozone was down 1% in
2017 (as of October 2017) and is anticipated to fall further under
8% in 2018 as the business cycle accelerates.
The situation is not as positive in the UK where growth is
anticipated to decline to c. 1% in 2018 from 1.5% in 2017 (Morgan
Stanley, 2018 Global Macro Outlook, 26 November 2017) due to a
number of factors, including Brexit, consumer risks and increased
inflation. Furthermore, with a minority government torn over Brexit
negotiations, another early election in 2018 remains a plausible
risk.
Global central banks led by the US Federal Reserve embarked
towards policy normalisation in 2017. We are expecting, further
interest rate increases from the US Federal Reserve in 2018,
accelerating its balance sheet unwind while the ECB starts to taper
its bonds purchases. As the European economy continues to show
robust growth and inflation expectations pick up, the ECB is likely
to stop its open-ended asset programme at the end of 2018 while
signalling a first interest hike for early 2019.
Public ABS
European ABS performed extremely well in 2017, in line with
broader credit markets as both fundamental and technical factors
remained strong throughout the year. Supported by improved growth
momentum and an extremely accommodative monetary policy, there were
very few sectors to be concerned about. Early signs of
deterioration appeared in UK consumer ABS sectors and specific
retail exposures weighed on some CLOs. However, overall
fundamentals were robust across the spectrum underpinned by further
underlying improvement for peripheral credits and solid financial
and operational performance for corporates (the lagging 12-month
default rate on the S&P European Leveraged Loan Index fell to
1.41% at the end of October 2017).
The technical dynamic was also very supportive with c. EUR20bn
of negative net issuance in 2017 (Morgan Stanley 2018 European ABS
and CLO Outlook) which translated into a relatively acute
supply/demand imbalance, driving spread compression relentlessly
throughout the year in the absence of volatility. The Company's
Public ABS strategy was up 20% (gross) in 2017 as the strategy
benefitted from alpha generation on CDO of ABS exposure as well as
spread compression in CLO 2.0 BB and B-rated tranches. The ABS
allocation shrank from 59% to 25% of the Company's NAV over the
year, and the Portfolio Manager now sees fewer opportunities going
forward, as the quantum of outstanding ABS continues to decrease
and most consumer ABS now trade at nearly pre-crisis spreads.
Exposure to ABS is therefore likely to decrease further while
the Portfolio Manager will focus primarily on CLOs and a few
esoteric sectors that continue to provide some of the most
attractive spread pick up across structured credit products and
broader credit markets.
Portfolio Manager's Report (continued)
Investment Outlook (continued)
Private Asset Backed Finance Strategy
At 30 September 2017, exposure to the Private Asset Backed
Finance Strategy stood at 20% of the Company's NAV (up from 14% at
30 September 2016) through seven transactions. Performance was
disappointing in 2017 as this sub-strategy was down 0.7% YoY (based
on the Company's NAV). Indeed, gains on Project Clove (3% of the
Company's NAV; a portfolio of Irish performing and re-performing
residential mortgage loans) were offset by mark-to-market losses on
Project Wind (7.4% of the Company's NAV; a portfolio of primarily
Spanish non-performing residential mortgage loans) while the
aggregated performance on other private asset backed transactions
was relatively flat over the period.
Although the performance on Wind has stabilised and collections
have increased substantially in the quarter to 30 September 2017
(up 172% vs. the same quarter in 2016), a new revised business plan
was produced in September 2017. This adjustment implied an increase
of the weighted average life of the transaction to 3.5 years from
2.4 years due to a forecasted reduction of amicable resolutions in
favour of additional foreclosures, while the recovery rate remains
in line with the initial business plan. The Portfolio Manager
anticipates recovering such mark-to-market losses as collections
accelerate following continuing improvement of the Spanish
residential market and employment rate while households' balance
sheets continue to recover. According to Eurostat, the gross
debt-to-income ratio of Spanish households is down to 102.6% at the
end of 2016 from 131% in 2010.
Allocation to the Private Asset Backed Finance Strategy is
anticipated to reach 25% of the Company's NAV in 2018. The
Portfolio Manager will favour performing loans in specific sectors
such as Irish mortgage loans (in order to consolidate on the
existing exposure) or first loss exposure in European CLO warehouse
(which offers a decent premium to CLO investments while providing
downside protection).
Direct Origination Strategy
As at the year end ended 30 September 2017, the Direct
Origination Strategy was the largest Direct Strategy, representing
33% of the Company's NAV (up from 16% at 30 September 2016). This
increase reflects the expansion of the existing origination
platforms launched in 2016 which include Project Shamrock (1.8% of
the Company's NAV; Irish buy-to-let mortgage loans) and Project
SpRED (9.2% of the Company's NAV; secured financing backed by
residential developments in Catalonia).
The Portfolio Manager believes growth will remain strong for
quite some time in Spain and Ireland, both of which are still in
the early stages of their cycles. Both the Shamrock and SpRED
transactions are forecast to generate attractive returns next year
with the issuance of an Irish RMBS transaction scheduled for H2
2018 (following the origination of over EUR50m of loans in 2017)
and the pickup in completion and sale of residential units in Spain
(over 20% of the largest project has been sold off-plan and an
offer for an entire building is currently under
consideration).Although unionist parties won the majority of votes
in Catalonia, pro-independent parties secured a majority in the
Catalan Parliament. With no clear outcome, the formation of a
regional government is likely to be challenging while another
potential unilateral declaration of independence now appears
improbable. As political tensions gradually subside, the region
should benefit from additional momentum as firms' investment plans
and consumers spending decisions, which may have been postponed,
resume in the first calendar quarter of 2018.
Taurus, the CLO Originator entity fully owned by the Company,
grew by 2.5x over the year (23% of the Company's NAV as of 30
September 2017) as Taurus acted as the risk retention provider for
two new CLOs managed by Chenavari, TCLO 3 and TCLO 4. Taurus has
also provided 51% of the first loss tranches of two CLO warehouses
respectively managed by Commerzbank Debt Fund Management and
Chenavari. Taurus will then roll into the risk retention pieces
when both warehouses are 70% ramped up. The current exposure on
Taurus is split as follows:
Equity Pricing Last Annualised Expected
Manager NAV stake date Status payment Returns
TCLO 2 Chenavari 16,830,000 55.6% Aug-16 Effective 19.10% 19%
TCLO 3 Chenavari 18,040,000 50.5% Mar-17 Effective 13.10% 20%
TCLO 4 Chenavari 20,460,000 57.4% Jun-17 95% invested 11.90% 20%
1(st) Commerzbank
loss CLO Debt Fund
warehouse Management 18,000,000 51.0% Q1 18 40% invested - 18%
1(st)
loss CLO
warehouse Chenavari 18,000,000 51.0% Q1 18 Launched - 20%
Portfolio Manager's Report (continued)
Investment Outlook (continued)
Direct Origination Strategy (continued)
Returns on TCLO 3 and 4 investments are anticipated to improve
as both CLOs become fully ramped. There have been no defaults in
the aggregate portfolios, while the quality of the collateral
amongst all three CLOs remains high with the percentage of loans
trading below 90 cash price standing at 0%, 0.46% and 0%
respectively for TCLO 2, 3 and 4 versus 1.3% and 8.3% on average
for European and US collateral CLO respectively.
Barring any unexpected events, defaults rates on leveraged loans
should remain below the 2% historical average as the European
economic outlook is in a strong phase of the cycle, while inflation
remains contained. Concurrently, the attractiveness of the CLO
arbitrage, i.e. the spread differential which should accrue to the
equity, has improved since H2 2017. The weighted average funding
cost of a European CLO has tightened faster than spread compression
on leveraged loans as shown in the following chart. Therefore, the
excess spread (after management fees) is back to c. 200bps (or
250bps for Taurus investments) while the ratio of leveraged loans
spread over the weighted average funding cost (which tells us how
much of the available asset spread accrues to the equity) is up to
57%.
* Chart based on Credit Suisse Western European Leveraged Index
Loans 3yr Discount Margin data & Barclays EUR CLO Market Colour
data.
The leveraged loan market should continue to see healthy
issuance driven by increased M&A activity, funding and
investment appetite from private equity firms and bond-to-loan
migration. The continuous tightening of spreads during 2017 appears
to have bottomed out, volatility has increased from historical lows
thereby creating potential for outperformance through trading gains
and credit pricing has begun to decompress more adequately
reflecting risk. Barring geopolitical shocks, the risk/reward of
the asset class, particularly in a CLO structure, should remain
very attractive throughout 2018.
The ongoing rotation out of Public ABS should increase the gross
interest income to over 10% and overall yield to 14% in 2018 as
indicated in the chart below. The Portfolio Manager anticipates
that the Portfolio will reach the following allocation in December
2018: 20% Public ABS, 25% Private Asset Backed Finance and 50%
Direct Origination.
Portfolio Manager's Report (continued)
Investment Outlook (continued)
Direct Origination Strategy (continued)
Although the Portfolio Manager anticipates a favourable default
and downgrade environment for 2018, which will support CLO equity
performance, we believe dispersion amongst corporate credits will
rise and high yield bonds remain the most vulnerable form of
European credit given how stretched both valuations and positioning
are. Therefore, the Portfolio Manager will seek to generate alpha
for shareholders while protecting capital with a sensible hedging
policy as volatility, as well as unexpected risk, may increase next
year.
Chenavari Credit Partners LLP
Portfolio Manager
22 January 2018
Board of Directors
Directors
The Directors are responsible for the determination of the
Company's investment objective and investment policy and have
overall responsibility for the Company's activities including the
review of investment activity and performance and the control and
supervision of the Portfolio Manager. All of the Directors are
non-executive and, except for Roberto Silvotti (as described
below), are independent of the Portfolio Manager.
The Directors meet at least quarterly.
The Directors are as follows:
Frederic Hervouet, non-executive Chairman (aged 44)
Frederic Hervouet has over 20 years' experience in the financial
markets and asset management industry with a focus on multi-asset
class investment management, risk management, structured products
and structured finance. Mr. Hervouet holds a Masters Degree (DESS
203) in Financial Markets, Commodity Markets and Risk Management
and an MSc in Applied Mathematics and International Finance from
University Paris Dauphine. Previously Mr. Hervouet worked for two
multibillion multi-strategy hedge funds specialising in
quantitative strategies, convertible arbitrage, derivatives and
emerging markets debt. Mr. Hervouet is an independent director of
Tetragon Financial Group Limited and Tetragon Financial Group
Master Fund Limited and Funding Circle SME Income Fund Limited and
Crystal Amber Fund Limited. Mr Hervouet is also a Board member of
the General Partner on Terra Firma Private Equity funds and
Lakestar Private Equity funds. Prior to this role, Mr. Hervouet was
managing director and head of commodity derivatives in Asia for BNP
Paribas. Mr Hervouet is a resident of Guernsey. He is a member of
the UK Institute of Directors ("IoD"), of the UK AIC, Association
of Investment Companies, of the Guernsey Chamber of Commerce and of
the Guernsey Investment Fund Association ("GIFA").
John Whittle, non-executive director (aged 62)
John Whittle has significant experience of the loan market and
is a non-executive director of International Public Partnerships
Ltd (as audit committee chair), Starwood European Real Estate
Finance Ltd. (as audit committee chair), India Capital Growth Fund
Ltd (as audit committee chair), Globalworth Real Estate Investments
Ltd (as audit committee chair), GLI Finance Ltd (as audit committee
chair) and Aberdeen Frontier Markets Investment Company Ltd (as
chairman). Mr. Whittle worked as a chartered accountant at
PriceWaterhouseCoopers. He is a Chartered Accountant and holds the
IoD Diploma in Company Direction. Prior to acting as a
non-executive director, Mr. Whittle was finance director at Close
Fund Services, a large independent fund administrator. He has also
held senior positions at John Lewis, Vodafone and as CFO of
Windsmoor (London LSE).
Roberto Silvotti, non-independent non-executive director (aged
59)
Roberto Silvotti has over 20 years' experience in both academic
and senior credit market positions, and was formerly the Chief Risk
Officer of the Chenavari Financial Group. He started his career as
Professor of Mathematics in institutions such as Columbia
University (New York), The Institute for Advanced Study (Princeton,
New Jersey) and Scuola Normale Superiore (Pisa, Italy). Mr.
Silvotti then moved to the capital markets industry. Over the past
10 years, he has held senior positions in various investment banks,
including risk manager at Goldman Sachs, head of credit derivatives
risk management for Banca Intesa, global head of structured credit
trading at Calyon, global head of derivatives structuring and new
product development at Dresdner Kleinwort. Prior to his role as
Chief Risk Officer of the Chenavari Financial Group he was co-head
of structured credit and head of index strategy at Royal Bank of
Scotland. Mr Silvotti is a director of Chenavari Multi-Strategy
Credit Fund SPC and Chenavari Investment Managers (Luxembourg) Sàrl
and, as such, is not considered independent of the Portfolio
Manager.
Disclosure of Directorships in Public Companies Listed on
Recognised Stock Exchanges
The following summarises the Directors' directorships in other
public companies:
Company Name Stock Exchange
Frederic Hervouet
Tetragon Financial Group Limited Euronext
Funding Circle SME Income Fund
Limited LSE
Crystal Amber Fund Limited* AIM (LSE)
John Whittle
International Public Partnerships
Ltd LSE
India Capital Growth Fund Ltd AIM
Aberdeen Frontier Markets Investment
Company Ltd AIM
Starwood European Real Estate Finance
Limited LSE
Global worth Real Estate Investments
Limited AIM
GLI Finance Ltd AIM
Robert Silvotti
None held N/A
* announced 07-12-'17
Report of the Directors
The Directors are pleased to present their Annual Report and
Audited Financial Statements for the Year. In the opinion of the
Directors, the Annual Report and Audited Financial Statements are
fair, balanced and understandable and provide the information
necessary for Shareholders to assess the Company's performance,
business model and strategy.
Incorporation
The Company is a closed-ended limited liability company
registered in Guernsey under the Companies (Guernsey) Law, 2008 (as
amended) with registered number 59940.
Results
The results for the year to 30 September 2017 are set out in the
Statement of Comprehensive Income on page 44. The profit for the
Year was EUR23.8 million (2016: EUR11.2 million).
Dividends
Dividends of 6.75 cents per Share were declared in respect of
the Year. Dividend payments in the Year were 6 cents per Share,
which included dividends relating to the previous financial year.
For further detail please see note 18 on page 81.
The payment of any dividend by the Company is subject to the
satisfaction of a solvency test as required by the Companies
(Guernsey) Law, 2008 (as amended).
Share capital and discount control
Details of the rights attaching the Shares are set out in Note
16 of the Financial Statements on pages 79 & 80. As at 30
September 2017, the Company's issued share capital amounted to
361,450,000 million shares. 38,343,396 shares were bought back
during the Year and 36,646,953 of which were held in treasury.
The Company may, subject to compliance with the Companies Law
(Guernsey) 2008 (the "Law"), purchase its own Shares in the market
on an ad hoc basis with a view to addressing any imbalance between
the supply of, and demand for, the Shares, to increase the NAV per
Share and to assist in minimising any discount to the NAV per Share
in relation to the price at which Shares may be trading.
As set out in the Prospectus, the Directors will give
consideration to using surplus cash to purchase Shares under this
authority, but are not bound to do so, where the market price of a
Share trades at more than 7.5% below the latest published NAV per
Share for more than 180 days. Surplus cash for these purposes will
comprise undistributed coupons and the proceeds of normal portfolio
realisations. The Board will continue to apply the buyback policy
published in the Prospectus (and set out above) but may, at its
sole discretion and without limit, make additional purchases of
Shares beyond those required by the policy.
Investors should note that the purchase of Shares by the Company
is entirely discretionary and no expectation or reliance should be
placed on the Directors exercising such discretion on any one or
more occasions. The Current position of the Board on the use of the
Share buyback facility is set out in the Chairman's Statements.
Investors should also note that any purchase or redemption of
Shares will be subject to the ability of the Company to fund the
purchase price or redemption amount. Purchases of Shares may be
made only in accordance with the Law, the Disclosure Guidance and
Transparency Rules. The Company is not required to comply with the
provisions of Chapter 12 of the Listing Rules regarding market
repurchases by the Company of its shares. Nonetheless, by adopting
the policy above, the Company will voluntarily be complying with
the provisions of Listing Rule 12.4.1 and 12.4.2.
The current authority to purchase shares for cancellation or
holding in treasury expires on the date of the next Annual General
Meeting ("AGM") which will be held in Guernsey on 19 March 2018.
The Directors intend to seek annual renewal of this buyback
authority from Shareholders each year at the Company's AGM. If the
Company purchases any of its Shares, the maximum price (exclusive
of expenses) which may be paid for a Share must not be more than
the higher of (i) 5 % above the average of the mid-market values of
a Share for the five Business Days before the purchase is made, or
(ii) the higher of the price of the last independent trade and the
highest current independent bid for the Shares. In addition, Shares
will be purchased through the market only at prices below the last
published NAV per Share, which should have the effect of increasing
the NAV per Share for the remaining Shareholders. Any such purchase
will be carried out in accordance with the Companies Law, which
provides inter alia, that any buy-back is subject to the Company
passing the solvency test contained in the Companies Law at the
relevant time. The minimum price payable per Share is GBP0.01.
Report of the Directors (continued)
Share capital and discount control (continued)
The Law allows companies to hold shares acquired by way of
market purchase as treasury shares, rather than having to cancel
them. This gives the Company the ability to re-issue Shares quickly
and cost effectively, thereby potentially improving liquidity and
providing the Company with additional flexibility in the management
of its capital base. No Shares will be sold from treasury for cash
at a price less than the NAV per Share at the time of their sale
without Shareholder approval. During the period when the Company
holds Shares as treasury shares, the rights and obligations in
respect of those Shares may not be exercised or enforced by or
against the Company.
Shareholder information
The NAV will be calculated as of the last business day of each
month (or at any other times at the Board's discretion) by the
Sub-Administrator, based on third party valuations or information
supplied by bank counterparties (as applicable) or derived from
valuation models prepared by the Portfolio manager. The NAV and the
NAV per Share will be published in Euros by an RIS announcement and
on the website of the Company at
http://www.chenavaritoroincomefund.com/.
Portfolio Manager
The Board keeps the performance of the Portfolio Manager under
regular review, and the management engagement committee, comprising
all Directors, conducts an annual appraisal of the Portfolio
Manager's performance, and makes a recommendation to the Board
about the continuing appointment of the Portfolio Manager. The
Portfolio Manager has executed the investment strategy according to
the Board's expectations and it is the opinion of the Directors
that the continuing appointment of Chenavari Credit Partners LLP is
in the interests of shareholders as a whole.
The portfolio management fee payable to the Portfolio Manager is
paid monthly in arrears at a rate of 1% per annum of NAV, which is
based upon the month end NAV and calculated as of the last business
day of each month.
The Portfolio Manager shall be entitled to receive from the
Company a performance fee in respect of each Class of Shares as
detailed in note 4 of the financial statements. Performance fees of
EUR4,853,361 (30 September 2016: EUR1,971,246) were charged in the
Year. As at 30 September 2017 EUR4,853,361 was payable (2016:
EUR2,837,574).
Non-mainstream pooled investments
On 1 January 2014, FCA rules concerning the promotion of
non-mainstream pooled investments came into effect. The Board
conducts and intends to continue to conduct its affairs so that the
Company's shares will be "excluded securities" under the FCA's new
rules. This is on the basis that the Company which is resident
outside the EEA, would qualify for approval as an investment trust
by the Commissioners for HM Revenue and Customs if resident and
listed in the United Kingdom. Promotion of the Company's shares
will not be subject to the FCA's restriction on promotion of non-
mainstream pooled investments.
Report on viability
The Directors have assessed the viability of the Company over
the three years to 30 September 2020. The Board have chosen this
timeframe as it reflects a reasonable investment horizon with
regards risks and uncertainty and the Board have reviewed a cash
flow forecast prepared by the Portfolio Manager consistent with
this time horizon. In making this assessment, the Directors have
considered detailed information provided at Board meetings taking
account of the Company's balance sheet, gearing level, share price
discount, asset allocation, operating expenses, investment
strategy, the potential impact of the relevant principal risks
detailed in the Statement of Principal Risks and Uncertainties on
pages 27 to 28 and the expected future cash flows based on the
current portfolio. The assumptions herein are based on there being
no significant change in the global financial and or credit markets
over the three year period.
In making this assessment, the Directors had regard for the
expected yield from the portfolio and the significant margin over
the low cost base of the Company and it is the Board's opinion that
the Company would continue to hold sufficient cash to meet its
expenses given the inherent liquidity of much of the portfolio.
Report of the Directors (continued)
Report on viability (continued)
Based on the above, the Board confirms it has a reasonable
expectation that the Company will be able to continue in operation
and meet its liabilities as they fall due over the three year
period of this assessment.
The aforementioned principal risks, set out on pages 27 to 28,
will continue to be monitored closely.
Going concern
Going concern refers to the conclusion that the Company has the
resources to continue in operation 12 months from signing. After
analysing the following, the Directors believe that it is
appropriate to adopt the going concern basis in preparing the
financial statements:
1. Working capital - As at 30 September 2017, there was working
capital of approximately EUR73.6 million. The Directors noted that
as at 30 September 2017 (i) the gross investment income for the
Year was approximately EUR32.9 million. As such the Board believes
the Company has sufficient capital to cover all expenses (which
mainly consist of management fees, performance fees, administration
fees and professional fees) and to meet all of its obligations as
they fall due.
2. Closed-ended Company - The Company has been registered with
the Guernsey Financial Services Commission as a Registered
Closed-ended Collective Investment Scheme, as such there cannot be
any shareholder requested redemptions, and therefore no cash flows
out of the Company in this respect. Subsequently in the year ended
30 September 2017, the Board initiated a buy back programme.
3. Investments - The Company has a tradable portfolio, therefore
the investments can be sold for cash in most market conditions. At
30 September 2017 the market value of level 1 and 2 securities was
EUR224 million (including the assets of the originator) and the
Company had cash balances of EUR66.8 million adjusting for
repurchase agreements. Part of the portfolio is less liquid,
consisting of level 3 assets, under certain market circumstances
already seen in the past, most of the portfolio which consists of
ABS can become less liquid and the cost of unwinding may become
significant. This risk is mitigated by the closed-ended nature of
the Company.
Based on the above assessments, the Directors are of the opinion
that the Company is able to meet its liabilities as they fall due
for payment because it has and is expected to maintain, adequate
cash resources. Given the nature of the Company's business, the
Directors have a reasonable expectation that the Company has
adequate financial resources to continue in operational existence
for the foreseeable future. Accordingly, the financial statements
have been prepared on a going concern basis.
AIFMD
Under European Law the Company is considered to be an
Alternative Investment Fund ("AIF") under the AIFMD and has
appointed Carne Global AIFM Solutions (C.I.) Limited as the
Company's external AIFM.
The Company currently intends to operate as an externally
managed non-EEA domiciled AIF with a non-EEA AIFM for the purposes
of the AIFM Directive and as such neither it nor the AIFM will be
required to seek authorisation under the AIFM Directive. However,
following national transposition of the AIFM Directive in a given
EU member state, the marketing of shares in non-EEA AIFs with a
non-EEA AIFM (such as the AIFM) to investors in that EU member
state is prohibited unless certain conditions are met. The AIFM
filed a notification on 9 April 2015 with the FCA pursuant to
Article 42 of the AIFM Directive to market the Shares in the UK
under the UK national private placement regime.
