Final Results
ACM European Enhanced Inc.Fund PLC
30 April 2003
Final Results
ACM European Enhanced Income Fund PLC
30 April 2003
Final results for the year ended 31 December 2002
Enquiries:
ACM Mark Hamilton, 020 7470 0100
The Company presents its report together with the audited financial statements
for the year ended 31 December 2002.
RESULTS
The results of operations for the year are set out in the Statement of Total
Return on page 15.
DIVIDENDS
The following dividends were declared and paid in the year:
Ex Date Payment Date Amount £ £ Per Share
16-01-02 28-01-02 956,458 0.0175
24-04-02 30-04-02 655,857 0.0120
17-07-02 30-07-02 655,857 0.0120
23-10-02 31-10-02 573,875 0.0105
SIGNIFICANT EVENTS SINCE THE YEAR END
The Company paid a dividend on 28 January 2003 of £524,686, in aggregate, at a
rate of £0.0096 per Share. The Shares went ex-dividend on 10 January 2003.
The Company has applied for admission of the Shares for trading and settlement
through the CREST system which should facilitate more efficient dealings in the
Shares. It is expected that the Shares will become eligible for settlement from
12 May 2003.
FUND MANAGER'S REVIEW
INVESTMENT OBJECTIVES AND POLICIES
The Company's investment objective is to provide a high level of income through
investment in European corporate and sovereign fixed income securities. As a
secondary objective, the Company seeks to provide capital growth, which is
expected to arise principally through enhancement of the credit rating of
specific securities bought by the Company but also through a general re-rating
of European high yield debt as that market matures. The Company may borrow an
amount of up to 25% of its net asset value at any time.
INVESTMENT RESULTS
The following table provides performance data for the Company for the six- and
12-month periods ended 31 December 2002. For comparison, we have included a
custom blended benchmark consisting of 50% Merrill Lynch European Currency High
Yield Index hedged into euros and 50% Lehman Brothers European Corporate Bond
Index. This is then leveraged by 25% and converted into sterling. This benchmark
represents an unmanaged measure of the markets and instruments in which the
Company is able to invest. The performance presented below is reported in
sterling.
INVESTMENT RESULTS*
Periods Ended 31 December 2002
6 Months 12 Months
ACM European
Enhanced Income
Fund Plc 4.98% 6.47%
Custom Benchmark** 7.16% 7.70%
* The Company's investment results are monthly compounded total returns for the
periods shown and are based on the net asset value (NAV) as of 31 December 2002.
All fees and expenses related to the operation of the Company have been
deducted. Past performance is no guarantee of future results.
** The custom benchmark is comprised of equal 50% weightings of two indices,
which are leveraged by 25% and converted into sterling. The unmanaged Merrill
Lynch European Currency High Yield Index (hedged into euros) is comprised of
corporate bonds with maturities greater than or equal to one year. The Lehman
Brothers European Corporate Bond Index is a measure of fixed-rate securities
with at least one year remaining until maturity. An investor cannot invest
directly in an index, and its results are not indicative of the performance for
any particular investment, including the Company. The custom benchmark does not
include the operating expenses associated with an investment in an investment
company and, in the case of the Company, its borrowing costs.
The Company underperformed its custom benchmark for the six- and 12-month
periods ended 31 December 2002. The primary source of the Company's
underperformance was its underweight position in many so-called 'fallen angels'
in the high yield market. Fallen angels, which are formerly investment grade
companies that have been downgraded to high yield, have come to dominate the
European high yield market. As of the beginning of 2003, the top eight issuers
in European high yield were all fallen angels; together they account for over
46% of the market capitalisation of the custom benchmark. Fiat alone accounts
for nearly 15% of the index, with Alcatel and Ericsson at nearly 9% and 6%,
respectively. These bonds have been very volatile, and on average outperformed
during the final quarter of 2002. Of the top eight issuers, we have a negative
fundamental outlook on five, namely ABB, Alcatel, Ericsson, Vivendi Universal
and Xerox, and so the portfolio has been underexposed to these bonds. However,
even if we held a more positive view, we would still likely to underweight the
portfolio in these securities as we think it prudent to have greater
diversification in the Company's high yield holdings.
