Annual Financial Report
ANNUAL FINANCIAL REPORT for the year ended
31 December 2008(audited)
This is the Annual Financial Report of The Law Debenture Corporation p.l.c. as
required to be published under DTR 4 of the UKLA Listing Rules.
The directors recommend a final dividend of 8.00p per share making a total for
the year of 12.20p. Subject to the approval of shareholders, the final dividend
will be paid on 22 April 2009 to holders on the register on the record date of
13 March 2009. The annual financial report has been prepared in accordance with
International Financial Reporting Standards.
Group income statement
for the year ended 31 December
2008 2007
Revenue Capital Revenue Revenue Capital Total
£000 £000 £000 £000 £000 £000
UK dividends 12,738 - 12,738 9,643 - 9,643
UK special 15 - 15 94 - 94
dividends
Overseas dividends 2,248 - 2,248 1,507 - 1,507
Overseas special 20 - 20 - - -
dividends
Interest from 180 - 180 418 - 418
securities
15,201 - 15,201 11,662 - 11,662
Interest income 1,461 - 1,461 4,323 - 4,323
Independent 32,090 - 32,090 32,418 - 32,418
fiduciary services
fees
Other income 112 - 112 129 - 129
Total income 48,864 - 48,864 48,532 - 48,532
Net (loss)/gain on - (141,314) (141,314) - 11,635 11,635
investments held at
fair value through
profit or loss
Gross income and 48,864 (141,314) (92,450) 48,532 11,635 60,167
capital (losses)/
gains
Cost of sales (9,431) - (9,431) (8,371) - (8,371)
Administrative (16,449) 77 (16,372) (17,038) (659) (17,697)
expenses
Operating(loss)/ 22,984 (141,237) (118,253) 23,123 10,976 34,099
profit
Finance costs
Interest payable (2,456) - (2,456) (2,459) - (2,459)
(Loss)/ profit 20,528 (141,237) (120,709) 20,664 10,976 31,640
before taxation
Taxation (2,280) - (2,280) (4,008) - (4,008)
(Loss)/profit for 18,248 (141,237) (122,989) 16,656 10,976 27,632
year
(Loss)/return per 15.58 (120.59) (105.01) 14.23 9.37 23.60
ordinary share
(pence)
Diluted (loss)/ 15.58 (120.59) (105.01) 14.19 9.34 23.53
return per ordinary
share (pence)
Statement of recognised income and expense
for the year ended 31 December
Revenue Capital Total Revenue Capital Total
2008 2008 2008 2007 2007 2007
£000 £000 £000 £000 £000 £000
Group
(Loss)/profitfor the 18,248 (141,237) (122,989) 16,656 10,976 27,632
year
Foreign exchange 1,117 - 1,117 (31) - (31)
Taxation on foreign (70) - (70) - - -
exchange
Pension actuarial (6,032) - (6,032) 26 - 26
(losses)/gains
Taxation on pension 1,605 - 1,605 (8) - (8)
Total recognised income 14,868 (141,237) (126,369) 16,643 10,976 27,619
and expense relating to
the year
Financial summary
Highlights
31 December 31 December Change
2008 2007 %
pence pence
Share price 223.50 354.50 -37.0
NAV per share 219.20 339.64 -35.5
after proposed final
dividend
Revenue return per share
- Investment trust 10.23 8.60 19.0
- Independent fiduciary 5.35 5.63 -5.0
services
Group revenue return per 15.58 14.23 9.5
share
Dividends per share 12.20 12.00 1.7
Performance
2008 2007
% %
Share price total return -33.5 5.0
NAV total return -31.9 7.2
FTSE All-Share Index total -29.9 5.3
return
Chairman's statement and review of 2008
Performance
The year to 31 December 2008 was a most disappointing one for stock markets.
Our net asset value total return was -31.9%, compared to a total return of
-29.9% for the FTSE Actuaries All-Share Index.
Our gross income increased over the year by 0.7% from £48.5 million to £48.9
million. Profit (revenue) attributable to shareholders was £18.2 million, an
increase of 9.6% over the previous year, as a result of a 19.0% improvement in
the investment trust and a 5.0% fall in independent fiduciary services.