US FATCA
The Foreign Account Tax Compliance Act (FATCA) was introduced by
the US in 2010 to identify and report on US citizens, corporates
and trusts who held financial assets - whether US source or not -
with financial institutions in other jurisdictions. The intention
is to reduce tax evasion by ensuring such assets and the related
income were being declared on US tax returns.
The Company has registered under the FATCA and its GIIN is
SHB2T2.99999.SL.831.
Report of the Directors (continued)
Common reporting standard
The Common reporting standard ("CRS") is a global tax
information sharing initiative promoted by the O.E.C.D., similar to
FATCA, which came into force on 1 January 2016. Approximately 60
'Early Adopter' ("EA") countries have signed up to comply with CRS
from 1 January 2016 with a further 40 countries in agreement to
comply from 1 January 2017. The requirements of CRS are closely
aligned to requirements under a FATCA Model 1 Intergovernmental
agreement where certain disclosure requirements may be imposed in
respect of certain investors in the Company. It is expected that,
where applicable, information that may need to be disclosed would
include certain information about investors, their ultimate
beneficial owners and/or controllers, and their investment in and
returns from the Company.
SFS and FATCA/CRS exemptions
Whilst there are exemptions to reporting interests (holdings) in
shares that are 'regularly traded on an established securities
market' the UK FATCA and US FATCA rules and supporting guidance
interpret this phrase differently and have tests to help establish
adherence. The end result is that if the definition cannot be met -
and the US IGA specifically suspends it for Investment Entities -
some holdings will instead require the application of FATCA due
diligence and subsequent reporting of holders. Helpfully some
holding types can be treated as excluded accounts for reporting
purposes (e.g. the UK's HMRC now excludes CREST holdings), and
there is more to be announced. CRS similarly adds further
differences and thus complications.
Further developments will continue to be monitored by the
Company's specialist service providers to ensure that the Company
remains compliant with each of FATCA and CRS.
Significant shareholdings
The Company has received the following notifications of major
interests in Shares:
Notification received from Number of Percentage of
shares share capital
as at 30 September
2017 (excluding
treasury shares)
%
---------------------------------- ----------- --------------------
Chase Nominees Limited 96,692,112 29.77
---------------------------------- ----------- --------------------
Vidacos Nominees Limited 36,374,148 11.20
---------------------------------- ----------- --------------------
Luna Nominees Limited 22,014,367 6.78
---------------------------------- ----------- --------------------
HSBC Global Custody Nominee (UK) 19,143,695 5.89
---------------------------------- ----------- --------------------
The Bank of New York (Nominees) 18,577,950 5.72
---------------------------------- ----------- --------------------
Lynchwood Nominees Limited 14,928,632 4.60
---------------------------------- ----------- --------------------
HSBC Global Custody Nominee (UK) 11,512,847 3.54
---------------------------------- ----------- --------------------
The concert party
As a Guernsey company which has its shares admitted to trading
on the Specialist Fund Segment of the London Stock Exchange, the
Company is subject to The City Code on Takeovers and Mergers (the
"Code"). Under Rule 9 of the Code, any person who acquires an
interest (as defined in the Code) in shares which, taken together
with shares in which he is already interested and shares in which
persons acting in concert with him are interested, carry 30 per
cent. or more of the voting rights of a company which is subject to
the Code, is normally required to make a general offer to all the
remaining shareholders to acquire their shares.
Similarly, when any person, together with persons acting in
concert with him, is interested in shares which in the aggregate
carry not less than 30 per cent. of the voting rights of such a
company, but does not hold shares carrying more than 50 per cent.
of such voting rights, a general offer will normally be required if
any further interests in shares are acquired by any such
person.
When members of a concert party hold more than 50 per cent. of
the voting rights in a company, no obligations normally arise from
acquisitions by any member of the concert party. They may
accordingly increase their aggregate interests in shares without
incurring any obligation under Rule 9 to make a general offer,
although individual members of a concert party will not be able to
increase their percentage interests in shares through or between a
Rule 9 threshold without Panel consent.
Rule 37 of the Takeover Code further provides that when a
company redeems or purchases its own voting shares, any resulting
increase in the percentage of shares carrying voting rights in
which a person or group of persons acting in concert is interested
will be treated as an acquisition for the purpose of Rule 9.
Report of the Directors (continued)
The concert party (continued)
An offer under Rule 9 must be made in cash and at the highest
price paid by the person required to make the offer, or any person
acting in concert with him, for any interest in shares of the
company during the 12 months prior to the announcement of the
offer.
Shares representing 30% or more (but less than 50%) of the
voting rights of the Company are held by a concert party comprising
Chenavari Credit Partners LLP (acting as discretionary portfolio
manager for Chenavari European Opportunistic Credit Fund Limited),
other group companies in the Chenavari Financial Group, certain
other individuals connected with, or employed by, the Chenavari
Financial Group (including Roberto Silvotti, a director of the
Company) (the "Concert Party").
In March 2017, Independent Shareholders approved waivers from
the Panel relating to the obligation on any member of the Concert
Party (including the Portfolio Manager individually) to make a
general offer that would otherwise arise as a result of the issue
of the shares to the Portfolio Manager in connection with the
performance fee arising in the year to 30 September 2016, or the
exercise of the buyback authority.
If the Concert Party's aggregate shareholding were to increase
to greater than 50 per cent. of the Company's total voting rights,
as a result of the exercise of the buyback authority and/or the
issue of Shares relating to the performance fee or otherwise, no
obligations would normally arise from acquisitions by any member of
the Concert Party. They may accordingly increase their aggregate
interests in Shares without incurring any obligation under Rule 9
to make a general offer, although individual members of the Concert
Party will not be able to increase their percentage interests in
Shares through or between a Rule 9 threshold without Panel
consent.
Directors
The Directors of the Company during the year and at the date of
this Report are set out on page16.
Directors' and other interests
The Directors' holdings and interests in the Company are listed
in note 4 on page 61.
Mr Silvotti, by virtue of his directorships of entities within
the Portfolio Manager's group, previous roles with the Portfolio
Manager and other funds managed within the Chenavari Group is not
considered independent of the Portfolio Manager and therefore
stands for re-election each year.
Retirement by rotation
Under the terms of their appointment, each Director is required
to retire by rotation and be subject to re-election at least every
three years. The Directors are required to seek re-election if they
have already served for more than nine years. The Company may
terminate the appointment of a Director immediately on serving
written notice and no compensation is payable upon termination of
office as a Director of the Company becoming effective.
Disclosure of information to the Auditor
The Directors who held office at the date of approval of these
Financial Statements confirm that, so far as they are each aware,
there is no relevant audit information of which the Company's
auditor is unaware; and each Director has taken all the steps that
they ought to have taken as a Director to make themselves aware of
any relevant audit information and to establish that the Company's
auditor is aware of that information.
Independent Auditor
Deloitte LLP ("Deloitte") was re-appointed as the Company's
Auditor for the 2017 audit following the AGM on 17 March 2017.
A resolution for the re-appointment of Deloitte will be proposed
at the next AGM.
Signed on behalf of the Board of Directors by:
Frederic Hervouet, Chairman
John Whittle, Director
22 January 2018
Corporate Governance Report
The Company is admitted to trading on the Specialist Fund
Segment ("SFS") of the London Stock Exchange and as such, the
Listing Rules applicable to closed-ended investment companies which
are listed on the premium listing segment of the Official List of
the UKLA do not apply to the Company.
Whilst the Company is subject to the Disclosure Guidance and
Transparency Rules of the Financial Conduct Authority ("DTRs")
while traded on the SFS, the Directors have resolved that, as a
matter of good corporate governance, the Company will also
voluntarily comply with certain provisions of the Listing Rules,
including the relevant provisions of Chapter 9 regarding corporate
governance and continuing obligations.
The Directors recognise the value of the UK Corporate Governance
Code (the "UK Code") and have taken appropriate measures to ensure
that the Company complies with the UK Code. The UK Code is
publically available at
www.frc.org.uk/Our-Work/Codes-Standards/Corporate-governance.aspx.
Compliance with the UK Code
Pursuant to its voluntary compliance with the listing rules of
the UKLA, the Company is required to provide shareholders with a
statement on how the main and supporting principles set out in the
UK Code have been applied and whether the Company has complied with
the provisions of the UK Code. The Board recognises the importance
of a strong corporate governance culture and has established a
framework for corporate governance which it considers to be
appropriate to the business of the Company. The Board has reviewed
the principles and recommendations of the UK Code and considers
that the Company has complied throughout the Period, except as
disclosed below:
Section A-C: The Company does not have a Deputy Chairman,
Executive Directors or a Chief Executive Officer. Accordingly,
provisions of the UK Code relating to the Deputy Chairman,
Executive Directors and Chief Executive Officer do not apply to the
Company.
Explanation: As the UK Code itself states, investment companies
typically have a Board structure that differs from those of other
companies and this affects the relevance of particular provisions
of the UK Code. Due to the nature of the Company's business and the
structure of its relationships with its Administrator,
Sub-Administrator, AIFM, Custodian and Portfolio Manager, the
Directors do not believe it would be at present cost-effective or
advisable to have full-time Executive Directors.
Section A4.1: The Company has not appointed one of the
independent non-executive Directors to be the senior independent
Director.
Explanation: An independent senior director has not been
identified and such a role is not considered necessary because the
Company has adopted a policy that the composition of the Board of
Directors, which is required by the Company's Articles to comprise
of at least two persons, is at all times such that a majority of
the Directors are independent of the Portfolio Manager and any
company in the same group as the Portfolio Manager; the Chairman of
the Board of Directors is free from any conflicts of interest and
is independent of the Portfolio Manager and of any company in the
same group as the Portfolio Manager; and that no partner, employee
or professional adviser to the Portfolio Manager or any company in
the same group as the Portfolio Manager may be a Director of the
Company at any time.
Section B2.1: The Company has not established a nomination
committee to lead the process for board appointments and make
recommendations to the Board.
Explanation: The appointment of new Directors forms part of the
schedule of matters reserved for the Board through the Management
Engagement Committee and the Board considers that the process for
Board appointments to be the Board's responsibility in accordance
with the principles set out in the UK Code.
Section B2.3: Non-executive directors should be appointed for
specified terms subject to re-election and to statutory provisions
relating to the removal of a director.
Explanation: All newly appointed Directors shall stand for
election by the shareholders at the next AGM following their
appointment. The Directors shall retire by rotation every three
years and, if appropriate, offer themselves for re-election in
accordance with UKLA Listing Rules LR 15.4.7 and 15.2.13A, with
which the Company voluntarily complies. Mr Silvotti is subject to
annual re-election as he is not considered to be independent due to
his current appointment to the Boards of other companies in the
Group of the Portfolio Manager and previous appointment as chief
risk officer of the Portfolio Manager.
Corporate Governance Report (continued)
Compliance with the UK Code (continued)
Explanation: (continued) Directors who have served on the Board
for more than nine years are subject to annual re-election. The
names of Directors submitted for appointment or reappointment shall
be accompanied by sufficient biographical details to enable
shareholders to make an informed decision.
Section C3.1: The Board should establish an Audit Committee of
at least three, or in the case of smaller companies two,
independent non-executive directors.
Explanation: The Company's Audit Committee comprises all members
of the Board, however Mr Silvotti, by virtue of his directorship
and previous roles with the Portfolio Manager and other funds
managed within the Chenavari Group, is not considered independent
of the Advisers. Given Mr Silvotti's extensive investment
experience, the independent members of the Audit Committee are of
the opinion that shareholder interests are best served through Mr
Silvotti's membership of the Audit Committee. Per the Code, for
small companies the Company Chairman may be a member but not the
Chair of the Audit Committee.
Section C3.5: The audit committee should review arrangements by
which staff of the Company may, in confidence, raise concerns about
possible improprieties in matters of financial reporting or other
matters. The audit committee's objective should be to ensure that
arrangements are in place for the proportionate and independent
investigation of such matters and for appropriate follow-up
action.
Explanation: Given the Directors are non-executive and the
Company does not have employees, there is no whistle-blowing policy
and the Company relies on the Company Secretary and other
third-party service providers to address any concerns raised.
Section C3.6: The Company does not have an internal audit
function.
Explanation: The Directors believe that this requirement of the
UK Code was intended for companies with internal accounting
departments. The Company has no employees and relies on its
Administrator and Sub-Administrator for assistance in drawing up
its financial statements and reports to Shareholders. As such the
applicable internal controls that would normally be expected exist
within those organisations. The Audit Committee reviews their
internal controls as part of its work. Annually, the Directors
review this approach.
Section D.1: The Board has not established a remuneration
committee to consider executive Directors remuneration to promote
the long-term success of the Company.
Explanation: In view of its non-executive nature, the Board
considers that it is not appropriate for there to be a separate
remuneration and nominee committee. The Board of Directors make all
representations regarding Directors' remuneration. The Board as a
whole fulfils the functions of the remuneration committee, and a
separate Directors' Remuneration Report is set out on page 33 of
these Financial Statements.
Further details of compliance with the UK Code are noted in the
succeeding pages. There have been no instances of non-compliance,
other than those noted above and the Company has therefore not
reported further in respect of these provisions.
The Guernsey Financial Services Commission issued a Finance
Sector Code of Corporate Governance (the "GFSC Code") which came
into effect on 1 January 2012. As the Company voluntarily reports
by reference to the UK Code, it is deemed by the GFSC also to meet
the requirements of the GFSC Code.
Composition and Independence of the Board
The Board currently consists of three non-executive Directors.
Biographies for all the Directors can be found on page 16. Mr
Hervouet and Mr Whittle are considered independent of the Advisers
for the purposes of the Company's compliance with the UK Code.
However Mr Silvotti, by virtue of his directorship and previous
roles with the Portfolio Manager and other funds managed within the
Chenavari Group is not considered independent of the Advisers and
therefore will be re-elected annually at the AGM.
The Chairman of the Board is Frederic Hervouet and, in this
function, is responsible for the leadership of the Board and
ensuring its effectiveness on all aspects of its role. In
considering the independence of the Chairman, the Board has taken
note of the criteria set out in B.1.1 of the UK Code relating to
independence, and has determined that Mr Hervouet is an Independent
Director.
Corporate Governance Report (continued)
Composition and Independence of the Board (continued)
The Company has no employees and therefore there is no
requirement for a chief executive. The Board is responsible for the
appointment and monitoring of all service providers to the Company.
Between formal meetings there is regular contact with the Portfolio
Manager and the Corporate Broker. The Directors are kept fully
informed of investment and financial controls and other matters
that are relevant to the business of the Company and should be
brought to the attention of the Directors. The Directors also have
access to the Company Secretary and, where necessary in the
furtherance of their duties, to independent professional advice at
the expense of the Company.
The Board holds quarterly Board meetings, the Audit Committee
meets at least three times a year and the Management Engagement
Committee meets at least annually. In addition, ad hoc meetings of
the Board to review specific items between the regular scheduled
quarterly meetings can be arranged.
Attendance at the Board, Audit Committee and Management
Engagement Committee meetings for the year ended 30 September 2017
was as follows:
Audit Committee Management Engagement
Director Board meetings meetings Committee meetings
------------------- ----------------- ------------------ ------------------------
Held Attended Held Attended Held Attended
------------------- ------ --------- ------ ---------- -------- --------------
Frederic Hervouet 7 7 4 3 1 1
------------------- ------ --------- ------ ---------- -------- --------------
John Whittle 7 7 4 4 1 1
------------------- ------ --------- ------ ---------- -------- --------------
Roberto Silvotti 7 7 4 4 1 1
------------------- ------ --------- ------ ---------- -------- --------------
At the Board meetings the Directors review the management of the
Company's assets and all other significant matters so as to ensure
that the Directors maintain overall control and supervision of the
Company's affairs. Agendas and Board papers are circulated in
advance of meetings to assist members to discharge their duties
appropriately. The Company maintains a formal schedule of matters
reserved for the Board. The Directors are responsible for the
determination of the Company's investment objective and investment
policy and have overall responsibility for the Company's activities
including the review of investment activity and performance and the
control and supervision of the Portfolio Manager.
The Board has a breadth of experience relevant to the Company
and the Directors believe that any changes to the Board's
composition can be managed without undue disruption. With any new
director appointment to the Board, consideration will be given as
to whether an induction process is appropriate.
The Board has reviewed its composition and believes that the
current appointments provide an appropriate range of skills,
experience and diversity. In order to maintain its diversity, the
Board is committed to continuing to review its current composition.
No board appointments were made in the period under review.
Diversity is important in bringing an appropriate range of skills
and experience to the Board, but the Board has not set itself
objectives in relation to this element of board composition. In the
context of a relatively small Board, the policy when recruiting a
new Director is to appoint individuals on their merit and
suitability for the role.
Audit Committee
An Audit Committee has been established and is chaired by John
Whittle and also has Frederic Hervouet and Roberto Silvotti as a
member. The Audit Committee's primary function is to assist the
Board in fulfilling its oversight responsibilities and under the
Terms of Reference its main duties include financial reporting,
risk management systems, compliance, whistle blowing and fraud. It
will review the scope, results, cost effectiveness, independence
and objectivity of the external auditor. Further details on the
Audit Committee can be found in the Audit Committee Report on pages
29 to 32.
Management Engagement Committee
The Board has established a Management Engagement Committee with
formal duties and responsibilities. The Management Engagement
Committee commits to meeting at least once a year and comprises the
entire Board with John Whittle appointed as Chairman. Its principal
duty is to consider the terms of appointment of the Portfolio
Manager and it will annually review that appointment and the terms
of the Portfolio Management Agreement. Its duties and
responsibilities also extend to the regular review of the
performance of and contractual arrangements with other service
providers.
Corporate Governance Report (continued)
Management Engagement Committee (continued)
The Management Engagement Committee carried out its review of
the performance and capabilities of the Portfolio Manager at its
meeting on 28 November 2017 to confirm that the continued
appointment of Chenavari Credit Partners LLP as Portfolio Manager
is deemed to be in the interest of shareholders.
At the same meeting, the Management Engagement Committee
concluded that the Company's other service providers were
performing in accordance with the Company's expectations and
contractual arrangements in place.
Board Performance
The Management Engagement Committee formally evaluated the
Board's effectiveness on 28 November 2017 by considering the
balance of skills, experience, independence and knowledge of the
Company on the Board, its diversity, how the Board works together
as a unit, the allocation of sufficient time to the Company as well
as other factors relevant to its effectiveness. The Management
Engagement Committee found the performance of the Chairman,
individual directors and the Board as a whole over the review
period to be as expected.
Investor Relations
Shareholders are able to contact the Company through Chenavari
investor relations (e-mail address TLIR@chenavari.com) or by
correspondence sent to the Company Secretary (toro@estera.com) or
the Corporate Broker. As a consequence, the Board receives
appropriate updates from the Company Secretary, Portfolio Manager
or Corporate Broker relative to such correspondence to keep it
informed of Shareholders' sentiment or analyst views.
The Company also publishes a monthly factsheet on its website
http://www.chenavaritoroincomefund.com/, which include updates on
markets and the Company's performance.
Statement of Principal Risks and Uncertainties
Summary
An investment in the Shares is only suitable for institutional
investors and professionally advised private investors who
understand and are capable of evaluating the merits and risks of
such an investment and who have sufficient resources to be able to
bear any losses (which may equal the whole amount invested) that
may result from such an investment. Furthermore, an investment in
the Shares should constitute part of a diversified investment
portfolio. It should be remembered that the price of securities and
the income from them can go down as well as up.
The risks set out below are those which are considered to be the
material risks relating to an investment in the Shares but are not
the only risks relating to the Shares or the Company. Additional
risks and uncertainties of which the Company is presently unaware
or that the Company currently believes are immaterial may also
adversely affect its business, financial condition, results of
operations or the value of the Shares. The Directors have
undertaken a robust assessment of the principal risks facing the
Company, including those that would threaten its business model,
future performance, solvency or liquidity, and have undertaken a
detailed review of the effectiveness of the risk management and
internal control systems. There have been no changes to the
principle risks in the period. The Directors are comfortable that
the risks are being appropriately monitored.
Risk Explanation/Mitigant
----------------------------- ------------------------------------------------------------
Collateral risk Investment Instruments purchased by the Company
(default, recovery, are linked to the credit performance of the underlying
prepayment) Collateral. This means that defaults or credit losses
in the Collateral may adversely impact the performance
of the company, the NAV and the value of the Shares.
The Portfolio Manager conducts detailed fundamental,
statistical and scenario analyses. Where it is considered
desirable, the Company may enter into hedging transactions
designed to protect against or mitigate the consequences
of single reference obligations defaulting and/or
more generalised credit events. Alongside the fundamental
credit analysis, the structural features of the
transaction are also assessed. This includes a review
of the payment waterfall, the subordination of the
proposed Investment Instrument, the extent of the
reserve fund, the amortisation profile and extension
risk.
----------------------------- ------------------------------------------------------------
Market risk The fund is exposed to several market factors. In
particular, this fund is primarily driven by underlying
asset appreciation/depreciation, captured in the
"Collateral Risk" section above. The market price
of the instruments can also be affected by the changes
in expectations on the underlying collateral and
the ability to pay. In the short term, the unrealised
performance can be affected by the sentiment of
the market, supply/demand of asset types, expectations
on unemployment, GDP growth, credit cycle and stability
of the Eurozone. Because the liquidity of the instruments
is relatively low, prices will tend to be sticky,
but can be at risk to sudden jumps in price when
momentum of sentiment is strong enough and certain
pools of investors are forced to liquidate. The
timing of these technical factors can be quite out
of sync with fundamentals.
The Company is closed ended, and has a tight limit
on leverage. It is well setup to ride out any short-term
dislocations in pricing without being forced to
liquidate investments at technically distressed
prices. This is achieved by employing hedging strategies
using liquid instruments. This reduces the beta
of the portfolio compared to some of its peers.
----------------------------- ------------------------------------------------------------
Valuation and classification Investments are valued in accordance with the Company's
of financial assets Valuation Policy which is compiled with reference
at fair value through to key principles comprising; independence, documentation,
profit or loss risk transparency, consistency and relevance and documents
the pricing process and timeline, with particular
reference to difficult to value securities, and
sets out escalation procedures.
The Board has established a committee to review
the valuation of illiquid Investment Instruments,
particularly where a valuation is provided by a
single counterparty or where the Portfolio Manager's
risk officer recommends a more conservative valuation
than that provided by a counterparty.
----------------------------- ------------------------------------------------------------
Statement of Principal Risks and Uncertainties (continued)
Risk Explanation/Mitigant
----------------------------- ----------------------------------------------------------------
Valuation and classification The Portfolio Manager also engaged Duff & Phelps,
of financial assets Ltd ("Duff & Phelps"), on behalf of the Company,
at fair value through as a valuation advisor to provide certain limited
profit or loss risk procedures on some Transactions' valuation which
(continued) the Investment Adviser identified and requested
Duff & Phelps to perform. For the avoidance of doubt,
notwithstanding the engagement with Duff & Phelps,
the Valuation Committee of the Company remains ultimately
responsible for the determination of the Fair Value
of each Transaction, but may consider Duff & Phelps'
input in making such determinations. Specifically,
as of 30 September 2017, Duff & Phelps estimated
ranges of Fair Value for the Company's interests
in one transaction as of 30 September 2017 (as well
as five transactions as at 31 December 2017).
