Half-yearly Report
City Merchants High Yield Trust Limited
Financial Report for the Period 19 December 2011 to 30 June 2012
KEY FACTS
City Merchants High Yield Trust Limited is a Jersey incorporated investment
company listed on the London Stock Exchange. The Company was incorporated on 19
December 2011 and commenced trading on 2 April 2012 following the scheme of
reconstruction and voluntary winding up of City Merchants High Yield Trust plc
(`CMHYT') on 30 March 2012, as detailed in the prospectus dated 23 February
2012.
Objective of the Company
The Company's investment objective is to seek to obtain both high income and
capital growth from investment, predominantly in high-yielding fixed-interest
securities.
The Company seeks to provide a high level of dividend income relative to
prevailing interest rates through investment in fixed-interest securities,
various equity-like securities within fixed-income markets and equity-linked
securities such as convertible bonds and in direct equities that have a high
income yield. It also seeks to enhance total returns through capital
appreciation generated by investments which have equity-related
characteristics.
Share Capital and Structure
As at 30 June 2012, the Company's stated share capital consisted of 72,786,327
ordinary shares of no par value.
Gearing is provided by a one-year multicurrency revolving credit facility of £
20 million. At 30 June 2012, the Company was not geared.
INTERIM MANAGEMENT REPORT INCORPORATING THE CHAIRMAN'S STATEMENT
Chairman's Statement
My statement in the 2011 annual report of City Merchants High Yield Trust plc
(`CMHYT') set out proposals for the transfer of the assets of that company to
City Merchants High Yield Trust Limited (`the new Company'), a Jersey resident
company in exchange for shares. These proposals were intended to put
shareholders in a position equivalent to previous years, by increasing the net
distributable income as compared with that achievable had CMHYT continued.
These proposals were implemented on 2 April 2012 and I am pleased to report
that the new Company is operating satisfactorily.
The terms of the re-domicile allow direct comparison of the new Company's
financial information from 2 April 2012 with CMHYT's financial information
prior to that date. In the six months to 30 June 2012, the total return was
7.8% which compares favourably with the average return of 4.7% from the funds
in the Investment Management Association Sterling Strategic Bond sector. An
analysis of the total and capital returns for CMHYT and the new Company are
shown under the performance statistics. In addition, I am pleased to report
that the new Company continues to produce an attractive level of income for
shareholders.
As a result of the re-domicile, two interim dividends have been declared in
respect of the period to 30 June 2012, one of 2.4p per share paid in March 2012
by CMHYT and another of 2.6p per share to be paid on 24 August 2012 by the new
Company. While actual dividends will depend on revenue during the remainder of
the year, on the basis of current market conditions the Board continues to
target total dividends of 10p per share for 2012.
Clive Nicholson
Chairman
16 August 2012
Performance Statistics
The performance for the six months to 30 June 2012 uses CMHYT figures as at 31
December 2011 and for the period from then until 30 March 2012, and are shown
for information purposes.
NEW
CMHYT COMPANY COMBINED
31 DEC 2 APR 31 DEC
2011 TO 2012 TO 2011 TO
30 MAR 30 JUN 30 JUN
2012 2012 2012
Total Return
 Total Return NAV % in period 10.4% -2.5% 7.8%
 FTSE All-Share Index* 6.1% -2.6% 3.3%
 FTSE Government Securities -
  All Stocks Index* -1.7% 3.8% 2.0%
Capital Return
 Net asset value per share 7.0% -2.5% 4.4%
 FTSE All-Share Index* 5.1% -3.7% 1.2%
 FTSE Government Securities -
  All Stocks Index* -2.9% 3.1% 0.1%
 Mid-market price per share 9.9% -7.4% 1.8%
* Source: Thomson Reuters Datastream.