Improved company dividends and a £455,000 VAT refund increased the return from
the investment trust. Our independent fiduciary services businesses performed
well but without the exceptional level of special fees which arose last year.
Revenue return and dividends
Revenue return per share for the year to 31 December 2008 was 15.58p, an
increase of 9.5% from the previous year. The board is recommending a final
dividend of 8.0p per ordinary share (2007: 8.0p), which, together with the
interim dividend of 4.2p (2007: 4.0p) gives a total dividend of 12.2p (2007:
12.0p), an increase of 1.7%. The final dividend will be paid, subject to
shareholder approval, on 22 April 2009 to holders on the register at the record
date of 13 March 2009. The policy of the Corporation continues to be to seek
growth in both capital and income.
Investment trust
During the year the total return of the portfolio was -29.9%, in line with the
FTSE All-Share Index. The underperformance of our net asset value total return
was a result of the level of gearing in the period.
The year was dominated by the crisis in the international financial system. We
underestimated the extent to which this would spread to the wider economy, and
indeed we raised our gearing to a peak of 116% before recognising our error. By
the end of the year gearing had been reduced to 108%, partly through the sale
of bank holdings. The outlook for economic activity is very uncertain, and our
focus is on investment in companies which we think would be survivors even in a
deep recession. Following the steep fall in markets, equities look reasonably
valued by conservative standards on a long term view.
The investment trust benefited from a VAT refund arising from the successful
JPMorgan Fleming Claverhouse case against HM Revenue & Customs. We reached a
final agreement with our investment manager in respect of the period 2000-2007
and we have recognised this in 2008. We have not recognised any amount at 31
December 2008 in respect of earlier periods, which in any event will not
materially effect our NAV and results.
Independent fiduciary services
Independent fiduciary services profit before tax fell by 16.6% as a result of
the non-recurrence of exceptional fees which arose in 2007. There has been a
marked downturn in the level of activity in the capital markets following the
global credit crunch. The economic outlook for 2009 is poor and we expect an
adverse impact on the results. However, we continue to seek new opportunities
and Law Debenture is involved in a wide variety of capital market transactions.
We have new appointments in the UK and the US as a result of restructurings.
Increased levels of fraud in the current environment help us market our whistle
blowing service. Our pension trustee business continues to see growth in the
market for professional independent trustees.
Board
Rob Williams is not seeking re-election to the board at the Annual General
Meeting and I thank him for his long and distinguished service to the
Corporation. Christopher Smith, recently retired as a Managing Director -
Corporate Finance of JPMorgan Cazenove, comes up for election to the board at
the Annual General Meeting. Christopher has long experience of investment
trusts; he should be a valuable addition and we look forward to working with
him.
Staff
The independent fiduciary services businesses are dependent upon the
professionalism and commitment of our people, whom I should like to thank for
their hard work during the year.
Douglas McDougall
Investment review of 2008 and outlook for 2009
The global banking crisis spread out of the financial sector into all areas of
the economy during 2008. The authorities in the US believed something needed to
be done but their plans altered and the scale of the problem was continually
underestimated. They were criticised about the potential moral hazard of saving
investment banks, yet when they allowed Lehman Brothers to go into
administration the scale of the problem massively escalated. The UK banks, with
their global spread, were major sufferers and failed in their attempts to raise
enough new capital as the size of the losses expanded. The Monetary Policy
Committee, while setting interest rate policy, was for the first half of the
year fighting the wrong battle with inflation moving up as a result of
increased commodity prices. The oil price doubled over a twelve month period.
The problems in the credit markets needed interest rates to fall but the
authorities were watching with alarm as inflation rose. The concerns over
inflation were misplaced as the deflationary effects of the credit crunch were
to slow the global economy. Western economies are now facing a significant
recession and interest rates have been markedly reduced.
Credit is often likened to the fuel in an engine. When the supply of it is
interrupted continual problems occur. The portfolio manager thought during the
first part of the year that the credit problems were easing. The spreads
between corporate bonds and government stock were narrowing, which he took as
an indication that the fuel was beginning to flow again. The portfolio was
positioned to benefit from the resumption of lending and a reasonable level of
gearing was built up and holdings that would benefit were added to. Like the
MPC his concern was more about commodity prices and inflation rather than
realising how unsustainable the leverage had become in major financial
institutions. The events of the autumn with commodity prices and interest rates
falling, yet economic activity contracting, clearly illustrated the mistake of
this thinking. The banking exposure was reduced during the autumn and the focus
changed to companies with sustainable franchises that will allow them to come
through the current economic turbulence.