The Board requested the Audit Committee to further
consider this risk with work undertaken by the Audit
Committee discussed on page 29. As a result of the
work undertaken by the Audit Committee, the Board
is satisfied that the valuation of financial assets
at fair value through profit or loss was correctly
stated in the Financial Statements.
----------------------------- ----------------------------------------------------------------
Replenishment risk The terms of an investment may permit the relevant
(quality of new counterparty to alter the composition of the collateral.
reference assets) The Portfolio Manager will seek to ensure that the
investment documents clearly define eligible replacement
assets to mitigate the risk of inferior quality
assets being added. In certain cases, and to the
extent possible in respect of primary investments,
the Portfolio Manager may negotiate veto rights
for investors on new names being added to the collateral
pool.
----------------------------- ----------------------------------------------------------------
Call risk Investments may have call features which, if activated,
would result in re-investment risks for the Company.
This is mitigated by restricting the situations
where an investment can be terminated and/or by
requiring that premiums be payable to investors
when an investment is called.
----------------------------- ----------------------------------------------------------------
Portfolio Manager The Company is dependent on the expertise of the
risks Portfolio Manager and their respective key personnel
to evaluate investment opportunities and to implement
the Company's investment objective and investment
policy.
The Board has instructed the Portfolio Manager to
conduct the Company's investment related activities
in compliance with the applicable law, the Company's
investment objectives and guidelines and the Company's
contractual obligations.
The Management Engagement Committee carried out
its review of the performance and capabilities of
the Portfolio Manager at its meeting on 28 November
2017 and confirmed that the continued appointment
of the Portfolio Manager is deemed to be in the
interest of shareholders.
There can be no assurance that the Portfolio Manager's
past performance will be any guide to future performance
or results.
----------------------------- ----------------------------------------------------------------
Operational risks The Company is exposed to the risk arising from
any failures of systems and controls in the operations
of the Portfolio Manager, Administrator, the Sub-Administrator
and the Custodian. The Board and its Audit Committee
regularly review reports from the Portfolio Manager
and the Administrator on their internal controls.
----------------------------- ----------------------------------------------------------------
Audit Committee Report
I am pleased to report to you on the activities of the Audit
Committee for the year ended 30 September 2017.
The Board has established terms of reference in respect of the
membership of the Audit Committee, its duties, reporting
responsibilities, and authority given to its members (the "Terms of
Reference").
The Audit Committee is supportive of the latest UK Code
recommendations and is of the opinion that the revised UK Code
allows it to act as a key independent oversight committee
contributing to a climate of discipline and control.
Terms of reference
The Audit Committee's primary function is to assist the Board in
fulfilling its oversight responsibilities and, under the Terms of
Reference, its main duties include:
Financial reporting
-- monitoring the integrity of the financial statements of the
Company, including its annual and half-yearly reports and any other
formal announcement relating to its financial performance,
reviewing significant financial reporting issues and judgments
which they contain.
Risk management systems
-- review the adequacy and effectiveness of the Company's risk
management systems and review and approve the statements to be
included in the annual report concerning risk management.
Compliance, whistle blowing and fraud
-- review the adequacy and security of the Company's
arrangements to raise concerns, if any, about possible wrongdoing
in financial reporting or other matters;
-- reviewing the Company's procedures for detecting fraud;
-- reviewing the Company's systems and controls for the
prevention of bribery and receive reports on non-compliance;
-- reviewing the adequacy and effectiveness of the Company's
anti-money laundering systems and controls; and
-- reviewing the adequacy and effectiveness of the Company's compliance function.
External audit
-- overseeing the relationship with the external auditor
including making recommendations of remuneration, terms of
engagement, assessing independence and objectivity, compliance with
relevant ethical and professional guidance on the rotation of audit
partners, the level of fees paid by the Company, assessing
qualifications, expertise and resources and the effectiveness of
the audit process.
In regard to the above duties, I confirm, on behalf of the Audit
Committee, that, to the best of our knowledge and belief, we have
fulfilled our responsibilities in line with our Terms of Reference
and in accordance with the UK Code.
Delegation of duties
The Company has no employees and all functions, including the
preparation of the financial statements, have been outsourced to
various service providers. Estera Administration Limited have been
appointed as Administrator and Company Secretary, Quintillion
Limited as Sub-Administrator, Chenavari Credit Partners LLP as
Portfolio Manager, Carne Global AIFM Solutions (C.I.) Limited as
AIFM, JPMorgan Chase Bank National Association as Custodian,
Depositary and Principal Bankers and Link Asset Services as
Registrar (together the "Outsourced Service Providers"). Please see
note 5 for further details in relation to these service
providers.
Membership of the committee
The Audit Committee was established on incorporation and
consists of Frederic Hervouet, Roberto Silvotti and myself, John
Whittle, as its Chairman. All the members of the Audit Committee
are non-executive directors. Mr Hervouet and I are considered
independent of the Advisers for the purposes of the Company's
compliance with the UK Code however Mr Silvotti, by virtue of his
directorship and previous roles with the Portfolio Manager and
other funds managed within the Chenavari Group is not considered
independent of the Advisers. The Audit Committee has concluded that
its membership meets the requirements of C.3.1 of the UK Code and
each member is financially literate and has knowledge of the
following key areas:
-- financial reporting principles and accounting standards;
-- the regulatory framework within which the Company operates;
-- the Company's internal control and risk management environment; and
-- factors impacting the Company's Financial Statements.
Audit Committee Report (continued)
Membership of the Committee (continued)
The Audit Committee meets at least three times a year. During
the Year the Audit Committee has met four times. Personnel from the
Company's Outsourced Service Providers along with representatives
of the Company's external auditor, Deloitte LLP ("Deloitte"),
attend Audit Committee meetings when appropriate.
In his role as a member of the Audit Committee, each member is
available to discuss any particular matter with his fellow Board
members and in addition the Audit Committee has the opportunity to
meet with Deloitte without the presence of Outsourced Service
Providers. In order to ensure that all Directors are kept up to
date and informed of the Audit Committee's work, I provide a verbal
report to the Board at Board meetings on key matters discussed at
the Audit Committee meetings. In addition, the minutes of all Audit
Committee meetings are available to the Board.
How the Audit Committee has discharged its responsibilities
In the period under review, the Audit Committee has met four
times, attendance at which is set out on page 25. The Audit
Committee meetings focused on the following key areas:
Monitoring the integrity of the financial statements including
significant judgments
-- We reviewed the appropriateness of the Company's significant
accounting policies, critical accounting judgments and key sources
of uncertainty and monitored changes to, and compliance with,
accounting standards on an ongoing basis.
-- Prior to making any recommendations to the Board, we reviewed
the Annual Report and Audited Financial Statements for the year
ended 30 September 2017 (the "Annual Report"). We compared the
results with management accounts, budgets and monthly NAVs,
focusing on the significant accounting matters set out below.
-- In undertaking this review, we discussed with the
Administrator, Sub-Administrator and Deloitte the critical
accounting policies and judgments that have been applied and at the
request of the Audit Committee, the Administrator and
Sub-Administrator confirmed that they were not aware of any
material misstatements including matters relating to the Annual
Report presentation. Deloitte also reported to the Audit Committee
on any misstatements that they had found during the course of their
work and confirmed no material amounts remained unadjusted.
-- At its meeting to review the Annual Report, the Audit
Committee received and reviewed a report on the audit from
Deloitte. On the basis of its review of the report, the Audit
Committee is satisfied Deloitte has fulfilled its responsibilities
with diligence and professional scepticism.
-- The Audit Committee is satisfied that the Annual Report
appropriately addresses the critical judgments and key estimates
(both in respect to the amounts reported and the disclosures) and
that the significant assumptions used for determining the value of
assets and liabilities determined were in compliance with IFRS and
were reasonable.
-- The Audit Committee is therefore satisfied that the Annual
Report, taken as a whole, is fair, balanced and understandable and
provides the information necessary for Shareholders to assess the
Company's performance, business model and strategy.
Significant accounting matters
During the Period the Audit Committee considered key accounting
issues, matters and judgments regarding the Company's financial
statements and disclosures including those relating to:
Valuation and classification of Financial Assets at Fair Value
through Profit or Loss
At 30 September 2017, the Company's investments had a fair value
of EUR250.6 million and represented a substantial portion of net
assets of the Company. As such this is the largest factor in
relation to the accuracy of the financial statements and is
monitored by the Portfolio Manager, the Administrator, the
Sub-Administrator, the Custodian, the Audit Committee, the AIFM and
the Board.
Investments are valued in accordance the Company's Valuation
Policy and with the Accounting Policies set out in note 2.2 to the
financial statements. The Valuation Policy is compiled with
reference to key principles comprising; independence,
documentation, transparency, consistency and relevance and
documents the pricing process and timeline, with particular
reference to difficult to value securities, and sets out escalation
procedures.
Audit Committee Report (continued)
The Audit Committee required the Portfolio Manager to provide
detailed analysis of the broker quotes obtained for investments,
including the liquidity, the number of quotes received, and the
range of quotes. For primary transactions, the Portfolio Manager's
own analysis of the fair value of the deal was compared to the
quotes obtained and where pricing was obtained from the manager of
the transaction, the Portfolio Manager provided an assessment of
the manager's independence and reliability. Additionally, the Audit
Committee required the Portfolio Manager to provide a reasoned
assessment of fair value for each investment held and its
classification in the fair value hierarchy.
During the Year the Portfolio Manager also engaged Duff &
Phelps, Ltd ("Duff & Phelps"), on behalf of the Company, as a
valuation advisor to provide certain limited procedures on some
Transactions' valuation which the Investment Adviser identified and
requested Duff & Phelps to perform. For the avoidance of doubt,
notwithstanding the engagement with Duff & Phelps, the Board of
the Company remains ultimately responsible for the determination of
the Fair Value of each Transaction, but may consider Duff &
Phelps' input in making such determinations. Specifically, as of 30
September 2017, Duff & Phelps estimated ranges of Fair Value
for the Company's interests in one transaction. On 8 November 2017,
representatives from the Portfolio Manager met with the Board of
Directors to discuss this valuation in detail.
Following discussion, we were satisfied that the judgments made
and methodologies applied were fair value and appropriate and that
the correct accounting treatment has been adopted. Please see
further details outlined in notes 2 and 8 to the financial
statements.
Income recognition
For primary and secondary transactions, the Audit Committee
considered whether the separate presentation of interest income in
the Statement of Comprehensive Income is required or if a net fair
value movement is more appropriate.
Due to the nature of the Company's investment strategy resulting
in the possibility of investments being sold before maturity and
given the consequent inherent uncertainty of using maturity dates
to calculate income using the Effective Interest Rate method, for
both primary and secondary investments, the Company's accounting
policy recognises only a net fair value movement rather than
reporting a split between fair value movement and interest income
in the income statement. This is explained further in note 2.4 to
the financial statements.
Assessment of principal risks and uncertainties
The risks associated with the Company's financial assets, as
disclosed in the financial statements, particularly in note 6,
represent a key accounting disclosure. The Audit Committee
critically reviews, on the basis of input from relevant Outsourced
Service Providers, the process of ongoing identification and
measurement of these risks disclosures.
Risk management and internal controls
The Board as a whole is responsible for the Company's system of
internal control; however, the Audit Committee assists the Board in
meeting its obligations in this regard. The daily operational
activities of the Company were delegated to the Outsourced Service
Providers and as a result the Company has no direct internal audit
function and instead places reliance on the external and internal
audit controls applicable to the Outsourced Service Providers as
regulated entities. The Audit Committee regularly monitors
confirmations from the Outsourced Service Providers that no
material issues have arisen in respect of the system of internal
controls and risk management operated within the Company's
Outsourced Service Providers.
The Audit Committee confirms that this is an ongoing process in
order to manage the significant risks faced by the Company.
Annually, the Audit Committee reviews the effectiveness of the
Company's material controls, including financial, operational and
compliance controls. We deem that, to date, there are no
significant issues in this area that need to be brought to your
attention. The Board visited the Portfolio Manager on 8 November
2017 in order to review the valuation of securities contained in
the portfolio.
Audit Committee Report (continued)
External audit
It is the responsibility of the Audit Committee to monitor the
performance, independence, objectivity and re-appointment of
Deloitte. On 7 September 2017, we met with Deloitte who presented
their Audit Strategy and Plan for the Year; we agreed the audit
plan for the Year, highlighting the key financial statement and
audit risks, to seek to ensure that the audit was appropriately
focused. Deloitte attended our Audit Committee meetings throughout
the Year, as appropriate, which allows the opportunity to discuss
any matters the auditor may wish to raise without the Portfolio
Manager or other Outsourced Service Providers being present.
Deloitte provides feedback at each Audit Committee meeting on
topics such as the key accounting matters, mandatory communications
and the control environment.
The Committee is required to assess and report to the Board on
the effectiveness of the audit process. During the Year it
accomplished this as follows:
-- Met with Deloitte and reviewed the audit plan as above;
-- Met with Deloitte and reviewed the audit report at the conclusion of the audit;
-- In addition the Chairman discussed the effectiveness of the
audit with staff of the Administrator and Sub-Administrator;
and
-- Completed a comprehensive check list covering all aspects of the audit process.
-- Reviewed the FRC audit quality review
From its work the Committee concluded that audit process had
been effective.
Deloitte was re-appointed as the Company's auditor for the 2017
audit following the AGM on 17 March 2017. The lead audit partner
will be rotated every five years to ensure continued independence
and objectivity. The Audit Committee continues to be satisfied with
the performance of Deloitte. We have therefore recommended to the
Board that Deloitte, in accordance with agreed terms of engagement
and remuneration, should continue as the Company's auditor until
the forthcoming AGM. In advance of the commencement of the annual
audit, the Audit Committee reviewed a statement provided by
Deloitte confirming their independence within the meaning of the
regulations and professional standards. In addition, in order to
satisfy itself as to Deloitte's independence, the Audit Committee
undertook a review of the auditor compensation and the balance
between audit and non-audit fees.
During the Year the value of non-audit services provided by
Deloitte amounted to EUR27,565 consisting of tax and reporting
services. Non-audit services were primarily in relation to PFIC
statement preparation for the Company and the Audit Committee is
satisfied that the overall quantum of ongoing non-audit services is
not anticipated to be material. Deloitte also charged a fee for
reviewing the interim financial statements of EUR20,000.
Committee effectiveness
The effectiveness of the Audit Committee was reviewed by both
the Board and Audit Committee as part of the annual Board
Evaluation process at the meeting held on 19 March 2018. A member
of the Audit Committee will be available to shareholders at the
forthcoming AGM of the Company to answer any questions relating to
the role of the Audit Committee.
Signed on behalf of the Audit Committee by:
John Whittle
Chairman, Audit Committee
22 January 2018
Directors' Remuneration Report
The Directors' remuneration report has been prepared on behalf
of the Directors in accordance with the UK Code.
The Directors do not consider it necessary for the Company to
establish a separate Remuneration Committee. The Board's
remuneration along with the matters recommended by the UK Code that
would be delegated to such a committee, are considered by the Board
as a whole.
The Company's policy is to ensure that the fees payable to the
Directors reflect the time spent by the Directors on the Company's
affairs, the responsibilities borne by the Directors and be
sufficient to attract, retain and motivate directors of a quality
required to run the Company successfully. The Chairman of the Board
is paid a higher fee in recognition of his additional
responsibilities, as are the Chairman of the Audit Committee and
the Management Engagement Committee. The policy is to review fee
rates periodically, although such a review will not necessarily
result in any changes to the rates, account will be taken of fees
paid to directors of comparable companies.
No element of the Directors' remuneration is performance
related, nor does any Director have any entitlement to pensions,
share options or any long term incentive plans from the
Company.
Following a recommendation from the Chairman, having regard to
the level of fees payable to non-executive Directors that reflects
comparable compensation levels of the peer universe for the
Company, the role that individual Directors fulfil in respect of
Board and Committee responsibilities, it is the responsibility of
the Board as a whole to determine and approve the Directors'
fees.
The Chairman's remuneration is decided separately and is
approved by the Board as a whole.
The Directors are currently entitled to the following annual
remuneration in the form of Directors' fees:
Frederic Hervouet (Chairman of the Board) GBP50,000
John Whittle (Audit Committee Chair) GBP40,000
Roberto Silvotti GBP30,000
------------
Total GBP120,000
The Company's Articles limit the fees payable to Directors in
aggregate to GBP300,000 per annum.
The remuneration policy set out above is the one applied for the
year ended 30 September 2017.
Directors' and Officers' liability insurance cover is maintained
by the Company on behalf of the Directors.
The Directors were appointed as non-executive Directors by
letters issued on 20 April 2015. Each Director's appointment letter
provides that all records received by them during the course of
their directorship remain the property of the Company. The
Directors' appointments can be terminated in accordance with the
Articles and without compensation. There is no notice period
specified in the Articles for the removal of Directors. The
Articles provide that the office of director shall be terminated
by, among other things: (a) written resignation; (b) unauthorised
absences from board meetings for a consecutive period of twelve
months and the Board resolve that the Director in question's office
be vacated; (c) unanimous written request of the other Directors;
and (d) the Director in question becomes ineligible to be a
Director in accordance with Section 137 of the Law.
Under the terms of their appointment, each Director is required
to retire by rotation and be subject to re-election at least every
three years. The Directors are required to annually seek
re-election if they have already served for more than nine years.
The Company may terminate the appointment of a Director immediately
on serving written notice and no compensation is payable upon
termination of office as a director of the Company becoming
effective.
The amounts payable to Directors shown in note 4 to the
Financial Statements were for services as non-executive Directors.
No Director has a service contract with the Company, nor are any
such contracts proposed.
None of the Directors has any personal financial interest in any
of the Company's investments.
Directors' Remuneration Report (continued)
Quantitative remuneration disclosure
Disclosure in accordance with Article 22(2)(e) and 22(2)(f) of
the AIFMD is set out at appendix 1.
Signed on behalf of the Board of Directors by:
Frederic Hervouet, Chairman
22 January 2018
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Directors'
Report and the financial statements in accordance with applicable
Guernsey law and regulations.
Guernsey Company law requires the Directors to prepare financial
statements for each financial year. Under that law they have
elected to prepare the financial statements in accordance with IFRS
as adopted by the European Union and applicable law.
Under company law the Directors must not approve the accounts
unless they are satisfied that they give a true and fair view of
the state of affairs of the Company and of the profit or loss of
the Company for that period.
In preparing these financial statements, International
Accounting Standards 1states that the Directors are required
to:
-- properly select and apply accounting policies;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- provide additional disclosures when compliance with the
specific requirements in IFRS are insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the entity's financial position and financial
performance; and
-- make an assessment of the Company's ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements comply with The Companies (Guernsey) Law,
2008. They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in Guernsey and the United Kingdom
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
Directors' responsibility statement
We confirm that to the best of our knowledge:
-- the financial statements, prepared in accordance with IFRS as
adopted by the European Union, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company;
-- the Directors' report includes a fair review of the
development and performance of the business and the position of the
Company, together with a description of the principal risks and
uncertainties that it faces;
-- the Annual Report and Audited Financial Statements, taken as
a whole, are fair, balanced and understandable and provide the
information necessary for Shareholders to assess the Company's
performance, business model and strategy; and
-- The Annual Report includes information required by the LSE
and for ensuring the Company complies with the relevant provisions
of the Disclosure Guidance and Transparency Rules.
This responsibility statement was approved by the Board of
Directors on 22 January 2018 and is signed on its behalf by:
Frederic Hervouet
Non-executive Chairman
22 January 2018
Independent Auditor's Report to the Members of Chenavari Toro
Income Fund Limited (Formerly Toro Limited)
Report on the audit of the financial statements
Opinion
==================================================================
In our opinion the financial statements:
* give a true and fair view of the state of the
Company's affairs as at 30 September 2017 and of its
profit for the year then ended;
* have been properly prepared in accordance with
International Financial Reporting Standards (IFRSs)
as adopted by the European Union; and
* have been prepared in accordance with the
requirements of the Companies (Guernsey) Law, 2008.
We have audited the financial statements of Chenavari Toro
Income Fund Limited which comprise:
* the Statement of Comprehensive Income;
* the Statement of Financial Position;
* the Statement of Cash Flows;
* the Statement of Changes in Equity; and
* the related notes 1 to 22.
The financial reporting framework that has been applied in
their preparation is applicable law and IFRSs as adopted by
the European Union.
Basis for opinion
=======================================================================
We conducted our audit in accordance with International Standards
on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities
under those standards are further described in the auditor's
responsibilities for the audit of the financial statements
section of our report.
We are independent of the Company in accordance with the ethical
requirements that are relevant to our audit of the financial
statements in the UK, including the FRC's Ethical Standard
as applied to listed public interest entities, and we have
fulfilled our other ethical responsibilities in accordance
with these requirements. We confirm that the non-audit services
prohibited by the FRC's Ethical Standard were not provided
to the Company.
We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our opinion.
Summary of our audit approach
=====================================================================================
Key audit matters The key audit matters that we identified in
the current year were:
* Valuation and classification of investments at fair
value through profit or loss; and
* Revenue recognition.
Within this report, any new key audit matters
are identified with and any key audit matters
which are the same as the prior year identified
with
------------------- ================================================================
Materiality The materiality that we used in the current
year was EUR6.5m which was determined on the
basis of 2% of net asset value.
------------------- ================================================================
Scoping The Company is a standalone entity. Audit work
to respond to the risks of material misstatement
was performed directly by the audit engagement
team.
------------------- ================================================================
Significant There have been no significant changes in our
changes in our audit approach from 2016.
approach
----------------- ==============================================
Conclusions relating to principal risks, going concern and
viability statement
We have reviewed the directors' statement We confirm that we
regarding the appropriateness of the going have nothing material
concern basis of accounting contained within to add or draw attention
note 2 to the financial statements and the to in respect of
directors' statement on the longer-term these matters.
viability of the Company contained within
the Report of the Directors on page 19. We agreed with the
directors' adoption
We are required to state whether we have of the going concern
anything material to add or draw attention basis of accounting
to in relation to: and we did not identify
-- the disclosures on pages 27-28 that describe any such material
the principal risks and explain how they uncertainties. However,
are being managed or mitigated; because not all future
-- the directors' confirmation on page 27 events or conditions
that they have carried out a robust assessment can be predicted,
of the principal risks facing the Company, this statement is
including those that would threaten its not a guarantee as
business model, future performance, solvency to the Company's
or liquidity; ability to continue
-- the directors' statement in note 2 to as a going concern.
the financial statements about whether they
considered it appropriate to adopt the going
concern basis of accounting in preparing
them and their identification of any material
uncertainties to the Company's ability to
continue to do so over a period of at least
twelve months from the date of approval
of the financial statements; or
-- the directors' explanation on page 18-22
as to how they have assessed the prospects
of the Company, over what period they have
done so and why they consider that period
to be appropriate, and their statement as
to whether they have a reasonable expectation
that the Company will be able to continue
in operation and meet its liabilities as
they fall due over the period of their assessment,
including any related disclosures drawing
attention to any necessary qualifications
or assumptions.
Key audit matters
====================================================================
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due
to fraud) that we identified. These matters included those
which had the greatest effect on: the overall audit strategy,
the allocation of resources in the audit; and directing the
efforts of the engagement team.