Period End Information
NEW
COMPANY CMHYT CMHYT
AT 30 JUN AT 30 MAR AT 31 DEC
2012 2012 2011
Net asset value per share 151.97p 155.82p 145.56p
Mid-market price per share 149.62p 161.62p 147.00p
Discount/(premium) per share 1.5% (3.7%) (1.0%)
Gearing
 Gross gearing nil nil nil
 Net gearing -5.1% -1.4% -5.2%
Manager's Investment Report
As detailed in the Chairman's Statement, the Company is the successor vehicle
to CMHYT following its re-domicile to Jersey. It retains the same investment
objectives and portfolio managers and substantially the same investment
portfolio. Consequently this report covers the six months to 30 June 2012, even
though the re-domicile was enacted on half was through the period. Over the six
months to 30 June 2012, and using the NAV of CMHYT at 31 December 2011, the NAV
total return was +7.8%. For the trading period 2 April to 30 June 2012, the NAV
total return was -2.5%. The Company's cash position is just over 5% and the
borrowing facility was undrawn at 30 June 2012.
Market Background
The first six months of 2012 has been a positive period for the high yield bond
market and for corporate bonds in general. Investor concerns about the Eurozone
banking sector were soothed by support from monetary authorities and this
combined with a low level of net new issuance to push down yields from the high
levels reached in the later months of 2011. Corporate fundamentals also remain
relatively strong and default rates low. According to Moody's, the default rate
in European high yield bonds in the second quarter of 2012 was 2.6%, down from
3.0% in the first quarter, but up slightly from 2.1% in the second quarter of
2011. European high yield issuance in the first half of the year was estimated
by Barclays to have been €28.4 billion across all currencies, approximately 30%
lower than the same period a year ago. This issuance was concentrated in the
first quarter, when market conditions were strongest. Market performance has
continued to be marked by bouts of volatility, driven primarily by developments
in the Eurozone debt crisis.
According to data from Merrill Lynch, the total return for European high yield
bonds in the first six months of 2012 was 11.9% in local currency terms (8.8%
in sterling terms). The aggregate yield for the sector fell 258 basis points
(`bps') to 9.57%. Sterling investment grade bonds returned 5.8%. Within
investment grade, financials were the strongest sector, returning 8.1%, led by
subordinated bank debt. The aggregate yield on sterling Tier 1 subordinated
bank debt fell 285 bps to 10.43%. By comparison, following a strong rally in
2011 Gilts returned 1.9%, their yield rising 8 bps to 1.76%.
The European Central Bank's Long Term Refinancing Operations (`LTRO'), offering
three year loans with relaxed collateral requirements to Eurozone banks, gave a
significant boost to credit markets. Over the course of the two exercises, in
December and February, more than €1 trillion was loaned to several hundred
banks, effectively resolving market concerns about the immediate funding of the
Eurozone banking system. Investor risk appetite, which had been depressed by
fears of systemic failure, recovered strongly, boosting not just banking debt
but all credit-sensitive assets. The gains in these markets year-to-date were
concentrated in this earlier part of the period. Following the second LTRO, the
underlying issue of the sustainability of Eurozone sovereign debt levels began
to re-assert itself in investor sentiment. Political success in France and
Germany for parties opposing government austerity and signs of weakness in
Spanish banks pushed up credit yields somewhat from the levels of the first
quarter. European authorities announced a bail-out plan for Spain's banks and
also agreed in the June EU summit to extend the flexibility of EU rescue funds
to support sovereign and corporate bond markets. Combined, these measures eased
market concerns, although questions about the detail and implementation of
these plans clouded the outlook.
The UK officially re-entered recession by recording its second consecutive
quarter of negative growth in the first three months of 2012. Consumption
remains hamstrung by persistently high levels of unemployment and low earnings
growth. The rate of CPI inflation fell from 4.2% in December to 2.4% in June,
as commodity prices fell and the impact of the 2011 VAT increase passed out of
the annual change calculation. In this environment, the Bank of England was
happy to hold its interest rate at the record low level of 0.5%.
Portfolio Strategy
Notwithstanding the rally over the early months of 2012, we believe that we can
still find select bonds across the high yield universe to add attractive
risk-adjusted yields to the portfolio. While yields have fallen over the first
half, they remain higher than during much of 2011 and we think they compare
favourably with the very low levels of yield currently available on core
government bonds and very high credit quality corporate bonds. We have added to
our portfolio over the period as we have identified value opportunities.
Purchases included Boparan 9.875% (Food, B+), Direct Line 9.25% (Insurance,
BBB+) and Lecta 8.875% (Paper, B+). There has been no significant change to our
sector exposures. Banks and insurance remain the largest two sectors held.
