Annual Financial Report

RNS Number : 8770Z

Axiom European Financial Debt Fd Ld

20 March 2017

Axiom European Financial Debt Fund Limited

Annual Financial Report for the period from 7 October 2015 (date of incorporation) to 31 December 2016

A copy of the Company's Annual Report and Financial Statements for the period from 7 October 2015 (date of incorporation) to 31 December 2016 will shortly be available to view and download from the Company's website, www.axiom-ai.com. Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into or forms part of this announcement.

Enquiries to:

Elysium Fund Management Limited PO Box 650 1^st Floor Royal Chambers St Julian's Avenue St Peter Port Guernsey GY1 3JX axiom@elysiumfundman.com Tel: +44 1481 810 100	Liberum Capital Limited Level 12 Ropemaker Place 25 Ropemaker Street London EC2Y 9LY Richard Bootle Henry Freeman Tel: +44 20 3100 2232	MHP Communications 6 Agar Street London WC2N 4HN Rachel Cohen Reg Hoare Giles Robinson Ollie Hoare Tel: +44 20 3128 8100

	www.axiom-ai.com

The following text is extracted from the Annual Report and Financial Statements of the Company for the period ended 31 December 2016:

Strategic Report
Highlights
		31 December 2016
Net assets		£58,010,000
Net asset value ("NAV") per Ordinary Share		95.21p
Share price at 31 December 2016		92.50p
Discount to NAV		(2.85)%
Profit for the period		£1,339,000
Dividend per share declared in respect of the period [1]		6.00p
Total return per Ordinary Share (based on NAV) [2]		+1.59%
Total return per Ordinary Share (based on share price) [2]		(3.15)%
Ordinary Shares in issue		60,930,764

[1]	Only 4.35p of the 6.00p per Ordinary Share dividends declared out of the profits for the period ended 31 December 2016 had been deducted from the 31 December 2016 NAV as the dividend of 1.65p per Ordinary Share announced on 18 January 2017, payable to shareholders on record at 3 February 2017, and which was paid on 24 February 2017, had not been provided for in these financial statements at 31 December 2016 as, in accordance with IFRS, it was not deemed to be a liability of the Company at that date.
[2]	Total return per Ordinary Share has been calculated by comparing the NAV or share price, as applicable, at launch with the NAV or share price, as applicable, plus dividends paid, at the period end.

Overview and Investment Strategy

General information

Axiom European Financial Debt Fund Limited (the "Company") was incorporated as an authorised closed-ended investment company, under the Companies (Guernsey) Law, 2008 (the "Law") on 7 October 2015 with registered number 61003. Its Ordinary Shares were admitted to trading on the Specialist Fund Segment ("SFS") (formerly the Specialist Fund Market) of the London Stock Exchange on 5 November 2015 ("Admission").

Investment objective

The investment objective of the Company is to provide Shareholders with an attractive return, while limiting downside risk, through investment in the following financial institution investment instruments:

· Regulatory capital instruments, being financial instruments issued by a European financial institution which constitute regulatory capital for the purposes of Basel I, Basel II or Basel III or Solvency I or Solvency II;

· Other financial institution investment instruments, being financial instruments issued by a European financial institution, including without limitation senior debt, which do not constitute regulatory capital instruments; and

· Derivative instruments, being CDOs, securitisations or derivatives, whether funded or unfunded, linked or referenced to regulatory capital instruments or other financial institution investment instruments.

Investment policy

The Company will seek to invest in a diversified portfolio of financial institution investment instruments. The Company will focus primarily on investing in the secondary market although instruments may also be subscribed in the primary market where the Investment Manager, Axiom Alternative Investments SARL ("Axiom"), identifies attractive opportunities.

The Company will invest its assets with the aim of spreading investment risk.

For a more detailed description of the investment policy, please see the Company's Prospectus, which is available on the Company's website (http://www.axiom-ai.com/img/Axiom-Final-Prospectus.pdf).

Chairman's Statement

Welcome to our first audited financial statements which cover the period from the incorporation of the Company to 31 December 2016. The Company effectively commenced operations on 5 November 2015 when it was admitted to trading on the SFS. Net of launch expenses, the Company started with a Net Asset Value ("NAV") per share of 98.00p and ended with a NAV per share of 95.21p, having paid dividends of 4.35p and with the balance of the first year's dividend paid after the year end on 24 February 2017. The initial placing of shares in November 2015 raised gross proceeds of £50.74 million. The Company's capital base was expanded by two additional secondary placings to raise gross proceeds of £3.55 million on 4 March 2016 and a further £6.03 million on 4 October 2016. At the end of the period, the Company had 60.93 million shares in issue with a total NAV of £58.01 million.

The early months of the Company's life were especially challenging as our Investment Manager, Axiom Alternative Investments SARL ("Axiom") explains in its report. A combination of ever-tightening capital requirements from regulators and slowing growth raising concerns over the future outlook for credit quality to name but two factors, led to brutal mark-downs across the market in general through January and February 2016. The Company could not be immune from the wider market malaise with its NAV per share bottoming out at 86.39p on 12 February 2016 before recovering steadily through the remainder of the year.

The Company's total NAV return of +1.59% for the period, while below our 7-year target return of 10% p.a., should therefore be seen in the context of circumstances and in that light, is a creditable result. To some extent, Axiom were able to avoid the worst by lightening exposures into the downswing and becoming more fully-invested as it played out, exploiting the natural advantages of the Company's closed-ended structure by opportunistically increasing exposures at market lows when, in contrast, open-ended funds are often at their most vulnerable to being forced sellers to meet investor redemptions. This is especially the case where the instruments held in the portfolio are relatively illiquid at the best of times.

2017 starts under a different environment. Geopolitical risks still lie ahead, but the banking sector appears stronger with better prospects of profitability, under easier and clearer regulations. Regulators appear to have taken on board the lessons of early 2016 to give the sector clarity on the future stability of capital requirements. Issuers continue to recycle their old liabilities into the newly eligible format.

The Company is well-positioned to capitalise on the opportunities that the sector has to offer in this transition. The investment manager has developed over the years a deep set of skills in understanding regulations, analysing bank fundamentals and in selecting the right instruments. In a highly-specialised sector such as regulatory capital instruments, Axiom's skills will be all the more important.

At the Annual General Meeting a minor change is proposed to the investment policy to broaden the definition of European Financial Institutions to include instruments that are issued by (i) financial institutions in the EEA (i.e. including countries other than the UK and the members of the EU, as per the Company's current investment mandate) and Switzerland and (ii) entities which are not financial institutions but which are subsidiaries of such institutions.

The portfolio as at 28 February 2017 had a weighted average yield to call of 12.74%, comfortably in excess of what is required to meet the Company's long term target return of 10% p.a. net of operating expenses. The Board therefore looks forward to 2017 and beyond with confidence.

William Scott

Chairman

17 March 2017

Investment Manager's Report

Axiom European Financial Debt Fund Limited ("AEFD") was launched on 5 November 2015; following a successful listing on the Specialist Fund Segment of the LSE raising gross proceeds of £50.74 million. Additional gross proceeds of £3.55 million were raised in a secondary placing on 4 March 2016 and a further £6.03 million was raised on 4 October 2016.

1- Market developments

November 2015 stood as a relatively benign environment. After a strong reporting season showing more capital build-up and asset quality improvements, the banking sector had received clean bills of health both by the European Single Supervisor with its 2015 Asset Quality Review and the UK Prudential Regulation Authority with its stress tests.

December 2015 saw the start of market volatility when banks were notified of new capital requirements under the Supervisory Review and Evaluation Process ("SREP"). Italian banks were the first under scrutiny, in particular those with high Non-Performing Loan ("NPL") ratios. The focus moved quickly to companies with large balance sheets in core EU countries, such as BNP Paribas, and investor confidence took a further hit with the decision by the Bank of Portugal on 29 December 2015 to re-transfer senior bonds back to Banco Espirito Santo.

With this challenging regulatory backdrop, January and February 2016 proved to be a perfect storm for bank valuations as investors expressed further caution in the wake of low oil prices, Chinese economic slowdown, potential US rate hikes and EU uncertainty from the UK's pending referendum. Despite strong capital updates from banks like Crédit Agricole, the earnings season showed how banks struggled to maintain revenues and how costs, whether operational, conduct-related or regulatory, ultimately dragged down the profitability outlook. In addition to NPLs, investors added negative interest rates to the list of concerns for the sector. Investor sentiment was hit further when very negative headlines were reported about Deutsche Bank and the risks of its business model.

The segment that suffered the most was the Additional Tier 1 ("AT1") market which fell to an all-time low on
11 February 2016. This new format of hybrids was impacted by the combination of disappointing updates in their results from banks including Société Générale and Royal Bank of Scotland, and an increasing awareness of investors towards the regulatory risk attached to the coupon payments.

Regulatory authorities tried to alleviate investor concerns themselves. Mrs Nouy, Chair of the Supervisory Board at the ECB, reiterated that banks could count on capital requirements staying at current levels as the regulatory requirements have reached "steady state". At the end of February, in a remarkable initiative of disclosure and transparency, the ECB published a booklet detailing its approach towards go-to capital ratios and organised a Q&A session with analysts, where it suggested a change to the legislation, in particular Article 141 that defines the restrictions on Maximum Distributable Amounts under the new Capital Requirements Directive.

The market reaction was subdued with AT1 valuations gaining back only half of what they had lost, while UK banks were dragged down by the launch of the UK's EU Leave and Remain campaigns following Prime Minister Cameron's revised EU deal.

In March 2016 financial institutions saw a number of positive developments. In the Netherlands, Delta Lloyd's EUR 650 million rights issue was approved. In the UK, Old Mutual confirmed the break-up of the group. In Italy, Popolare and Milano finally agreed on their merger after lengthy negotiations with the ECB and Vicenza started its equity raise. At the instrument level, issuers launched opportunistic tenders (Barclays, Standard Chartered, Crédit Agricole), called at their first call date (BNP Paribas), and re-opened the primary market for AT1s (UBS).

The real support came on 10 March 2016 from Mario Draghi himself when he spontaneously referred to a note from the ECB, in his closing comments of a press conference. This note, prepared for the Banking Union in discussion with the European Parliament, recommends a favourable treatment of AT1s relative to dividends and bonuses, alongside a split of capital demands between requirement (mandatory) and guidance (non-binding).

In April and May 2016, the Q1 results season was mixed as weaker revenues were offset by lower loan losses and further capital strengthening. However, the sentiment towards the banking sector improved as oil prices rebounded above US$50 per barrel, Brexit risks receded in polls, and Italy launched Atlante, its sector-wide fund set up for smaller bank recapitalisations and securitisation of NPLs, with EUR 4.25 billion in private sector capital.

On the back of this, five new AT1 deals printed (Rabobank, BBVA, Bankinter, HSBC, Erste Bank) and, in a surprisingly coordinated manner, Global Systemically Important Banks announced a series of calls (Santander UK, Barclays, UBS, RBS, HSBC) and tenders (Unicredit). Finally, in reaction to the regulatory pressure on NPLs, Banco Popular announced a surprise EUR 2.5 billion capital raise.

The month of June 2016 saw investors polarised on political risk: in the UK, with the polls driving an ever increasing uncertainty closer to the Brexit vote date, in Spain where the new round of elections failed to deliver a majority, and in Italy investors looked towards the Italian constitutional referendum in October 2016. At the end of the month bank valuations across the UK and EU dropped sharply on the back of British voters choosing to leave the EU. Notwithstanding these risks, bank fundamentals saw significant improvements with successful capital raises of Banco Popolare and Veneto Banca and more liability management exercises from Lloyds, Novo Banco and Pfandbriefbank

July 2016 saw a prompt recovery in bank valuations, driven by expectations of central bank moves towards further monetary easing, combined with GBP weakness. Investors got comfort from the stabilisation of the British political crisis with a new Prime Minister and a foreign policy downplaying the economic impact of the implementation of Brexit.

It was to Italy that financials investors returned their focus once again. Factors that weighed on Italian investors included the upcoming constitutional referendum in October, continued pressure from European authorities on NPLs and, last but not least, the stress test results expected at the end of the month. Monte dei Paschi performed badly, once more, and as a result had to execute a precautionary recapitalisation alongside a transformational disposal of its NPL stock, leaving its subordinated creditors under threat of burden sharing as required by the EU rules.

It wasn't all bad news from Italian financials as Unicredit started its strategic overhaul: new CEO Mustier had settled in, stakes in Pekao and Fineco had been sold and a EUR 5 billion capital injection was being discussed.

Finally, some much awaited clarification was provided by the Single Supervisor on AT1s. Capital requirements for 2017 will soften through the back-loading of the Capital Conservation Buffer hence providing significant room for AT1 coupons.