Among the positive contributions to performance for the year was the Company's
tactical move to a more defensive construction, particularly its opportunistic
allocation to government bonds which outperformed both investment grade and high
yield corporate bonds for the year. A second key contributor was the avoidance
of many distressed high yield issuers; in particular the Company maintained
underweight positions in the telecommunications and cable sub-sectors, which
suffered significant defaults in the first half of the year.
Among specific securities, positions in high yield issuers Euronet Worldwide
Inc., Dana Corp. and Weightwatchers International Corp. were all outperformers.
Among investment grade issues, the Company's positions in subordinated bank debt
added to performance, as did several holdings in the telecommunications sector,
notably MMO2 which outperformed significantly during the latter part of the
year.
INVESTMENT STRATEGY
As a result of heightened volatility in the markets during 2002, we adopted a
more defensive position for the Company. We reduced the portfolio's overweight
positions in high yield and BBB-rated corporates and increased a tactical
position in government debt, which benefited the Company over the course of the
year. We have shifted the portfolio to more defensive names within the high
yield sector, reducing our exposure to the volatile telecommunications and cable
sectors and other distressed issuers. Among investment grade issuers, we favour
the banking sector, particularly UK and Scandinavian banks, higher quality
telecommunications firms such as Vodafone Group, British Telecom Plc and KPN,
and industrial names we believe can withstand the continued difficult economic
conditions in Europe. Finally, the Company remains predominantly exposed to the
euro, with non-euro exposure being marginal.
MARKET REVIEW
At the start of 2002, signs of a global economic recovery began to appear,
evidenced by flatter yield curves among the G-7 countries (a group of seven
industrialised nations, including Canada, France, Germany, Italy, Japan, the
United Kingdom and the United States), rebounding commodity prices and an end to
the European Central Bank (ECB) interest rate reductions. Yet, despite improving
economic fundamentals, the anticipated recovery stalled, led by a loss of
economic momentum in the United States. Continued weakness in the labour market,
anemic business spending, corporate governance issues and a sharp decline in
equity valuations dampened prospects for a stronger and quicker economic
recovery. U.S. and European government yields declined in light of weakness in
the equity markets and rising concerns about corporate integrity. The conflict
in the Middle East and the ongoing war against terrorism also contributed to
investor nervousness, resulting in a flight to quality that benefited the
higher-quality sectors of the fixed-income markets.
Euroland's sentiment and production data indicated a recovery in the first
quarter of 2002; nonetheless, growth in the second half of the year did not meet
expectations. In the first quarter, French industrial production increased more
than expected and the German index of business confidence rose above its
pre-September 11th level. Yet, by the third quarter, the lack of an economic
policy direction by Germany's re-elected Chancellor Schroeder weighed heavily on
business and consumer sentiment, which was already affected by upward price
adjustments brought on by the euro changeover at the beginning of the year. In
addition, geopolitical tensions continued to affect consumer behavior and
business decisions. The ECB finally lowered its main refinancing rate to 2.75%
in December, as it revised growth expectations downwards. Germany's contracting
gross domestic product (GDP) growth pulled down the whole, leaving France's
household spending to extend a feeble hand to overall economic growth.
The UK outperformed the eurozone, thanks to stronger domestic demand. Despite
this, fiscal policy dedicated to increased spending on public services created a
fiscal shortfall of -2.8% of GDP, and higher energy costs caused inflation to
accelerate rapidly from 1.5% year-over-year in June to 2.7% year-over-year in
December.
The European investment grade corporate bond market returned 8.54% for the
12-month period ended 31 December 2002 as measured by the Lehman Brothers
European Corporate Bond Index. By comparison, European government bonds returned
9.73% for the year, according to the Lehman Brothers European Government Bond
Index. Early in the year, corporates suffered relative to government securities
as accounting irregularities, apparent fraud, aggressive rating-agency actions
and investors' increased risk aversion disrupted the markets. Also holding back
investment grade returns were difficulties in the technology sector, where both
Alcatel and Ericsson were downgraded to junk status during the period. In the
cyclical services sector, ABB was hurt by liquidity concerns and asbestos
liabilities, and eventually was downgraded to junk status by Moody's in October.
The European high yield market, as represented by the Merrill Lynch European
Currency High Yield Index, returned
-6.65% for the period. Performance of the index was hurt by weak equity
performance, credit quality downgrades and poor earnings reports for much of the
year. High yield was rocked early in the year by deterioration in the cable and
telecommunications sectors, culminating in defaults by issuers such as UPC,
Energis, NTL, KPNQwest and Callahan. Through the end of September, the high
yield market was down over 16%. However, the market rallied over 10% in the
fourth quarter, led by many of the fallen angels mentioned previously.