A protection in an uncertain investment climate is to have genuine diversity of
activities within the investment portfolio. There are some underlying themes in
the portfolio however. There is considerable exposure to industrial companies
that are global leaders. The current downturn is showing the fundamental
problems in the financial sector. The fallout from this is damaging the wider
economy but in the medium term the drivers of global industrial growth are in
place, with the most important of these being the emergence of the dynamic
economies of China, India and Brazil. The industrial companies servicing this
future growth will benefit. Examples in the portfolio that will benefit are
Caterpillar and Cummins in the US and GKN and Weir in the UK, which will see
demand for their products increase. These companies have over the last year
seen their share prices fall but should be strong performers when economies
stabilise. Another area where the portfolio is well represented is non life
insurance. These companies, unlike the industrials, are benefiting from the
tightness of credit and insurance underwriting profits are improving. The
companies in this area, Hiscox and Amlin, are coming through with strong
performance. They bring diversification to the portfolio as they are on a
different cycle to the economically sensitive holdings.
The smaller companies have experienced some of the worst share price falls. For
some this has been justified as their business models have not proved robust
enough for the current economic climate. However, a large element of the share
price weakness has been the result of investors' desire for liquidity leading
to a significant fall in valuations. When the results come through and
investors see how these businesses have coped with the difficult economic
conditions, there is considerable scope for substantial share price
appreciation from this area of the portfolio.
Outlook for 2009 - the authorities are applying a great deal of monetary and
fiscal stimulus to the economy. The problem is that credit is not available in
sufficient quantity to allow activity to stabilise. Banks are wanting to reduce
their balance sheet exposures and companies are responding by reducing stock
levels, costs and capital expenditure plans so as to generate cash. This trend
will end when companies see demand stabilise and the banks have confidence in
their capital adequacy. The authorities' action to increase public spending and
cut interest rates will result in the stabilisation of demand, while the banks
capital raising will eventually lead to the return of confidence that the
equity cushion is sufficient.
Demand will be further helped in the UK by the depreciation of sterling. UK
goods and services are looking increasingly cheap to overseas buyers. The lower
prices of commodities and energy are reducing costs for many UK companies,
which will help to offset the margin pressure of declining sales.
The portfolio has a modest level of gearing and consists of lowly valued
companies, which will benefit when confidence starts to improve.
Independent fiduciary services review of 2008
Although the international capital markets had a torrid year, certain high
profile investment grade borrowers were still able to access the bond market.
We were appointed by Anglo American, Aviva, British American Tobacco, BP,
Centrica, Cadbury Schweppes, GlaxoSmithKline and National Grid, and towards the
end of the year as trustee on new bond issues for Lloyds TSB, Nationwide and
the Royal Bank of Scotland, all of which were guaranteed by the UK Government.
Law Debenture's recognised independence and ability to handle more complex
deals is widely recognised in the market. Hence we were involved in the
recommended bid by EDF Energy for British Energy. The offer to the British
Energy shareholders involved an innovative structure as shareholders were
offered either cash or a mixture of cash and contingent value rights
instruments, which will pay out sums over the next ten years linked to energy
prices. Law Debenture was selected to act as trustee of the contingent value
rights instruments. It was an active year for established trusts. Actions
continued in relation to the Polish company, Elektrim, with a further
substantial distribution being made to bondholders in 2008. Additional work
continues to arise as a result of the credit crunch.
The need, and consequent demand, for our pension trusteeship services remains
strong. Our income for 2008 was slightly below 2007 levels, when the extreme
level of corporate activity affecting the sponsors of pension schemes led to
unprecedented demands on pension scheme trustees. We won a number of new
appointments, however, reflecting the growing appreciation by schemes of the
value that a professional independent trustee can bring. New appointments
included the Lloyds TSB Group and Mitchells & Butlers Pension Schemes. We
appointed three new members to our team with strong commercial and financial
experience. This reflects our confidence for the potential demand for our
services, and our determination to maintain and enhance our strong capability
and reputation.