August 2016 proved to be the least volatile month of the year as bank subordinated debt valuations remained range bound and the Subfin index hovered around 200bp.

Investors quickly moved on after the EBA stress tests did not produce anything new that regulators and banks did not know before. The earnings season proved fairly benign given the low rate environment: bank results disclosed a slowdown of revenues as well as provisions, contributing to lower NPL ratios and slightly higher CET1 ratios.

The real support came from authorities. Firstly, monetary policy measures as the Bank of England ("BoE") responded to the Brexit uncertainty with a rate cut, a new Term Funding Scheme and the expansion of the asset purchase scheme. Secondly, forbearance from supervisors moving from Italy towards Portugal, where the Banco de Portugal delayed the introduction of the systemic risk buffer, the resolution fund got authorised to spread the losses related to the Novo Banco recapitalisation and Caixa Geral capital plan got approved by the European Commission ("EC"). Lastly, and more importantly, regulation, as the European Parliament considered ways to prioritise coupons on hybrid instruments for the upcoming draft of CRD5/CRR2.

Against this favourable backdrop, UBS, Standard Chartered, RBS and Barclays issued new AT1 in US$ with order books reaching more than 20 billion. In parallel, three series of preference shares got called: one of US$750 million at Barclays, and two totalling US$1.53 billion at RBS.

Last but not least, Erste Bank in Austria called three legacy instruments at par, including one trading around EUR 55.00 before the announcement.

September 2016 saw a reversal in bank subordinated debt valuations as the SubFin index widened from 187bp on 7 September to end the month at 223bp.

After the concerns towards banks' equity valuations voiced in July, Mr Draghi did not give any hint that his Zero Interest Rate Policy would slow its erosion of banks' profitability anytime soon. The Bank of Japan's policy of yield curve control announced on 21 September sent a glimmer of hope, quickly overridden by the headlines on Deutsche Bank. The German bank came under pressure after it confirmed that the US Department of Justice proposed US$14 billion to settle on US RMBS while its litigation reserves stood at EUR 5.5 billion in June. The impact on the available distributions for hybrids could be significant. However, with EUR 215 billion of liquid assets, full access to central bank liquidity, the bank steered clear from any bail-in, state injection or resolution.

In Italy, Monte dei Paschi's CEO stepped down and the capital raise was delayed to 2017. The expected Liability Management Exercise was confirmed as voluntary, with a timing likely before or around the referendum vote. UniCredit also postponed its capital raise to next year, allowing more time to sell Pekao, Fineco and Pioneer. In Austria, Raiffeisen postponed the announcement of its merger to October.

On the regulatory front, we witnessed further forbearance, as the Bank of Italy aligned the phasing in of buffers with other European countries, conceding a 1.25% capital relief for Italian banks. In Basel, European countries insisted that the proposed changes to RWAs must be scaled back. EC Vice President Dombrovskis stood firm by declaring: "At a time when we are focused on supporting investment, we want to avoid changes which would lead to a significant increase in the overall capital requirements shouldered by Europe's banking sector". In parallel, banks started receiving draft letters from the Single Supervisor on their future SREP capital requirements.

Primary activity in new AT1 issuance was limited to SocGen, Jyske Bank and Clydesdale. Barclays tendered £1.7 billion of legacy instruments 10pt above the secondary levels and Lloyds called a legacy Tier 1.

October 2016 saw a strong performance as the subordinated financial index tightened 20bp, while interest rates in GBP, EUR and US$ moved back to pre-Brexit levels.

The ECB not only acknowledged that low rates eroded bank profitability and hindered the transmission of its monetary policy, but it also started discussing a possible tapering of its quantitative easing programme. In the UK, the BoE took note of the strong economic data and higher inflation while the Fed was increasingly expected to hike post US elections.

Investors took comfort in the Q3 results that showed the resilience of bank revenues, both net interest income and fees, alongside an improvement of asset quality and a strengthening of capital. Pressure on Deutsche Bank alleviated as its liquidity normalised and Q3 proved to be a strong quarter for all investment banks. Raiffeisen announced its long-awaited merger. UniCredit progressed on its asset sales with a reduction of its stake in Fineco, a NPL transaction and the selection of potential bidders for Pioneer. Finally, Monte dei Paschi finalised the details of its capital raising plan, while considering a new offer from a group of investors coordinated by Mr Passera. The insurance sector saw some M&A activity with NN making an unsolicited bid to acquire Delta Lloyd.

Regulations also provided some support as SREP capital requirements got revised lower, confirming the trend towards more supervisory forbearance. The EC, France and Germany altogether pushed back further against the latest proposals by Basel, such as risk weight floors and other nominal measures penalising European banks.

Primary activity in new AT1 issuance was limited to DNB in Norway launching a new US$750 million 6.5% AT1.

In November 2016 rates continued their increase, driven by the unexpected outcome of the US election and the resulting expectations towards Trumpflation. In subordinated financials, cash valuations followed the sell-off in rates but saw a contained widening of credit spreads: SubFin widened from 235bp to 245bp.

The Q3 earning season continued with more banks posting resilient revenues, higher fee income, and lower loan losses supporting capital build. However, some disappointed like NordLB on shipping provisions and Banco Popular on the spin-off of its real-assets. Monte dei Paschi launched its ambitious capital plan combining a tender offer on subordinated debt, an equity raise and a transforming NPL securitisation. UniCredit guided towards a capital raise that could reach EUR13 billion.

Regulations reached some important milestones: the BoE released its MREL policy covering a new class of loss-absorbing liabilities, the EC released the final draft of the new CRD5/CRR2 and the Basel Committee met in Chile to finalise an agreement on the last tweaks to Basel IV.

Politics kept risk premia high ahead of the Italian referendum on 4 December, even if European policymakers commented about the bail-in tool not being the most appropriate for systemic crisis.

Primary markets saw new AT1 issues by Virgin Money, ING and Danske Bank (in domestic currency) and a new Tier 2 by BMN in Spain.

Calling activity of legacy instruments continued with Credit Suisse redeeming a cost-efficient Discount Perp, while StanChart, Commerzbank and Vivat (in CHF) skipped their first calls triggering some opportunities in the universe of short-dated calls.

December 2016 saw a strong rebound of the banking sector. The Italian referendum led to a negative result that was widely expected. The announcements by the Fed (25bp rate hike) and the ECB (reduction of its asset purchase programme) took bank valuations higher as the prospect of higher rates boosted the sector's future profitability.

Regulations produced another tailwind as the ECB confirmed the capital add-ons for 2017 at a level 200bp lower than those for 2016, and foreign regulators continued their work towards a pragmatic compromise around Basel IV.

Financial institutions progressed in their transformation. UniCredit announced its 2019 strategic plan with a EUR13 billion rights issue. Deutsche Bank and Credit Suisse finally settled their litigation with the US authorities over RMBS on favourable terms and Delta Lloyd and NN agreed to merge. Even Banco Popular in Spain got mentioned as a potential takeover target of banks like BBVA. The only negative development came from Monte dei Paschi: the market solution combining a NPL securitisation and LME together with a capital raise ultimately failed, leaving the State negotiating a precautionary recapitalisation with the European authorities.

In primary activity, three new AT1s were issued by Swedbank, BNP Paribas and UniCredit. Crédit Agricole and Société Générale launched the new format of Tier 3 with "non-preferred senior" instruments eligible to MREL and TLAC.

2- Investment Objective and Strategy

AEFD is a closed-ended fund investing in liabilities issued by European financial institutions, predominantly legacy Tier 1s, Tier 2s, and AT1s across five sub-strategies:

· Liquid Relative Value: instruments issued by large and strong quality institutions, with significant liquidity. These can be purchased on either primary or secondary markets.

· Less Liquid Relative Value: instruments issued by large and strong quality institutions, with limited liquidity due to past tenders or complex features (secondary market).

· Restructuring: instruments issued by institutions in preparation or implementation of a restructuring process (secondary market).

· Special Situations: instruments issued by entities in run-off, under a merger process or split between several entities (secondary market).

· Midcap Origination: instruments issued by small institutions or small subsidiaries of larger institutions (primary market).

3- Trade activity and positioning

Deployment

On the day following the listing, AEFD deployed 40% of its capital across the full range of its strategies (including 22% in the Liquid Relative Value strategy). This increased to 82%, as of 30 November 2015, deployed across 40 instruments.

Prior to launch, the Investment Manager guided that it would invest predominantly in the Liquid Relative Value strategy and re-allocate over a six-month period into opportunities in the other strategies. However, given the uncertainty on capital rules mostly affecting AT1s, the Investment Manager reduced the portion of Liquid Relative Value instruments (consisting essentially of AT1s) and kept it high in the second quarter to benefit from the price normalisation. See below the chart showing the ramp-up as realised (dotted lines) vs. intended (squares).

	1^st Month		2^nd Month		4^th Month		6^th Month

Liquid Relative Value	80%	49%	50%	53%	30%	50%	25%	37%
Less Liquid Relative Value	5%	16%	15%	21%	25%	25%	30%	27%
Restructuring	5%	10%	10%	13%	15%	14%	15%	16%
Special Situations	5%	5%	10%	5%	15%	6%	15%	9%
Midcap Origination	5%	4%	10%	4%	15%	5%	15%	4%
Number of Positions		40		53		66		72

Allocation Strategies	Phase-in Period						Target portfolio

Source: AEFD Monthly Fact Sheets.

November 2015: ramping up cautiously

The Company continued its ramp-up on less liquid instruments including fixed-to-fixed Tier 1s (6% of capital) and two bonds recently issued by Irish banks (3% of capital). A strong position was also built on Delta Lloyd old-style Tier 2 bonds (5%) ahead of its capital increase. This position was reduced to 3.5% after contributing 0.15p to the NAV.

December 2015: volatility begins

The Company completed its ramp-up by adding 4% of UK AT1s and 2% of Italian sub debt, benefiting from the lower valuations. Still the correction impacted negatively on positions held in Italian old style Tier 1s and Tier 2s, which reduced the NAV by 0.18p. Positions held on insurers gave back some of their recent gains, negatively impacting the NAV by 0.3p. In Portugal, the Company took some marginal exposures in seniors and legacy Tier 1s across three issuers that negatively impacted the NAV by 0.85p overall.

The Company invested in legacy Tier 1s less prone to the increasing market volatility: one step-up floater issued by Société Générale offering more than 8% to the call in 2017, and one old-style UK "Permanent Interest Bearing Shares" instrument offering more than 13% to its call in 2017.

January 2016: Lightening up into sell-off

While the Company started the month 97% invested, early in the month it sold some of its most liquid positions:

· 4% in the 1st week: Société Générale 6.75 AT1 at 102.71 and LivVic 6.5 2043-23 at 99.00;

· 4% in the 2nd week on Irish banks: Bank of Ireland AT1 at 103.75 and AIB Tier 2 at 99.25; and

· 3% in the 3rd week: KBC AT1 and Erste Bank Tier 1 (with accrued).

Meanwhile the Company continued the sourcing of legacy Tier 1s and bought Italian subordinated bonds at all-time lows benefiting from the market overreaction to NPL concerns in the sector.

The Company did not hold any instruments issued by Deutsche Bank.

February 2016: Seeking opportunities into historical stress

The Company started the month with 6% cash which was fully deployed over the month. In the first two weeks, it bought selectively AT1s at historically low prices: BNP EUR AT1 below 90.00, Santander EUR AT1 at 82.25, AIB EUR AT1 at 84.50.

Less Liquid Relative Value: the Company bought Credit Logement legacy Tier 1s, after a 10pt drop, some legacy Tier 1 issued by PostBank at 11% yield to call; some high coupon hybrid by Banca Popolare di Milano; and very short dated Tier 2 by Carige.

Restructuring: it trimmed down senior exposures to small Popolari banks raising capital in Italy (Veneto Banco and Vicenza), realising gains from the entry levels in mid-January.

Towards the end of the month, it reduced its exposure to UK AT1s before Brexit concerns were priced in, selling some Coventry Building Society and Nationwide AT1s.

March 2016: Positioning into the rebound

In the Liquid Relative Value strategy, the Company bought higher beta AT1s (Unicredit 8, Deutsche Bank 6) ahead of the ECB press conference and sold bonds in Old Mutual and Delta Lloyd after their capital updates. It also added AT1s with dividend stoppers (CS and new UBS) as defensive plays pending new legislation around AT1 format.

In the Less Liquid Relative Value strategy, the Company reduced exposure to Unicredit Cashes in front of adverse technicals and sourced further Société Générale step-up floaters as well as a new RBS fixed-to-fixed US$ Tier 1 position.

The Company also built a small (1%) position on a BNP Paribas non-step GBP legacy Tier 1 whose call was just announced (bought at 96.10 and sold at 100.25).