In the currency market, the euro surged over 17% against the dollar and rose
over 6.5% against sterling for the year, from 0.6117 E/GBP at the end of 2001 to
0.6518 E /GBP.
OUTLOOK
Looking ahead, we expect that the European economy should improve modestly in
2003 as compared with 2002, but still at a pace below its long-term trend rate
of 2.0%-2.5%. The ECB's December 5 interest rate reduction was ineffective in
igniting an upsurge in confidence. Accordingly, our forecast for real GDP growth
in the eurozone is 1.3%.
While the U.S. Federal Reserve has probably completed its easing cycle, the ECB
is likely to continue. The weakness in production and sentiment indicators, as
well as the sluggishness of the global recovery, will require Europe to provide
additional stimulus. Improving inflation performance and a strong euro will give
the ECB the leeway to act. Accordingly, European yields will remain low, and may
even have further to fall in shorter maturities, while longer maturities are
likely to rise less than those in the U.S. where recovery is expected to be more
vigorous. Therefore, European government bond markets are likely to outperform
U.S. Treasuries.
With expected weakness in the European economy and prospects for further ECB
rate cuts, we continue to have a cautious outlook toward corporate credit
markets in Europe. In the near-term, the Company will likely remain underweight
in corporate bonds, particularly to highly cyclical credits, as these holdings
remain the most sensitive to economic weakness, market volatility and global
uncertainty. We are monitoring both the macroeconomy and individual corporate
financials in Europe for signs of improvement. We will alter our investment
strategy when we see a change in the underlying fundamental situation. As
always, we will also look to take advantage of specific mispricing opportunities
in the marketplace.
Statement Of Total Return
For the year ended 31 December 2002
Notes Revenue Capital 2002 2001
£ £ Total Total
£ £
Net losses on investments during the 3 -0- (582,934) (582,934) (10,368,908)
year
Net gains/(losses) on foreign exchange 4 -0- 292,383 292,383 (397,511)
Net investment losses for the year -0- (290,551) (290,551) (10,766,419)
Gross income 5 2,963,582 -0- 2,963,582 4,773,538
Expenses 6 (551,895) (183,966) (735,861) (880,817)
Net income for the year 2,411,687 (183,966) 2,227,721 3,892,721
Return on ordinary activities 2,411,687 (474,517) 1,937,170 (6,873,698)
Distributions 8 (2,842,047) -0- (2,842,047) (4,537,652)
Income equalisation 9 -0- -0- -0- 96,000
Net decrease in Shareholders' funds
from investment activities
(430,360) (474,517) (904,877) (11,315,350)
Statement Of Movements In Shareholders' Funds For the year ended 31 December
2002
2002 2001
£ £
Net assets at the start of the year 33,790,218 41,121,568
Net proceeds on sale of Shares -0- 3,984,000
Net decrease in Shareholders' funds from investment activities (904,877) (11,315,350)
Net assets at the end of the year 32,885,341 33,790,218
All returns are generated by continuing operations. There are no gains or losses
other than those included in the Statement of Total Return.