These matters were addressed in the context of our audit of
the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters.
Our key audit matters below are consistent with the prior
year other than we no longer refer to the non-consolidation
of the originator under IFRS 10, which was considered in the
prior year with no significant changes in the year which would
impact this assessment.
Valuation and classification of investments at fair value
through profit or loss
==========================================================================
Key audit matter Investments held by the Company as at 30 September
description 2017 had a fair value of EUR249m (2016: EUR321m)
representing 77% (2016: 92%) of the net asset
value of the Company. Details of investments
are disclosed in note 8. Investments comprise
the most quantitatively significant balance
and are an area of focus because they are the
main driver of the Company's performance and
net asset value.
Most investments are not actively traded and
their valuation is reliant on broker quotes
and in some cases is derived from valuation
models. The inputs to those valuations can
be judgemental and may include but are not
limited to pre-payment rates, discount rates
and credit default rates. As these assumptions
involve a degree of management judgement and
drive the performance of the Company, we consider
that there was a potential for fraud through
possible manipulation of this balance.
Further details of the accounting policy and
methodology on valuation of investments are
described in note 3.1 to the financial statements.
This is also highlighted as significant matter
in the Audit Committee report on page 30.
Classification of investments within the fair
value hierarchy is a significant judgement.
In particular determining what constitutes
observable evidence of trading in investments
is subjective in the absence of public sources
of information.
For investments classified as being at level
3 in the fair value hierarchy, determining
the appropriate disclosure of risks and sensitivities
also requires judgement. These judgements may
include but are not limited to pre-payment
rates, discount rates and credit default rates.
================= =======================================================
How the scope To test the valuation of investments as at
of our audit 30 September 2017 we performed the following
responded to procedures:
the key audit * Assessed the design and implementation of controls
matter around the valuation of investments, and operating
effectiveness in respect of investments priced
through broker quotes, to determine whether
appropriate oversight had been exercised within the
valuation process;
* Assessed the valuation policy and methodology adopted
by management in comparison to IFRS and industry
practice;
* Where broker pricing was used, we obtained
independent price quotes from the brokers;
* For a sample of investments, we obtained price
information from independent sources such as Markit
to determine whether this information was consistent
with prices used;
* For a sample of investments realised during the
period, we reviewed the accuracy of management's
valuations by comparing the price at which
investments were realised to the price recorded by
the Company at the time of disposal;
* For the investment in Taurus, we have agreed the net
asset value recorded to the audited financial
statements of Taurus. The loan warehouse held by
Taurus is audited by Deloitte Dublin, we review their
work to ensure it supports our opinion.
* For investments valued at cost we have assessed the
rationale behind cost being a representative of fair
value and whether this is reasonable.
To test the classification of the investments
on the fair value hierarchy, we reviewed and
challenged management's classification of investments
within the fair value hierarchy and the associated
disclosures by performing the following procedures
to assess whether fair value classification
is in line with the levelling policy:
* Reviewed the number of broker quotes obtained by
management for each applicable investment, which
provides an indicator for where the investment is
positioned in the fair value hierarchy;
* Reviewed evidence of third party transactions used to
corroborate broker valuations; and
* Reviewed the disclosures provided, including
sensitivity analysis to movements in key inputs for
investments classified as level 3 in the fair value
hierarchy.
==================== ==================================================================
Key observations Based on the work performed the valuation and
classification of investments at fair value
is appropriate.
-------------------- ------------------------------------------------------------------
Revenue recognition
-------------------- ------------------------------------------------------------------
Key audit matter Interest income and fair value adjustments
description of EUR33.2m (2016: EUR18.1m) are the Company's
material income streams and revenue recognised
is a key determinant in the reported financial
performance. The increase driven by an increase
in the value of asset backed securities. We
consider the unrealised gains on investments
to represent a fraud risk, given the valuation
of investments valued through models may potentially
be manipulated. Our response to the valuation
risk is described above.
Given the concentration of the portfolio and
the bespoke nature of the primary transactions,
the expected cash flows over the holding period
may be complex. For the secondary transactions
the holding period will also impact on the
income to be recognised by the Company. For
these reasons, identifying the element of yield
on an investment that represents interest income
and that represents return of capital may be
more difficult. As a result interest income
is aggregated with fair value movements on
investments in the Statement of Comprehensive
Income.
The accounting policy on revenue recognition
has been disclosed in note 2.4 and a breakdown
of total income has been provided on note 12.
This is also highlighted as significant matter
in the Audit Committee report on page 30.
-------------------- ------------------------------------------------------------------
How the scope To test revenue recognition for the year ended
of our audit 30 September 2017, we performed the following
responded to procedures:
the key audit * Assessed the design and implementation of the
matter controls, and operating effectiveness where
appropriate, around revenue recognition;
* Recalculated the expected interest received on
investments based on contractual agreements, holding
periods and principal amounts;
* Recalculated accrued interest amounts based on the
period elapsed since the last interest payment date;
* Verified receipts of interest to bank and to
counterparty interest statements; and
* Tested the realised gain/(loss) for the year by
comparing a sample of the proceeds in the bank
statements to a calculation of the book cost for each
investment disposed.
-------------------- ------------------------------------------------------------------
Key observations Based on the work performed interest income
and fair value adjustments are appropriately
recognised.
================= ==============================================
Our application of materiality
===============================
We define materiality as the magnitude of misstatement in the
financial statements that makes it probable that the economic
decisions of a reasonably knowledgeable person would be changed
or influenced. We use materiality both in planning the scope
of our audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality
for the financial statements as a whole as follows:
Materiality EUR6,486,000 (2016: EUR7,000,000)
----------------------- ===============================================
Basis for determining 2% of net asset value (2016: 2% of net asset
materiality value)
----------------------- ===============================================
Rationale for We have derived our materiality based on the
the benchmark net asset value of the Company as we consider
applied it to be the most important balance on which
the shareholders would judge the performance
of the Company.
----------------------- ===============================================
We agreed with the Audit Committee that we would report to the
Committee all audit differences in excess of EUR324,300 (2016:
EUR140,000), as well as differences below that threshold that,
in our view, warranted reporting on qualitative grounds. We
also report to the Audit Committee on disclosure matters that
we identified when assessing the overall presentation of the
financial statements. The increase in our reporting threshold
from the prior year is attributed to there being no history
of misstatements and our understanding of the business.
An overview of the scope of our audit
======================================
Our audit was scoped by obtaining an understanding of the
Company and its environment, including internal control, and
assessing the risks of material misstatement. Audit work to respond
to the risks of material misstatement was performed directly by the
audit engagement team.
Consistent with 2016, we tailored the scope of our audit taking
into account the types of investments held within the Company.
The administrator and sub-administrator maintain the books and
records of the entity. The investment manager and investment
adviser maintain detailed documentation pertaining to the
investment activities of the entity. Our audit therefore included
obtaining an understanding of these service organisations
(including, in respect of the sub-administrator, obtaining their
internal controls report) and their relationship with the
Company.
Other information
=================================================================================
The directors are responsible for the other We have nothing to
information. The other information comprises report in respect
the information included in the annual report, of these matters.
other than the financial statements and
our auditor's report thereon
Our opinion on the financial statements
does not cover the other information and
we do not express any form of assurance
conclusion thereon.
In connection with our audit of the financial
statements, our responsibility is to read
the other information and, in doing so,
consider whether the other information is
materially inconsistent with the financial
statements or our knowledge obtained in
the audit or otherwise appears to be materially
misstated.
If we identify such material inconsistencies
or apparent material misstatements, we are
required to determine whether there is a
material misstatement in the financial statements
or a material misstatement of the other
information. If, based on the work we have
performed, we conclude that there is a material
misstatement of this other information,
we are required to report that fact.
In this context, matters that we are specifically
required to report to you as uncorrected
material misstatements of the other information
include where we conclude that:
* Fair, balanced and understandable - the statement
given by the directors that they consider the annual
report and financial statements taken as a whole is
fair, balanced and understandable and provides the
information necessary for shareholders to assess the
Company's performance, business model and strategy,
is materially inconsistent with our knowledge
obtained in the audit; or
* Audit committee reporting - the section describing
the work of the audit committee does not
appropriately address matters communicated by us to
the audit committee; or
-- Directors' statement of voluntary compliance
with the UK Corporate Governance Code -
the parts of the directors' statement required
under the Listing Rules relating to the
Company's compliance with the UK Corporate
Governance Code containing provisions specified
for review by the auditor in accordance
with Listing Rule 9.8.10R(2) do not properly
disclose a departure from a relevant provision
of the UK Corporate Governance Code.
Responsibilities of directors
======================================================================
As explained more fully in the directors' responsibilities
statement, the directors are responsible for the preparation
of the financial statements and for being satisfied that they
give a true and fair view, and for such internal control as
the directors determine is necessary to enable the preparation
of financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, the directors are responsible
for assessing the Company's ability to continue as a going
concern, disclosing as applicable, matters related to going
concern and using the going concern basis of accounting unless
the directors either intend to liquidate the Company or to
cease operations, or have no realistic alternative but to do
so.
Auditor's responsibilities for the audit of the financial statements
=====================================================================
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an
audit conducted in accordance with ISAs (UK) will always detect
a material misstatement when it exists. Misstatements can arise
from fraud or error and are considered material if, individually
or in the aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these
financial statements.
A further description of our responsibilities for the audit
of the financial statements is located on the Financial Reporting
Council's website at: www.frc.org.uk/auditorsresponsibilities.
This description forms part of our auditor's report.
Use of our report
=====================================================================
This report is made solely to the Company's members, as a body,
in accordance with Section 262 of the Companies (Guernsey)
Law, 2008. Our audit work has been undertaken so that we might
state to the Company's members those matters we are required
to state to them in an auditor's report and for no other purpose.
To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company and
the Company's members as a body, for our audit work, for this
report, or for the opinions we have formed.
Report on other legal and regulatory requirements
Matters on which we are required to report by exception
======================================================================================
Adequacy of explanations received and accounting
records We have nothing to
Under the Companies (Guernsey) Law, 2008 report in respect
we are required to report to you if, in of these matters.
our opinion:
* we have not received all the information and
explanations we require for our audit; or
* proper accounting records have not been kept; or
* the financial statements are not in agreement with
the accounting records.
Other matters
=================================================================
Auditor tenure
Following the recommendation of the audit committee, we were
appointed by the Board on 25 April 2015 to audit the financial
statements for the year ending 30 September 2015 and subsequent
financial periods. The period of total uninterrupted engagement
including previous renewals and reappointments of the firm
is 3 years, covering the years ending 30 September 2015 to
30 September 2017.
Consistency of the audit report with the additional report
to the audit committee
Our audit opinion is consistent with the additional report
to the audit committee we are required to provide in accordance
with ISAs (UK).
David Becker
For and on behalf of Deloitte LLP
Recognised Auditors
St Peter Port, Guernsey
22 January 2018
Statement of Comprehensive Income
For the year ended 30 September 2017
30 September 30 September
2017 2016
Notes EUR EUR
Income
Net gain on financial assets and
financial liabilities held at fair
value through profit or loss 12 33,187,497 18,133,459
Interest income 13,069 493,684
------------- -------------
Total net income 33,200,566 18,627,143
------------- -------------
Expenses
Management fees 4 (c) 3,179,716 3,540,618
Performance fees 4 (c) 4,853,361 1,971,246
Administration fees 5 (b) 81,300 82,496
Sub-administration fees 5 (c) 215,176 260,049
Custodian and brokerage fees 5 (d) 36,171 43,796
Legal fees 58,300 *569,145
Directors' fees 4(a) 143,818 153,439
Audit fees 122,121 131,847
AIFM fees 4 (c) 58,227 103,931
Other operating expenses 437,150 261,217
------------- -------------
Total operating expenses 9,185,340 7,117,784
------------- -------------
Financing costs
Interest expense 233,536 338,965
------------- -------------
Profit for the year 23,781,690 11,170,394
============= =============
Earnings per Share
Basic and diluted 9 7.04 cents 3.09 cents
*2016 legal fees inclusive of issue costs related to the set up
and structuring of the Originator of EUR271,506
All items in the above statement derive from continuing
operations.
The Condensed Schedule of Investments and notes to the financial
statements are an integral part of the financial statements.
Statement of Financial Position
As at 30 September 2017
30 September 30 September
Notes 2017 2016
Assets EUR EUR
Financial assets at fair value
through profit or loss 2.2,8,11 260,759,107 325,171,844
Due from broker 13 16,710,630 12,984,494
Other receivables and prepayments 14 50,302 66,971
Cash and cash equivalents 2.5 66,758,986 24,548,560
Total assets 344,279,025 362,771,869
Equity
Share capital and share premium 16 354,752,496 354,752,496
Treasury Reserve (31,277,176)
Retained earnings 841,688 (2,761,799)
Total equity 324,317,008 351,990,697
Current liabilities
Financial liabilities at fair
value through profit or loss 2.2,8,11,2.13 10,113,545 3,958,272
Due to broker 13 4,185,556 3,501,238
Accrued expenses 15 5,662,916 3,321,662
Total current liabilities 19,962,017 10,781,172
Total equity and liabilities 344,279,025 362,771,869
Shares outstanding 16 324,803,047 361,450,000
NAV per share 10 99.85 cents 97.38 cents
Frederic Hervouet John Whittle
Date: 22 January 2018 Date: 22 January 2018
The Condensed Schedule of Investments and notes to the financial
statements are an integral part of the financial statements.
Statement of Changes in Equity
For the year ended 30 September 2017
Share capital
Retained and share Treasury
earnings premium Reserve Total
Note EUR EUR EUR EUR
At 30 September 2016 (2,761,799) 354,752,496 - 351,990,697
Profit for the year 23,781,690 - - 23,781,690
Transfer from treasury
reserve on settling
of performance fees 4(c) - - 1,654,826 1,654,826
Repurchase of shares 16 - - (32,932,002) (32,932,002)
Distributions to
equity shareholders 18 (20,178,203) - - (20,178,203)
At 30 September 2017 841,688 354,752,496 (31,277,176) 324,317,008
============= ============== ============= =============
Share capital
Retained and share Treasury
earnings premium Reserve Total
Note EUR EUR EUR EUR
At 30 September 2015 12,272,932 354,752,496 - 367,025,428
Profit for the year 11,170,394 - - 11,170,394
Transfer from treasury
reserve on settling
of performance fees 4(c) - - - -
Repurchase of shares - - - -
Distributions to
equity shareholders 18 (26,205,125) (26,205,125)
At 30 September 2016 (2,761,799) 354,752,496 - 351,990,697
============= ============== =========== =============
The Condensed Schedule of Investments and notes to the financial
statements are an integral part of the financial statements.
Statement of Cash Flows
For the year ended 30 September 2017
30 September 30 September
2017 2016
EUR EUR
Cash flows from operating activities
Profit for the year 23,781,690 11,170,394
Adjustments for non-cash items and working
capital:
Purchase of investments (168,927,680) (297,989,539)
Disposal and paydowns of investments 256,460,774 255,773,714
Net (gain)/loss on financial assets and
derivatives at fair value (16,965,084) 3,017,064
(Increase)/decrease in amounts due from
brokers (3,726,136) 17,573,759
Decrease/(increase) in other receivables
and prepayments 16,669 (56,457)
Increase in amounts due to brokers 684,318 2,888,738
Increase in accrued expenses* 3,996,080 554,580
Net cash inflow/(outflow) from operating
activities 95,320,631 (7,067,747)
Cash flows from financing activities
Distributions to participating equity shareholders (20,178,203) (26,205,125)
Repurchase of shares net of costs (32,932,002) -
Net cash outflow from financing activities (53,110,205) (26,205,125)
Net increase/(decrease) in cash and cash
equivalents 42,210,426 (33,272,872)
Cash and cash equivalents at beginning
of the year 24,548,560 57,821,432
Cash and cash equivalents at end of the
year 66,758,986 24,548,560
*Increase in accrued expenses incorporates accrued expenses
& settlement of accrued performance fees with treasury
shares.
The Condensed Schedule of Investments and notes to the financial
statements are an integral part of the financial statements.
Condensed Schedule of Investments, at Fair Value
As at 30 September 2017
Great
Europe France Germany Britain Ireland Italy Netherlands Portugal Spain U.S.A Other* Total NAV
EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR %
Financial assets
at fair value
through
profit or loss
Equity
securities - - - - - - 270,500 - - - - 270,500 0.08%
Hotels,
restaurants
& leisure - - - - - - - - - - 2,283,205 2,283,205 0.70%
---------- ---------- ----------- ----------- ----------- ---------- ------------ ----------- ----------- ---------- ------------ ------------ -------
Equities
securities
total - - - - - - 270,500 - - - 2,283,205 2,553,705 0.78%
---------- ---------- ----------- ----------- ----------- ---------- ------------ ----------- ----------- ---------- ------------ ------------ -------
Debt securities - - - - - - - 4,581,786 - - - 4,581,786 1.41%
Bond - 303,741 - 984,916 152,317 - 299,990 - - - 1,128,799 2,869,763 0.88%
Arbitrage CDO - - 412,479 5,466,886 - - 340,221 - - - - 6,219,586 1.92%
Commercial
mortgage-backed
security 306,025 3,765,483 5,487,067 2,700,838 615,658 683,971 3,362,041 2,202 1,105,571 5,987,419 12,659,626 36,675,901 11.31%
Arbitrage CLO - - 17,158 2,311,436 10,614,291 - - 2,597,613 4,199,557 - 759,002 20,499,057 6.32%
Residential
mortgage-backed
security 9,000,000 - - - - 6,763,652 - 4,798,000 6,612,008 - - 27,173,660 8.38%
Balance sheet
CLO - - 7,957,423 2,604,154 - - - - 840,000 - - 11,401,577 3.52%
Consumer ABS - - - - 1,659,054 - - - - - 2,263,857 3,922,911 1.21%
Senior loan - - - - - - - - - - 73,080 73,080 0.02%
Whole loan - - - - 407,369 - - - - - - 407,369 0.13%
Non-performing
loan - - - - - - - - 24,157,123 - - 24,157,123 7.45%
Preferred equity - - - 15,434 - - - - 30,272,742 - 15,043,901 45,332,077 13.98%
Equity - - - - - - - - - - 73,486,380 73,486,380 22.66%
---------- ---------- ----------- ----------- ----------- ---------- ------------ ----------- ----------- ---------- ------------ ------------ -------
Debt securities
total 9,306,025 4,069,224 13,874,127 14,083,664 13,448,689 7,447,623 4,002,252 11,979,601 67,187,001 5,987,419 105,414,645 256,800,270 79.19%
---------- ---------- ----------- ----------- ----------- ---------- ------------ ----------- ----------- ---------- ------------ ------------ -------
Derivative
financial
asset
CDS - - - - - - - - - - 1,374,420 1,374,420 0.42%
Listed options - - - - - - - - - - 30,712 30,712 0.01%
---------- ---------- ----------- ----------- ----------- ---------- ------------ ----------- ----------- ---------- ------------ ------------ -------
Derivative
financial
asset total - - - - - - - - - - 1,405,132 1,405,132 0.43%
---------- ---------- ----------- ----------- ----------- ---------- ------------ ----------- ----------- ---------- ------------ ------------ -------
Financial assets
at fair value
through
profit or loss
total 9,306,025 4,069,224 13,874,127 14,083,664 13,448,689 7,447,623 4,272,752 11,979,601 67,187,001 5,987,419 109,102,982 260,759,107 80.40%
---------- ---------- ----------- ----------- ----------- ---------- ------------ ----------- ----------- ---------- ------------ ------------ -------
*Investment in the originator (Taurus) is presented in "Equity"
and "Other" in the statement of investments.
Condensed Schedule of Investments, at Fair Value (continued)
As at 30 September 2017
Great
Europe France Germany Britain Ireland Italy Netherlands Portugal Spain U.S.A Other* Total NAV
------------- ---------- ---------- ----------- ----------- ----------- ---------- ------------ ----------- ----------- ---------- ----------- ------------ --------
EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR %
-------------
Financial
liabilities
at fair
value
through
profit or
loss
-------------
Derivative
financial
liabilities
CDS - - - - - - - - - - 9,334,547 9,334,547 2.88%
Forward FX
contracts - - - - - - - - - - 778,998 778,998 0.24%
Derivative
financial
liabilities
total - - - - - - - - - - 10,113,545 10,113,545 3.12%
---------- ---------- ----------- ----------- ----------- ---------- ------------ ----------- ----------- ---------- ----------- ------------ --------
Financial
liabilities
at fair
value
through
profit or
loss
total - - - - - - - - - - 10,113,545 10,113,545 3.12%
---------- ---------- ----------- ----------- ----------- ---------- ------------ ----------- ----------- ---------- ----------- ------------ --------
Total net
investments 9,306,025 4,069,224 13,874,127 14,083,664 13,448,689 7,447,623 4,272,752 11,979,601 67,187,001 5,987,419 98,989,437 250,645,562 77.28%
---------- ---------- ----------- ----------- ----------- ---------- ------------ ----------- ----------- ---------- ----------- ------------ --------
Other assets
and
liabilities 73,671,446 22.72%
------------ --------
Net assets 324,317,008 100.00%
------------ --------
*Investment in the originator (Taurus) is presented in "Equity"
and "Other" in the statement of investments.
Condensed Schedule of Investments, at Fair Value*
As at 30 September 2016
Great
Europe France Germany Britain Ireland Italy Netherlands Portugal Spain U.S.A Other* Total NAV
EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR %
Financial assets
at fair value
through
profit or loss
Equity
securities
Hotels,
restaurants
& leisure - - - 190,689 - - - - - - - 190,689 0.05%
----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ -------
Equities
securities
total - - - 190,689 - - - - - - - 190,689 0.05%
----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ -------
Debt securities
Bond 331,590 - - 3,167,259 - - - - - - - 3,498,849 0.99%
Arbitrage CDO 13,982,295 279,101 4,301,298 14,046,398 2,920,716 5,764,743 12,004,162 1,489,247 6,490,292 1,516,569 3,968,510 66,763,331 18.97%
Commercial
mortgage-backed
security 280,605 43,839 1,549,163 9,425,324 - - 176,756 - 5,480 - 140,303 11,621,470 3.30%
Arbitrage CLO 8,484,579 11,627,888 13,357,575 8,666,126 1,531,089 990,891 7,930,652 63,771 3,014,521 14,061,355 8,008,245 77,736,692 22.08%
Residential
mortgage-backed
security 1,398,712 - 35,780 15,174,798 7,458,546 - 71,667 269,171 10,715,702 - - 35,124,376 9.98%
Balance sheet
CLO 760,593 - - - - 6,517,925 - 7,404,500 4,011,297 - - 18,694,315 5.31%
Consumer ABS - - 7,791,589 2,637,898 - - 6,128,478 - 120,000 - - 16,677,965 4.74%
Senior loan 3,377,807 - - - - - - - - - - 3,377,807 0.96%
Whole loan 5,389,701 - - - - - - - - - - 5,389,701 1.53%
Non-performing
loan - - - - - - - - 28,046,479 - - 28,046,479 7.97%
Preferred equity - - - - - - - - 19,377,804 136,535 118,102 19,632,441 5.59%
Equity - - - - 35,847,475 - - - - - - 35,847,475 10.18%
----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ -------
Debt securities
total 34,005,882 11,950,828 27,035,405 53,117,803 47,757,826 13,273,559 26,311,715 9,226,689 71,781,575 15,714,459 12,235,160 322,410,901 91.60%
----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ -------
Derivative
financial
asset
CDS - - - - - - - - - - 831,870 831,870 0.24%
Listed options - - - - - - - - - - 70,742 70,742 0.02%
Forward FX
contracts - - - - - - - - - - 683,852 683,852 0.19%
Repurchase
agreement - - - - - - - - - - 983,790 983,790 0.28%
Derivative
financial
asset total - - - - - - - - - - 2,570,254 2,570,254 0.73%
Financial assets
at fair value
through
profit or loss
total 34,005,882 11,950,828 27,035,405 53,308,492 47,757,826 13,273,559 26,311,715 9,226,689 71,781,575 15,714,459 14,805,414 325,171,844 92.38%
----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ -------
*This consists of all European issued bonds where the fair value
is less than 1% of the NAV of the Fund at 30 September 2016.