In the Restructuring strategy, the Company added slightly more exposure to Monte dei Paschi legacy non-paying Tier 1s at distressed level (38.00 cash price).

April 2016: maximising exposure

The Company continued its ramp-up towards the other less liquid strategies while remaining exposed to the AT1 segment, ahead of the upcoming change to coupon rules.

· Liquid Relative Value: the Company sold down its remaining positions on Old Mutual and Delta Lloyd to increase its exposure to AT1s. On 12 April 2016, the Company bought AT1s issued by BNP, Santander, Bank of Ireland and AIB. It added more AIB AT1s, dismissing the whistleblower's warning about NPL write-backs, and new BBVA 8.875 and Rabobank 6.625 at levels that discounted heavily any extension risk.

· Less Liquid Relative Value: the Company's allocation in the new Bankinter 8.625 AT1 went under this sub-strategy given the small outstanding amount (EUR 200 million). It also bought discounted UBS Prefs and RBS Fixed-to-Fixed instruments ahead of potential liability management exercises. To fund these purchases, it sold some of its BFCM CMS position because of its longer-term catalyst.

· Restructuring: the Company sold its Monte dei Paschi Tier 2 position at 92.50 (bought at 65.00 in January) and started trimming down exposures to Popolari di Vicenza into the launch of its capital increase and the Atlante announcements. It replaced these exposures with rare short-dated BCP Tier 2s sourced at 87.00 from a liquidation auction.

The Company ended the month with 1% cash, with the capacity to borrow 5% at short notice.

May 2016: when expected calls happened

Liquid Relative Value: the Company took part in the new Erste Bank AT1 but passed on HSBC for relative value considerations. Four large AT1 positions were sold in the final week of the month where the valuations reached their peaks taking the sub-strategy down from 45% to 42%.

Less Liquid Relative Value: the Company added on three fixed-to-fixed instruments and lightened up on a legacy Tier 1 above par. It benefited strongly from two calls. The first one on UBS discounted Prefs saw valuations jumping from 65.00 to 100.00 and the second one on HSBC from 89.00 to 100.40 overnight, contributing 0.56p into the NAV.

Restructuring: the Company sold its residual position on Vicenza following the completion of the capital raise and switched it partly into Veneto Banca. It bought some Banco Popular legacy Tier 1 early in the month and later sold its Banco Popular AT1 position on the announcement of the capital raise.

June 2016: preparing for all political outcomes

The Company started the month with 7% cash and increased the cash position to 13% ahead of the Brexit vote. Liquid AT1s stood at 36%, stable vs. end of May, down from 48% at the end of April, and the portion of UK AT1s was limited to 8.5%. At the end of the Brexit week, the NAV dropped by 1.22%.

Activity across sub-strategies was as follows:

· Liquid Relative Value: the Company bought a defensive position in Tier 2s, in anticipation of a potential capital increase.

· Less Liquid Relative Value: a position in Banca Carige Tier 2 matured and two positions, Spanish AT1 and Italian legacy Tier 1, were sold, both above par.

· Special Situations: the Company bought a hybrid instrument issued by an insurance holding in the process of splitting its group entities.

· Restructuring: the Company bought two legacy Tier 1s issued by two banks under stress in Italy and Germany.

The Company ended the month with 6% cash.

July 2016: moving defensively in the post-Brexit rally

The Company cut its exposure to the UK by reducing its positions on Pfandbrief Bank legacy Tier 1s (at a gain) and Santander UK AT1s, both in the Liquid Relative Value sub-strategy, and Lloyds Opco Tier 2s (1% below its entry point) in the Less Liquid Relative Value. In this strategy, the Company added some Société Générale legacy floaters.

In the Restructuring strategy, the Company slightly increased its exposure to Monte dei Paschi on its lows, as any exchange offer was likely to remain voluntary and hence offer value upside. A marginal exposure to Caixa Geral short dated debt was also added.

Finally, as AT1 coupon rules drove valuations higher before the stress test publication, the Company sold AT1 positions in France and Spain. It also reduced its exposure to Italian AT1s ahead of the referendum expected in late October.

August 2016: Austrian issuer calling all its legacy Tier 1s

The Company participated in the new AT1 issues to capture primary concessions, all under the Liquid Relative Value sub-strategy. As three out of the four new issues were UK issuers, the Company sold some old AT1s by Lloyds and Barclays, some of which were bought 6 pts lower shortly after the Brexit vote.

In the Less Liquid Relative Value strategy, following the call activity by Barclays and RBS, the Company sold two fixed-to-fixed bonds by Lloyds and RBS callable at any time at a price above par and bought two rare RBS step-up Tier 1s with a call in 2017 at a discount.

The Less Liquid Relative Value strategy also benefited from holding one of the three Erste Bank instruments that got called: the fixed-to-fixed 5.25%, bought at 97.00 in May. The announcement impacted positively valuations on other discounted legacy instruments: Barclays +6pt (2% holding), BFCM +8pt (0.5% holding) and RZB step-up +10pt (2.5% holding).

The Company ended the month with 8% cash, ready to deploy on new issues, while the political economy remained uncertain.

September 2016: when Barclays finally tendered

· Liquid Relative Value: the Company took part in the new AT1 issues, and added the recent StanChart issue.

· Less Liquid Relative Value: the Company held 1.4% Barclays legacy Tier 2s, purchased at 71.25 at launch and tendered at 80.00 this month. It increased its holding in Ethias.

· Restructuring: the Company reduced its exposure to Deutsche Bank on AT1s and added exposure on Tier 2s and seniors. It reduced slightly its exposure to Raiffeisen Tier 1s.

· Special Situations: the Company added a discounted legacy Tier 1 issued by a German bank.

October 2016: when interest rates start to increase

The rate sell-off helped the Company to deploy the proceeds from the secondary placement in the Less Liquid Relative Value and Special Situation strategies, where it invested essentially on legacy hybrids issued by OpCos of UK banks with long-dated calls.

· Liquid Relative Value: the Company took part in the new DNB AT1 and sold AT1s issued earlier in the year at a premium, reducing its exposure in AT1s overall from 42% to 32%. It increased its position on Delta Lloyd.

· Less Liquid Relative Value: the Company reduced its position on Ethias Tier 2 following the strong rally.

· Special Situations: the Company increased its holdings of convertible hybrids ahead of potential tenders.

· Restructuring: the Company added marginally on Monte dei Paschi Tier 1s and a discounted Tier 1 issued by a German Landesbank.

· Midcap origination: the Company took part in a new Tier 2 issue by a Spanish co-operative group.

The Company closed the month fully invested.

November 2016: regulatory certainty offset by interest rate moves

In the correction, the Company sold out of positions whose catalysts had played out (Ethias, Delta Lloyd) and instruments with low volatility (Fortis Cashes, Credit Logement) to seize opportunities on instruments that had repriced lower.

· Liquid Relative Value: the Company took part in the new ING AT1, after having sold three new AT1s at a gain.

· Less Liquid Relative Value: the Company reduced its position on short dated Tier 1s, Ethias and Credit Logement to buy some legacy Tier 1s issued by a strongly capitalised medium-sized bank at 9% yield.

· Special Situations: the Company reduced exposure to equity-linked hybrids to increase its holdings of SPVs following the disqualification under CRD5.

· Restructuring: the Company bought into short dated AT1s and Tier 2s on the negative sentiment towards Popular in Spain.

· Midcap Origination: the Company took part in the new issues by Virgin Money and domestic Danske Bank.

· CDS: the Company added risk on Spanish banks and bought protection on the Austrian banking sector, ahead of the presidential election on 4 December.

The Company closed the month with 2% cash, ready to deploy on opportunities triggered by a No in the Italian referendum.

December 2016: regulatory forbearance materialises

In the rebound, the Company reduced positions in AT1s to participate in the new issues, adjusted its exposure on Italy and short dated callables, and redeployed risk from cash positions into CDS.

· Liquid Relative Value: the Company took part in the new Swedbank and BNP AT1s and the new Crédit Agricole Tier 3, while reducing AT1s in Ireland and UK, and UniCredit on its announcement.

· Less Liquid Relative Value: the Company reduced exposure on short dated callable Tier 1s issued by Deutsche Bank at 98.00 (bought at 94.00).

· Special Situations: the Company increased marginally its holdings of discount perps.

· Restructuring: the Company sold Popular AT1s into the takeover rumour and bought Monte dei Paschi seniors. It also unwound a CDS on Deutsche Bank seniors (sold at 255, bought back at 199).

· Midcap Origination: the Company reduced recent issues in UK and Spain.

· CDS: the Company added risk on French and Spanish banks as well as Dutch and UK OpCos.

Following these new CDS trades, the Company closed the month with a high cash balance of 11%, ready to deploy in opportunities in new issues and less liquid instruments.

4- Portfolio (as at 31 December 2016)

Strategy Allocation (as a % of investments held)
Liquid Relative Value	30.8%
Less Liquid Relative Value	23.8%
Restructuring	11.4%
Special Situations	18.4%
Midcap Origination	4.7%
Cash	11.0%

Denomination (as a % of investments held, excluding cash)
EUR	46.5%
GBP	24.7%
USD	25.3%
DKK	2.2%
CAD	1.3%

Portfolio Breakdown (as a % of non-cash investments held, excluding cash)

By rating		By subordination
A	2.8%	Additional Tier 1	32.1%
BBB	17.1%	Legacy Tier 1	52.1%
BB	54.1%	Tier 2	13.0%
B	14.1%	Senior	1.7%
CCC and below	6.5%	Equity	1.1%

By maturity		By country
<1 year	23.9%	UK	33.1%
1-3	27.0%	France	24.1%
3-5	15.8%	Germany	8.1%
5-7	12.3%	Spain	7.6%
7-10	13.5%	Italy	6.9%
>10	7.5%	Denmark	4.8%
		Austria	4.6%
		Ireland	4.1%
		Netherlands	2.3%
		Den/US	2.0%
		Sweden	1.3%
		Portugal	1.0%

Main Positions (top ten)
Instruments	Strategy	% of NAV
Crédit Agricole GBP 7.5% Perp-06/2026	Liquid Relative Value	3.5%
Lloyds Bank PLC GBP 13% Perp-01/2029	Special Situation	3.0%
Société Générale USD FRN Perp-04/2017	Less Liquid Relative Value	2.9%
RBS Group PLC EUR 5.5% Perp-12/2009	Less Liquid Relative Value	2.8%
Saxo Bank EUR 9.75% Perp-02/2020	Midcap Origination	2.2%
Société Générale USD 7.375% Perp-09/2021	Liquid Relative Value	2.1%
BNP Paribas USD 6.75% Perp-03/2022	Liquid Relative Value	2.1%
Groupama EUR 6.375% Perp-05/2024	Liquid Relative Value	2.1%
Old Mutual PLC GBP 7.875% 2025	Special Situation	1.9%
Sparekassen Sjaelland DKK 10.835% Perp-10/2018	Midcap Origination	1.9%

5- Company metrics

Share price and NAV		GBP	Portfolio information
Share price (mid)	0.9250		Modified duration⁺	2.11
NAV per share (weekly)	0.9521		Sensitivity to credit⁺	2.85
Dividednds paid since IPO	0.0435		Positions	86
Shares in issue	60,930,764		Yield to call⁺	12.54%
Market capitalisation	56,360,956.70		Yield to perpetuity⁺	6.67%
Total net assets	58,009,515.92		Net gearing*	96.75%
(Discount) / premium	(2.85)%		* (Investments + Accrued + Cash) / Net assets

As of 31 Dec 2016:

+"Modified duration" measures the sensitivity of bond prices to interest rates

"Sensitivity to credit" measures the sensitivity of bond prices to credit spreads

"Yield to call" is the yield of the portfolio at the expected repayment date of the bonds

"Yield to perpetuity" is the yield of the portfolio assuming that securities are not repaid but kept outstanding to perpetuity.