Balance Sheet
as at 31 December 2002
Notes 2002 2001
Total Total
£ £
Portfolio of investments 1(e) 38,371,525 36,167,697
Current assets
Debtors 10 1,238,620 1,522,155
Cash and bank balances 11 764,440 1,035,878
2,003,060 2,558,033
Less: Current liabilities
Bank overdraft 11 (62,270) -0-
Creditors 12 (126,752) (194,291)
Loan 12 (7,300,222) (4,741,221)
(7,489,244) (4,935,512)
Net current liabilities (5,486,184) (2,377,479)
Net current liabilities (5,486,184) (2,377,479)
Net assets 32,885,341 33,790,218
Shareholders' Funds 32,885,341 33,790,218
Number of Shares in issue 54,654,743 54,654,743
Net Asset Value per Share £0.6017 £0.6182
Cashflow Statement
For the year ended 31 December 2002
Notes 2002 2001
£ £
Net cash inflow from operating activities 13 2,996,948 3,995,539
Servicing of finance
Interest paid 6 (260,848) (358,604)
Net cash outflow from servicing of finance (260,848) (358,604)
Capital expenditure and financial investment
Acquisition of investments (43,321,828) (67,403,581)
Sale of investments 40,535,066 68,642,699
Net cash (outflow)/inflow from capital expenditure and financial (2,786,762) 1,239,118
investment
Distributions 8 (2,842,047) (4,537,652)
Financing
Amounts received on sale of Shares -0- 3,984,000
Income equalisation 9 -0- 96,000
Increase (Decrease) in loan 12 2,559,001 (5,157,591)
Net cash inflow/(outflow) from financing 2,559,001 (1,077,591)
Decrease in cash (333,708) (739,190)
Closing cash balance 11 702,170 1,035,878
Opening cash balance 1,035,878 1,775,068
Movement in cash balance (333,708) (739,190)
1. Accounting policies
a) Basis of accounting
The financial statements are prepared under the historical cost convention
as modified by the inclusion of securities at valuation. The financial
statements are prepared in sterling (£).
b) Income recognition
Income on interest bearing securities is accounted for on an accrual basis
and bank deposit interest is accounted for on a receipts basis. Income is shown
gross of any withholding tax. The Company accretes discounts and amortises
premiums as adjustments to interest income.
c) Realised gains and losses on investments
Realised gains and losses on sales of investments are calculated on the
FIFO basis of the investment in local currency. The associated foreign exchange
movement between the date of purchase and the date of sale on the sale of
investments is included in net gains or losses on foreign exchange in the
Statement of Total Return.
d) Unrealised gains and losses on investments
Unrealised gains and losses on investments arising during the year are
reflected as a component of net gains or losses on investments in the Statement
of Total Return.
e) Valuation of securities
Assets listed or traded on a regulated market are valued at the official
close of business prices at the year end. If for specific assets the official
close of business prices do not, in the opinion of the Administrator, reflect
their fair value or if prices are unavailable, the values are calculated with
care and in good faith by the Administrator, approved for that purpose by the
Custodian, in consultation with the Investment Manager, on the basis of the
probable realisation values for such assets as at the close of business as at
the year end.
f) Foreign exchange
Foreign currency assets and liabilities, including investments, are
translated into sterling at the exchange rate prevailing at the year end. The
foreign exchange gain or loss based on the translation of the original cost of
the investments, together with the gain or loss arising on the translation of
other assets and liabilities, is included in net gains or losses on foreign
exchange in the Statement of Total Return.
Foreign currency forward exchange contracts are revalued to a forward rate
as at their close of business price at the year end. The resulting unrealised
gain or loss between this rate and the contract rate is included in net gains or
losses on foreign exchange in the Statement of Total Return and is shown as a
debtor or creditor in the Balance Sheet.
g) Distribution policy
It is intended that substantially all of the net income of the Company is
distributed as dividends. Dividends will, if declared, be declared and paid
quarterly in or about January, April, July and October of each year.
h) Issue costs
Issue costs incurred directly in connection with the issue of the Shares
are deducted from the consideration received in the Statement of Movements in
Shareholders' Funds.
2. Taxation
Under current law and practice, the Company qualifies as an investment
undertaking as defined in Section 739B (1) of the Taxes Consolidation Act, 1997,
as amended. It is not chargeable to Irish tax on its income or capital gains.
However, a tax can arise on the happening of a 'chargeable event' in the
Company. A chargeable event includes any distribution payments to Shareholders
or any encashment, redemption or transfer of Shares. Any tax arising on a
chargeable event is a liability of the Shareholder, albeit that it is paid by
the Company (although if the Company fails to deduct the tax or the correct
amount of tax, it becomes ultimately a liability of the Company). No tax will
arise on a chargeable event in respect of a Shareholder who is an Exempt Irish
Investor (as defined in Section 739D of the Taxes Consolidation Act, 1997, as
amended) or who is neither Irish resident nor ordinarily resident in Ireland at
the time of the chargeable event provided that the necessary signed declaration
is in place.