We continue to see financials as the main area of value. We think that the
reform of bank capital structures which has taken place over the past three
years and which is ongoing will result in better capitalised, more liquid,
better funded and more conservative institutions. As debt holders, we welcome
this and we think that there are generous yields available in the market,
especially in large, northern European and American `national champion' banks,
relative to the credit and subordination risks entailed in these bonds and
relative to non-financials. The sector continues to be supported by tenders
from banks across Europe, including Spain and Italy, to buy back their own
debts. We hold significant exposure in the fund to subordinated bank bonds as
well as senior bank debt.
Outlook
The high yield bond market is likely to continue to be affected by the shifts
up and down in risk appetite that have been a feature of investment markets
generally over the last few years. These shifts are now being driven in
particular by developments in the Eurozone debt crisis. While many individual
companies have fundamentally strong balance sheets, risk appetite and the
market can be moved by changes in political and macroeconomic factors. This
adds volatility but can also present opportunities for investors to capture
attractive yields.
Both in Europe and in the US, the tone of economic news has been worsening.
While the US economy is continuing to recover, the pace of improvement has
slackened, with employment growth and economic activity indicators slowing. In
the UK and the Eurozone, business activity and consumer confidence measures are
consistent with recession or near-recessionary levels of growth. As well as
presenting a challenge to corporate earnings, this is increasing the pressure
on national finances and debt levels, raising the possibility that more members
of the Eurozone will require support. Central banks have maintained loose
monetary conditions, both through interest rates and through asset purchases
and the supply of liquidity to the financial system. We do not expect that
monetary policy will be tightened very much in the coming quarters.
In such an environment of low interest rates, with risk-aversion driving the
yields of core government bonds and other more interest rate-sensitive assets
to low levels, we continue to see opportunities in credit risk and to believe
that a portfolio of higher-yielding bonds such as ours is an attractive option
for income and return.
Invesco Asset Management Limited
Manager
Paul Read    Paul Causer
Portfolio Managers
16 August 2012
Related Parties
Invesco Asset Management Limited (`IAML'), a wholly-owned subsidiary of Invesco
Limited, acts as Manager to the Company. Details of IAML's services and fee
arrangements are given in the Prospectus dated 23 February 2012, which is
available on the Manager's website at www.invescoperpetual.co.uk/investments.
Principal Risks and Uncertainties
The principal risk factors relating to the Company can be summarised as
follows:
- Investment Policy (incorporating the Investment Objective) and Process - the
success of the Company depends on the Investment Manager's ability to achieve
the Company's investment objective. There is no guarantee that the Company's
investment objective will be achieved or will provide the returns sought by the
Company.
- Market Risk - global markets have been experiencing volatility, disruption
and instability. Material changes affecting global capital markets may have a
negative effect on the Company's business, financial condition and results of
operations.
- Portfolio Performance - all of the Company's investment decisions are made by
the Investment Manager and, accordingly, the poor performance of any individual
portfolio investments has a negative effect on the value of the portfolio and
consequently the Net Asset Value (`NAV') per share.
- Non-investment Grade, High-Yield Fixed-Interest Securities - these are
subject to credit, liquidity, duration and interest rate risks.
- Gearing - performance maybe geared by means of a bank credit facility. Whilst
gearing will be used with the aim of enhancing returns on the portfolio when
the value of the Company's assets is rising, it will have the opposite effect
when the value is falling. There is no guarantee that any credit facility would
be renewable at maturity on terms acceptable to the Company.
- Derivatives - the Company may enter into derivative transactions for
efficient portfolio management. Derivative instruments can be highly volatile
and expose investors to a high risk of loss.
- Dividends - the ability of the Company to pay dividends quarterly is
dependent on the level and timing of receipt of income on its investments.
- Regulatory and Tax Related - whilst compliance with rules and regulations is
closely monitored, breaches could affect returns to shareholders. Changes to
regulation or to the Company's tax status or tax treatment might adversely
affect the Company.
- Resources: Reliance on Third Party Providers - failure by any service
provider to carry out its obligations in accordance with the terms of its
appointment could have a materially detrimental impact on the effective
operation of the Company and on the ability of the Company to pursue its
investment policy successfully.