Performance - Total Shareholder Return (NAV plus dividends, per share)
1 month	3 months	6 months	YTD	1 year	Since inception
1.82%	2.25%	6.63%	2.92%	2.92%	1.59%

Monthly Performance - Total Shareholder Return (NAV plus dividends, per share)
	Jan %	Feb %	Mar %	Apr %	May %	Jun %	Jul %	Aug %	Sep %	Oct %	Nov %	Dec %	Annual %
2015	-	-	-	-	-	-	-	-	-	-	0.19	-1.48	-1.29
2016	-4.02	-4.59	3.56	1.16	2.61	-1.94	2.78	1.67	-0.20	2.00	-1.55	1.82	2.92

6- NAV evolution

Date	NAV	Share price (mid)	NAV + dividends	Share price (mid) + dividends
05/11/2015	97.97	101.50	97.97	101.50
27/11/2015	98.19	101.50	98.19	101.50
31/12/2015	96.74	101.50	96.74	101.50
29/01/2016	92.85	101.50	92.85	101.50
26/02/2016	88.24	101.25	88.59	101.60
24/03/2016	91.39	96.50	91.74	96.85
29/04/2016	92.45	96.50	92.80	96.85
27/05/2016	93.87	95.50	95.22	96.85
30/06/2016	92.02	95.50	93.37	96.85
29/07/2016	94.62	93.50	95.97	94.85
26/08/2016	94.72	94.50	97.57	97.35
30/09/2016	94.52	95.50	97.37	98.35
28/10/2016	96.47	95.50	99.32	98.35
25/11/2016	93.43	93.50	97.78	97.85
31/12/2016	95.21	92.50	99.56	96.85

7- Exposures to counterparties

The Company implements hedging and derivative strategies:

· Currency risk is systematically hedged through currency forward agreements with one counterparty, CACEIS, rated A/A-1 at S&P.

· Interest rate risk is partly hedged to neutralise the impact on the portfolio yield of the difference between the GBP yield curve and other yield curves in investment currencies. This is implemented via Bond Futures traded on Eurex.

· Credit derivatives are used as a hedge around specific risks related to the economic or geopolitical environment, or as a risk overlay taken on specific issuing entities whose credit is expected to benefit from the changes affecting the sector. Derivative contracts are standardised under the ISDA documentation. The Company has opened ISDA contracts with three counterparties: Credit Suisse, JP Morgan and Goldman Sachs.

As of 31 December 2016, net exposures to the above counterparties are as follows:

Risk

Instrument

Counterparty

S&P Rating

Net exposure (% of NAV)

Currency

FX forward

CACEIS

0.33

Interest rate

Bond futures

Eurex Clearing

0.80

Credit

CDS

Credit Suisse

BBB+

0.01

Goldman Sachs

BBB+

2.49

JP Morgan

A-

1.29

The Company has the capacity to borrow for investment purposes. For this reason, it has negotiated credit lines and implemented borrowing contracts with two counterparties: GMRA with Goldman Sachs and French law "convention FBF" with an operating entity rated A/A-1 of French banking group BPCE. As of 31 December 2016, the Company did not have any opened repo trades.

8- Outlook

After a volatile start, the banking sector ended 2016 on a firm tone.

The pace of regulatory changes is now slowing down, regulators are increasingly showing more pragmatism and a number of supervisory rules have been clarified. For instance, mechanics of capital buffers and their impact on capacity to pay dividends and hybrid coupons have now reached a consensual understanding. A new draft of the Capital Requirement Directive has finally been published in November. The ECB now communicates openly and directly with analysts about its Supervisory Review and Evaluation Process. Bank fundamentals continue to improve quarter after quarter. Capital continues to build up to reach historical levels, liquidity is stronger than ever and future profitability is supported by the prospect of higher interest rates.

In this context, bank managements are in a better position to accelerate the transition of their liabilities into the new regulatory framework. Calls and tenders continued to be announced on a regular basis, even on instruments that provide liquidity at a competitive cost for the issuers.

For the above reasons, our outlook remains constructive. On the newly issued instruments, such as AT1s, we expect prices to normalise further as buffers continue to increase, giving clear visibility on coupon payments to investors. On the legacy instruments, we expect issuers to continue taking out their old liabilities. Finally, we expect a number of banks to succeed in the execution of their restructuring plans, as regulatory interference from supervisors reduces and investors get progressively more comfortable with the profitability prospects the sector has to offer.

Gildas Surry

Axiom Alternative Investments SARL

17 March 2017

Investment Portfolio

	£'000	% of NAV
Investment in bonds at fair value through profit or loss
Crédit Agricole SA 7.500% Perp 06/23/26	2,006	3.46
Axiom Contingent Capital	1,831	3.16
Lloyds Bank PLC 13.000% Perp	1,765	3.04
Société Générale 1.749% Perp 04/05/17	1,694	2.92
Royal Bank of Scotland Group PLC 5.500% Perp 06/30/17	1,623	2.80
Saxo bank 9.75% 02/26/20	1,259	2.17
Société Générale 7.375% Perp 09/13/21	1,214	2.09
BNP Paribas SA 6.75 0% Perp 03/14/22	1,205	2.08
Groupama SA 6.375% Perp 05/28/24	1,203	2.07
Old Mutual Bond PLC 7.875% 11/03/25	1,117	1.93
Sparekassen Sjaelland 10.835% Perp 10/30/18	1,084	1.87
Barclays PLC 7 875% Perp 09/15/22	1,000	1.72
NIBC Bank NV 7.625% Perp 10/18/17	991	1.71
Coventry Building Society 6.375% 11/01/19	968	1.67
Barclays Bank PLC 7.000% 09/15/19	952	1.64
Lloyds Bank PLC 11.750% Perp	878	1.51
Banco Popular Espanol SA 8.000% 07/29/21	855	1.47
Allied Irish Banks PLC 7.375% Perp 12/03/20	845	1.46
HBOS Capital Funding LP 6.850% Perp 06/23/17	825	1.42
Banca Monte dei Paschi de Siena SPA 3.625% 04/01/19	822	1.42
Catlin Insurance Co Ltd 4.000% Perp 04/19/17	810	1.40
RBS Capital Trust 6.8% Perp 06/30/17	803	1.38
Unicredit SPA 6.75% Perp 09/10/21	802	1.38
Crédit Agricole SA 6.637% Perp	772	1.33
RZB Finance Jersey IV 0 Perp 05/16/17	767	1.32
Deutsche Postbank IV 5.983% Perp 06/29/17	751	1.30
Popular Capital SA 6% Perp 04/20/17	737	1.27
BNP Paribas Fortis SA 0 Perp	707	1.22
Hypo Real Intl Trust 1 5.864% Perp 06/04/17	675	1.16
Credit Logement SA 0.834% Perp 06/16/17	674	1.16
SwedBank AB 6.000% Perp 03/17/22	653	1.13
Royal Bank of Scotland Group PLC 6.666% Perp 10/05/17	646	1.11
KA Finanz AG 5.430% 02/13/24	631	1.09
Co-Operative Bank 11.000% 12/20/23	603	1.04
Axiom Equity C FCP	556	0.96
Banco Bilbao Vizcaya Arg 8.875% Perp 04/14/21	553	0.95
Fuerstenberg Capital II GmbH 5.625% Perp 06/30/17	545	0.94
Royal Bank of Scotland Group PLC 6.990% Perp 10/05/17	527	0.91
Standard Chartered PLC 2.549% Perp 01/30/27	509	0.88
ING Groep NV 6.875% Perp 04/16/22	489	0.84
CYBG PLC 5.000% 02/09/26	481	0.83
Hong Kong & Shanghai Bank 1.035% Perp 04/27/17	481	0.83
Banco Santander SA 6.250% Perp 03/12/19	480	0.83
Capital Funding GmbH 2.088% Perp	477	0.82
Royal Bank of Scotland Group PLC 7.648% Perp 09/30/31	463	0.80
RZB Finance (Jersey) Limited 0.895% Perp 06/15/17	452	0.78
Deutsche Bank AG 7.125% Perp 04/30/26	442	0.76
Achmea BV 6% Perp 11/01/2017	440	0.76
Banco BPM SPA 9.000% Perp 06/25/18	427	0.74
Immigon Portfolioabbau AG 6.000% 03/30/2017	419	0.72
Barclays Bank PLC 8.125% Perp 06/15/17	414	0.71
Bank of Ireland Holdings 2.931% Perp 06/07/17	371	0.64
Royal Bank of Scotland Group PLC 6.990% Perp 10/05/17	353	0.61
Santander Perpetual 1.282% 06/10/17	352	0.61
DB Cap Fin Trust I 1.750% perp 06/27/17	321	0.55
National Westminster Bank PLC 9.000% Perp	309	0.53
Monte dei Paschi Siena 2.787% 10/31/18	300	0.52
Banca Carige SPA 8.338% Perp	272	0.47
Deutsche Postbank Fund I 0.640% Perp 06/02/17	266	0.46
BBVA Intl Pref Uniperson 1.231% Perp 04/19/17	259	0.45
Argon Capital PLC 2.697% Perp 06/30/17	256	0.44
Banco de Credito Social Cooperativo SA FRN 9.000% 11/03/26	256	0.44
Fuerstenberg Capital 1.451% Perp 06/30/17	246	0.42
Bank of Scotland PLC 7.281% Perp 05/31/26	239	0.41
HSBC Bank PLC 1.500% Perp 09/29/17	233	0.40
Delta Lloyd NV 4.375% Perp 06/13/24	206	0.36
MPOS Capital Trust I 6.587% 05/07/17	200	0.35
Banca Monte dei Paschi 2.290% 05/15/18	194	0.33
Skipton Building Society 6.875% Perp 04/13/17	193	0.33
HT1 Funding GmbH 6.352% Perp 06/30/17	192	0.33
Barclays Bank PLC 6.000% Perp 12/15/17	191	0.33
Principality Building Society 7.000% Perp 06/01/20	190	0.33
BCP Finance Cp 1.742% Perp 06/09/17	190	0.33
Anton Veneta Cap Trust I 5.987% Perp	186	0.32
GNB Cia de Seguros de Vida SA 3.184% Perp 06/19/17	164	0.28
Lloyds Banking Group PLC 9.75% Perp	148	0.26
Popular Capital SA 1.321% Perp 06/06/17	128	0.22
National Westminster Bank 11.500% Perp 12/17/52	122	0.21
GNB Cia de Seguros de Vida SA 1.884% 12/19/22	116	0.20
Monte dei Paschi Siena 5.000% 04/21/20	100	0.17
Pastor Part Preferntes 1.842% Perp 04/27/17	66	0.11
Bremer Landesbank 8.500% Perp 06/29/20	65	0.11
BA-CA Finance Cayman 2 Ltd 0.719% perp 03/22/18	64	0.11
Anton Venta Capital Trust 5.984% 06/27/17	37	0.06
Santander UK PLC 6.984% Perp 02/09/18	34	0.06
Banco Pinto & Sotto May 0.678% Perp 06/04/17	9	0.01
	------------	------------
	49,145	84.72
	------------	------------

Principal Risks

Risk is inherent in the Company's activities, but it is managed through an ongoing process of identifying and assessing risks and ensuring that appropriate controls are in place. The key risks faced by the Company, along with controls employed to mitigate those risks, are set out below.

Macroeconomic risk

Adverse changes affecting the global financial markets and economy as a whole, and in particular European financial debt markets, may have a material negative impact on the performance of the Company's investments. In addition, the Company's non-Pounds Sterling investments may be affected by fluctuations in currency exchange rates. Prices of financial and derivative instruments in which the Company invests are subject to significant volatility due to market risk.

The Company may use derivatives, including options, short market indices, credit default swaps ("CDS"), and others, to mitigate market-related downside risk, but the Company is not committed to maintaining market hedges at any time.

The Company has a systematic hedging policy with respect to currency risk. The assets denominated in currencies other than Pounds Sterling are hedged by the Company (to a certain extent) by using currency forward agreements to buy or sell a specified amount of Pounds Sterling on a particular date in the future.

Historically, foreign exchange hedging has undermined many closed-ended investment funds, as a result of sharp movements in the foreign exchange rates leaving large hedging losses which could not be met as assets were illiquid and banks were under severe balance sheet strain and could not offer forbearance on facilities in breach.

The Company is exposed to foreign exchange hedging risks but this risk is mitigated by the following:

- As at 31 December 2016, only 75.3% of the investment portfolio is not held in Sterling (46.5% in Euro, 25.3% in US Dollars, 2.2% in Danish Krone and 1.3% in Canadian Dollars);

- Based on the worst case scenario observed in monthly spot movement in the past 10 years, our worst case expected hedging loss on expiry would be 8.46% of NAV;

- Our portfolio trading liquidity is such that it would take 1 day, in normal circumstances, to liquidate sufficient assets to meet such an anticipated worst case loss; and

- In "stressed" markets, we estimate it would take 3 days to raise such liquidity.

Over the next three years there is likely to be significant uncertainty in European markets due to the UK Referendum decision to leave the European Union ("Brexit"). During the two year negotiation period, it is possible that there will be increased volatility in European financial markets.

Investment risk

There are certain risks associated with the Company's investment activities that are largely a result of the Company's investment policy (e.g. a portfolio concentrated on European financial debt) and certain investment techniques which are inherently risky (e.g. short selling).

There are numerous risks associated with having a concentrated portfolio and that the primary risk management tool used by the Company is the extensive research performed by the Investment Manager prior to investment, along with the ongoing monitoring of a position once held in the Company's portfolio. The Board reviews portfolio concentration and receives a detailed overview of the portfolio positions quarterly, and more frequently if necessary.