3. Net losses on investments
The net gains (losses) on investments during the year comprise:
Notes 2002 2001
£ £
Proceeds from sales of investments during the year 40,535,066 68,642,699
Original cost of investments sold during the year (46,654,292) (80,422,301)
Net losses realised on investments sold during the year 1(c) (6,119,226) (11,779,602)
Net change in unrealised appreciation (depreciation) at the end of 1(d) 5,536,292 1,410,694
the year
Net losses on investments during the year (582,934) (10,368,908)
4. Net gains/(losses) on foreign exchange
2002 2001
£ £
Net realised and change in unrealised foreign exchange gains/ 292,383 (397,511)
(losses)
5. Gross income
2002 2001
£ £
Interest on securities 1(b) 2,942,573 4,704,166
Bank interest 1(b) 21,009 36,962
Income from new Shares issued 1(h) -0- 32,410
2,963,582 4,773,538
6. Expenses
The Company charges 25% of the investment management fees, operational
expenses and borrowing expenses in each year to capital (such expenses amounted
to £183,966 for the year ended 31 December 2002 and £222,185 for the year ended
31 December 2001) and 75% of such fees and expenses to its income account. Thus,
on realisation of Shares, Shareholders may not receive back the full amount
invested.
2002 2002 2002 2001
£ £ £ £
Revene Capital Total Total
Payable to the Administrator and
Registrar
Administration fee (40,500) (13,500) (54,000) (55,122)
Share registration and transfer agency (17,912) (5,971) (23,883) -0-
fee
Payable to the Custodian
Custody fee (19,848) (6,616) (26,464) (17,675)
Payable to the Investment Manager
Investment management fee (207,459) (69,153) (276,612) (323,461)
Other expenses
Loan interest (195,636) (65,212) (260,848) (358,604)
Legal fees (31,412) (10,471) (41,883) (57,223)
Printing & postage (11,862) (3,954) (15,816) (28,812)
Directors' remuneration and expenses (16,622) (5,541) (22,163) (20,011)
Audit fee (7,885) (2,628) (10,513) (7,172)
Miscellaneous (2,759) (920) (3,679) (12,737)
(266,176) (88,726) (354,902) (484,559)
Total expenses (551,895) (183,966) (735,861) (880,817)
7. Related party transactions
Investment Manager
The Investment Manager (Alliance Capital Management L.P.) is entitled to an
annual investment management fee of 0.65% of the Company's average weekly Net
Asset Value (having added back the amount borrowed at any time under the
Company's borrowing facility with Deutsche Bank AG London). The Investment
Manager is entitled, subject to approval of the Directors, to receive from the
Company an amount not to exceed USD 45,000 annually exclusive of VAT, if any,
thereon, to cover certain ancillary expenses incurred by the Investment Manager
in connection with its provision of investment management services to the
Company. Such compensation amounted to £27,945 (or USD 45,000) for the year
ended 31 December 2002. The Investment Management Agreement may be terminated by
the Investment Manager or the Company giving not less than 90 days' notice in
writing.
Alliance Capital Management L.P. has not entered into transactions for the
Company in relation to a placing and/or a new issue in which a connected person
with the Investment Manager has a material interest as a member of the
underwriting syndicate.
Administrator
State Street Fund Services (Ireland) Limited has been appointed to act as
Administrator pursuant to the Administration Agreement. For this service, the
Company pays to the Administrator an annual fee, accrued daily based on the
average weekly Net Asset Value and payable monthly in arrears at the following
rates:
Rate NAV
0.15% p.a. 0-£30 million
0.10% p.a. £30 million-£60 million
0.075% p.a. £60 million +
The Administrator receives a minimum fee of £4,500 per month. The
Administrator is also entitled to an annual fee of £20 per Shareholder for
registrar maintenance, £15 for each share registry entry, £10 for each dividend
payment, £15 for each statement issued and £7 for each payment by telegraphic
transfer. The Administrator is also reimbursed by the Company, as appropriate,
for all reasonable costs, expenses and disbursements incurred by it in the
performance of its duties for the Company.
Custodian
State Street Custodial Services (Ireland) Limited has been appointed
Custodian to the Company pursuant to the Custodian Agreement. For this service,
the Company pays to the Custodian a fee of 0.025% per annum of the average
weekly Net Asset Value of the Company. The Custodian's fee is paid monthly in
arrears and is accrued daily based on the average weekly Net Asset Value of the
Company. In addition, the Custodian is entitled to a transaction charge of £20
per transaction. The Custodian is also reimbursed by the Company for all
reasonable out-of-pocket expenses, including sub-custody fees and expenses which
are charged at normal commercial rates.