Condensed Schedule of Investments, at Fair Value*
(continued)
As at 30 September 2016
Great
Europe France Germany Britain Ireland Italy Netherlands Portugal Spain U.S.A Other* Total NAV
EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR %
Financial
liabilities
at fair
value
through
profit or
loss
Debt
securities
Bond - 1,078,750 - - - - - - - - - 1,078,750 0.30%
Senior loan - - - - - - - - 871,125 - - 871,125 0.25%
----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ --------
Debt
securities
total - 1,078,750 - - - - - - 871,125 - - 1,949,875 0.55%
----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ --------
Derivative
financial
liabilities
CDS - - - - - - - - - - 2,008,397 2,008,397 0.57%
----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ --------
Derivative
financial
liabilities
total - - - - - - - - - - 2,008,397 2,008,397 0.57%
----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ --------
Financial
liabilities
at fair
value
through
profit or
loss
total - 1,078,750 - - - - - - 871,125 - 2,008,397 3,958,272 1.12%
----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ --------
Total net
investments 34,005,882 10,872,078 27,035,405 53,308,492 47,757,826 13,273,559 26,311,715 9,226,689 70,910,450 15,714,459 12,797,017 321,213,572 91.26%
----------- ----------- ----------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- ----------- ------------ --------
Other assets
and
liabilities 30,777,125 30,777,125 8.74%
----------- ------------ --------
Net assets 79,421,617 351,990,697 100.00%
----------- ------------ --------
*This consists of all European issued bonds where the fair value
is less than 1% of the NAV of the Fund at 30 September 2016.
Notes to the Financial Statements
1. General information
The Company is a closed-ended investment company limited by
shares. The Company was incorporated with limited liability in
Guernsey under the Companies Law (Guernsey) 2008 (the "Law") on 2
March 2015 with registered number 59940, to be a Registered
Closed-ended Collective Investment Scheme. The principal
legislation under which the Company operates is the Law.
The Company has appointed Carne Global AIFM Solutions (C.I.)
Limited as the Company's external AIFM. The AIFM has delegated
portfolio management to the Portfolio Manager, Chenavari Credit
Partners LLP, a wholly owned member of the Chenavari Financial
Group.
The Company's Shares are admitted to trading on the SFS of the
London Stock Exchange. Such Shares were also listed on the Official
List of The International Stock Exchange ("TISE") on 8 May 2015.
The Initial Public Offering ("IPO") of the Company raised gross
proceeds of EUR331.8 million. With further issues raising EUR16.4
million (gross of issue) costs on 21 July 2015 and EUR8.8 million
(gross of issue costs) on 3 August 2015.
Investment objective
The investment objective of the Company is to deliver an
absolute return from, investing and trading in ABS and other
structured credit investments in liquid markets and investing
directly or indirectly in asset backed transactions including
without limitation, through the origination of credit
portfolios.
Target returns and dividend policy
On the basis of market conditions as at the date of the
prospectus (28 April 2015), and whilst not forming part of its
investment objective or investment policy, the Company will target
a net total return on invested capital of 12 to 15 per cent per
annum over three to five years. Returns to Shareholders will be
predominantly as dividend income.
Subject to compliance with the Law and the satisfaction of the
solvency test, the Company intends to distribute all of its income
from investments, net of expenses, by way of dividends payable
quarterly in March, June, September and December of each year.
The target returns and dividend payments should not be taken as
a forecast of the Company's future performance, profits or results.
The target returns and dividend payments are targets only and there
is no guarantee that they can or will be achieved and they should
not be seen as an indication of the Company's actual return.
Accordingly, investors should not place any reliance on the target
returns and dividend payments in deciding whether to invest in the
Shares. Dividend payments may fall short of or exceed, the amounts
indicated above.
Investment policy
The Company will seek to invest in a diversified portfolio of
exposures to predominantly European based obligors. The Company's
investment strategies will be:
The Opportunistic Credit Strategy - the Company will
opportunistically invest or trade in primary and secondary market
ABS and other structured credit investments including private asset
backed finance investments.
The Originated Transactions Strategy - the Company will invest
in transactions on a buy-to-hold basis, via a variety of means,
including, without limitation, Warehouse Credit Facilities, which
can originate credits that may be refinanced in structured credit
markets as well as other financing opportunities.
Notes to the Financial Statements (continued)
1. General information (continued)
Originated transactions
The Company intends to invest in Originators (Originators or
sponsors of originated credit investments- CLO's or securitisations
of pools of consumer loans including residential mortgages, credit
card receivables or auto loans) which establish securitisation
vehicles and retain the requisite Retention Securities in such
vehicles pursuant to the EU Risk Retention Requirements and/or, in
future, the U.S. Risk Retention Regulations. In exchange for its
capital and participation facilitating retention compliant
origination transactions, the Company expects to receive enhanced
returns relative to direct investment in structured credit
investments (such as CLOs). Such returns may take the form of
additional returns from fees, fee rebates or other financial
accommodations agreed by parties who may benefit from the Company's
involvement depending upon the asset class of a securitisation
vehicle.
Eligible investments
Each investment shall, as of the date of acquisition by the
Company, be either a debt obligation (including, but not limited
to, a bond or loan), a share or equity security, a hybrid
instrument, derivative instrument or contract or an equitable or
other interest. In addition, the Company may from time to time have
surplus cash (for example, following the disposal of an acquired
investment). Cash held by the Company pending investment or
distribution will be held in either cash or cash equivalents,
including but not limited to money market instruments or funds,
bonds, commercial paper or other debt obligations with banks or
other counterparties provided such bank or counterparty has an
investment grade credit rating (as determined by any reputable
rating agency selected by the Company on the advice of the
Portfolio Manager).
Investment restrictions
Concentration limits
The Company shall comply with the concentration limits set out
below, which shall, in relation to each new investment, be tested
at the point such new investment is made assessed in accordance
with the exposure limit policy.
Where investments are issued by entities with a
compartmentalised or cellular legal structure, each compartment or
cell shall be considered to be a separate issuer/counterparty
provided that the principle of segregation and insolvency
remoteness of commitments of the different compartments/cells of
such issuer is materially established by law, contract and/or
trust.
None of the restrictions set out below shall apply to
investments issued or guaranteed by the government of an OECD
Member State.
In relation to investments made:
-- no more than 20 per cent of NAV shall be exposed to the
credit risk of any underlying single transaction or issue;
-- the top five exposures to any transactions or issues shall
not, in aggregate, account for more than 50 per cent. of NAV;
-- no more than 50 per cent of NAV, in aggregate, shall be invested in unlisted investments;
and in each case, the restrictions set out above shall not apply
to the Company's investment in Originators but shall be applied on
a look through basis to the investments of such Originators;
and
-- no more than 20 per cent of NAV, in aggregate, shall be
exposed to transactions or issues where the underlying collateral
is non-European.
For the purposes of interpreting the above provision, Europe
shall include Switzerland, the member states of the EU and EEA and
the European Common Customs Territory (from time to time) and, for
the avoidance of doubt, shall continue to include any members, who
being or subsequently joining as members of such groupings,
subsequently cease to be members.
Notes to the Financial Statements (continued)
1. General information (continued)
Hedging and derivatives
The Company may implement hedging and derivative strategies
designed to protect investment performance against material
movements in exchange rates and interest rates and to protect
against credit risk. Such strategies may include (but are not
limited to) options, forwards and futures and interest rate or CDS
and will only be entered into when they are available in a timely
manner and on terms acceptable to the Company. The Company may also
bear risks that could otherwise be hedged where it is considered
appropriate to the investment objective and investment policy.
The Company may also use hedging or derivatives (both long and
short) for investment purposes, for efficient portfolio management,
financing or protection of individual or aggregate positions.
In addition, as the Company's base operating currency is Euro,
the Company proposes to engage in currency hedging in an attempt to
reduce the impact on the Sterling Shares (if any) of currency
fluctuations.
Borrowing limits
The Company may use borrowings from time to time for the purpose
of short term bridging, financing Share buy backs, repurchase
agreements with market counterparties or managing working capital
requirements, including hedging facilities. Cash borrowings can
contribute alongside other forms of leverage to increase the level
of gearing of the Company. The Company may also use gearing to
increase potential returns to Shareholders. In the past, the
Portfolio Manager has employed leverage against senior tranches of
ABS to enhance their returns, and expects it will continue to do
so, where the economic terms offered by counterparties can increase
potential returns to Shareholders.
The Company has set a borrowing limit such that the Company's
gearing shall not exceed 130 per cent at the time of incurrence and
deployment of any borrowing. For the purposes of this calculation,
gearing will be calculated as the sum of the Company's exposures to
each position directly held, divided by the last published NAV (and
for the avoidance of doubt, will include the full exposure held by
the Company under any full recourse total return swap, but will
exclude any borrowing arrangements that are limited-recourse to the
Company, such as borrowings by an Originator).
Borrowings employed by the Company may be secured on individual
assets or portfolios without recourse to the Company or by a charge
over some or all of the Company's assets to take advantage of
potentially preferential terms.
The Board will oversee the gearing levels in the Company, and
will review the position with the AIFM and the Portfolio Manager on
a regular basis.
It is anticipated that the gearing level of any Originators will
differ from the above restrictions. Any leverage of an Originator
shall be nonrecourse to the Company. In particular, such an
Originator may enter into Warehouse Credit Facilities to acquire
exposure to assets. Where a Warehouse Credit Facility takes the
form of a loan facility, an Originator will borrow funds to acquire
assets in anticipation of the creation of a securitisation vehicle
to securitise such assets, such facilities generally being
non-recourse to the assets of such Originator (other than assets
acquired with such funding) and repaid following the transfer of
such assets to a securitisation vehicle. Originators will be
required to give representations, warranties and indemnities to
financing providers including confirmations relating to compliance
with risk retention requirements.
Cash uses and cash management activities
In accordance with the Company's investment policy, the
Company's principal use of cash (including the Net Issue Proceeds)
has been to fund investments sourced by the Portfolio Manager,
ongoing operational expenses and payment of dividends and other
distributions to Shareholders in accordance with the Company's
dividend policy as set out in the section entitled "Dividend
Policy" in Part I of the prospectus.
Notes to the Financial Statements (continued)
2. Summary of significant accounting policies
The principal accounting policies applied in the preparation of
these financial statements are set out below.
2.1 Basis of preparation
The Audited Annual Financial Statements for the year ended 30
September 2017 have been prepared in accordance with IFRS as issued
by the International Accounting Standards Board, the Disclosure
Guidance and Transparency Rules of the Financial Conduct Authority
and applicable legal and regulatory requirements of the Law.
The financial statements have been prepared under the historical
cost convention, as modified by the revaluation of financial assets
and financial liabilities held at fair value through profit or
loss.
The preparation of financial statements in conformity with IFRS
requires the use of certain critical accounting estimates. It also
requires the Board of Directors to exercise its judgement in the
process of applying the Company's accounting policies. The areas
involving a higher degree of judgement or complexity, or areas
where assumptions and estimates are significant to the financial
statements are disclosed in Note 3.
The Directors are of the opinion that the Company is able to
meet its liabilities as they fall due for payment because it has
and is expected to maintain, adequate cash resources. Given the
nature of the Company's business, the Directors have a reasonable
expectation that the Company has adequate financial resources to
continue in operational existence for the foreseeable future.
Accordingly, the financial statements have been prepared on a going
concern basis.
Application of IFRS 10, its related Investment Entities
Amendment and IFRS 12
The Company has adopted IFRS 10 'Consolidated Financial
Statements' and as an investment entity is required to measure the
investment in its subsidiaries at fair value, to the extent that
these subsidiaries also meet the definition of investment entities
themselves. The financial statements therefore comprise the results
of the Company only. A subsidiary is an entity controlled by the
Company. A Company has control of an investee, when it is exposed,
or has rights, to variable returns from its involvement with the
investee and has the ability to affect those returns through its
power over the investee as defined in IFRS 10 'Consolidated
Financial Statements'.
The Company has an investment in a subsidiary, Taurus Corporate
Financing LLP ("Taurus" or "Originator") in which it holds 100% of
the partnership interest. The Board determined that both the
Company and Taurus meet the definition of an investment entity as
set out under IFRS 10 and that therefore the Company should measure
its investment in Taurus at fair value rather than consolidate its
results.
An entity shall consider all facts and circumstances when
assessing whether it is an investment entity, including its purpose
and design. Under the definition of an investment entity, as set
out in paragraph 27 in the standard, the entity must satisfy all
three of the following tests:
i) Obtains funds from one or more investors for the purpose of
providing those investors with investment management services;
ii) Commits to its investors that its business purpose is to
invest funds solely for returns from capital appreciation,
investment income, or both (including having an exit strategy for
investments); and
iii) Measure and evaluate the performance of substantially all
of its investments on a fair value basis.
The three essential criteria met by the Company and the
Originator are:
i) Typically, an investment entity would have several investors
who pool their funds to gain access to investment management
services and investment opportunities that they might not have had
access to individually. The Company and the Originator through the
Company obtain funds from a diverse group of external
shareholders;
ii) An investment entity should not hold its investments
indefinitely. Whilst some investments held by either the Company or
the Originator may be retained for a longer period, such
investments will have a contractual maturity and hence a limited
life;
Notes to the Financial Statements (continued)
2. Summary of significant accounting policies (continued)
2.1 Basis of preparation (continued)
Application of IFRS 10, its related Investment Entities
Amendment and IFRS 12 (continued)
iii) The Company and the Originator measure and evaluate the
performance of their investments on a fair value basis and believe
that investor focus is on the fair value of the portfolio. This is
also consistent with the basis of reporting internally to the Board
of each entity which will use the fair value information as the
primary measurement attribute to evaluate the performance of
substantially all of their investments and to make investment
decisions.
The Directors are of the opinion that the Company and the
Originator therefore meet the criteria set out in IFRS 10.
New standards and interpretations not yet adopted:
The Company has not applied the following new and revised IFRS
that have been issued but are not yet effective in these financial
statements however these are not expected to have a material
impact:
IFRS 9 Financial Instruments ("IFRS 9")
The International Accounting Standards Board ("IASB") has
published the final version of IFRS 9 bringing together the
classification and measurement, impairment (including the expected
loss model for financial assets) and hedge accounting phases of the
IASB's project to replace IAS 39 'Financial Instruments:
Recognition and Measurement'. IFRS 9 is effective for periods
beginning on or after 1 January 2018.
The Company will be required to apply the new classification and
measurement model for financial assets. This will include both
assessing the business model objective of the Company in holding
financial assets for the collection of contractual cash flows and
sales of such assets; and assessing whether the contractual terms
of the financial asset give rise on specified dates to cash flows
that are solely payments of principal and interest on the
contractual amount outstanding. Depending on the analysis, the
Company may be required to measure its investments in accordance
with the new provisions of IFRS 9 under Fair Value through Other
Comprehensive Income or amortised cost. In such circumstances the
Company would be required to apply the impairment provisions of the
new expected loss model.
The Company is primarily invested in complex structured debt
positions which are held for trading and which are not expected to
meet the requirements for classification as assets held at
amortised cost and hence it is expected that these will continue to
be classified as assets at Fair Value Through Profit or Loss.
Whilst the Company hold a small number of direct loans which may
meet the requirements for classification as assets held at
amortised cost, the Directors believe that the fair value is
currently materially equivalent to the amortised cost basis and
hence do not expect the adoption of IFRS 9 to have any material
impact on the Company's net asset value.
IFRS 15 Revenue from contracts with customers ("IFRS 15")
IFRS 15 establishes principles for reporting useful information
to users of financial statements about the nature, amount, timing
and uncertainty of revenue and cash flows arising from an entity's
contracts with customers.
IFRS 15 is effective for annual periods beginning on or after 1
January 2018 with early adoption permitted.
Notes to the Financial Statements (continued)
2. Summary of significant accounting policies (continued)
2.1 Basis of preparation (continued)
Application of IFRS 10, its related Investment Entities
Amendment and IFRS 12 (continued)
IFRS 16 Leases ("IFRS 16")
IFRS 16 specifies how an IFRS reporter will recognise, measure,
present and disclose leases. The standard provides a single lessee
accounting model, requiring lessees to recognise assets and
liabilities for all leases unless the lease term is 12 months or
less or the underlying asset has a low value. Lessors continue to
classify leases as operating or finance, with IFRS 16's approach to
lessor accounting substantially from its predecessor, IAS 17.
IFRS 16 was issued in January 2016 and applies to annual
reporting periods beginning on or after 1 January 2019.
2.2 Financial assets and financial liabilities at fair value through profit or loss
(a) Classification
The Company classifies its investments and derivatives as
financial assets or financial liabilities at fair value through
profit or loss. These financial assets and financial liabilities
are classified as held for trading or designated by the Board of
Directors at fair value through profit or loss at inception.
Financial assets or financial liabilities held for trading are
those acquired or incurred principally for the purposes of selling
or repurchasing in the short term. Derivatives are also categorised
as financial assets or financial liabilities held for trading. The
Company does not classify any derivatives as hedges in a hedging
relationship. Financial assets and financial liabilities designated
at fair value through profit or loss at inception are those that
are managed and their performance evaluated on a fair value basis
in accordance with the Company's documented investment strategy.
The Company's policy is for the Portfolio Manager and the Board of
Directors to evaluate the information about these financial assets
on a fair value basis together with other related financial
information.
(b) Recognition/derecognition
Regular-way purchases and sales of investments are recognised on
the trade date - the date on which the Company commits to purchase
or sell the investment. Investments are derecognised when the
rights to receive cash flows from the investments have expired or
the Company has transferred substantially all risks and rewards of
ownership.
ABS transactions may be structured in a variety of ways and are
highly bespoke to the needs of the bank involved and the investors
in the transaction. In all situations, the amount of interest and
principal payable on the instrument will be linked to the credit
performance of the underlying collateral. The investment
characteristics of ABS transactions are such that principal
payments are made more frequently than traditional debt securities.
The principal may be repaid at any time because the underlying debt
or other assets generally may be repaid at any time.
(c) Measurement
Financial assets and financial liabilities at fair value through
profit or loss are initially recognised at fair value. Transaction
costs are expensed in the Statement of Comprehensive Income.
Subsequent to initial recognition, all financial assets and
financial liabilities at fair value through profit or loss are
measured at fair value.
Gains and losses arising from changes in the fair value of the
'financial assets or financial liabilities at fair value through
profit or loss' category are presented in the Statement of
Comprehensive Income in the period in which they arise. The net
gain on financial assets and financial liabilities held at fair
value through profit or loss consists of coupons and interest
received and both realised and unrealised gains and losses on
financial assets and financial liabilities at fair value through
profit or loss, calculated as described in note 8. For the purposes
of the Statement of Cash Flows, the coupon income is considered an
operating activity.
Notes to the Financial Statements (continued)
2. Summary of significant accounting policies (continued)
2.2 Financial assets and financial liabilities at fair value through profit or loss (continued)
(d) Fair value estimation
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value of
financial assets and liabilities traded in active markets (such as
publicly traded derivatives and trading securities) are based on
quoted market prices at the close of trading on the reporting date.
The Company adopted IFRS 13 and this standard requires the Company
to use an exit price (a traded market price or mid-price) for both
financial assets and financial liabilities where such price falls
within the bid-ask spread. In circumstances where the exit price is
not within the bid-ask spread, management will determine the point
within the bid-ask spread that is most representative of fair
value. If a significant movement in fair value occurs subsequent to
the close of trading up to midnight on the year end date, valuation
techniques will be applied to determine the fair value. A
significant event is any event that occurs after the last market
price for a security, close of market or close of the foreign
exchange, but before the Company's valuation time that materially
affects the integrity of the closing prices for any security,
instrument, currency or securities affected by that event so that
they cannot be considered 'readily available' market
quotations.
The fair value of financial assets and liabilities at fair value
through profit or loss is measured through a combination of
dedicated price feeds from recognised valuation vendors and the
application of relevant broker quotations where the broker is a
recognised market maker in the respective position. Where broker
quotes are not available, investment valuations are based on the
Portfolio Manager's internal models.
The fair value of financial assets and liabilities that are not
traded in an active market (for example, over-the-counter
derivatives) is determined using counterparty valuations for ABS or
Markit for credit derivatives instruments. In the opinion of the
Directors Markit is the benchmark for CDS pricing data. Markit
receives data from the official books of market makers, and then
subjects it to a rigorous testing process. Loan investments are
classified as at fair value through profit or loss, as these
financial assets form part of the overall investment portfolio,
these assets are managed and their performance is evaluated on a
fair value basis. The loans are
not traded in an active market and their fair value is
determined using valuation techniques which reference the value of
the underlying collateral attaching to the loans. Adjustments to
the fair value are considered in light of changes in the credit
quality of the borrower, the value of the underlying collateral and
any relevant market changes.
Refer Note 3.1 and Note 8 for further disclosure and analysis of
valuation of assets and liabilities which contain unobservable
inputs.
(e) Offsetting financial instruments
Financial assets and liabilities are offset and the net amount
reported in the Statement of Financial Position when there is a
legally enforceable right to offset the recognised amounts and
there is an intention to settle on a net basis, or realise the
asset and settle the liability simultaneously.
2.3 Due from and to brokers
Amounts due from and to brokers represents receivables for
securities sold and payables for securities purchased that have
been contracted for but not yet settled or delivered on the
Statement of Financial Position date, respectively as well as
collateral posted to derivatives counterparts.
These amounts are recognised initially at fair value and
subsequently measured at amortised cost using the effective
interest method, less provision for impairment for amounts due from
brokers.
2.4 Interest income
Interest income on transactions is recognised in the Statement
of Comprehensive Income in net gain on financial assets and
financial liabilities held at fair value through profit or loss.
Income receivable on cash and cash equivalents is recognised
separately through profit or loss in the Statement of Comprehensive
Income.
2.5 Cash and cash equivalents
Cash and cash equivalents represents cash in-hand, demand
deposits, other short-term highly liquid investments with original
maturities of three months or less and bank overdrafts.
Notes to the Financial Statements (continued)
2. Summary of significant accounting policies (continued)
2.6 Share capital
Shares are classified as equity. Incremental costs directly
attributable to the issue of Shares are shown in equity as a
deduction, net of tax, from the proceeds. The costs are those which
were necessary for the initial issue of shares. Such costs and
expenses were fixed at 2 per cent of the gross issue proceeds.