The service of process business saw a significant down turn in new appointments
in the second half of the year as the global economic situation reduced the
number of corporate transactions. Regarding corporate services (provision of
corporate directors, company secretary, accounting and incorporations service
for Special Purpose Vehicles - SPVs), although structured finance markets
experienced a traumatic year, with very few new issues, we provided services
for covered bond issues by Standard Life and Newcastle Building Society.
Appointments were secured from sectors other than securitisation/structured
finance including appointments to manage SPVs for real property holding
structures and PFI projects, and for capital raising initiatives by companies
in central and eastern Europe.
In structured finance administration, we managed to secure a number of new
appointments, despite the collapse of the structured finance market. The
general mistrust of opaque structures with strong ratings has resulted in a
greater focus on third party administration and verification roles with a
transparent approach to reporting. These are our core strengths and as a
result, in 2008 we were appointed as fund administrator for Whistlejacket (in
receivership) Limited, a structured investment vehicle in the process of being
restructured, and as collateral administrator for Gresham V, a CLO issue.
Safecall increased its client base during the year as more and more
organisations appreciated the added value an external whistleblowing service
provides. The increased level of fraud, driven by the economic downturn, has
helped raise the demand for independent confidential reporting and we are well
placed to capitalise on this. New appointments included Provident Financial,
Taylor Wimpey, Metronet, Max Petroleum, Dominos Pizzas, Man Group and Severn
Trent.
In the USA, Law Debenture Trust Company of New York continued to expand its
presence as a premier provider of corporate trust service in the United States.
While performance was down against 2007, when there were exceptional levels of
bankruptcy settlement fees, towards the end of 2008 we were appointed as
trustee, administration and paying agent for the Common Fund for Short Term
Investments. The Common Fund is a Non-Profit Organization, which provides
investment and financial services to over 990 colleges and universities. At the
time of the appointment the portfolio held over $4 billion of assets. Other
noteworthy appointments included successor trustee, registrar and paying agent
for GlaxoSmithKline Capital Inc., Univision Communications Inc., and British
Telecommunications plc. Trustee appointments included Clear Channel
Communications, Stillwater Mining Company, Pacific Life Global Funding, and
Nielsen Finance LLC. We were also named as trustee for Fosse 2008-1 (Alliance
Leicester) and serve on the creditors committee of Washington Mutual Inc. Law
Debenture Corporate Services Inc. had a strong first half of the year, but saw
reduced transaction volumes in the second half of 2008.
Hong Kong experienced a notable slowdown in M&A activity in late 2008. However,
corporate activity on a smaller scale has continued, thereby mitigating the
impact of the slowing economy on our escrow business. Falling share prices led
more companies to adopt employee share trusts in 2008, in some cases as
replacements for share option schemes that had gone `out of the money' and this
created opportunities for us, including an appointment by Tradelink Electronic
Commerce Limited. The service of process business made a significant
contribution to the business during the year. Mainland China continues to be an
attractive destination for external operators and we expect an increasing role
for our niche services in China over the coming year.
In Jersey, the global credit crunch has resulted in a significant fall in new
business enquiries. However we have been involved as trustee in considering a
number of matters arising on some of our existing transactions which have
resulted in additional work for us.
Outlook for 2009 and events since the year end
There have been no important events since the year end that require to be
reported here. The outlook for the investment portfolio is described above in
the Investment Review. The independent fiduciary services businesses may be
adversely affected by the difficult market conditions that will continue for
some time. The recession has curbed activity in some of the markets where the
businesses operate and it will be difficult to maintain revenues at the levels
reached in recent years. The Managing Director and her team will continue to
seek new opportunities wherever possible.