The Company's activities may include short selling which theoretically could result in unlimited loss. The Company enters into these positions infrequently, often using CDS or other derivative positions to obtain economic short exposure, or to hedge certain positions, and relies on extensive due diligence prior to entering into a short position.

The Investment Manager reports to the Board at each quarterly Board meeting or more frequently, as necessary, on developments and risks relating to portfolio positions, financial instruments used in the portfolio and the portfolio composition as a whole.

Counterparty risk

The Company will have credit and operational risk exposure to its counterparties which will require it to post collateral to support its obligations in connection with forwards and other derivative instruments. Cash pending investment or held on deposit will also be held with counterparties. The insolvency of a counterparty would result in a loss to the Company which could be material.

In order to mitigate this risk the Company seeks to trade only with reputable counterparties that the Investment Manager believes to be creditworthy. The Investment Manager negotiates its International Swaps and Derivatives Association ("ISDA") agreements to include bilateral collateral agreements. In addition, cash held will be with financial institutions with short term credit rating of A-1 (Standard & Poor's) or P-1 (Moody's).

Exposure to counterparties will be monitored by the Investment Manager and reported to the Board each quarter.

Credit risk

The Company may use leverage to meet its investment objectives. The Company will also use forward contracts to hedge its non-Pounds Sterling assets. In order to do this, it will need to have in place credit lines with one or more financial institutions.

Due to market conditions or other factors credit lines may be withdrawn and it might not be possible to put in place alternative arrangements. As such, the ability to meet the Company's investment objective and/or hedging strategy may not be met.

The Investment Manager will monitor the use of credit lines and report to the Board each quarter.

Share price risk

The Company is exposed to the risk that its shares may trade at a significant discount to NAV or that the market in the shares will be illiquid. To mitigate this risk the Company has retained the Broker to maintain regular contact with existing and potential shareholders. In addition, the Company may instigate a share buyback programme in an attempt to reduce the discount. The Board monitors the trading activity of the shares on a regular basis and addresses the premium/discount to NAV at its regular quarterly meetings.

From launch on 5 November 2015 to 31 December 2016, the Company's shares traded at an average premium of 3.34% to NAV. The premium rose as high as 17.20% on 12 February 2016, after the NAV fell in a difficult start to 2016 for European financial debt markets. As the NAV recovered, the premium of the share price to NAV decreased and moved to a small discount on 22 July 2016. Since July, the share price has tracked the NAV reasonably closely (trading at both a discount and premium) and at the year end the shares traded at a 2.85% discount to NAV.

Regulatory risk

Changes in laws or regulations, or a failure to comply with these, could have a detrimental impact on the Company's operations. Prior to initiating a position, the Investment Manager considers any possible legal and regulatory issues that could impact the investment and the Company. The Company's advisers and service providers monitor regulatory changes on an ongoing basis, and the Board is apprised of any regulatory inquiries and material regulatory developments on a quarterly basis.

Brexit may, in time, lead to divergence in regulatory regimes between the UK and the European Union and may create additional investment and trading opportunities. However, in a process which is yet to be determined, it is too early to fully appreciate what these opportunities will be or when they will present themselves.

Reputational risk

Reputational damage to the Company or the Investment Manager as a result of negative publicity could adversely affect the Company. To address this risk, the Company has engaged the Broker and a public relations firm to monitor media coverage and actively engage with media sources as necessary. The Board receives an update from the Broker and the Investment Manager on a quarterly basis and considers measures to address concerns as they arise.

Environment, Employee, Social and Community Issues

As an investment company, the Company does not have any employees or physical property, and most of its activities are performed by other organisations. Therefore, the Company does not combust fuel and does not have any greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emissions producing sources. The Investment Manager does not consider the impact that an entity in which the Company invests may have on the community. However, the Board believes that the Company does not have any direct impact on the community or environment and, as a result, does not maintain policies in relation to these matters.

Gender Diversity

The Board of Directors of the Company currently comprises three male Directors. Further information in relation to the Board's policy on diversity can be found in the Directors' Remuneration Report.

Key Performance Indicators

The Board uses the following key performance indicators ("KPIs") to help assess the Company's performance against its objectives. Further information regarding the Company's performance is provided in the Chairman's Statement and the Investment Manager's Report.

Dividends per Ordinary Share
As set out in the Prospectus, the Company intends to distribute all of its income from investments, net of expenses, by way of dividends on a quarterly basis. The Company may retain income for distribution in a subsequent quarter to that in which it arises in order to smooth dividend amounts or for the purposes of efficient cash management. On admission, it was the intention for the Company to pay dividends totalling at least 6 pence per Share in respect of the period from Admission to 31 December 2016. The Company announced dividends of £3,464,000 (6.00p per Ordinary Share) for the period ended 31 December 2016 (see note 6 for further details). Only 4.35p of the 6.00p per Ordinary Share dividends declared out of the profits for the period ended 31 December 2016 had been deducted from the 31 December 2016 NAV as the dividend of 1.65p per Ordinary Share announced on 18 January 2017, payable to shareholders on record at 3 February 2017, and which was paid on 24 February 2017, had not been provided for in these financial statements at 31 December 2016 as, in accordance with IFRS, it was not deemed to be a liability of the Company at that date. As the Company suffered a loss for the period on foreign currency exchange and on investments held at fair value through profit or loss, the earnings of 2.44p per Ordinary Share for the period were significantly below the target 6.00p dividend per Ordinary Share. Therefore, the remaining 3.56p dividend per Ordinary Share for the period was paid from the Company's distributable reserves. If markets were to continue to fall indefinitely or if the portfolio were to suffer stock-specific losses indefinitely, this approach may not be sustainable in the long run, depending on the rate of such losses, but since the period end the Company has recovered a significant proportion of those investment losses and, as at 28 February 2017, the Company had a NAV (after deduction of the 6.00p dividend) of 97.01p per Ordinary Share, which is 99.0% of the NAV at launch. The portfolio as at 28 February 2017 had a weighted average yield to call of 12.74%, which is in excess of what is required to meet the Company's long term target return of 10% p.a. net of operating expenses and its dividend target of 6.00p per share which is a yield of 6.18% on the NAV as at that date.

NAV and total return
In line with the Prospectus, the Company is targeting a net total return on invested capital in excess of 10 per cent. per annum over a seven year period. The Company achieved a total return of 1.59% in the period ended 31 December 2016. The underperformance compared to the seven year target was largely the result of the fall in the European financial debt market at the start of 2016. As set out above, almost all of these losses have been recovered as at the end of February 2017 and the weighted average yield to call on the portfolio is such that the Board believes that both the target rate of return and dividend policy remain achievable.

Premium/discount of share price to NAV
The Board regularly monitors the premium/discount of the price of the Ordinary Shares to the NAV per share. Should the discount of share price to NAV become unacceptable to the Board, the Company may buy back some of its shares. As such, the Board will put forward a proposal to shareholders at the upcoming Annual General Meeting to renew the authority to buy back shares. At 31 December 2016 the share price was 92.50p, a 2.85% discount to NAV.

William Scott
Chairman
17 March 2017

Statement of Comprehensive Income
for the period from 7 October 2015 (date of incorporation) to 31 December 2016

	Note	Period from 7 October 2015 to 31 December 2016
		£'000
Income
Bond income		3,549
Credit default swap income	17	148
Bank interest receivable		2
		------------
Total income		3,699
		------------
Investment gains and losses on investments held at fair value through profit or loss
Realised gains on disposal of bonds	14	2,998
Movement in unrealised gains on bonds	14	2,197
Realised losses on derivative financial instruments	17	(5,987)
Movement in unrealised gains on derivative financial instruments	17	114
		------------
Total investments gains and losses		(678)
		------------
Expenses
Investment management fee	8a	(345)
Administration fee	8b	(140)
Directors' fees	8f	(110)
Other expenses	11	(355)
		------------
Total expenses		(950)
		------------
Profit from operating activities before gains and losses on foreign currency transactions		2,071

Loss on foreign currency		(670)
		------------
Profit from operating activities after gains and losses on foreign currency transactions and before taxation		1,401
		------------
Taxation	12	(62)
		------------
Profit for the period attributable to the Owners of the Company		1,339
		------------

Earnings per Ordinary Share - basic and diluted	13	2.44p
		------------
All of the items in the above statement are derived from continuing operations. The accompanying notes form an integral part of these financial statements.

Statement of Changes in Equity
for the period from 7 October 2015 (date of incorporation) to 31 December 2016

	Note	Share capital	Distributable reserves	Total
		£'000	£'000	£'000

Opening balance at 7 October 2015		-	-	-

Profit for the period from incorporation to 31 December 2016		-	1,339	1,339

Contributions by and distributions to Owners
Ordinary Shares issued	20	-	60,318	60,318
Share issue costs		-	(1,188)	(1,188)
Dividends paid	6	-	(2,459)	(2,459)
		------------	------------	------------
At 31 December 2016		-	58,010	58,010
		------------	------------	------------

There were no other comprehensive income items in the period. The accompanying notes form an integral part of these financial statements.

Statement of Financial Position
as at 31 December 2016

		Note	As at 31 December 2016
			£'000
Non-current assets
Investment in bonds at fair value through profit or loss		14, 18	49,145
			------------
Current assets
Collateral accounts for derivative financial instruments at fair value through profit or loss		15	4,548
Derivative financial assets at fair value through profit or loss		17	207
Other receivables and prepayments		16	825
Cash and cash equivalents			6,152
			------------
Total current assets			11,732
			------------
Total assets			60,877
			------------

Current liabilities
Derivative financial liabilities at fair value through profit or loss		17	(2,626)
Other payables and accruals		19	(241)
			------------
Total liabilities			(2,867)
			------------
Net assets			58,010
			------------

Share capital and reserves
Share capital		20	-
Distributable reserves			58,010
			------------
Total equity holders' funds			58,010
			------------

Net asset value per Ordinary Share: basic and diluted		21	95.21p

These financial statements were approved by the Board of Directors on 17 March 2017 and were signed on its behalf by:

William Scott Chairman 17 March 2017	John Renouf Director 17 March 2017

The accompanying notes on form an integral part of these financial statements.

Statement of Cash Flows
for the period from 7 October 2015 (date of incorporation) to 31 December 2016

	Note	Period from 7 October 2015 to 31 December 2016
		£'000
Cash flows from operating activities
Net profit before taxation		1,401
Adjustments for:
Foreign exchange movements		(670)
Realised gains on bonds	14	(2,998)
Movement in unrealised gains on bonds	14	(2,197)
Realised losses on derivative financial instruments	17	5,987
Movement in unrealised gains on derivative financial instruments	17	(114)
Increase in operating assets:
Payment to collateral accounts for derivative financial instruments	15	(4,548)
Purchase of bonds	14	(124,470)
Sale of bonds	14	80,520
Increase in operating liabilities:
Premiums received from selling credit default swap agreements	17	3,675
Premiums paid on buying credit default swap agreements	17	(1,035)
Purchase of foreign currency derivatives	17	(159,249)
Close-out of foreign currency derivatives	17	153,270
Purchase of bond futures	17	2,596
Sale of bond futures	17	(2,552)
Proceeds from sale and repurchase agreements	17	5,918
Payments to close out sale and repurchase agreements	17	(6,077)
		------------
Net cash outflow from operating activities before working capital changes		(50,543)
Increase in other receivables and prepayments		(825)
Increase in other payables and accruals		241
Taxation paid	12	(62)
		------------
Net cash outflow from operating activities		(51,189)

Cash flows from financing activities
Proceeds from issue of Ordinary Shares		60,318
Share issue costs paid		(1,188)
Dividends paid	6	(2,459)
		------------
Net cash inflow from financing activities		56,671
		------------
Increase in cash and cash equivalents		5,482
Cash and cash equivalents brought forward		-
Effect of foreign exchange on cash and cash equivalents		670
		------------
Cash and cash equivalents carried forward		6,152
		------------
Supplemental disclosure of cash flow information
Cash paid during the period for interest		2,086
Cash received during the period for interest		4,876

The accompanying notes form an integral part of these financial statements.

Notes to the Financial Statements

for the period from 7 October 2015 (date of incorporation) to 31 December 2016

1. General information

The Company was incorporated as an authorised closed-ended investment Company, under the Law on 7 October 2015 with registered number 61003. Its Ordinary Shares were admitted to trading on the Specialist Fund Segment of the London Stock Exchange on 5 November 2015.