Where the Company purchases its own equity share capital, the
consideration paid is deducted from total shareholders' equity and
classified as treasury shares until such shares are cancelled or
reissued. Where such shares are subsequently sold or reissued, any
consideration received is included in total shareholders' equity.
No gains or losses are recognised on the purchase, sale,
cancellation or issue of treasury shares.
As at 30 September 2017, the Company's issued share capital
amounted to 361,450,000 million shares, 36,646,953 of which were
held in treasury. 38,343,396 shares were bought back during the
Year.
2.7 Foreign currency
(a) Functional and presentation currency
The functional and presentation currency of the Company is EUR
(EUR).The performance of the Company is measured and reported to
the investors in EUR.
(b) Foreign currency translation
Foreign currency transactions are translated into the functional
currency of the Company using the exchange rates prevailing at the
dates of the transactions. Foreign exchange gains and losses
resulting from the settlement of such transactions and from the
translation at period-end exchange rates of monetary assets and
liabilities denominated in foreign currencies are recognised in the
Statement of Comprehensive Income. Translation differences on
non-monetary financial assets and liabilities at fair value through
profit or loss are recognised in the Statement of Comprehensive
Income within the fair value net gain or loss.
(c) Exchange rates
The foreign currency exchange rates at 30 September 2017 were as
follows: GBP 1.1349 per EUR and USD 0.8459 per EUR (2016: GBP
1.1559 and USD 0.8898).
2.8 Transaction costs
Transaction costs on financial assets at fair value through
profit or loss include fees and commissions paid to agents,
advisers, brokers and dealers. Transaction costs, when incurred,
are immediately recognised in the Statement of Comprehensive
Income.
2.9 Accrued expenses
Expenses are accounted for on an accruals basis.
2.10 Other receivables and prepayments
Other receivables are amounts due in the ordinary course of
business. Other receivables are accounted for on an accruals
basis.
2.11 Dividend distribution
Dividend distribution to the Company's shareholders is
recognised as a liability in the Company's financial statements and
disclosed in the Statement of Changes in Equity in the period in
which the dividends are approved by the Board.
2.12 Taxation
The Company is exempt from Guernsey taxation on income derived
outside of Guernsey and bank interest earned in Guernsey. No charge
to Guernsey taxation arises on capital gains.
2.13 Securities sold under agreements to repurchase and
securities purchases under agreements to resell
Securities sold under agreements to repurchase ("repurchase
agreements") and securities purchased under agreements to resell
("reverse repurchase agreements") are treated as collateralised
financing transactions. The financing is carried at the amount at
which the securities were sold or acquired plus accrued interest,
which approximates fair value. It is the Company's policy to
deliver securities sold under agreements to repurchase and to take
possession of securities purchased under agreements to resell.
Notes to the Financial Statements (continued)
3. Critical accounting judgements and key sources of estimation uncertainty
The preparation of the Company's Annual Financial Statements
requires management to make judgements, estimates and assumptions
that affect the reported amounts of revenues, expenses, assets and
liabilities and the accompanying disclosures. Uncertainty about
these assumptions and estimates could result in outcomes that
require a material adjustment to the carrying amount of assets or
liabilities affected in future periods.
3.1 Key sources of estimation uncertainty
Fair value of financial instruments
The assets held by the Company are mostly valued through a
combination of dedicated price feeds from recognised valuation
vendors, valuation techniques, and the application of relevant
broker quotations where the broker is a recognised dealer in the
respective position or derived from valuation models prepared by
the Portfolio Manager.
The monthly NAV is derived from the Company's valuation policy.
A documented valuation policy determines the hierarchy of prices to
be applied to the fair value. Prices are sourced from third party
broker or dealer quotes for the relevant security. Where no third
party price is available, or where the Portfolio Manager determines
that the third party quote is not an accurate representation of the
fair value, the Portfolio Manager will determine the valuation
based on the valuation policy. This may include the use of a
comparable arm's length transaction, reference to other securities
that are substantially the same, discounted cash flow analysis and
other valuation techniques commonly used by market participants
making the maximum use of market inputs and relying as little as
possible on entity-specific inputs.
Based on the hierarchy set out in IFRS 13, 81 transactions are
classified as Level 1 or 2 based on quoted market prices, dealer
quotations or alternative pricing sources supported by observable
inputs. The remaining transactions have been classified as Level 3
where broker quotes are unavailable or discounted, or cannot be
substantiated by market transactions or where the prices used are
derived from internal models. The Directors monitor the
availability of observable inputs and if necessary, reclassify to
level 3 where observable trading is not available.
Note 8 outlines the Level 3 classifications and the analysis of
the impacts of Level 3 investments on the performance of the
Company.
3.2 Critical judgements in applying accounting policies
Functional currency
The Board of Directors considers EUR (EUR) as the currency that
most fairly represents the economic effect of the underlying
transactions, events and conditions. The performance of the Company
is measured and reported to the investors in EUR.
Valuation and classification of investments
The Board of Directors consider the valuation of investments and
the classification of these investments in the fair value hierarchy
as the critical judgements. The fair value of investments is
described in 3.1 above and the judgements associated with the
disclosures in the fair value hierarchy are described in Note
8.
Investment entity definition
Having considered the criteria set out in IFRS 10, the Directors
have determined that both the Company and the Originator meet the
definition of an investment entity. Note 2.1 set out the Directors'
key considerations in this respect.
Income recognition
Due to the nature of the Company's investment strategy resulting
in the possibility of investments being sold before maturity and
given the consequent inherent uncertainty of using maturity dates
to calculate income using the Effective Interest Rate method, for
both primary and secondary investments, the Company's accounting
policy recognises only a net fair value movement rather than
reporting a split between fair value movement and interest income
in the income statement.
Notes to the Financial Statements (continued)
4. Related parties
(a) Directors' remuneration & expenses
The Directors of the Company are remunerated for their services
at such a rate as the Directors determine. The fee for Mr. Hervouet
as Non-executive Chairman is GBP50,000 per annum. The fee for Mr.
Whittle as Chairman of the Audit Committee is GBP40,000 per annum.
The fee for Mr. Silvotti is GBP30,000 per annum.
Frederic Hervouet elected to invest a portion of his director's
remuneration in the form of shares and bought 32,629 shares as a
result.
(b) Shares held by related parties
As at 30 September 2017, the Directors held the following Shares
in the Company.
Frederic Hervouet 114,000 (2016: 81,371)
John Whittle 37,091 (2016: 37,091)
Roberto Silvotti 954,692 (2016: 954,692)
Loic Fery is the representative of the managing partner of
Chenavari Credit Partners LLP. Chenavari Credit Partners LLP acts
as discretionary portfolio manager for Chenavari European
Opportunistic Credit Master Fund LP (the "Managed Account"). The
Managed Account and Loic Fery hold 35.65% of the shares in the
Company.
Roberto Silvotti is a Director of Chenavari Investment Managers
(Luxembourg) S.à.r.l (being a member of the Chenavari Financial
Group) and Chenavari Multi Strategy Credit Fund SPC (a company
under the management of Chenavari Investment Managers (Luxembourg)
S.à.r.l). He forms part of the Concert Party described on page 21
which includes Chenavari Credit Partners LLP and related Chenavari
Group companies, relevant Chenavari Partners and employees and
Chenavari European Opportunistic Credit Master Fund LP. In total,
this Concert Party holds approximately 48.79% of the shares of the
Company and is therefore deemed to have a significant influence
over the Company through these shareholdings.
(c) AIFM and Portfolio Manager
The Company has appointed Carne Global AIFM Solutions (C.I.)
Limited as the Company's external AIFM. The AIFM has delegated
portfolio management to the Portfolio Manager. Under the terms of
the AIFM Agreement, the AIFM is entitled to receive from the
Company an annual fee, payable out of the assets of the Company, of
GBP66,000. EUR58,227 (30 September 2016: EUR103,931) has been
charged during the Year.
The AIFM and the Company have appointed the Portfolio Manager,
Chenavari Credit Partners LLP, a member of the Chenavari Financial
Group, as the external Portfolio Manager with delegated
responsibility for portfolio management functions in accordance
with the Company's investment objectives and policy, subject to the
overall supervision and control of the Directors and the AIFM.
Under the terms of the Portfolio Management Agreement the
Portfolio Manager is entitled to receive from the Company a
portfolio management fee calculated and accrued monthly at a rate
equivalent to one-twelfth of 1 per cent. of the NAV per Share Class
(before deducting the amount of that month's portfolio management
fee and any accrued liability with respect to any performance
fee).
Total portfolio management fees for the year amounted to
EUR3,179,716 (30 September 2016: EUR3,540,618) with EUR547,465 (30
September 2016: EUR295,214) outstanding at end of the year.
Notes to the Financial Statements (continued)
4. Related parties (continued)
(c) AIFM and Portfolio Manager (continued)
The Portfolio Manager shall also be entitled to receive a
performance fee in respect of each Class of Shares equal to 15 per
cent. of the total increase in the NAV per Share of the relevant
Class at the end of the relevant Performance Period (as adjusted
to, (i) add back the aggregate value of any dividends per Share
paid to Shareholders since the end of the Performance Period in
respect of which a performance fee was last paid in respect of that
Class (or the date of First Admission, if no performance fee has
been paid in respect of that Class) and, (ii) exclude any accrual
for unpaid performance fees) over the highest previously recorded
NAV per Share of the relevant Class as at the end of the relevant
Performance Period in respect of which a performance fee was last
paid (or the NAV per Share of the relevant class as at First
Admission (after deduction of launch costs), if no performance fee
has been paid in respect of that Class of Shares) multiplied by the
number of issued and outstanding Shares of that Class at the end of
the relevant Performance Period, having made
adjustments for numbers of Shares of that Class issued or
repurchased during the relevant Performance Period.
Performance Period
Subject to any regulatory limitations, the Portfolio Manager has
agreed that for a given Performance Period (i.e, each twelve month
period ending 30 September each year) any performance fee shall be
satisfied as to a maximum of 60 per cent in cash and as to a
minimum (save as set out below) of 40 per cent by the issuance of
new Euro Shares (including the reissue of treasury shares) issued
at the latest published NAV per Share. At no time shall the
Portfolio Manager (and/or any persons deemed to be acting in
concert with it for the purposes of the Takeover Code) be obliged,
in the absence of a relevant Whitewash Resolution having been
passed, to receive further Shares where to do so would trigger a
requirement to make a mandatory offer pursuant to Rule 9 of the
Takeover Code.
The issuance of further Shares to the Portfolio Manager will not
take place without a Whitewash Resolution from Shareholders.
Performance fees of EUR4,853,361 (30 September 2016: EUR1,971,246)
were changed in the Year. As at 30 September 2017, EUR4,853,361 was
payable (2016:EUR2,837,574). Cash of EUR1,182,748 and 800,181
shares (with a prevailing net asset value at the date of transfer,
being 24 March 2017, of EUR788,498) were paid to the Portfolio
Manager in the period, in relation to the Performance Fee for the
period ended 30 September 2016. In addition, on 24 November 2016,
896,262 shares (with a prevailing net asset value at the date of
transfer of EUR866,327) were transferred to the Portfolio Manager,
in relation to part-payment of the Performance Fee for the period
ended 30 September 2015.
5. Material agreements
The Company has funded investments with a value of EUR98,169,195
(2016: EUR66,956,036) via hybrid instruments or equity issued by
legally segregated compartments of AREO S.à.r.l. ("Areo"), a
company incorporated in Luxembourg under the Securitization Law of
2004. Areo is majority owned by funds managed by the Chenavari
group and is managed by a Board of Directors composed of a majority
of independent directors that consider investment opportunities
sourced by the Portfolio Manager. The Company is currently invested
in ten compartments of Areo, and which it fair values in accordance
with IFRS 13 as set out in the Company's accounting policies. The
Portfolio Manager receives no fees from Areo. Areo is a conduit
special purpose vehicle sponsored by a member of the Chenavari
Financial Group, for the purposes of the Company's application of
Listing Rule II.
(a) Corporate Broker
Fidante Partners Europe Limited, trading as Fidante Capital,
receives a retainer for their corporate broking services of
GBP75,000 per annum, payable semi-annually in arrears.
(b) Administration fee
Estera Administration Limited (Guernsey) (the "Administrator")
serves as the Company's administrator and secretary. The
Administrator is entitled to an annual asset-based fee calculated
at a rate of 0.017 per cent per annum of NAV and subject to a
minimum fee of GBP70,000 per annum. All fees are payable quarterly
in advance. Administration fees for the year amounted to EUR81,300
(year ended 30 September 2016: EUR82,496) of which EUR6,619 (2016:
EUR6,665) remained payable at the end of the year.
Notes to the Financial Statements (continued)
5. Material agreements (continued)
(c) Sub-administration fee
The Administrator has appointed Quintillion Limited (the
"Sub-Administrator") as the Company's Sub-Administrator. The
Sub-Administrator is entitled to receive an annual asset-based fee
from the Company of up to 0.073% per annum of NAV, excluding
certain expenses. Sub-administration fees for the year amounted to
EUR215,176 (year ended 30 September 2016: EUR260,049) of which
EUR16,277 (2016: EUR19,176) remained payable at the end of the
year.
(d) Custodian fee
J.P. Morgan Chase Bank N.A has been appointed to act as
custodian to the Company and to provide custodial, settlement and
other associated services to the Company. Under the provisions of
the custodian agreement dated 27 April 2015 the Custodian is
entitled to a safekeeping and administration fee on each
transaction calculated using a basis point fee charge based on the
country of settlement and the value of the assets together with
various other payment/wire charges on outgoing payments, subject to
an aggregate minimum fee of EUR31,500 per annum.
(e) AIFM and Portfolio Manager
Contractual arrangements relating to the AIFM and Portfolio
Manager are detailed in note 4.
6. Financial risk management
Throughout the investment process and following acquisition of
an investment, the Portfolio Manager is proactive in identifying
and seeking to mitigate transaction and portfolio risk.
The Portfolio Manager will be responsible for sourcing potential
investments. The Portfolio Manager will not be required to, and
generally will not, submit decisions concerning the discretionary
or ongoing management of the Company's assets for the approval of
the Board, except where such approval relates to an application of
the investment guidelines or a conflict of interest.
6.1 Credit risk
The Company takes on exposure to credit risk, which is the risk
that a counterparty will be unable to pay amounts in full when due.
To the extent that the Portfolio is exposed to underlying
concentrations in any one geographical region, borrower sector or
credit or asset type, an economic downturn relating generally to
such geographical region, borrower type or credit or asset type may
result in an increase in underlying defaults or prepayments within
a short time period.
6.1 Credit risk (continued)
The Portfolio is expected to carry leveraged exposure and an
increase in credit losses with respect to any or all Collateral
could reduce the Company's income (and thus the ability to pay
dividends to Shareholders), the NAV and the value of the
Shares.
None of the restrictions set out below shall apply to
investments issued or guaranteed by the government of an OECD
Member State.
In relation to investments made:
-- no more than 20% of NAV shall be exposed to the credit risk
of any underlying single transaction or issue;
o As of 30 September 2017, the largest investment represents
7.45% of the NAV.
-- the top five exposures to any transactions or issues shall
not, in aggregate, account for more than 50% of NAV;
o As of 30 September 2017, the top 5 investments represent
24.42% of the NAV.
-- no more than 50% of NAV, in aggregate, shall be invested in unlisted investments;
o As of 30 September 2017, 30.27% of the NAV is invested in
unlisted investments.
Notes to the Financial Statements (continued)
6. Financial risk management (continued)
6.1 Credit risk (continued)
Additionally, in each case, the restrictions set out above shall
not apply to the Company's investment in Originators (the
originator or sponsor of a CLO or a securitisation of a pools of
consumer loan assets) but shall be applied on a look-through basis
to the investments of such Originators; and
-- no more than 20% of NAV, in aggregate, shall be exposed to
transactions or issues where the underlying collateral is
non-European.
o As of 30 September 2017, 16.10% of the NAV is exposed to
non-European underlying collateral.
The Company may use borrowings from time to time for the purpose
of short term bridging, financing Share buy backs, repurchase
agreements with market counterparties or managing working capital
requirements, including hedging facilities.
-- The Company has set a borrowing limit such that the Company's
gearing shall not exceed 130% at the time of incurrence and
deployment of any borrowing.
o As of 30 September 2017, the gearing of the Company was
approximately 78.67%.
In addition, the Company may from time to time have surplus cash
(for example, following the disposal of an acquired investment).
Cash held by the Company pending investment or distribution will be
held in either cash or cash equivalents, including but not limited
to money market instruments or funds, bonds, commercial paper or
other debt obligations with banks or other counterparties provided
such bank or counterparty has an investment grade credit rating (as
determined by any reputable rating agency selected by the Company
on the advice of the Portfolio Manager).
The Company manages the portfolio with appropriate
diversification in terms of sectors and geographical breakdowns. As
of 30 September 2017, the breakdown of the NAV per asset class and
geography was as follows:
30 September 30 September
2017 2016
Asset class breakdown % NAV % NAV
Equity securities 0.78% 0.05%
Bond 1.41% 0.69%
Arbitrage CDO 0.88% 18.97%
Commercial mortgage-backed security 1.92% 3.30%
Arbitrage CLO 11.31% 22.08%
Residential mortgage-backed security 6.32% 9.98%
Balance sheet CLO 8.38% 5.31%
Consumer ABS 3.52% 4.74%
Senior loan 1.21% 0.72%
Whole loan 0.02% 1.53%
Mezzanine loan 0.13%
Non-performing loan 7.45% 7.97%
Preferred equity 13.98% 5.58%
Equity 22.66% 10.18%
Repo - 0.28%
Cash, hedges and accruals 20.03% 8.62%
Total 100.00% 100.00%
------------- -------------
Notes to the Financial Statements (continued)
6. Financial risk management (continued)
6.1 Credit risk (continued)
30 September 30 September
Geographic breakdown 2017 2016
European Union 5.36% 9.66%
France 4.42% 3.09%
Germany 8.69% 7.68%
Great Britain 6.39% 15.14%
Ireland 4.55% 13.57%
Italy 2.54% 3.77%
Netherlands 5.47% 7.48%
Portugal 3.69% 2.62%
Spain 20.88% 20.15%
U.S.A 6.01% 4.46%
Other 9.28% 3.64%
Cash and collateral 22.72% 8.74%
Total 100.00% 100.00%
------------- -------------
The Company is also exposed to counterparty credit risk on
forwards, cash and cash equivalents, amounts due from brokers and
other receivable balances, as shown in the following tables:
Royal Bank Deutsche
30 September 2017 of Scotland Bank JP Morgan Barclays Total
S&P rating A-3 A-2 A-2 A-2
EUR EUR EUR EUR EUR
Cash and cash equivalents - - 66,758,986 66,758,986
Due from broker 31,672 4,135,115 11,515,035 1,028,808 16,710,630
CDS - - 1,374,420 - 1,374,420
Listed options - - 30,712 - 30,712
Total counterparty
exposure 31,671 4,135,115 79,679,153 1,028,808 84,874,748
------------- ---------- ----------- ---------- -----------
Net asset exposure
% 0.01% 1.28% 24.57% 0.32% 26.17%
30 September Royal Bank Deutsche
2016 of Scotland Bank JP Morgan Credit Suisse Total
S&P rating BBB- BBB+ A-* BBB+
EUR EUR EUR EUR EUR
Cash and cash
equivalents - - 24,548,560 - 24,548,560
Due from
broker 1,253,954 2,975,342 6,907,698 1,847,500 12,984,494
CDS - - 831,870 - 831,870
Listed
options - - 70,742 - 70,742
Forward FX
contracts - 683,852 - - 683,852
Total
counterparty
exposure 1,253,954 3,659,194 32,358,870 1,847,500 39,119,518
-------------------------- -------------------------- -------------------------- -------------------------- --------------------
Net asset
exposure
% 0.36% 1.04% 9.19% 0.52% 11.11%
* JP Morgan cash and cash equivalents represents cash held in a
custodian account.
Notes to the Financial Statements (continued)
6. Financial risk management (continued)
6.1 Credit risk (continued)
Offsetting financial assets and financial liabilities
The Company enters into transactions with a number of
counterparties whereby the resulting financial instrument is
subject to an enforceable master netting arrangement or similar
agreement, such as an ISDA Master Agreement (a "Master Netting
Agreement"). Such Master Netting Agreements may allow for net
settlement of certain open contracts where the Company and the
respective counterparty both elect to settle on a net basis. In the
absence of such an election, contracts will be settled on a gross
basis. All Master Netting Agreements allow for net settlement at
the option of the non-defaulting party in an event of default, such
as failure to make payment when due or bankruptcy.
The below tables present the Company's financial asset and
liabilities subject to offsetting, enforceable master netting
agreements.
Assets
Related amount not offset in the Statement
As at 30 September 2017 of Financial Position
------------------------------------------------
Net amounts of
Gross amounts assets
offset in the presented in
Gross amounts Statement of the Statement
of recognised Financial of Financial Financial Cash collateral
Counterparty assets Position Position instruments received/pledged Net amount
----------------- --------------- --------------- --------------- ---------------- ----------------- -----------
EUR EUR EUR EUR EUR EUR
Derivative
contracts
CDS
JP Morgan 1,374,420 - 1,374,420 (1,374,420) - -
Listed option
JP Morgan 30,712 - 30,712 - - 30,712
--------------- --------------- --------------- ---------------- ----------------- -----------
1,405,132 - 1,405,132 (1,374,420) - 30,712
=============== =============== =============== ================ ================= ===========
Liabilities
Related amount not offset in the Statement
As at 30 September 2017 of Financial Position
------------------------------------------------
Net amounts of
Gross amounts liabilities
offset in the presented in
Gross amounts Statement of the Statement
of recognised Financial of Financial Financial Cash collateral
Counterparty liabilities Position Position instruments received/pledged Net amount
----------------- --------------- --------------- --------------- ---------------- ----------------- -----------
EUR EUR EUR EUR EUR EUR
Derivative
contracts
CDS
Barclays (842,858) - (842,858) - 842,858 -
JP Morgan (8,491,689) - (8,491,689) 1,374,420 7,117,270 -
Forward FX
contracts
Deutsche Bank (778,998) - (778,998) - 778,998 -
--------------- --------------- --------------- ---------------- ----------------- -----------
(10,113,545) - (10,113,545) 1,374,420 8,739,126 -
=============== =============== =============== ================ ================= ===========
Notes to the Financial Statements (continued)
6. Financial risk management (continued)
6.1 Credit risk (continued)
Offsetting financial assets and financial liabilities
(continued)
Assets
Related amount not offset in the Statement
As at 30 September 2016 of Financial Position
------------------------------------------------
Net amounts of
Gross amounts assets
offset in the presented in
Gross amounts Statement of the Statement
of recognised Financial of Financial Financial Cash collateral
Counterparty assets Position Position instruments received/pledged Net amount
----------------- --------------- --------------- --------------- ---------------- ----------------- -----------
EUR EUR EUR EUR EUR EUR
Derivative
contracts
CDS
JP Morgan 831,870 - 831,870 (831,870) - -
Forward FX
contracts
Deutsche Bank 683,852 - 683,852 - - 683,852
--------------- --------------- --------------- ---------------- ----------------- -----------
1,515,722 - 1,515,722 (831,870) - 683,852
=============== =============== =============== ================ ================= ===========
Liabilities
Related amount not offset in the
Statement
of Financial Position
As at 30 September 2016 of Financial Position
Net amounts of
Gross amounts liabilities
offset in the presented in
Gross amounts Statement of the Statement
of recognised Financial of Financial Financial Cash collateral
Counterparty liabilities Position Position instruments received/pledged Net amount
----------------- --------------- --------------- --------------- --------------- ----------------- ------------
EUR EUR EUR EUR EUR EUR
Derivative
contracts
CDS
JP Morgan (2,008,397) - (2,008,397) 831,870 - (1,176,527)
(2,008,397) - (2,008,397) 831,870 - (1,176,527)
=============== =============== =============== =============== ================= ============
None of the financial assets and financial liabilities are
offset in the Statement of Financial Position, as the Master
Netting Agreements create a right of set-off of recognised amounts
that is enforceable only following an event of default, insolvency
or bankruptcy of the Company or counterparties. In addition, the
Company and its counterparties do not intend to settle on a net
basis or to realise the assets and settle the liabilities
simultaneously.