- Ordinary Shares - the shares may trade at a discount to NAV and shareholders
may be unable to realise their investments through the secondary market at NAV.
The existence of a liquid market in the shares cannot be guaranteed.
In the view of the Board, these principal risks and uncertainties are as
applicable to the remaining six months of the financial period as they were to
the period under review.
Going Concern
The financial statements are prepared on a going concern basis. The Directors
consider that going concern is the appropriate basis as they have a reasonable
expectation that the Company has adequate resources to continue in operational
existence for the foreseeable future. In reaching this conclusion, the
Directors have taken into account the Company's investment objective, its risk
management policies, the diversified nature of its investment portfolio, the
borrowing facility which can be used to meet short-term funding requirements,
the liquidity of most of its investments which could be used to repay any
borrowings in the event that the facility could not be renewed or replaced and
the ability of the Company to meet all of its liabilities and ongoing expenses.
THIRTY LARGEST INVESTMENTS AT 30 JUNE 2012
MARKET
MOODY/S&P COUNTRY OF VALUE % OF
ISSUER/ISSUE RATING SECTOR INCORPORATION £'000 PORTFOLIO
LBG Capital Financial UK
7.975% 15 Sep 2024 B1/BB 2,948
6.385% 12 May 2020 Ba3/BB+ 963
9.000% 15 Dec 2019 Ba3/BB+ 873
6.439% 23 May 2020 B1/BB 643
16.125% 10 Dec 2024 Ba3/BB+ 121
5,548 5.4
Premier Farnell Industrials UK
89.2P Cum Cnv Red Pref NR/NR 3,616 3.5
Societe Generale Financial France
8.875% FRN Perpetual Ba2/BBB- 2,917 2.8
Vedanta Resources Basic UK
Materials
4% Cnv 30 Mar 2017 NR/BB 2,183
8.25% 07 Jun 2021 Ba3/BB 585
2,768 2.7
Aviva Financial UK
6.125% Perpetual A3/BBB+ 2,415 2.4
Balfour Beatty Industrials UK
10.75P Gross Cum
  Cnv Red Prf NR/NR 2,306 2.2
Citigroup Financial USA
FRN 28 Jun 2067 Baa3/BB 1,760
Pfd USD100 NR/NR 497
Common stock Equity 35
2,292 2.2
Intergen Oil & Gas Holland
9.5% 30 Jun 2017 Ba3/BB- 2,030
8.5% 30 Jun 2017 Ba3/BB- 202
2,232 2.2
General Motors Industrials UK
Wts 10 Jul 2019 Equity 1,916
Wts 10 Jul 2016 Equity 214
Motors Liquidation Equity 68
2,196 2.1
Cemex Consumer
Goods
4.875% 15 Mar 2015 NR/NR Mexico 1,642
9.250% 12 May 2020 NR/B- Spain 463
2,105 2.0
REA Finance Consumer Holland
Goods
9.5% 31 Dec 2017 NR/NR 2,070 2.0
Intesa Sanpaolo Financials Italy
8.375% FRN Perpetual Ba1/BB+ 2,000 2.0
Abengoa Industrials Spain
6.875% Cnv Nts 24 Jul NR/NR 1,006
2014
8.500% 31 Mar 2016 Ba3/B+ 731
4.5% 03 Feb 2017 NR/NR 250
1,987 1.9
DFS Furniture Consumer UK
Goods
9.750% 15 Jul 2017 B2/B 1,971 1.9
First Hydro Finance Utilities UK
9% 31 Jul 2021 NR/NR 1,821 1.8
Catlin Financial USA
7.249% FRN Perpetual NR/BBB+ 1,767 1.7
Barclays Financial UK
9.25% 29 Nov 2049 Ba1/BBB 1,000
6.625% 30 Mar 2022 Baa3/BBB+ 764
1,764 1.7
Unity Media Consumer Germany
Services
9.625% 01 Dec 2019 B3/B- 1,754 1.7
American International Financials USA
Group
8.625% FRN 22 May 2068 Baa2/BBB 999
8.175% 15 May 2068 Baa2/BBB 685
1,684 1.6
UBS Capital Securities Financials Switzerland
8.836% FRN Perpetual Ba2/BBB- 1,633 1.6
Origin Oil & Gas Australia
7.875% FRN 16 Jun 2071 Baa3/BB 1,568 1.5
Enterprise Inns Consumer UK
Goods
6.500% 06 Dec 2018 NR/BB- 1,560 1.5
RWE Utilities Germany
4.625% FRN Perpetual Baa2/BBB 1,550 1.5
SSE Utilities UK
5.025% Perpetual Baa2/BBB 1,544 1.5
Santos Finance Oil & Gas Australia
8.250% FRN 22 Sep 2070 NR/BB 1,536 1.5
Iron Mountain Support USA
Services
6.75% 15 Oct 2018 B1/B+ 1,399 1.4
Credit Agricole Financials France
7.589% FRN Perpetual Ba2/BBB- 1,288 1.3
Ineos Basic UK
Materials
9.250% 15 May 2015 B1/B+ 1,283 1.3
General Accident Financial UK
8.875% Cum Irrd Prf NR/NR 1,159 1.1
Suez Utilities France