Investment objective

· Regulatory Capital Instruments, being financial instruments issued by a European financial institution which constitute regulatory capital for the purposes of Basel I, Basel II or Basel III or Solvency I or Solvency II;

· Derivative Instruments, being CDOs, securitisations or derivatives, whether funded or unfunded, linked or referenced to Regulatory Capital Instruments or Other financial institution investment instruments.

Investment policy

The Company will invest its assets with the aim of spreading investment risk.

2. Statement of compliance

a) Basis of preparation

These financial statements present the results of the Company for the period from 7 October 2015 (date of incorporation) to 31 December 2016. These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union.

b) Going concern

After making reasonable enquiries, and assessing all data relating to the Company's liquidity, including its significant cash resources, income stream and level 1 investments, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future and do not consider there to be any threat to the going concern status of the Company. Therefore, the financial statements have been prepared on a going concern basis.

c) Basis of measurement

The financial statements have been prepared on a historical cost basis, except for financial instruments (including derivative financial instruments), which are measured at fair value through profit or loss. The financial statements have been prepared on a going concern basis.

d) Use of estimates and judgements

The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods.

Judgements made by management in the application of IFRSs that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 3.

3. Significant accounting policies

a) Income and expenses

Bank interest, bond income and credit default swap income is recognised on a time-proportionate basis.

Dividend income is recognised when the right to receive payment is established.

All expenses are recognised on an accruals basis. All of the Company's expenses (with the exception of share issue costs, which are charged directly to the distributable reserve) are charged through the Statement of Comprehensive Income in the period in which they are incurred.

b) Transaction costs

Transaction costs incurred on the acquisition or disposal of a financial investment designated at fair value through profit or loss will be charged through the Statement of Comprehensive Income in the period in which they are incurred.

c) Foreign currency

Foreign currency transactions are translated into Sterling using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Comprehensive Income.

The exchange rates used by the Company as at 31 December 2016 were £1/€1.1731, £1/US$1.2340, £1/DKK8.7202, £1/CA$1.6574 and £1/SEK11.2754.

d) Taxation

The Directors intend to conduct the Company's affairs such that the Company continues to qualify for exemption from Guernsey taxation.

Investment income is recorded gross of applicable taxes and any tax expenses are recognised through the Statement of Comprehensive Income as incurred.

The Company holds investments in several European countries, in some jurisdictions, investment income and capital gains are subject to withholding tax deducted at the source of the income. The Company presents the withholding tax separately from the gross investment income in the Statement of Comprehensive Income. For the purpose of the Statement of Cash Flows, cash inflows from investments are presented net of withholding taxes when applicable.

e) Financial assets and liabilities

The financial assets and liabilities of the Company are investments in bonds at fair value through profit or loss, collateral accounts for derivative financial instruments, cash and cash equivalents, other receivables, derivative financial instruments and other payables. These financial instruments are designated at fair value through profit or loss upon initial recognition on the basis that they are part of a group of financial assets which are managed and have their performance evaluated on a fair value basis, in accordance with investment strategies and risk management of the Company.

Recognition The Company recognises a financial asset or a financial liability when, and only when, it becomes a party to the contractual provisions of the instrument. Purchases and sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the marketplace are recognised on the trade date, i.e. the date that the Company commits to purchase or sell the asset. Derecognition A financial asset (or, where applicable, a part of a financial asset or part of a group of similar assets) is derecognised where: · The rights to receive cash flows from the asset have expired; or · The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a "pass-through" arrangement; and · Either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Company has transferred its rights to receive cash flows from an asset (or has entered into a pass-through arrangement) and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Company's continuing involvement in the asset. The Company derecognises a financial liability when the obligation under the liability is discharged, cancelled or expires. Initial measurement Financial assets and financial liabilities at fair value through profit or loss are recorded in the Statement of Financial Position at fair value. All transaction costs for such instruments are recognised directly in the Statement of Comprehensive Income. Subsequent measurement After initial measurement, the Company measures financial assets which are classified at fair value through profit or loss, at fair value. Subsequent changes in the fair value of those financial instruments are recorded in net gain or loss on financial assets and liabilities at fair value through profit or loss. Interest and dividend earned or paid on these instruments are recorded separately in interest income or expense and dividend income or expense. Net gain or loss on financial assets and financial liabilities at fair value through profit or loss The Company records its transactions in bonds and the related revenue and expenses on a trade date basis. Unrealised gains and losses comprise changes in the fair value of financial instruments at the period end. These gains and losses represent the difference between an instrument's initial carrying amount and disposal amount, or cash payment on, or receipts from derivative contracts. Offsetting of financial instruments Financial assets and financial liabilities are reported net by counterparty in the Statement of Financial Position, provided that the legal right of offset exists, and is not offset by collateral pledged to or received from counterparties.

f) Derivative financial instruments
Derivative financial instruments, including credit default swap agreements, foreign currency forward contracts, bond future contracts and sale and repurchase agreements are recognised initially, and are subsequently measured at fair value. Derivative financial instruments are classified as assets when their fair value is positive or as liabilities when their fair value is negative. Derivative assets and liabilities arising from different transactions are offset only if the transactions are with the same counterparty, a legal right of offset exists, and the parties intend to settle the cash flows on a net basis. Fair value movements on derivative financial instruments are recognised in the Statement of Comprehensive Income in the period in which they arise.

g) Offsetting of derivative assets and liabilities
IFRS 7, Financial Instruments: Disclosures, requires an entity to disclose information about offsetting rights and related arrangements. The disclosures in note 17 provide users with information to evaluate the effect of netting arrangements on an entity's financial position. The disclosures are required for all recognised financial instruments that could be offset in accordance with International Accounting Standard ("IAS") 32, Financial Instruments Presentation. The disclosures also apply to recognised financial instruments that are subject to an enforceable master netting agreement or similar agreement, irrespective of whether these are offset in accordance with IAS 32.

h) Collateral accounts for derivative financial instruments at fair value through profit or loss
Collateral accounts for derivative financial instruments at fair value through profit or loss comprises cash balances held at the Company's depositary and the Company's clearing brokers and cash collateral pledged to counterparties related to derivative contracts. Cash that is related to securities sold, not yet purchased, is restricted until the securities are purchased. Financial instruments held within the margin account consist of cash received from brokers to collateralise the Company's derivative contracts and amounts transferred from the Company's bank account.

i) Receivables and prepayments
Receivables are carried at the original invoice amount, less allowance for doubtful receivables. Provision is made when there is objective evidence that the Company will be unable to recover balances in full. Balances are written-off when the probability of recovery is assessed as being remote. There are instruments in the portfolio that do not pay any distributions because the payment remains at the discretion of the issuer, or is under regulatory or state aid restrictions. These are not classified as "bad debts". With respect to senior debt only: · If bond interest has not been received within 30 calendar days of the expected pay date, unless there is good reason, 50% of the interest will be provided against; and · If bond interest has not been received within 60 calendar days of the expected pay date, unless there is good reason, 100% of the interest will be provided against. Bad debts will be considered on an investment by investment basis and no general provision will be made.

j) Cash and cash equivalents
Cash in hand and in banks and short-term deposits which are held to maturity are carried at cost. Cash and cash equivalents are defined as cash in hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value.

k) Payables and accruals
Trade and other payables are carried at payment or settlement amounts. Where the time value of money is material, payables are carried at amortised cost. When payables are received in currencies other than the reporting currency, they are carried forward, translated at the rate prevailing at the period end date.

l) Share capital
Ordinary Shares are classified as equity. Incremental costs directly attributable to the issue of Ordinary Shares are recognised as a deduction from equity. When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognised as a deduction from equity. Repurchased shares that are classified as Treasury Shares are presented as a deduction from equity. When Treasury Shares are sold or subsequently reissued, the amount received is recognised as an increase in equity and the resulting surplus or deficit is transferred to/from retained earnings. Funds received from the issue of Ordinary Shares are allocated to share capital, to the extent that they relate to the nominal value of the Ordinary Shares, with any excess being allocated to distributable reserves.

m) Distributable and non-distributable reserves
All income and expenses, foreign exchange gains and losses and realised investment gains and losses of the Company are allocated to the distributable reserve.

n) NAV per share and earnings per share
The NAV per share disclosed on the face of the Statement of the Statement of Financial Position is calculated by dividing the net assets by the number of Ordinary Shares in issue at the period end. Earnings per share is calculated by dividing the earnings for the period by the weighted average number of Ordinary Shares in issue during the period.

o) Accounting standards issued but not yet effective
The International Accounting Standards Board ("IASB") has issued/revised a number of relevant standards with an effective date after the date of these financial statements. Any standards that are not deemed relevant to the operations of the Company have been excluded. The Directors have chosen not to early adopt these standards and interpretations and they do not anticipate that they would have a material impact on the Company's financial statements in the period of initial application.

		Effective date
IFRS 2	Share-based payments	1 January 2018
IFRS 9	Financial Instruments	1 January 2018
IFRS 15	Revenue from Contracts with Customers	1 January 2018
IAS 7	Statement of Cash Flows	1 January 2017

In July 2014, the IASB issued the final version of IFRS 9, Financial Instruments that replaces IAS 39, Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. The Company plans to adopt the new standard on the required effective date. During 2016, the Company performed a high-level impact assessment of all three aspects of IFRS 9. This preliminary assessment is based on currently available information and may be subject to changes arising from further detailed analyses or additional reasonable and supportable information being made available to the Company in the future. Overall, the Company expects no significant impact on its balance sheet and equity, and will perform a more detailed assessment in 2017.

i) Classification and measurement The Company does not expect a significant impact on its balance sheet or equity on applying the classification and measurement requirements of IFRS 9. It expects to continue measuring at fair value all financial assets and liabilities currently held at fair value. ii) Impairment IFRS 9 requires the Company to record expected credit losses on all of its debt securities, loans and trade receivables, either on a 12-month or lifetime basis. The Company expects to apply the simplified approach and record lifetime expected losses on all investment income and other receivables. Given that investment income and other receivables have not been impaired to date, the Company does not expect there to be a significant impact on its equity from reviewing the expected credit losses on investment income and other receivables over their lifetimes, but it will need to perform a more detailed analysis which considers all reasonable and supportable information, including forward-looking elements to determine the extent of the impact. iii) Hedge accounting The Company does not currently designate any hedges as effective hedging relationships which qualify for hedge accounting. Therefore, the Company does not expect there to be any impact with respect to hedge accounting on the Company as a result of applying IFRS 9.

The impact that IFRS 15 will have on the Company's financial statements is also considered to be immaterial because the Company does not have any contracts with customers which meet the definition under IFRS 15.

4. Use of judgements and estimates

The preparation of the Company's financial statements requires the Directors to make judgements, estimates and assumptions that affect the reported amounts recognised in the financial statements and disclosure of contingent liabilities. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability in future periods.

Judgements

In the process of applying the Company's accounting policies, management has made the following judgement which had a significant effect on the amounts recognised in the financial statements:

i) Determination of functional currency

The performance of the Company is measured and reported to investors in Sterling. Although the majority of the Company's underlying assets are held in currencies other than Sterling, because the Company's capital is raised in Sterling, expenses are paid in Sterling and the Company hedges some of its foreign currency risk back to Sterling the Directors consider Sterling to be the Company's functional currency.

Estimates and assumption

The Company based its assumptions and estimates on parameters available when the financial statements were approved. However, existing circumstances and assumptions about future developments may change due to market changes or circumstances arising beyond the control of the Company. Such changes are reflected in the assumptions when they occur.

i) Valuation of financial assets and liabilities

The Company uses the expertise of the Investment Manager to assess the prices of investments at the valuation date. The majority of the prices can be independently verified with reference to external data sources, however a minority of investments cannot be verified by reference to an external source and the Investment Manager secures an independent valuation with reference to the latest prices traded within the market place.

5. Segmental reporting

In accordance with IFRS 8, Operating Segments, it is mandatory for the Company to present and disclose segmental information based on the internal reports that are regularly reviewed by the Board in order to assess each segment's performance.

Management information for the Company as a whole is provided internally for decision making purposes. The Company does compartmentalise different investments in order to monitor compliance with investment restrictions, however the performance of these allocations does not drive the investment decision process. The Directors' decisions are based on a single integrated investment strategy and the Company's performance is evaluated on an overall basis. Therefore, the Directors are of the opinion that the Company is engaged in a single economic segment of business for all decision making purposes. The financial results of this segment are equivalent to the results of the Company as a whole.