6.2 Foreign currency risk
Foreign currency risk is the risk of gain or loss resulting from
exposure to movements on exchange rates on investments priced in
currencies other than the base currency of the Company. The Company
does not actively take risk in foreign currency, but incurs it as a
normal course of business and employs a series of economic hedges
to minimise these risks.
Notes to the Financial Statements (continued)
6. Financial risk management (continued)
6.2 Foreign currency risk (continued)
The currency exposure as at 30 September 2017 is as follows:
NAV impact
30 September 30 September for a +/-10%
Other net 2017 Total 2017 Total FX rate
Currency Investments FX Hedges Cash liabilities exposure exposure move
EUR EUR EUR EUR EUR % NAV %
CHF - - 687 - 687 0.00% 0.00%
GBP 10,318,460 (23,762,818) 13,496,729 (175,430) (123,059) (0.04%) (0.00%)
USD 19,744,445 (20,592,090) 864,310 (11,500) 5,165 0.00% 0.00%
------------- --------------
30,062,905 (44,354,908) 14,361,726 (186,930) (117,207) (0.04%) (0.00%)
------------ ------------- ----------- ------------- ------------- ------------- --------------
The currency exposure as at 30 September 2016 was:
NAV impact
30 September 30 September for a +/-10%
Other net 2016 Total 2016 Total FX rate
Currency Investments FX Hedges Cash liabilities exposure exposure move
EUR EUR EUR EUR EUR % NAV %
CHF - - 731 - 731 0.00% 0.00%
GBP 36,844,315 (36,912,938) 35,814 (128,453) (161,262) (0.05%) (0.00%)
USD 8,974,785 (12,412,122) 4,448,590 1,592,521 2,603,774 0.74% 0.07%
------------ ------------- ---------- ------------- ------------- ------------- --------------
45,819,100 (49,325,060) 4,485,135 1,464,068 2,443,243 0.69% 0.07%
------------ ------------- ---------- ------------- ------------- ------------- --------------
6.3 Interest rate risk
Interest rate risk is the risk of gain or loss resulting from
exposure to movements on interest rates. The Company does not
actively take interest rate risk, but incurs it as a normal course
of business and employs a series of hedges to minimise these risks.
The Company mainly holds floating rate financial instruments which
have little exposure to fair value interest rate risk as, when the
short term interest rates increase, the interest on a floating rate
note will increase. The value of assed backed securities may be
affected by interest rate movements. Interest receivable on bank
deposits or payable on bank overdraft positions will be affected by
fluctuations on interest rates; however the underlying cash
positions will not be affected.
The Company's continuing position in relation to interest rate
risk is monitored by the Portfolio Manager.
Notes to the Financial Statements (continued)
6. Financial risk management (continued)
6.3 Interest rate risk (continued)
Floating
Fixed rate rate Non-interest
interest interest bearing
EUR EUR EUR
30 September 2017
Financial assets at fair value
through profit or loss 57,124,659 201,320,532 2,313,916
Due from broker - 16,710,630 -
Other receivables and prepayments - - 50,302
Cash and cash equivalents - 66,758,986 -
Financial liabilities at fair
value through profit or loss - (9,334,547) (778,998)
Due to broker - (566,131) (3,619,425)
Accrued expenses - - (5,662,916)
57,124,659 274,889,470 (7,697,121)
---------------------- ------------------------- ----------------
30 September 2016
Financial assets at fair value
through profit or loss 46,933,306 276,546,360 1,692,178
Due from broker - - 12,984,494
Other receivables and prepayments - - 66,971
Cash and cash equivalents - 24,548,560 -
Financial liabilities at fair
value through profit or loss (1,078,750) - (2,879,522)
Due to broker - - (3,501,238)
Accrued expenses - - (3,321,662)
45,854,556 301,094,920 5,041,221
---------------------- ------------------------- ----------------
6.4 Liquidity risk
A proportion of the Company's balance sheet is made up of assets
and liabilities which may not be realisable as cash on demand.
Under certain market circumstances already seen in the past, most
of the portfolio which consists of ABS can become less liquid and
the cost of unwinding may become significant. As a result an
exposure to liquidity risk exists. This risk is mitigated by the
closed-ended nature of the Company.
The table below analyses the Company's liabilities into relevant
maturity groups based on the remaining period at the balance sheet
date to the contractual maturity date.
Less than Greater than
3 months 3 months Total
EUR EUR EUR
30 September 2017
Financial liabilities at fair
value through profit or loss - (10,113,545) (10,113,545)
Due to broker (4,185,556) - (4,185,556)
Accrued expenses (5,617,843) (45,073) (5,662,916)
(9,803,399) (10,158,618) (19,962,017)
---------------------------- -------------------------- --------------------
30 September 2016
Financial liabilities at fair
value through profit or loss - (3,958,272) (3,958,272)
Due to broker (3,501,238) - (3,501,238)
Accrued expenses (3,274,322) (47,340) (3,321,662)
(6,775,560) (4,005,612) (10,781,172)
---------------------------- -------------------------- --------------------
Notes to the Financial Statements (continued)
6. Financial risk management (continued)
6.4 Liquidity risk (continued)
The Company is all equity funded and has been established as a
Registered Closed-ended Collective Investment Scheme. Other than in
the circumstances and subject to the conditions set out in Part I
of the prospectus, Shareholders will have no right to have their
Shares redeemed or repurchased by the Company at any time.
Shareholders wishing to realise their investment in the Company
will normally therefore be required to dispose of their Shares
through the secondary market.
6.5 Price risk
Market price risk arises mainly from uncertainty about future
prices of financial instruments and credit ratings of debt issuers
in which the Company invests. Market price risk represents the
potential loss the Company may suffer through price movements on
its investments.
The Company is exposed to market price risk arising from the
investments in equity securities, debt and derivatives.
The Portfolio Manager manages the Company's price risk and
monitors its overall market positions on a daily basis in
accordance with the Company's investment objective and policies.
The Company's overall market positions are monitored on a quarterly
basis by the board of directors.
As at 30 September 2017 a 5% movement in prices (with all other
variables held constant) would have resulted in a change to the
total net assets of EUR12,532,278 (2016: EUR16,060,679).
7. The current risk profile of the AIF and the risk management
systems employed by the AIFM to manage those risks
The AIFM has delegated the portfolio management of the Company
to the Portfolio Manager whilst retaining responsibility for the
risk management functions for the Company in accordance with the
AIFMD. The AIFM's overall risk management process monitors the
consistency between the risk profile of the Company and the
investment objective, policies and strategy of the Company.
The day to day management of the Company's risk is undertaken by
the Portfolio Manager Risk Officer who is functionally and
hierarchically separate from portfolio management, and who has full
access to risk management information. The risk management systems
also include risk reporting, the monitoring of risk limits, and
breach alert and actions. The Risk Officer reports to the Risk
Committee of the AIFM. The Risk Committee has ultimate
responsibility for risk management and controls of the AIF and for
reviewing their effectiveness on a regular basis, including taking
appropriate remedial action to correct any deficiencies. The Risk
Committee has determined the current risk profile of the AIF to be
low. The AIFM has also implemented a risk management policy to
identify generic risk types and to continuously review the limits
and parameters used within the risk management system.
8. Fair value of financial instruments
The fair values of financial assets and liabilities traded in
active markets (such as publicly traded derivatives and trading
securities) are based on quoted market prices at the close of
trading on the year end date. The Company has adopted IFRS 13,
'Fair value measurement' and this standard requires the Company to
price its financial assets and liabilities using the price in the
bid-ask spread that is most representative of fair value for both
financial assets and financial liabilities. If a significant
movement in fair value occurs subsequent to the close of trading up
to midnight on the year end date, valuation techniques will be
applied to determine the fair value. No such event occurred. An
active market is a market in which transactions for the asset or
liability take place with sufficient frequency and volume to
provide pricing information on an ongoing basis.
For financial assets and liabilities not traded in active
markets the fair value is determined by using broker quotations
where the broker is a recognised dealer in the respective position,
valuation techniques and various methods including the use of
comparable recent arm's length transactions, reference to other
instruments that are substantially same, discounted cash flow
analysis, option pricing models, alternative price sources
including a combination of dedicated price feeds from recognised
valuation vendors and application of relevant broker quotations
where the broker is a recognised market maker in the respective
position.
Notes to the Financial Statements (continued)
8. Fair value of financial instruments (continued)
For instruments for which there is no active market, the Company
may also use internally developed models, which are usually based
on valuation methods and techniques generally recognised as a
standard within the industry. Some of the inputs to these models
may not be market observable and are therefore based on
assumptions.
The level of the fair value hierarchy of an instrument is
determined considering the inputs that are significant to the
entire measurement of such instrument and the level of the fair
value hierarchy within those inputs are categorised.
The hierarchy is broken down into three levels based on the
observability of inputs as follows:
Level 1: Quoted price (unadjusted) in an active market for an
identical instrument.
Level 2: Valuation techniques based on observable inputs, either
directly (i.e. as prices) or indirectly (i.e. derived from prices).
This category includes instruments valued using: quoted prices in
active markets for similar instruments; quoted prices for identical
or similar instruments in markets that are considered less than
active; or other valuation techniques for which all significant
inputs are directly or indirectly observable from market data.
Level 3: Valuation techniques using significant unobservable
inputs. This category includes all instruments for which the
valuation technique includes inputs not based on observable data
and the unobservable inputs have a significant effect on the
instrument's valuation. This category includes instruments that are
valued based on quoted prices for similar instruments for which
significant unobservable adjustments or assumptions are required to
reflect differences between the instruments.
The level in the fair value hierarchy within which the fair
value measurement is categorised in its entirety is determined on
the basis of the lowest level input that is significant to the fair
value measurement in its entirety. For this purpose, the
significance of an input is assessed against the fair value
measurement in its entirety. If a fair value measurement uses
observable inputs that require significant adjustment based on
unobservable inputs, that measurement is a Level 3 measurement.
Assessing the significance of a particular input to the fair value
measurement in its entirety requires judgement, considering factors
specific to the asset or liability.
The determination of what constitutes 'observable' requires
significant judgement by the Company. The Company considers
observable data to be that market data that is readily available,
regularly distributed or updated, reliable and verifiable, not
proprietary, and provided by independent sources that are actively
involved in the relevant market.
Notes to the Financial Statements (continued)
8. Fair value of financial instruments (continued)
The following tables show the Company's assets at 30 September
2017 based on the hierarchy set out in IFRS 13:
Quoted prices
in active
markets Significant Significant
for identical other observable unobservable
assets inputs inputs
(Level 1) (Level 2) (Level 3) Total
2017 2017 2017 2017
Assets EUR EUR EUR EUR
Financial assets held for
trading
Equity
securities
Europe: Equity 270,500 - - 270,500
Other: Equity - - 2,283,205 2,283,205
Debt securities
Europe: Corporate
& financials - 4,581,786 2,158,000 6,739,786
UK: Corporate &
financials - 1,153,343 - 1,153,343
Europe: Private
bond* - 73,486,380 - 73,486,380
Europe: ABS - 84,161,206 31,535,983 115,697,189
UK: ABS - 7,369,195 2,618,941 9,988,136
Europe: Money market
loan - 47,383,066 - 47,383,066
UK: Money market
loan - - 15,434 15,434
USA: Money market
loan - 2,263,856 73,080 2,336,936
OTC derivatives
CDS - 1,374,420 - 1,374,420
Listed options 30,712 - - 30,712
Total assets 301,212 221,773,252 38,684,643 260,759,107
--------------- ------------------ -------------- ------------
Liabilities
Financial liabilities held
for trading
OTC derivatives
CDS - 9,334,547 - 9,334,547
Forward FX contracts - 778,998 - 778,998
Total liabilities - 10,113,545 - 10,113,545
--------------- ------------------ -------------- ------------
*This is the fair value of the subsidiary Taurus Corporate
Financing LLP, as described in note 20. Taurus holds subordinated
notes of TCLO 2, 3 and 4 valued at EUR55.6m, other debt securities
through its investment into TCF Loan Warehouse Designated Activity
Company 1, valued of EUR29.9m and other assets and liabilities of
(EUR12.0)m.
Notes to the Financial Statements (continued)
8. Fair value of financial instruments (continued)
The following tables show the Company's assets at 30 September
2016 based on the hierarchy set out in IFRS 13:
Quoted prices
in active
markets Significant Significant
for identical other observable unobservable
assets inputs inputs
(Level 1) (Level 2) (Level 3) Total
2016 2016 2016 2016
Assets EUR EUR EUR EUR
Financial assets held for
trading
Equity
securities
UK: Equity 190,689 - - 190,689
Debt securities -
Europe: Corporate
& financials - - 7,841,266 7,841,266
UK: Corporate &
financials - 6,423,142 - 6,423,142
Europe: Sovereign - 331,590 - 331,590
Europe: Private
bond - 35,847,475 - 35,847,475
Europe: ABS - 137,687,949 43,749,634 181,437,583
UK: ABS - 41,854,436 4,697,533 46,551,969
USA: BS - 14,368,103 1,209,821 15,577,924
Money market loan - 23,010,251 5,389,701 28,399,952
OTC derivatives
CDS - 831,870 - 831,870
Listed options 70,742 - - 70,742
Forward FX contracts - 683,852 - 683,852
Repurchase agreement - 983,790 - 983,790
Total assets 261,431 262,022,458 62,887,955 325,171,844
--------------- ------------------ -------------- ------------
Liabilities
Financial liabilities held
for trading
Debt securities
Europe: Corporate
& financials - 1,078,750 - 1,078,750
Europe: Money market
loan - 871,125 - 871,125
OTC derivatives
CDS - 2,008,397 - 2,008,397
Total liabilities - 3,958,272 - 3,958,272
--------------- ------------------ -------------- ------------
Financial instruments that trade in markets that are not
considered to be active but are valued based on quoted market
prices, dealer quotations or alternative pricing sources supported
by observable inputs are classified within Level 2. Investments
classified within Level 3 have significant unobservable inputs, as
they trade infrequently.
Twenty-nine Level 3 investments were held during the Year.
Notes to the Financial Statements (continued)
8. Fair value of financial instruments (continued)
Fair value Fair value
at 01 Transfer at 30
Product October to/(from) Unrealised September
type Transaction 2017 Level 2 Realised & FX Purchases Sales Redemptions 2017
ARB CDO 2 488,077 - (15,889) (190,487) 18,289 - - 299,990
ARB CLO 9 1,128,000 - 2,732,006 839,994 - - (4,700,000) -
ARB CLO 10 1,092,000 - 272,966 183,226 - (1,548,192) - -
ARB CLO 13 1,642,339 - 134,156 103,395 - (1,879,890) - -
ARB CLO 16 28,046,479 - - (3,889,357) - - - 24,157,122
BS CLO 18 490,024 - 156,124 293,860 - (250,000) - 690,008
BS CLO 19 3,712,500 - - (1,282,500) 210,000 - - 2,640,000
CMBS 20 212,948 - - (212,948) - - - -
RMBS 24 17,000 - 17,000 25,500 - (59,500) - -
WHOLE
LOAN** 26 5,389,701 - (237,787) 563,072 540,746 (6,255,732) - -
BS CLO 27 3,692,000 - - (1,534,000) - - - 2,158,000
RMBS 28 197,796 - 42,850 10,872 - (241,429) (10,089) -
RMBS 29 1,951,883 - 365,733 (207,018) - (2,110,598) - -
RMBS 30 1,656,212 - 399,574 (55,786) - - (2,000,000) -
CMBS 31 1,053,472 - (217,187) 17,909 - (467,238) - 386,956
CMBS 32 1,190,078 - 873,104 271,381 - - (2,331,492) 3,071
RMBS 33 18,780 - - (1,622) - - - 17,158
RMBS 34 71,667 - 12,855 1,456 - (48,858) (37,120) -
ARB CLO 35 1,578,821 - 43,986 672,667 - (1,249,820) - 1,045,654
ARB CLO 36 1,806,476 - 27,861 232,397 - - (237,150) 1,829,584
CONS ABS 37 120,000 - - 720,000 - - - 840,000
RMBS 38 4,149,266 - 17,112 802,208 - (4,968,586) - -
ARB CLO 39 2,104,252 - 181,906 253,755 - (2,539,913) - -
ARB CLO 40 1,078,184 - 69,030 192,586 - (1,339,800) - -
ABS 41 - 24,811 - (11,415) - - - 13,396
Blocked
cash
in AREO 42 - 118,104 116,013 (102,670) - (116,013) - 15,434
EQUITY 43 - - - (3,899,088) 6,182,293 - - 2,283,205
RMBS 44 - - (318,670) (247,915) 3,123,332 (324,762) - 2,231,985
WHOLE
LOAN 45 - - - (1,898) 74,978 - - 73,080
62,887,955 142,915 4,672,743 (6,452,426) 10,131,349 (23,400,331) (9,297,562) 38,684,643
Notes to the Financial Statements (continued)
8. Fair value of financial instruments (continued)
Fair value Fair value
at 1 Transfer at 30
Product October to/(from) Unrealised September
type Transaction 2015 Level 2 Realised & FX Purchases Sales Redemptions 2016
ARB CDO 1 1,600,635 - 90,243 142,245 - (1,806,299) (26,824) -
ARB CDO 2 546,548 - 50,051 (50,137) 12,822 - (71,207) 488,077
ARB CDO 3 1,552,507 (1,550,889) - - - - (1,618) -
ARB CDO 4 963,206 - (3,660) (156,340) - (800,000) (3,206) -
ARB CDO 5 320,000 - 115,137 12,863 - (448,000) - -
ARB CDO 6 1,615,520 - (75,015) 145,015 - (1,680,000) (5,520) -
ARB CDO 7 39,115,186 (32,391,686) 1,863,587 (903,294) - - (7,683,793) -
ARB CDO 8 265,514 (408,217) - (48,468) 191,171 - - -
ARB CLO 9 752,000 - - 376,000 - - - 1,128,000
ARB CLO 10 1,086,068 - - 26,400 - - (20,468) 1,092,000
ARB CLO 11 635,665 - 65,749 4,806 - - (706,220) -
ARB CLO 12 5,766,810 - 246,169 95,281 - (6,034,250) (74,010) -
ARB CLO 13 1,627,636 - - 14,820 - - (117) 1,642,339
ARB CLO 14 202,050 (161,361) 8,984 4,521 - - (54,194) -
ARB CLO 15 10,130,000 (10,130,000) - - - - - -
ARB CLO 16 31,250,000 - - (1,802,925) - (1,400,596) - 28,046,479
BS CLO 17 203,257 - 38,939 48,171 - - (290,367) -
BS CLO 18 280,065 - - 209,979 - - (20) 490,024
BS CLO 19 5,593,000 - - (2,440,500) 560,000 - - 3,712,500
CMBS 20 255,538 - - (42,590) - - - 212,948
CMBS 21 48,142 (25,771) - (22,371) - - - -
CMBS 22 20,124 (6,104) 15,721 604 - (29,385) (960) -
RMBS 23 4,746,482 - (479,405) 937,110 18,636 (5,221,255) (1,568) -
RMBS 24 34,000 - - (17,000) - - - 17,000
SENIOR
LOAN* 25 7,943,300 - - - - (7,943,300) - -
WHOLE
LOAN** 26 6,003,365 - - (476,413) - - (137,251) 5,389,701
BS CLO 27 - - - (936,000) 4,628,000 - - 3,692,000
RMBS 28 - - 6,410 (7,497) 218,335 - (19,452) 197,796
RMBS 29 - - - 219,830 1,726,243 - 5,810 1,951,883
RMBS 30 - 1,630,991 - 25,209 - - 12 1,656,212
CMBS 31 - 1,238,261 - (219,625) - - 34,836 1,053,472
CMBS 32 289,517 902,624 - - (2,063) 1,190,078
RMBS 33 - 11,333 - 4,707 - - 2,740 18,780
RMBS 34 - 71,427 - (599) - - 839 71,667
ARB CLO 35 - 2,112,500 - (550,000) - - 16,321 1,578,821
ARB CLO 36 - 2,718,645 74,308 (559,575) - - (426,902) 1,806,476
CONS ABS 37 - 120,000 - - - - - 120,000
RMBS 38 - - - (766,700) 4,915,966 - - 4,149,266
ARB CLO 39 - 2,127,695 - (67,945) - - 44,502 2,104,252
ARB CLO 40 - 1,029,952 - 48,048 - - 184 1,078,184
122,556,618 (33,613,224) 2,017,218 (5,849,746) 12,560,690 (25,363,085) (9,420,516) 62,887,955
Notes to the Financial Statements (continued)
8. Fair value of financial instruments (continued)
Product type Description
ARB CDO Arbitrage CDO
ARB CLO Arbitrage CLO
BS CLO Balance sheet CLO
CMBS Commercial mortgage-backed security
CONS ABS Consumer asset-backed security
RMBS Residential mortgage-backed security
As of 30 September 2017, sixteen (2016: twenty-four) investments
were categorised within Level 3 of the fair value hierarchy,
representing 11.91% (2016: 18.62%) of the NAV.
The below sensitivity analysis presents an approximation of the
potential effects of events that could have occurred as at the
reporting date, and mostly based on the Portfolio Manager's stress
case of 1.5 and 2xCDR ("Constant Default Rate") per product type
expressed as a percentage of the NAV, this analysis excludes
transactions 26, 42 and 44. An analysis of which is stated
below.
1.5xCDR 2xCDR
ARB CDO -0.03% -0.05%
ARB CLO -0.05% -0.10%
BS CLO -0.24% -0.28%
CMBS 0.00% 0.00%
CONS ABS -0.01% -0.01%
RMBS -0.17% -0.31%
In addition to the CDR sensitivities above, some transactions
are sensitive to specific parameters:
ARB CLO - generally vulnerable to increase in default rate and
loss severity of leveraged loans (primarily large cap corporates);
though due to structural features, some tranches may benefit from
moderate increase in defaults. The default rate and loss severity
themselves are affected by state of global and regional economies
and capital markets.
BS CLO - generally vulnerable to increase in default rate and
loss severity of bank loans to SMEs. The default rate and loss
severity themselves are affected by interest rates and state of
local economy in particular growth.
CMBS - most of the pre-2008 deals consist of defaulted assets
and have high asset concentration. This makes the deals sensitive
to recovery rates (market value of commercial real estate) and
ability of borrowers to refinance.
CONS ABS - generally sensitive to default rate and loss severity
of consumers. The default rate and loss severity themselves are
affected by state of local economy in particular unemployment.