8. Distributions
It is intended that substantially all of the net income of the Company is
distributed as dividends. Dividends will, if declared, be declared and paid
quarterly in or about January, April, July and October of each year. The
following dividends were paid during the year:
Date paid 2002 Date paid 2001
£ £
Distribution based on income from 28/1/02 (956,458) 29/1/01 (1,121,732)
prior year
Distribution based on income from 30/4/02 (655,857) 10/4/01 (1,229,731)
current year
30/7/02 (655,857) 10/7/01 (1,229,731)
31/10/02 (573,875) 9/10/01 (956,458)
Total Distribution (2,842,047) (4,537,652)
9. Equalisation
Income equalisation arrangements are applied and are intended to ensure that the
income per Share which is distributed in respect of the distribution period is
not affected by changes in the number of Shares in issue during that period. The
calculation of equalisation is based on net income. No shares were issued during
the year ended 31 December 2002.
10. Debtors
2002 2001
£ £
Accrued income 1,198,291 1,269,249
Unrealised gain on forward exchange currency contracts 40,329 -0-
Unrealised gain on Index Swap (notional value EUR5,000,000) -0- 252,906
1,238,620 1,522,155
11. Analysis of cash on the Balance Sheet
2002 2001
£ £
Cash and bank balances 764,440 1,035,878
Bank overdraft (62,270) -0-
702,170 1,035,878
All cash and bank balances are held with Deutsche Bank A.G., London
12. Creditors
All settlements are scheduled for less than one year. As at 31 December 2002,
the Company had a loan outstanding with Deutsche Bank AG London of EUR
11,200,000 with an interest rate of 3.59% per annum. The facility is open for a
period of five years renewable on such terms as may be mutually agreed between
the Company and such banks and financial institutions as may be parties to the
Facility Agreement at such time, although the facility is repayable earlier
under certain circumstances.
2002 2001
£ £
Accrued expenses (126,752) (108,435)
Unrealised loss on forward exchange currency contracts -0- (85,856)
Loan (7,300,222) (4,741,221)
(7,426,974) (4,935,512)
13. Reconciliation of Operating Profit to Net Cash Inflow from Operating
Activities
Notes 2002 2001
£ £
Net income 5,6 2,227,721 3,892,721
Interest on loan 6 260,848 358,604
2,488,569 4,251,325
Net gains/(losses) on foreign exchange 4 292,383 (397,511)
Decrease in debtors 10 283,535 107,695
Decrease)/Increase in creditors 12 (67,539) 34,030
Net cash inflow from operating activities 2,996,948 3,995,539
14. Exchange rate
The following sterling exchange rates as at 31 December 2002 have been
used in this report:
EUR 1.5342
USD 1.6099
15. Soft commission arrangements
There were no soft commission arrangements during the year under review.
16. Efficient Portfolio Management
The Company entered into forward exchange currency contracts to provide a
cross currency hedge to protect against adverse movement in the exchange rates
with the Euro. While the base currency of the Company is sterling the policy of
the Company is to invest in European markets, therefore hedging non-Euro
currencies to Euro occurs. A forward exchange currency contract is a commitment
to purchase or sell a non-Euro currency at a future date at a negotiated forward
rate. The gain or loss arising from the difference between the original contract
and the closing of such contract is included in net gains or losses on foreign
exchange. Fluctuations in the value of open forward exchange currency contracts
are reflected for financial reporting purposes as a component of debtors or
creditors. Risks may arise from the potential inability of a counterparty to
meet the terms of a contract and from unanticipated movements in the value of a
foreign currency relative to the Euro. At 31 December 2002, the Company had
outstanding forward exchange currency contracts as follows:
£ £ £
Value on Current Unrealised
Contract Origination Value Appreciation
Amount Date Depreciation)
Forward Exchange Currency
Buy Contract
Euro, settling 10/1/03 3,337,047 2,129,904 2,175,584 45,680
US Dollar, settling 10/1/03 25,000 16,049 15,537 (512)
45,168
Sell Contract
Euro, settling 06/1/03 (313,701) (200,000) (204,491) (4,491)
Euro, settling 10/1/03 (25,151) (16,049) (16,397) (348)
(4,839)
40,329
The Company may utilise swap contracts for efficient portfolio
management. A swap is an agreement that obligates two parties to exchange a
series of cash flows at specified intervals based upon or calculated by
reference to changes in specified prices or rates for a specified amount of an
underlying asset or otherwise determined notional amount. The payment flows are
usually netted against each other, with the difference being paid by one party
to the other.