Group Balance sheet
as at 31 December
2008 2007
£000 £000
Assets
Non current assets
Goodwill 3,181 4,185
Property, plant and equipment 477 666
Other intangible assets 83 46
Investments held at fair value 288,566 423,494
through profit or loss
Deferred tax assets 1,953 332
Total non current assets 294,260 428,723
Current assets
Trade and other receivables 3,461 4,320
Other accrued income and prepaid 4,126 3,693
expenses
Corporation tax receivable 239 -
Other taxation including social 455 -
security
Cash and cash equivalents 31,590 34,685
Total current assets 39,871 42,698
Total assets 334,131 471,421
Current liabilities
Trade and other payables 8,491 8,583
Short term borrowings 85 65
Corporation tax payable 1,782 1,852
Other taxation including social 416 509
security
Deferred income 4,019 3,767
Total current liabilities 14,793 14,776
Non current liabilities and deferred
income
Long term borrowings 39,311 39,284
Retirement benefit obligations 5,478 257
Deferred income 7,226 7,871
Contingent purchase consideration 900 2,143
Total non current liabilities 52,915 49,555
Total net assets 266,423 407,090
Equity
Called up share capital 5,902 5,888
Share premium 7,971 7,477
Capital redemption 8 8
Shared based payments 201 195
Own shares (2,137) (1,603)
Capital reserves 226,763 368,000
Retained earnings 26,929 27,386
Translation reserve 786 (261)
Total equity shareholders' funds 266,423 407,090
Group cash flow statement
for the year ended 31 December
Operating activities 2008 2007
£000 £000
Operating profit before interest payable and (118,253) 34,099
taxation
Losses/(gains) on investments 141,772 (10,976)
Foreign exchange (248) -
Depreciation of property, plant and equipment 286 157
Amortisation of intangible assets 31 54
Share based payments 6 28
Decrease/(increase) in receivables (29) 6,860
(Decrease)/increase in payables (551) (1,496)
Transfer from capital reserves (336) (215)
UK and overseas withholding tax deducted at (212) (177)
source
Normal pension contributions in excess of cost (811) (790)
Cash generated from operating activities 21,655 27,544
Taxation (2,463) (2,497)
Interest paid (2,456) (2,459)
Operating cash flow 16,736 22,588
Investing activities
Acquisition of property, plant and equipment (88) (129)
Expenditure on intangible assets (68) (33)
Purchase of investments (81,112) (117,682)
Sale of investments 74,208 70,538
Acquisition of subsidiary undertakings - (1,905)
Cash flow from investing activities (7,060) (49,211)
Financing activities
Dividends paid (14,278) (12,994)
Proceeds of increase in share capital 508 69
Purchase of own shares (534) (277)
Net cash flow from financing activities (14,304) (13,202)
Net decreasein cash and cash equivalents (4,628) (39,825)
Cash and cash equivalents at beginning of 34,620 74,521
period
Exchange gains/(losses) on cash and cash 1,513 (76)
equivalents
Cash and cash equivalents at end of period 31,505 34,620
Cash and cash equivalents comprise
Cash and cash equivalents 31,590 34,685
Bank loans and overdrafts (85) (65)
31,505 34,620
Segmental Analysis
Investment trust Independent Total
fiduciary
services
2008 2007 2008 2007 2008 2007
£000 £000 £000 £000 £000 £000
Segment income 15,201 11,662 32,090 32,418 47,291 44,080
Other income 93 27 19 102 112 129
Cost of sales - - (9,431) (8,371) (9,431) (8,371)
Administration costs (1,254) (1,850) (15,195) (15,188) (16,449) (17,038)
14,040 9,839 7,483 8,961 21,523 18,800
Interest (net) (1,944) 711 949 1,153 (995) 1,864
Return, including profit 12,096 10,550 8,432 10,114 20,528 20,664
on ordinary activities
before taxation
Taxation (110) (481) (2,170) (3,527) (2,280) (4,008)
Return, including profit 11,986 10,069 6,262 6,587 18,248 16,656
attributable to
shareholders
Return per ordinary share 10.23 8.60 5.35 5.63 15.58 14.23
Assets 310,396 447,762 23,735 23,659 334,131 471,421
Liabilities (52,768) (50,729) (14,940) (13,602) (67,708) (64,331)
Total net assets 257,628 397,033 8,795 10,057 266,423 407,090
The capital element of the income statement is wholly, attributable to the
investment trust
Investment portfolio changes in geographical distribution
Valuation Purchases Sales Appreciation/ Valuations
31 £000 Proceeds (depreciation) 31
December December
£000 £000
2007 2008
£000 £000
United Kingdom 313,900 58,150 (54,857) (115,047) 202,146
North America 6,906 7,480 - (4,202) 10,184
Europe 58,703 15,482 (19,351) (14,400) 40,434
Japan 16,241 - - 1,019 17,260
Other Pacific 27,744 - - (9,202) 18,542
423,494 81,112 (74,208) (141,832) 288,566
The statutory accounts for the year ended 31 December 2008 will be filed with
the Registrar of Companies in due course together with the auditors' report
thereon. The information for the year ended 31 December 2007 is an extract from
the statutory accounts to that date, which has been filed with the Registrar of
Companies. Those accounts included an audit report which was unqualified and
which did not contain a statement under section 237(2) or (3) of the Companies
Act 1985.