4.82% FRN Perpetual Baa2/NR 1,148 1.1
60,883 59.1
Other investments 42,051 40.9
Total investments 102,934 100.0
DIRECTORS' RESPONSIBILITY STATEMENT
in respect of the preparation of the interim financial report.
The Directors are responsible for preparing the financial report, using
accounting policies consistent with applicable law and International Financial
Reporting Standards.
The Directors confirm that to the best of their knowledge:
- the condensed set of financial statements contained within the financial
report have been prepared in accordance with the International Accounting
Standards 34 `Interim Financial Reporting';
- the interim management report includes a fair review of the information
required by DTR 4.2.7R and DTR 4.2.8R of the FSA's Disclosure and Transparency
Rules; and
- the interim management report includes a fair review of the information
required on related party transactions.
The financial report has not been audited or reviewed by the Company's auditor.
Signed on behalf of the Board of Directors.
Clive Nicholson
Chairman
16 August 2012
CONDENSED STATEMENT OF CHANGES IN EQUITY
FOR THE PERIOD 19 DECEMBER 2011 TO 30 JUNE 2012
Trading commenced on 2 April 2012
STATED CAPITAL REVENUE
CAPITAL RESERVE RESERVE TOTAL
£'000 £'000 £'000 £'000
Period Ended 30 June 2012
At 19 December 2011 - - - -
Issue of new shares 113,930 - - 113,930
Issue costs (520) - - (520)
Return for the period from
  the income statement - (4,868) 2,073 (2,795)
At 30 June 2012 113,410 (4,868) 2,073 110,615
CONDENSED BALANCE SHEET
AT 30 JUNE 2012
Registered in Jersey No. 109714
30 JUN
2012
£'000
Non-current assets
  Investments held at fair value
through profit or loss:
  United Kingdom 51,940
  Overseas 50,994
102,934
Current assets
  Other receivables 2,442
  Amounts due from brokers 32
  Cash and cash equivalents 5,612
8,086
Total assets 111,020
Current liabilities
  Other payables (346)
  Derivative financial instruments
- loss on forward
    currency contract unrealised (59)
(405)
Net assets 110,615
Capital and reserves
Stated capital 113,410
Capital reserve (4,868)
Revenue reserve 2,073
Shareholders' funds 110,615
Net asset value per ordinary share 151.97p
- note 3
CONDENSED STATEMENT OF CASH FLOW
FOR THE PERIOD 19 DECEMBER 2011 TO 30 JUNE 2012
Trading commenced on 2 April 2012
19 DEC 2011
TO
30 JUN 2012
£'000
Cash flow from operating activities
Loss before tax (2,791)
Taxation (4)
Adjustment for:
  Purchases of investments (4,768)
  Sales of investments 5,261
493
Losses on investments 6,069
Exchange differences (5)
Profit on derivative financial
instruments -
  currency hedges (1,274)
Finance costs 7
Operating cash flows before
movements in
  working capital 2,495
Decrease in receivables 381
Increase in payables 263
Net cash flows from operating
activities before
  and after tax 3,139
Cash flow from financing activities
Issue costs paid (444)
Cash received from City Merchants
  High Yield Trust plc 1,579
Net cash flows from financing 1,135
activities
Net increase in cash and cash 4,274
equivalents
Net foreign exchange difference 5
Realised profits on derivative 1,333
financial instruments
Cash and cash equivalents at the
beginning of the period
Cash and cash equivalents at the 5,612
end of the period
CONDENSED STATEMENT OF COMPREHENSIVE INCOME
FOR THE PERIOD 19 DECEMBER 2011 TO 30 JUNE 2012
Trading commenced on 2 April 2012
FOR THE PERIOD 19 DEC 2011 TO 30 JUN
2012
REVENUE CAPITAL TOTAL
£'000 £'000 £'000
Loss on investments at fair value - (6,069) (6,069)
Exchange differences - 5 5
Profit on derivative financial instruments - 1,274 1,274
- currency hedges
Income
UK dividends 291 - 291
UK bond - interest 767 - 767
Overseas bond - interest 1,255 - 1,255
Deposit interest 4 - 4
2,317 (4,790) (2,473)
Investment management fee (138) (75) (213)