6. Dividends
As set out in the Prospectus, the Company intends to distribute all of its income from investments, net of expenses, by way of dividends on a quarterly basis. The Company may retain income for distribution in a subsequent quarter to that which it arises in order to smooth dividend amounts or for the purposes of efficient cash management. On admission, it was the intention for the Company to pay dividends totalling at least 6 pence per Share in respect of the period from Admission to 31 December 2016. As the Company suffered a loss for the period on foreign currency exchange and on investments held at fair value through profit or loss, the earnings of 2.44p per Ordinary Share for the period were significantly below the target 6.00p dividend per Ordinary Share. Therefore, the remaining 3.56p per Ordinary Share for the period was paid from the Company's distributable reserves. If markets were to continue to fall indefinitely or if the portfolio were to suffer stock-specific losses indefinitely, this approach may not be sustainable in the long run, depending on the rate of such losses, but since the period end the Company has recovered a significant proportion of those investment losses and, as at 28 February 2017, the Company had a NAV (after deduction of the 6.00p dividend) of 97.01p per Ordinary Share, which is 99.0% of the NAV at launch. The portfolio as at 28 February 2017 had a weighted average yield to call of 12.74%, which is in excess of what is required to meet the Company's long term target return of 10% p.a. net of operating expenses and its dividend target of 6.00p per share which is a yield of 6.18% on the NAV at that date. The Company has declared the following dividends in respect of the earnings for the period from incorporation to 31 December 2016:

Announcement date	Pay date	Total dividend declared in respect of earnings in the period	Amount per Ordinary Share
		£'000
26 January 2016	26 February 2016	178	0.35p
22 April 2016	27 May 2016	547	1.00p
19 July 2016	26 August 2016	820	1.50p
13 October 2016	25 November 2016	914	1.50p
		------------	------------
Dividends declared and paid in the period		2,459	4.35p
		------------	------------
19 January 2017	24 February 2017	1,005	1.65p
		------------	------------
Dividends declared in respect of the period		3,464	6.00p
		------------	------------

In accordance with IFRS, dividends are only provided for when they become a contractual liability of the Company. Therefore, during the period a total of £2,459,000 was incurred in respect of dividends, none of which was outstanding at the reporting date. The fifth dividend of £1,005,000 had not been provided for at 31 December 2016 as, in accordance with IFRS, it was not deemed to be a liability of the Company at that date.

7. Related parties

Details of the relationships between the Company, the Investment Manager, the Administrator, the Broker, the Registrar, the Depositary and the Directors are disclosed in note 8.

During the period, the Company purchased 2,910 units in Axiom Contingent Capital, which is managed by the Investment Manager, for £2,123,000 and subsequently sold 910 units for £673,000 making a realised gain on investment of £9,000. At the period end, the Company held 2,000 units in Axiom Contingent Capital valued at £1,831,000, generating an unrealised gain of £372,000.

During the period, the Company also purchased 740 units in Axiom Equity C FCP, which is managed by the Investment Manager, for £420,000. At the period end, these units were valued at £556,000, generating an unrealised gain of £136,000.

During the period, the investment manager charged commission of 1.5% on the invested amount as a result of the investors which it brought into the Company as part of the placings on 4 March 2016 and 4 October 2016. The total fee charged for the period was £49,000. The Investment Manager chose to repay this fee to the investors that it introduced.

The Directors are not aware of any ultimate controlling party.

8. Key contracts

a) Investment Manager

The Company has entered into an Investment Management Agreement with Axiom Alternative Investments SARL ("Axiom") under which the Company receives investment advice and management services.

Management fee

Under the terms of the Investment Management Agreement, a management fee is paid to the Investment Manager quarterly in arrears. The quarterly fee is calculated by reference to the following sliding scale:

i. where NAV is less than or equal to £250 million, 1% per annum of NAV;

ii. where NAV is greater than £250 million but less than or equal to £500 million, 1% per annum of NAV on the first £250 million and 0.8% per annum of NAV on the balance; and

iii. where NAV is greater than £500 million, 0.8% per annum of NAV, in each case, plus applicable VAT.

If in any quarter (other than the final quarter) of any accounting period the aggregate expenses of the Company during such quarter exceed an amount equal to one-quarter of 1.5% of the average NAV of the Company during such quarter (such amount being a "Quarterly Expenses Excess"), then the management fee payable in respect of that quarter shall be reduced by the amount of the Quarterly Expenses Excess, provided that the management fee shall not be reduced to an amount that is less than zero and no sum will be payable by the Investment Manager to the Company in respect of the Quarterly Expenses Excess.

During the period, a total of £345,000 was incurred in respect of Investment Management fees, of which £72,000 was payable at the reporting date.

In addition, the Investment Manager was paid £183,000 for its work on the initial placing. The £183,000 is included in share issue costs in the Statement of Changes in Equity.

Performance fee

The Investment Manager is entitled to receive from the Company a performance fee subject to certain performance benchmarks.

The fee is payable as a share of Total Shareholder Return ("TSR") where TSR is defined as growth in NAV per share plus dividends per share paid.

The performance fee, if any, is equal to 15% of TSRs in excess of a hurdle equal to a 7% per annum cumulative return since Admission, compounded annually. The performance fee is subject to a high watermark. The fee, if any, is payable annually and calculated on the basis of audited annual accounts.

50% of the performance fee will be settled in cash. The balance will be satisfied in shares, subject to certain exceptions where settlement in shares would be prohibited by law or would result in the Investment Manager or any person acting in concert with it incurring an obligation to make an offer under Rule 9 of the City Code, in which case the balance will be settled in cash.

Assuming no such requirement, the balance of the performance fee will be settled either by the allotment to the Investment Manager of such number of new shares credited as fully paid as is equal to 50% of the performance fee (net of VAT) divided by the most recent practicable NAV per share (rounded down to the nearest whole share) or by the acquisition of shares in the market, as required under the terms of the Investment Management Agreement. All shares allotted to (or acquired for) the Investment Manager in part satisfaction of the performance fee will be subject to a lock-up until the date that is 12 months from the end of the accounting period to which the award of such shares related.

During the period, no performance fee was incurred by the Company and there was no balance accrued at the period end date.

Under the terms of the Investment Management Agreement, if at any time there has been any deduction from the management fee as a result of the Quarterly Expenses Excess or annual expenses excess (a "management fee deduction"), and during any subsequent quarter:

i. all or part of the management fee deduction can be paid; and/or

ii. all or part of the management fee deduction shortfall payment can be repaid,

by the Company to the Investment Manager without:

iii. in any quarter (other than the final quarter) of any accounting period the aggregate expenses of the Company during such quarter exceeding an amount equal to one-quarter of 1.5% of the average NAV of the Company during such quarter; or

iv. in the final quarter of any accounting period the aggregate expenses of the Company during such accounting period exceeding an amount equal to 1.5% of the average NAV of the Company during such accounting period,

then such payment and/or repayment shall be made by the Company to the Investment Manager as soon as is reasonably practicable.

In the period ended 31 December 2016 the Quarterly Expenses Excess and annual expenses excess which would be repayable was £231,000.

b) Administrator and Company Secretary

Elysium Fund Management Limited has been appointed by the Company to provide day to day administration services to the Company, to calculate the NAV per share on a weekly basis and to provide company secretarial functions required under the Law.

Under the terms of the Administration Agreement, the Administrator is entitled to receive a fee of £110,000 per annum, which is subject to an annual adjustment upwards to reflect any percentage change in the retail prices index over the preceding year. In addition, the Company pays the Administrator a time-based fee for any work undertaken in connection with the calculation of the weekly NAV, up to a maximum of £400 per NAV calculation, subject to a maximum aggregate amount of £10,000 per annum. The Administrator was also paid a one-off establishment fee of £25,000 on Admission. The £25,000 is included in share issue costs in the Statement of Changes in Equity.

During the period, a total of £140,000 was incurred in respect of Administration fees of which £30,000 was payable at the reporting date.

c) Broker

Liberum Capital Limited ("Liberum") has been appointed to act as Corporate Broker ("Broker") for the Company. In consideration of Liberum agreeing to act as Broker the Company pays Liberum an annual retainer fee of £75,000 per annum, paid equally in two instalments on 1 January and 1 July each year. For the period from incorporation to 31 December 2016, the Company had paid £88,000 in respect of Broker fees. At the period end date there was no outstanding balance due to or from Liberum.

In addition, Liberum was paid a total of £381,000 for its work on the three placings. The £381,000 is included in share issue costs in the Statement of Changes in Equity.

d) Registrar

Capita Registrars (Guernsey) Limited has been appointed Registrar of the Company.

Under the terms of the Registrar Agreement, the Registrar is entitled to receive from the Company certain annual maintenance and activity fees, subject to a minimum fee of £5,500 per annum.

During the period, a total of £20,000 was incurred in respect of Registrar fees, of which £4,000 was payable at 31 December 2016.

e) Depositary

CACEIS Bank France has been appointed by the Company to provide depositary, settlement and other associated services to the Company.

Under the terms of the Depositary Agreement, the Depositary is entitled to receive from the Company:

i. an annual depositary fee of 0.03% of NAV, subject to a minimum annual fee of €25,000;

ii. a safekeeping fee calculated using a basis point fee charge based on the country of settlement and the value of the assets; and

iii. an administration fee on each transaction, together with various other payment/wire charges on outgoing payments.

During the period, a total of £30,000 was incurred in respect of depositary fees, of which £11,000 was payable at the reporting date.

CACEIS Bank Luxembourg is entitled to receive a monthly fee from the Company in respect of the provision of certain accounting services which will, subject to a minimum monthly fee of €1,800, be calculated by reference to the following sliding scale:

i. where NAV is less than or equal to €50 million, 0.04% per annum of NAV;

ii. where NAV is greater than €50 million but less than or equal to €100 million, 0.03% per annum of NAV; and

iii. where NAV is greater than €100 million, 0.02% per annum of NAV, in each case, plus applicable VAT.

During the period, a total of £25,000 was incurred in respect of fees paid to CACEIS Bank Luxembourg, of which £9,000 was payable at 31 December 2016.

f) Directors' remuneration

William Scott (Chairman) is paid £35,000 per annum, John Renouf (Chairman of the Audit Committee) is paid £32,500 per annum, and Max Hilton is paid £27,500 per annum.

The Directors are also entitled to reimbursement of all reasonable travelling and other expenses properly incurred in the performance of their duties.

During the period, a total of £110,000 was incurred in respect of Directors' fees, of which £24,000 was payable at the reporting date. No bonus or pension contributions were paid or payable on behalf of the Directors.

9. Key management and employees

The Company had no employees during the period.

10. Auditor's remuneration

For the period ended 31 December 2016, fees charged by EY, together with amounts accrued at 31 December 2016, amounted to £78,000, of which £25,000 related to audit services and £53,000 (included in Share issue costs) related to reporting accountant and tax work on the IPO. As at 31 December 2016, £25,000 was due to EY.

11. Other expenses
			Period from 7 October 2015 to 31 December 2016
			£'000
Broker fees (note 8c)			88
PR expenses			64
Other expenses			62
Bank charges and interest			41
Depositary fees (note 8e)			30
Audit fees (note 10)			25
Valuation agent fees			25
Registrar fees (note 8d)			20
			------------
			355
			------------

12. Taxation

The Company is exempt from taxation in Guernsey, and it is the intention to conduct the affairs of the Company to ensure that it continues to qualify for exempt company status for the purposes of Guernsey taxation. The Company pays a fixed fee for the exemption of £1,200 per annum.

The Company has a number of investments in bonds issued in Italy. Until 6 September 2016, as a Guernsey registered Company, any income received on Italian bonds suffered Italian withholding tax at 26%. In addition, Italian withholding tax was calculated, by the Depositary, and either charged or received on the purchase or sale of bond interest bought or sold with bonds at a rate of 26%. From 6 September 2016, foreign investors resident in Guernsey became entitled to benefit from exemption on interests on Italian Government and Corporate bonds and therefore no further Italian withholding tax has been payable.

13. Earnings per Ordinary Share

The earnings per Ordinary Share of 2.44p is based on a profit attributable to owners of the Company of £1,339,000 and on a weighted average number of 54,878,410 Ordinary Shares in issue since Admission. There is no difference between the basic and diluted earnings per share.

14. Investments in bonds at fair value through profit or loss
			Period from 7 October 2015 to 31 December 2016
			£'000
Balance as at 7 October 2015 (date of incorporation)			-
Additions in the period			124,470
Sales in the period			(80,520)
Movement in unrealised gains in the period			2,197
Movement in realised gains in the period			2,998
			------------
			49,145
			------------

Closing book cost			46,948
Closing unrealised gain on bonds at fair value through profit or loss			2,197
			------------
Closing valuation			49,145
			------------

15. Collateral accounts for derivative financial instruments at fair value through profit or loss
			31 December 2016
			£'000
Goldman Sachs International			2,723
JP Morgan			1,550
Credit Suisse			162
CACEIS Bank France			113
			------------
Total collateral held by brokers			4,548
			------------

With respect to derivatives, the Company pledges to third parties cash and/or other liquid securities ("Collateral") as initial margin and as variation margin. Collateral may be transferred either to the third party or to an unaffiliated custodian for the benefit of the third party. In the case where Collateral is transferred to the third party, the third party pursuant to these derivatives arrangements will be permitted to use, reuse, lend, borrow, hypothecate or re-hypothecate such Collateral. The third parties will have no obligation to retain an equivalent amount of similar property in their possession and control, until such time as the Company's obligations to the third party are satisfied. The Company has no right to this Collateral but has the right to receive fungible, equivalent Collateral upon the Company's satisfaction of the Company's obligation under the derivatives.