RMBS - generally sensitive to default rate and loss severity of
owner occupied and buy-to-let real estate. The default rate and
loss severity themselves are affected by interest rates and state
of local economy in particular unemployment.
However, since most valuations were based upon prices received
from banks or other market participants, the sensitivity analyses
produced are not necessarily based upon the assumptions used by
such banks/market participants as these are not made available to
the Company.
Transaction 16
The portfolio of NPL was stressed by reducing the collections on
the position by 6.25% and 12.50%, the impact to the NAV in each
scenario was a reduction of 0.46% and 0.93% respectively.
Transaction 44
This portfolio of auto loans was stressed under 8% and 10%
default rates, the impact to the NAV in each scenario was a
reduction of 0.01% and 0.02% respectively.
Transaction 43&45
This transaction is a complex situation with a binary
sensitivity to an ongoing legal dispute. In the adverse scenario,
the impact to the Company's NAV is a reduction of 0.73%
Notes to the Financial Statements (continued)
9. Earnings per Share - basic & diluted
The earnings per Share - basic and diluted of 7.04 cents (2016:
3.09 cents) has been calculated based on the weighted average
number of Shares of 332,755,715 (2016: 361,450,000) and a net gain
of EUR23,781,690 (2016: gain of EUR11,170,394) over the year. There
were no dilutive elements to shares issued or repurchased during
the year.
10. NAV per Share
The NAV per share of 99.85 cents (2016: 97.38 cents) is
determined by dividing the net assets of the Company attributed to
the Shares of EUR324,317,008 (2016: EUR351,990,697) by the number
of Shares in issue (excluding those held in treasury) at 30
September 2017 of 324,803,047 (30 September 2016: 361,450,000).
As at 30 September, 36,246,953 Shares were held in treasury.
11. Financial assets and financial liabilities at fair value through profit or loss
30 September 30 September
2017 2016
EUR EUR
Financial assets at fair value through
profit or loss :
Held for trading:
- Debt securities 29,818,856 25,557,709
- ABS 103,759,597 232,274,177
- Sovereign bonds - 331,590
- Equity securities 2,553,705 190,689
- Investment in Taurus Corporate Financing
LLP 73,486,380 35,847,475
- Listed options 30,712 70,742
- Money market loan 49,735,437 28,399,950
- CDS 1,374,420 831,870
- Forward FX contracts - 683,852
- Repurchase agreement - 983,790
-------------- -------------
Total financial assets at fair value
through profit or loss 260,759,107 325,171,844
-------------- -------------
Financial liabilities at fair value
through profit or loss :
Held for trading:
- Debt securities - (1,078,750)
- CDS (9,334,547) (2,008,397)
- Money market loan - (871,125)
- Repurchase agreement (778,998) -
-------------- -------------
Total financial liabilities at fair
value through profit or loss (10,113,545) (3,958,272)
-------------- -------------
Notes to the Financial Statements (continued)
12. Net gain/(loss) on financial assets and financial
liabilities held at fair value through profit or loss
30 September 30 September
2017 2016
Net gain/(loss) on financial assets
and liabilities at fair value through
profit or loss held for trading EUR EUR
- Debt securities 1,777,473 1,519,828
- ABS 35,209,627 19,267,289
- Sovereign bonds 25,315 -
- Equity securities (3,544,009) (25,853)
- Investment in Taurus Corporate Financing
LLP 2,638,905 847,475
- Listed options (355,064) (3,201,562)
- Money market loan 2,869,757 1,045,091
- CDS (4,896,745) (1,242,748)
- Futures - (12,345)
- Repo (12,719) -
Net gain on financial assets and liabilities
at fair value through profit or loss
held for trading 33,712,540 18,197,175
------------- -------------
Net gain/(loss) on foreign exchange
and forward contracts EUR EUR
Realised gain on forward contracts 2,048,564 7,919,768
Unrealised (loss)/gain on forward contracts (1,462,850) 559,824
Realised loss on foreign exchange (3,700,859) (3,998,349)
Unrealised gain/(loss) on foreign exchange 2,590,102 (4,544,959)
Net loss on foreign exchange and forward
contracts (525,043) (63,716)
------------ ------------
Net gain on financial assets and liabilities
at fair value through profit or loss
and foreign exchange and forward contracts 33,187,497 18,133,459
------------ ------------
13. Due from and to brokers
30 September 2017 30 September 2016
EUR EUR
Due from:
Collateral and funding cash 16,710,630 7,634,973
Receivables for securities sold - 5,349,521
16,710,630 12,984,494
------------------ -------------------------
Due to:
Collateral and funding cash 566,131 -
Payables for securities purchased 3,619,425 3,501,238
4,185,556 3,501,238
------------------ -------------------------
14. Other receivables and prepayments
30 September 2017 30 September 2016
EUR EUR
Prepayments 6,899 24,924
Interest receivable 43,403 -
Other fees - 42,047
50,302 66,971
-------------------------------- ---------------------------
Notes to the Financial Statements (continued)
15. Accrued expenses
30 September 30 September
2017 2016
EUR EUR
Management fee (547,465) (295,214)
Performance fees (4,853,361) (2,837,574)
Administration fee (6,619) (6,665)
Audit fee (45,073) (47,340)
Corporate broking fee (35,465) (35,823)
Sub-administration fee (16,277) (19,176)
Legal fee - (1,875)
Custodian fee (10,533) -
Other fee (148,123) (77,995)
(5,662,916) (3,321,662)
------------- -------------
16. Share capital
The authorised share capital of the Company consists of an
unlimited number of unclassified shares of no par value. The
unclassified shares may be issued as, (a) Shares in such currencies
as the Directors may determine; (b) C Shares in such currencies as
the Directors may determine; and (c) such other classes of shares
in such currencies as the Directors may determine in accordance
with the Articles and the Law. Shares will be redeemable at the
option of the Company and not Shareholders.
The rights attaching to the Shares are as follows:
(a) As to income - subject to the rights of any Shares which may
be issued with special rights or privileges, the Shares of each
class carry the right to receive all income of the Company
attributable to the Shares, and to participate in any distribution
of such income by the Company, pro rata to the relative NAV of each
of the classes of Shares and, within each such class, income shall
be divided pari passu amongst the holders of Shares of that class
in proportion to the number of Shares of such class held by
them.
(b) As to capital - on a winding up of the Company or other
return of capital (other than by way of a repurchase or redemption
of Shares in accordance with the provision of the Articles and the
Law), the surplus assets of the Company attributable to the Shares
remaining after payment of all creditors shall, subject to the
rights of any Shares that may be issued with special rights or
privileges, be divided amongst the holders of Shares of each class
pro rata to the relative NAVs of each of the classes of Shares and,
within each such class, such assets shall be divided pari passu
amongst the holders of Shares of that class in proportion to the
number of Shares of that class held by them.
(c) As to voting - the holders of the Shares shall be entitled
to receive notice of and to attend, speak and vote at general
meetings of the Company.
Notes to the Financial Statements (continued)
16. Share capital (continued)
The rights attaching to C Shares are as follows:
(a) subject to the rights of any C Shares which may be issued
with special rights or privileges, the C Shares of each class carry
the right to receive all income of the Company attributable to the
C Shares, and to participate in any distribution of such income by
the Company, pro rata to the relevant NAVs of any of the issued
class of Shares and within each such class income shall be divided
pari passu amongst the holders of that class in proportion to the
number of C Shares of such class held by them;
(b) the Shares of the relevant class into which C Shares of the
relevant class shall convert shall rank pari passu with the
Existing Shares of the relevant class for dividends and other
distributions made or declared by reference to a record date
falling after the Calculation Date; and
(c) no dividend or other distribution shall be made or paid by
the Company on any of its shares between the Calculation Date and
the Conversion Date (both dates inclusive) and no such dividend
shall be declared with a record date falling between the
Calculation Date and the Conversion Date (both dates
inclusive).
Movements in share capital
Shares held in
Shares outstanding treasury Total
As at 30 September 2016 361,450,000 - 361,450,000
Share repurchases in
the Period (38,343,396) 38,343,396 -
Performance fee shares
issued 1,696,443 (1,696,443) -
As at 30 September 2017 324,803,047 36,646,953 361,450,000
Share repurchases and Performance fee shares
The Company may, subject to compliance with the Companies Law
(Guernsey) 2008 (the "Law"), purchase its own Shares in the market
on an ad hoc basis with a view to addressing any imbalance between
the supply of, and demand for, the Shares, to increase the NAV per
Share and to assist in minimising any discount to the NAV per Share
in relation to the price at which Shares may be trading. 38,343,396
shares were purchased on this basis during the Year and moved to
treasury.
1,696,443 shares were transferred from treasury during the year
as payment pf performance fee. 800,181 shares (with a prevailing
net asset value at the date of transfer, being 24 March 2017, of
EUR788,498) were paid to the Portfolio Manager in the period, in
relation to the Performance Fee for the period ended 30 September
2016. In addition, on 25 November 2016, 896,262 shares (with a
prevailing net asset value at the date of transfer of EUR866,327)
were transferred to the Portfolio Manager, in relation to
part-payment of the Performance Fee for the period ended 30
September 2015.
Capital management
The Company's objectives when managing capital are to safeguard
the Company's ability to continue as a going concern to provide
returns to shareholders and benefits for other stakeholders and to
maintain an optimal capital structure to reduce the cost of
capital.
To maintain or adjust the capital structure, the Company may
adjust the amount of dividends paid to shareholders, return capital
to shareholders, issue new shares or sell assets. There are
currently no external capital requirements.
17. Segmental reporting
The Board is responsible for reviewing the Company's entire
portfolio and considers the business to have a single operating
segment. The Board's asset allocation decisions are based on a
single, integrated investment strategy of investing in ABS and
other structured credit investments in liquid markets and the
Company's performance is evaluated on an overall basis.
The Company invests in a diversified portfolio. The fair value
of the major financial instruments held by the Company and the
equivalent percentages of the total value of the Company are
reported in the Schedule of Investments.
Notes to the Financial Statements (continued)
18. Dividend policy
Subject to compliance with the Companies (Guernsey) Law, 2008
(as amended) and the satisfaction of the solvency test, the Company
intends to distribute all its income received from investments, net
of expenses, by way of dividends on a quarterly basis with
dividends declared in January, April, July and October each year
and paid in March, July, September and December. The Company
declared a dividend of 1.25 cents per Share in January 2017
(January 2016: 2 cents per Share) for the period from 1 October
2017 to 31 December 2017, 1.50 cents per Share in April 2017 (April
2016: 2 cents per Share) for the period from 1 January 2017 to 31
March 2017, 2 cents per Share in July 2017 July 2016: 1.25 cents
per Share) for the period from 1 April 2017 to 31 June 2017 and 2
cents per Share in October 2017 (October 2016: 1.25 cents per
Share) for the period from 1 July 2017 to 30 September 2017.
Under the Companies (Guernsey) Law, 2008 (as amended), companies
can pay dividends in excess of accounting profit provided they
satisfy the solvency test prescribed by the Companies Law. The
solvency test considers whether a company is able to pay its debts
when they fall due, and whether the value of a company's assets is
greater than its liabilities.
19. Derivative financial instruments
The Company holds the following derivative instruments:
CDS
These are derivative contracts referencing an underlying credit
exposure, which can either be a single credit issuer or a portfolio
of credit issuers. The Company pays or receives an interest flow in
return for the counterparty accepting or selling all or part of the
risk of default or failure to pay of a reference entity on which
the swap is written. Where the Fund has bought protection the
maximum potential payout is the value of the interest flows the
Company is contracted to pay until the maturity of the
contract.
For short CDS positions, where the Company has sold protection,
the maximum potential payout in the event of a default of the
underlying instrument is the nominal value of the protection
sold.
The market for CDS may from time to time be less liquid than
debt securities markets. Due to the lower amount of cash required
to hold a position in the CDS versus cash bond markets, the
opposite has shown to be true during times of market illiquidity.
In relation to CDS where the Company sells protection the Company
is subject to the risk of a credit event occurring in relation to
the reference issuer. Furthermore, in relation to CDS where the
Company buys protection, the Company is subject to the risk of the
counterparty of the CDS defaulting.
Listed options (equity options)
A listed option is a derivative financial instrument that
establishes a contract between two parties concerning the buying or
selling of an asset at a reference price during a specified time
frame. During this time frame, the buyer of the option gains the
right, but not the obligation, to engage in some specific
transaction on the asset, while the seller incurs the obligation to
fulfil the transaction if so requested by the buyer.
Forward foreign currency contracts
Forward foreign currency contracts entered into by the Company
represent a firm commitment to buy or sell an underlying currency
at a specified value and point in time based upon an agreed or
contracted quantity. The realised/unrealised gain or loss is equal
to the difference between the value of the contract at trade date
and the value of the contract at settlement date/period-end date,
and is included in the Statement of Comprehensive Income.
Notes to the Financial Statements (continued)
19. Derivative financial instruments (continued)
The following table shows the Company's derivative position as
at 30 September 2017:
Financial
assets at Financial liabilities Notional
fair value at fair value amount Maturity
EUR EUR EUR
20 December
CDS buy protection - (1,647,772) 16,000,000 2020
20 December
CDS buy protection - (2,219,909) 17,500,000 2021
CDS buy protection 1,015,555 (1,964,353) 15,300,000 20 June 2022
20 December
CDS buy protection - (3,502,513) 29,500,000 2022
CDS buy protection 358,865 - (43,000,000) 20 June 2027
24 November
Listed options 29,760 - 29,760 2017
19 January
Listed options 952 - 952 2018
FX contracts
16 January
GBP sell - (491,207) (23,271,612) 2018
16 January
USD sell - (287,791) (20,304,299) 2018
16 January
EUR buy - - 43,575,911 2018
------------ ---------------------- -------------
1,405,132 (10,113,545) 35,330,712
------------ ---------------------- -------------
The following table shows the Company's derivative position as
at 30 September 2016:
Financial
assets at Financial liabilities Notional
fair value at fair value amount Maturity
EUR EUR EUR
20 December
CDS buy protection 831,870 - (35,500,000) 2020
20 December
CDS buy protection - (1,327,039) 41,500,000 2020
CDS buy protection - (360,828) 4,500,000 20 June 2021
20 December
CDS buy protection - (320,530) 4,000,000 2021
21 October
Listed options 58,729 - 58,729 2016
16 December
Listed options 12,013 - 12,013 2016
Forward FX Contracts
14 December
GBP sell 665,595 - (37,578,533) 2016
14 December
USD sell 18,257 - (12,430,379) 2016
14 December
EUR buy - - 50,008,912 2016
------------ ---------------------- -------------
1,586,464 (2,008,397) 14,570,742
------------ ---------------------- -------------
20. Securities sold under agreements to repurchase and
securities purchased under agreements to resell
Securities sold under agreements to repurchase ("repurchase
agreements") and securities purchased under agreements to resell
("reverse repurchase agreements") are treated as collateralised
financing transactions. The financing is carried at the amount at
which the securities were sold or acquired plus accrued interest,
which approximates fair value. It is the Company's policy to
deliver securities sold under agreements to repurchase and to take
possession of securities purchased under agreements to resell.
As of 30 September 2017 there are no repurchase agreements in
place (at 30 September 2016 one repurchase agreement was open for
fair value of (EUR974,250)).
Notes to the Financial Statements (continued)
21. Interests in other entities
List of subsidiaries
Taurus Corporate Financing LLP (the "Originator") meets the
definition of a subsidiary in accordance with IFRS 10. The
subsidiary is a fully owned subsidiary of the Company and is
measured at fair value through profit or loss. The subsidiary
carrying value per the financial statements is shown below:
Carrying value
EUR
Taurus Corporate Financing
LLP 73,486,380
The Board determined that the Subsidiary meets the definition of
an investment entity as set out under IFRS 10 and that therefore
the Subsidiary should measure its investments in TCF Loan Warehouse
1 Designated Activity Company and TCF Loan Warehouse 3 Designated
Activity Company (the "Warehouses") at fair value rather than
consolidate their results. The Warehouses are fully owned
subsidiaries of the Subsidiary and were measured at fair value
through profit or loss.
In accordance with IFRS 12 paragraph 19, the Company is also
required to disclose the following information:
(i) Name; Taurus Corporate Financing LLP
(ii) Place of business;
Old Bank Chambers
La Grande Rue
St Martin's
Guernsey
GY4 6RT
(iii) Ownership interests held; 100%
The Company is also required to disclose the following
additional information for unconsolidated subsidiaries of a
subsidiary which is an investment entity:
TCF Loan Warehouse
1 Designated Activity TCF Loan Warehouse 3 Designated
Name: Company Activity Company
Place of Business: 3rd Floor, 3rd Floor
Kilmore House, Kilmore House
Park Lane, Park Lane
Spencer Dock, Spencer Dock
Dublin 1, Dublin 1
Ireland Ireland
Ownership interests
held: 100% 100%
Notes to the Financial Statements (continued)
22. Significant events during the year and post balance sheet
events
The Company announced, on 12 May 2017, that its dividend target
had been increased to at least 8 cents per ordinary share per
annum, compared to the initial target of 5 cents (annualised)
stated in the prospectus published in connection with the Company's
May 2015 IPO.
During the period the Company has bought back 38,343,396
shares.
The Company changed its name on 15 November 2017 to Chenavari
Toro Income Fund Limited.
The Company announced a dividend of 2 cents per Ordinary Share
for the quarter ending 30 September 2017 which was paid on 1
December 2017.
The Originator has agreed with a third-party CLO manager to
provide them with risk retention for both CLO warehouse and the CLO
which will be issued using assets accumulated in the warehouse. At
the warehouse stage the Originator will contribute EUR18m which is
just over half the junior tranche. Expected investment in the
equity of the CLO is EUR20m of which EUR18m will be the money
previously used for the warehouse. The CLO is expected to price in
the first calendar quarter of 2018. The Originator will act as well
as originator on the new Chenavari CLO which is scheduled to be
priced early 2018. The Originator will retain 51% of the Equity
Tranche for an amount of EUR18m.
23. Approval of the financial statements
The Audited Financial Statements were approved for issue to
shareholders by the Directors on 22 January 2018.
Appendix 1
AIFMD Disclosures - (unaudited)
Quantitative Remuneration Disclosure for the AIFM
The total fee paid to the AIFM by the Company for the year ended
30 September 2017 is disclosed in note 4.
The AIFM is not subject to the provisions of Article 13 of the
AIFM Directive, which require the AIFM to adopt remuneration
policies and practices in line with the principles detailed in
Annex II of the Directive. However, in accordance with Article 22
of the AIFM Directive and Article 107 of the AIFM Regulations, the
AIFM must make certain disclosures in respect of the remuneration
paid to its staff.
The AIFM has identified 8 staff as falling within the scope of
the disclosure requirements (the "Identified Staff"). These
Identified Staff are senior management, named as Designated Persons
of the AIFM's managerial functions, members of the Board of
Directors, and a risk officer as control function. With the
exception of one individual, who acted as a non-executive Director,
all Identified Staff of the AIFM are part of the Carne Group and as
such receive no separate remuneration for their role within the
AIFM. Instead they are remunerated as employees of other Carne
group companies with a combination of fixed and variable
discretionary remuneration where the latter is assessed on the
basis of their overall individual contribution to the group, with
reference to both financial and non-financial criteria, and not
directly linked to the performance of the staff of specific
business units or targets reached. The annualised remuneration
amount paid to all of the Identified Staff of the AIFM in respect
of their work with the AIFM for the 12 month period to 31 March
2017 was GBP 81,944. There was no variable component to this
remuneration and none of the AIFM's Identified Staff are in a
position to materially impact the risk profile of the Company. The
AIFM manages other AIFS and has no staff other than the Identified
Staff.
Liquidity
Liquidity risk is monitored by the AIFM on an ongoing basis. The
Risk Committee for the AIFM monitors the liquidity risk of the
Company to ensure that the liquidity profile of the investments of
the Fund complies with its underlying obligations.
At the date of this annual report there are no assets held by
the Company which are subject to special arrangements arising from
their illiquid nature. There has been no change to the liquidity
management system and procedures during the period since
incorporation. Please refer to the notes in the financial
statements for an analysis of the Company's liabilities and their
maturity dates at 30 September 2017.
Risk
The AIFM has delegated the portfolio management of the Company
to the Portfolio Manager whilst retaining responsibility for the
risk management functions for the Company in accordance with the
AIFMD. The AIFM's overall risk management process monitors the
consistency between the risk profile of the Company and the
investment objective, policies and strategy of the Company.
Responsibility for day to day management of the Company's risk
has been delegated to the Risk Officer, who works together with the
transversal risk team at the Portfolio Manager. The Risk Officer
reports to the Risk Committee of the AIFM. The Risk Committee has
ultimate responsibility for risk management and controls of the
Company and for reviewing their effectiveness on a regular basis,
including taking appropriate remedial action to correct any
deficiencies. The Risk Committee manages the risks of the Company
through the Risk Management Policy and Procedure (the "RMPP"). The
Risk Committee monitors all risk limits to ensure compliance or
that corrective action is taken in the event of breaches. The Risk
Committee monitors to see if limit levels are being approached and
endeavours to take appropriate steps to avoid limit breaches. The
Risk Committee is responsible for the implementation of the RMPP.
Operational risk is monitored through periodic due diligence of
delegates and ongoing monitoring of reporting from delegates.
The Risk Committee has oversight of the risk management
framework of the Company and specifically the effectiveness of the
risk management function with respect to governance and risk
compliance. The Committee ensures that market risk, liquidity risk,
credit risk, counterparty risk and operational risk are identified,
measured, monitored and managed in line with the AIFM's RMPP and
consistent with the Prospectus of the Company. The Committee
addresses any risk related issues and escalates to the AIFM Board
if necessary. The Committee is appointed by and reports to the AIFM
Board.
The AIFM has assessed the current risk profile of the Company to
be low.
Appendix 1 (continued)
AIFMD Disclosures - (unaudited) (continued)
Leverage
The leverage limitation provisions of the AIFM Directive do not
apply to the Company because the Company is a "non-EU AIF" and the
AIFM is a "non-EU AIFM". Consequently, the AIFM (where it
undertakes Portfolio Management directly or otherwise the Portfolio
Manager as delegate of this function) is not required to set a
maximum level of leverage (as calculated pursuant to the AIFM
Directive) for the Company. Notwithstanding this, the Company has
set a borrowing limit such that the Company's gearing shall not
exceed 130 per cent at the time of incurrence and deployment of any
borrowing. For the purposes of this calculation, gearing will be
calculated as the sum of the Company's exposures to each position
directly held, divided by the last published NAV (and for the
avoidance of doubt, will include the full exposure held by the
Company under any full recourse total return swap, but will exclude
any borrowing arrangements that are limited-recourse to the
Company, such as borrowings by an Originator).
There has been no change to the maximum level of leverage which
the AIFM may employ on behalf of the Company. The actual level of
gearing employed by the Company at 30 September 2017 was
78.67%.
Material changes to information
Article 23 of the AIFM Directive requires certain information to
be made available to investors before they invest and requires
material changes to this information to be disclosed in the annual
report. There have been no material changes (other than those
already reflected in the Annual Report) to the information
requiring disclosure.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR SEDFUEFASESF
(END) Dow Jones Newswires
January 23, 2018 02:00 ET (07:00 GMT)
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