Other expenses (97) (1) (98)
Profit/(loss) before finance costs and 2,082 (4,866) (2,784)
taxation
Finance costs (5) (2) (7)
Profit/(loss) before tax 2,077 (4,868) (2,791)
Taxation (4) - (4)
Profit/(loss) after tax 2,073 (4,868) (2,795)
Return per ordinary share - note 2 2.9p (6.7)p (3.8)p
The total column of this statement represents the Company's statement of
comprehensive income, prepared in accordance with International Financial
Reporting Standards. The supplementary revenue and capital columns are
presented for information in accordance with the Statement of Recommended
Practice issued by the Association of Investment Companies. All items in the
above statement derive from continuing operations and the Company has no other
gains or losses. No operations were discontinued in the period.
NOTES TO THE INTERIM FINANCIAL RESULTS
1. Principal Activity
The Company is a closed-end investment company incorporated in Jersey and
operates under the Companies (Jersey) Law 1991. The principal activity of the
Company is investment in a diversified portfolio of high yielding corporate and
government bonds and, to a lesser extent, equities and other instruments as
appropriate to its Investment Policy.
2. Principal Accounting Policies
The principal accounting policies adopted in the preparation of these financial
statements are set out below.
(a) Basis of Preparation
(i) Accounting Standards Applied
The financial statements have been prepared on an historical cost basis, except
for the measurement at fair value of investments and derivatives, and in
accordance with the applicable International Financial Reporting Standards
(`IFRS') and interpretations issued by the International Financial Reporting
Interpretations Committee as adopted by the European Union. The standards are
those endorsed by the European Union and effective at the date the financial
statements were approved by the Board.
Where presentational guidance set out in the Statement of Recommended Practice
(`SORP') `Financial Statements of Investment Trust Companies and Venture
Capital Trusts', issued by the Association of Investment Companies in January
2009, is consistent with the requirements of IFRS, the Directors have sought to
prepare the financial statements on a basis compliant with the recommendations
of the SORP. The supplementary information which analyses the statement of
comprehensive income between items of a revenue and a capital nature is
presented in accordance with this.
(b) Foreign Currency
(i) Functional and Presentation Currency
The financial statements are presented in sterling, which is the Company's
functional and presentation currency and the currency in which the Company's
share capital and expenses are denominated, as well as certain of its assets
and liabilities.
(ii) Transactions and Balances
Transactions in foreign currency are translated to sterling at the rate of
exchange ruling on the date of such transactions. Foreign currency assets and
liabilities are translated to sterling at the rates of exchange ruling at the
balance sheet date. Any gains or losses, whether realised or unrealised, are
taken to the capital reserve or to the revenue reserve, depending on whether
the gain or loss is of a capital or revenue nature. All gains and losses are
recognised in the statement of comprehensive income.
(c) Financial Instruments
(i) Recognition of Financial Assets and Financial Liabilities
The Company recognises financial assets and financial liabilities when the
Company becomes a party to the contractual provisions of the instrument. The
Company will offset financial assets and financial liabilities if the Company
has a legally enforceable right to set off the recognised amounts and interests
and intends to settle on a net basis.