Company summary
From its origins in 1889 Law Debenture has diversified to become a group with a
unique range of activities in the financial services sector. The group divides
into two distinct complementary areas of business.
Investment trust
We are a global growth investment trust, listed on the London Stock Exchange.
Our portfolio of investments is managed by Henderson Global Investors Limited
under a contract terminable by either side on 12 months' notice.
Our objective is to achieve long term capital growth in real terms and steadily
increasing income. The aim is to achieve a higher rate of total return than the
FTSE All-Share Index through investing in a portfolio diversified both
geographically and by industry.
Independent fiduciary services
We are a leading provider of independent fiduciary services. Our activities are
corporate trusts, treasury management, pension trusts, corporate services
(including agent for service of process), structured finance administration and
whistleblowing services. We have offices in London, Sunderland, New York,
Delaware, Hong Kong, the Channel Islands and the Cayman Islands.
Individuals, companies, agencies and organisations throughout the world rely
upon Law Debenture to carry out its duties with the independence and
professionalism upon which its reputation is built.
Principal risks and uncertainties
The principal risks of the Corporation relate to its investment activities and
include market price risk, foreign currency risk, liquidity risk, interest rate
risk, and credit risk. These will be explained in more detail in the notes to
the 2008 Annual Report and Accounts, but remain unchanged from those published
in the 2007 Annual Report and Accounts . The principal risks of the independent
fiduciary services business arise during the course of defaults, potential
defaults and restructurings where we have been appointed to provide services.
To mitigate these risks we work closely with our legal advisers and, where
appropriate, financial advisers, both in the set up phase to ensure that we
have as many protections as practicable, and at all other stages whether or not
there is a danger of default.
Related party transactions
There have been no related party transactions during the period which have
materially affected the financial position or performance of the group. During
the period transactions between the Corporation and its subsidiaries have been
eliminated on consolidation.
Acquisition of own shares
A subsidiary of the Corporation made two purchases of shares in 2008 in
connection with the Deferred Share Bonus Plan for senior staff. On 25 January,
20,421 shares were purchased in the market at 334.5 pence per share. On 29
February, a further 200,309 shares were purchased at 337.71 pence per share.
These shares will be held in trust by the subsidiary and released to eligible
staff if and when the release conditions (as prescribed under the Plan rules)
are met in 2011.
Total voting rights
The Corporation has an issued share capital at 26 February 2009 of 118,034,023
ordinary shares with voting rights and no restrictions and no special rights
with regard to control of the Corporation. There are no other classes of share
capital and none of the Corporation's issued shares are held in treasury.
Therefore the total number of voting rights in The Law Debenture Corporation
p.l.c. is currently 118,034,023.
Directors' responsibility statement
We confirm that to the best of our knowledge in accordance with the
requirements of UKLA DTR 4.1.12 that:
* the financial statements have been prepared in accordance with
International Financial Reporting Standards as adopted by the European
Union (IFRSs) and Article 4 of the IAS Regulation and give a true and fair
view of the assets, liabilities, financial position and profit or loss of
the The Law Debenture Corporation p.l.c. and its subsidiaries;
* the annual financial report includes a fair review of the development and
performance of the business and the position of The Law Debenture
Corporation p.l.c. and the undertakings included in the group as a whole,
together with a description of the principal risks and uncertainties that
they face.
Copies of this Annual Financial Report are available on www.lawdeb.com/
investment-trust/financial-statements/
Copies of the annual report will be available from the Corporation's registered
office or on the above website link once published on 6 March 2009.
By order of the board
Law Debenture Corporate Services Limited
Secretary
27 February 2009
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