Risks may arise as a result of the failure of the counterparty to the
swap agreement. The loss incurred by the failure of a counterparty is generally
limited to the net interest payment to be received by the Company, and/or the
termination value at the end of the agreement. Therefore, the Company considers
the creditworthiness of each counterparty to a swap agreement in evaluating
potential credit risk. Additionally, risks may arise from unanticipated
movements in interest rates or in the value of the underlying assets. At 31
December 2002, the Company did not have any such swap agreements outstanding.
17. Financial Instruments
The main risks and policies relating to financial instruments are set out
below. The financial instruments held by the Company are set out in the
Portfolio of Investments. The Company has no financial liabilities other than
short term creditors as outlined in note 12 on page 21.
Market Risk
Potential investors should note that the investments of the Company are
subject to market fluctuations and other risks inherent in investing in
securities in Europe and there can be no assurances that any appreciation in
value will occur. The value of investments can go down as well as up and an
investor may not get back the amount invested.
Liquidity Risk
Liquidity risk exists when a particular instrument is difficult to
purchase or sell. If a derivative transaction is particularly large or if the
relevant market is illiquid (as is the case with many privately negotiated
derivatives), it may not be possible to initiate a transaction or liquidate a
position at an advantageous price.
Foreign Exchange Risk
Changes in exchange rates between currencies may also cause the value of
the investments to diminish.
A substantial portion of the portfolio of investments and other net
assets/liabilities of the Company are denominated in currencies other than
sterling and are included below:
Currency Exposure as at 31 December 2002 Investments Other Net Total
£ Liabilities £
£
Currency
Euro 36,683,565 (5,340,642) 31,342,923
Sterling 1,687,960 (145,542) 1,542,418
38,371,525 (5,486,184) 32,885,341
Currency Exposure as at 31 December 2002 Investments Other Net Total
£ Liabilities £
£
Currency
Euro 29,543,782 2,034,238 31,578,020
German Mark 1,891,536 18,497 1,910,033
Sterling 4,732,379 (4,430,214) 302,165
36,167,697 (2,377,479) 33,790,218
___
Interest Rate Exposure
The interest rate profile of the Company's financial assets (excluding short
term debtors and creditors) at 31 December 2002 was:
Financial
on which
Fixed rate Floating rate no interest
Total financial financial assets is paid
assets
Currency £ £ £ £
Euro 36,683,565 35,278,305 1,405,249 11
Sterling 1,687,960 1,687,960 -0- -0-
38,371,525 36,966,265 1,405,249 11
Fixed rate Fixed rate
financial assets financial assets
weighted average weighted average
interest rate period for which
% rate is fixed
Currency Years
Euro 8.01 6.04
Sterling 10.14 7.39
The interest rate profile of the Company's financial assets (excluding
short term debtors and creditors) at 31 December 2001 was:
Financial
on which
Fixed rate Floating rate no interest
Total financial assets financial assets is paid
Currency £ £ £ £
Euro 29,543,782 28,010,165 1,532,638 979
German Mark 1,891,536 688,835 1,202,701 -0-
Sterling 4,732,379 3,970,127 762,252 -0-
36,167,697 32,669,127 3,497,591 979
Fixed rate Fixed rate
financial assets financial assets
weighted average weighted average
interest rate period for which
% rate is fixed
Currency Years
Euro 8.47 6.55
German Mark 8.69 6.03
Sterling 10.13 8.34
18. Historical net assets and net asset value per share
31 December 31 December 31 December
2002 2001 2000
Net assets £32,885,341 £33,790,218 £41,121,568
Net asset value per share £0.6017 £33,790,218 £41,121,568
£0.6017 £0.6182 £0.8248
19. Changes during the year
On 18 October 2002 HSBC Investment Bank Plc ceased its role as corporate
broker and Close Brothers Securities (a division of Winterflood Securities
Limited) was appointed as corporate stockbroker and financial adviser to the
Company.
20. Approval of annual report
The annual audited report was approved by the Board of Directors on 11
April 2003.
This information is provided by RNS
The company news service from the London Stock Exchange
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