(ii) Derecognition of Financial Assets
The Company derecognises a financial asset when the contractual rights to the
cash flows from the asset expire, or it transfers the right to receive the
contractual cash flows on the financial asset in a transaction in which
substantially all the risks and rewards of ownership of the financial asset are
transferred. Any interest in the transferred financial asset that is created or
retained by the Company is recognised as an asset.
(iii) Derecognition of Financial Liabilities
The Company derecognises financial liabilities when its obligations are
discharged, cancelled or expired.
(iv) Trade Date Accounting
Purchases and sales of financial assets are recognised on trade date, being the
date on which the Company commits to purchase or sell the assets.
(v) Classification of financial assets and financial liabilities
Financial assets
The Company's investments are classified as held at fair value through profit
or loss.
Financial assets held at fair value through profit or loss are initially
recognised at fair value, which is taken to be their cost, with transaction
costs expensed in the statement of comprehensive income, and are subsequently
valued at fair value.
For investments that are actively traded in organised financial markets, fair
value is determined by reference to stock exchange quoted bid prices at the
balance sheet date. For investments that are not actively traded or where
active stock exchange quoted bid prices are not available, fair value is
determined by reference to a variety of valuation techniques including broker
quotes and price modelling. Where there is no active market, investments are
valued by the Directors at fair value based on recommendations from Invesco's
Pricing Committee, using valuation techniques such as earnings multiples,
recent arm's length transactions and net assets.
Financial liabilities
Financial liabilities, including borrowings, are initially measured at fair
value, net of transaction costs and are subsequently measured at amortised cost
using the effective interest method.
(d) Hedging and Derivatives
Forward currency contracts entered into for hedging purposes are valued at the
appropriate forward exchange rate ruling at the balance sheet date. Profits or
losses on the closure or revaluation of positions are included in capital
reserves.
Futures contracts are entered into for hedging purposes and any profits and
losses on the closure or revaluation of positions are included in capital
reserves.
Derivative instruments are valued at fair value in the balance sheet.
(e) Cash and Cash Equivalents
Cash and cash equivalents comprise cash at bank and short-term deposits with an
original maturity date of three months or less.
(f) Revenue Recognition
Interest income arising from fixed income securities and cash is recognised in
the statement of comprehensive income using the effective interest method.
Dividend income arises from equity investments held and is recognised on the
date investments are marked `ex-dividend'. Deposit interest and underwriting
commission are taken into account on accruals basis.
(g) Expenses and Finance Costs
All expenses are accounted for on an accruals basis and are recognised in the
statement of comprehensive income. Investment management fees and finance costs
are allocated 35% to capital and 65% to revenue accordance with the Board's
expected long-term split of returns, in the form of capital gains and income
respectively, from the investment portfolio. Except for custodian dealing
costs, all other expenses are charged through revenue.
(h) Tax
Overseas interest and dividends are shown gross of withholding tax and the
corresponding irrecoverable tax is shown as a charge in the statement of
comprehensive income.
3. Taxation
The Company is subject to Jersey income tax at the rate of 0%. The overseas tax
charge consists of irrecoverable withholding tax.
4. Basis of Earnings per Ordinary Share
Earnings per ordinary share are based on the profit/(loss) after tax for the
period and on 72,786,327 weighted average number of shares in issue during the
period.
5. Dividends
The 1st interim dividend for 2012 of 2.6p has been declared and will be paid on
24 August 2012 to ordinary
shareholders on the register on 27 July 2012.
6. Basis of Net Asset Value per Ordinary Share
The NAV at 30 June 2012 is based on shareholders' funds of £110,615,000 and
72,786,327 shares in issue.
7. Stated Capital
At launch 72,786,327 ordinary shares of no par value were issued to the
shareholders of City Merchants High Yield Trust plc on a 1:1 basis in lieu of
their own investment. The net consideration for these shares was as follows:
£'000
Investments 109,528
Cash 1,579
Accrued income 2,823
113,930
Issue costs (520)
113,410
8. The financial information contained in this report, which has not been
reviewed or audited, does not constitute statutory accounts as defined in
Article 104 of Companies (Jersey) Law 1991 and has not been audited.
By order of the Board
R&H Fund Services (Jersey) Limited
Company Secretary
16 August 2012
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