16. Other receivables and prepayments
			31 December 2016
			£'000
Accrued bond interest receivable			794
Interest due on credit default swaps			18
Other receivables and prepayments			13
			------------
			825
			------------

17. Derivative financial instruments
Credit default swap agreements A credit default swap agreement represents an agreement that one party, the protection buyer, pays a fixed fee, the premium, in return for a payment by the other party, the protection seller, contingent upon a specified credit event relating to an underlying reference asset. If a specified credit event occurs, there is an exchange of cash flows and/or securities designed so the net payment to the protection buyer reflects the loss incurred by holders of the referenced obligation in the event of its default. The International Swaps and Derivatives Association ("ISDA") establishes the nature of the credit event and such events include bankruptcy and failure to meet payment obligations when due.

					Period from 7 October 2015 to 31 December 2016
					£'000
Balance as at 7 October 2015 (date of incorporation)					-
Premiums received from selling credit default swap agreements					(3,675)
Premiums paid on buying credit default swap agreements					1,035
Movement in unrealised losses in the period					304
Realised gains in the period					98
					------------
Outstanding liability due on credit default swaps as at 31 December 2016					(2,238)
					------------
Credit default swap assets at fair value through profit or loss					137
Credit default swap liabilities at fair value through profit or loss					(2,375)
					------------
Outstanding liability due on credit default swaps as at 31 December 2016					(2,238)
					------------

Interest paid or received on the credit default swap agreements has been accounted for in the Statement of Comprehensive Income as it has been incurred or received. At the period end, £18,000 of interest on credit default swap agreements was due to the Company. Collateral totalling £4,435,000 was held in respect of the credit default swap agreements.

Foreign currency forwards Foreign currency forward contracts are used for trading purposes and are used to hedge the Company's exposure to changes in foreign currency exchange rates on its foreign portfolio holdings. A foreign currency forward contract is a commitment to purchase or sell a foreign currency on a future date and at a negotiated forward exchange rate.

					Period from 7 October 2015 to 31 December 2016
					£'000
Balance as at 7 October 2015 (date of incorporation)					-
Purchase of foreign currency derivatives					159,249
Closing-out of foreign currency derivatives					(153,270)
Movement in unrealised losses in the period					(190)
Realised losses in the period					(5,979)
					------------
Net liabilities on foreign currency forwards as at 31 December 2016					(190)
					------------
Foreign currency forward assets at fair value through profit or loss					60
Foreign currency forward liabilities at fair value through profit or loss					(250)
					------------
Net liabilities on foreign currency forwards as at 31 December 2016					(190)
					------------

Bond futures A bond future contract involves a commitment by the Company to purchase or sell bond futures for a predetermined price, with payment and delivery of the bond future at a predetermined future date.

					Period from 7 October 2015 to 31 December 2016
					£'000
Balance as at 7 October 2015 (date of incorporation)					-
Purchase of bond futures					(2,596)
Sale of bond futures					2,552
Movement in unrealised gains in the period					-
Realised gains in the period					53
					------------
Balance receivable on bond futures as at 31 December 2016					9
					------------
Bond future assets at fair value through profit or loss					10
Bond future liabilities at fair value through profit or loss					(1)
					------------
Balance receivable on bond futures as at 31 December 2016					9
					------------

Sale and repurchase agreements Under the terms of a sale and repurchase agreement ("repo") one party in the agreement acts as a borrower of cash, using a security held as collateral, and the other party in the agreement acts as a lender of cash. Almost any security may be employed in the repo. Interest is paid by the borrower for the benefit of having funds to use until a specified date on which the effective loan needs to be repaid.

					Period from 7 October 2015 to 31 December 2016
					£'000
Balance as at 7 October 2015 (date of incorporation)					-
Opening of sale and repurchase agreements					(5,918)
Closing-out of sale and repurchase agreements					6,077
Realised losses in the period					(159)
					------------
Total liabilities on sale and repurchase agreements as at 31 December 2016					-
					------------

Interest paid on sale and repurchase agreements has been accounted for in the Statement of Comprehensive Income as it has been incurred. At 31 December 2016 no interest on sale and repurchase agreements was payable by the Company.

Offsetting of credit default swap agreements The Company presents the fair value of its derivative assets and liabilities on a gross basis, no such assets or liabilities have been offset in the Statement of Financial Position. Certain derivative financial instruments are subject to enforceable master netting arrangements, such as ISDA master netting agreements, or similar agreements that cover similar financial instruments. The similar agreements include derivative clearing agreements, global master repurchase agreements, global master securities lending agreements, and any related rights to financial collateral. The similar financial instruments and transactions include derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, securities borrowing, and securities lending agreements. The Company's agreements allow for offsetting following an event of default, but not in the ordinary course of business, and the Company does not intend to settle these transactions on a net basis or settle the assets and liabilities on a simultaneous basis. The table below sets out the carrying amounts of recognised financial assets and liabilities that are subject to the above arrangements, together with held or pledged against these assets and liabilities as at 31 December 2016:
	Gross carrying amount before offsetting	Amounts offset in accordance with offsetting criteria	Net amount presented in Statement of Financial Position	Effect of remaining rights of offset that do not meet the criteria for offsetting in the Statement of Financial Position - Cash held as collateral		Net exposure
	£'000	£'000	£'000	£'000		£'000
Financial assets
Derivatives	207	-	207	-		207
Collateral held	4,548	-	4,548	(2,559)		1,989
	------------	------------	------------	------------		------------
Total assets	4,755	-	4,755	(2,559)		2,196
	------------	------------	------------	------------		------------
Financial liabilities
Derivatives	(2,626)	-	(2,626)	2,559		(67)
	------------	------------	------------	------------		------------
Total liabilities	(2,626)	-	(2,626)	2,559		(67)
	------------	------------	------------	------------		------------

18. Fair value of financial instruments at fair value through profit or loss
The following table shows financial instruments recognised at fair value, analysed between those whose fair value is based on: · Quoted prices in active markets for identical assets or liabilities (Level 1); · Those involving inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2); and · Those with inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).

At 31 December 2016, the financial assets and liabilities designated at fair value through profit or loss were as follows:

	31 December 2016
	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Listed bonds	47,467	1,678	-	49,145
Credit default swaps	-	(2,238)	-	(2,238)
Derivative financial instruments	9	(190)	-	(181)
	------------	------------	------------	------------
	47,476	(750)	-	46,726
	------------	------------	------------	------------

Level 1 financial instruments include listed bonds and bond future contracts which have been valued at fair value by reference to quoted prices in active markets. No unobservable inputs were included in determining the fair value of these investments and, as such, alternative carrying values for ranges of unobservable inputs have not been provided. Level 2 financial instruments include credit default swap agreements, foreign currency forward contracts and sale and repurchase agreements. Each of these financial investments are valued by the Investment Manager using market observable inputs. The fair value of these securities may be based on, but are not limited to, the following inputs: market price of the underlying securities; notional amount; expiration date; fixed and floating interest rates; payment schedules; and/or dividends declared. The model used by the Company to fair value credit default swap agreements prices a credit default swap as a function of its schedule, deal spread, notional value, credit default swap curve and yield curve. The key assumptions employed in the model include: constant recovery as a fraction of par, piecewise constant risk neutral hazard rates and default events being statistically independent of changes in the default-free yield curve. The fair values of the derivative financial instruments are based on the forward foreign exchange rate curve. Transfers between levels Transfers between levels during the period are determined and deemed to have occurred at each financial reporting date. There were no investments classified as Level 3 during the period, and no transfers between levels in the period. See notes 14, 15 and 17 for movements in instruments held at fair value through profit or loss.

19. Other payables and accruals
			31 December 2016
			£'000
Other accruals			75
Investment management fee (note 8a)			72
Administration fee (note 8b)			30
Audit fees (note 10)			25
Directors' fees (note 8f)			24
Depositary fees (note 8e)			11
Registrar fees (note 8d)			4
			------------
			241
			------------

20. Share capital
	31 December 2016
	Number	£'000
Authorised:
Ordinary shares of no par value	Unlimited	-
	------------	------------
Allotted, called up and fully paid:
Ordinary Shares of no par value	60,930,764	-
	------------	------------

At the initial placing, on 3 November 2015 the Company issued 50,737,667 Ordinary Shares of no par value for £1.00 each, raising proceeds of £50.74 million.

On 4 March 2016 the Company raised £3.55 million through the placing of 3,945,555 new Ordinary Shares of no par value. The Ordinary Shares were issued at a price of 90.00p per share. On 4 October 2016 the Company raised a further £6.03 million through the placing of 6,247,542 new Ordinary Shares of no par value. The Ordinary Shares were issued at a price of 96.50p per share. At 31 December 2016, the total number of Ordinary Shares in issue was 60,930,764. The Ordinary Shares carry the right to receive all dividends declared by the Company. Shareholders are entitled to all dividends paid by the Company and, on a winding up, provided the Company has satisfied all of its liabilities, the shareholders are entitled to all of the surplus assets of the Company. Shareholders will be entitled to attend and vote at all general meetings of the Company and, on a poll, will be entitled to one vote for each Share held.

21. Net asset value per Ordinary Share

The net asset value per Ordinary Share is based on the net assets attributable to owners of the Company of £58,010,000, and on 60,930,764 Ordinary Shares in issue at the period end.

22. Financial instruments and risk management
The Investment Manager manages the Company's portfolio to provide Shareholders with attractive return, while limiting downside risk, through investment in the following financial institution investment instruments: · Regulatory capital instruments, being financial instruments issued by a European financial institution which constitute regulatory capital for the purposes of Basel I, Basel II or Basel III or Solvency I or Solvency II; · Other financial institution investment instruments, being financial instruments issued by a European financial institution, including without limitation senior debt, which do not constitute regulatory capital instruments; and · Derivative instruments, being CDOs, securitisations or derivatives, whether funded or unfunded, linked or referenced to regulatory capital instruments or other financial institution investment instruments.
The Company invests its assets with the aim of spreading investment risk. Risk is inherent in the Company's activities, but it is managed through a process of ongoing identification, measurement and monitoring. The Company is exposed to market risk (which includes currency risk, interest rate risk and price risk), credit risk and liquidity risk from the financial instruments it holds. Risk management procedures are in place to minimise the Company's exposure to these financial risks, in order to create and protect Shareholder value.

Risk management structure
The Investment Manager is responsible for identifying and controlling risks. The Board of Directors supervises the Investment Manager and is ultimately responsible for the overall risk management approach within the Company. The Company has no employees and is reliant on the performance of third party service providers. Failure by the Investment Manager, Administrator, Depositary, Registrar or any other third party service provider to perform in accordance with the terms of its appointment could have a significant detrimental impact on the operation of the Company. The market in which the Company participates is competitive and rapidly changing.

Risk concentration
Concentration indicates the relative sensitivity of the Company's performance to developments affecting a particular industry or geographical location. Concentrations of risk arise when a number of financial instruments or contracts are entered into with the same counterparty, or where a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of liquidity risk may arise from the repayment terms of financial liabilities, sources of borrowing facilities or reliance on a particular market in which to realise liquid assets. Concentrations of foreign exchange risk may arise if the Company has a significant net open position in a single foreign currency, or aggregate net open position in several currencies that tend to move together. Within the aim of maintaining a diversified investment portfolio, and thus mitigating concentration risks, the Company has established the following investment restriction in respect of the general deployment of assets: Concentration No more than 15% of NAV, calculated at the time of investments, will be exposed to any one financial counterparty. This limit will increase to 20% where, in the Investment Manager's opinion (having informed the Board in writing of such increase) the relevant financial institution investment instrument is expected to amortise such that, within 12 months of the date of the investment, the expected exposure (net of any hedging costs and expenses) will be equal to or less than 15% of NAV, calculated at the time of the investment.

Market risk
i) Price risk
Price risk exposure arises from the uncertainty about future prices of financial instruments held. It represents the potential loss that the Company may suffer through holding positions in the face of price movements. The investments in bonds and bond futures at fair value through profit or loss (see notes 14, 17 and 18) are exposed to price risk and it is not the intention to mitigate the price risk. At 31 December 2016, if the valuation of these investments at fair value through profit or loss had moved by 5% with all other variables remaining constant, the change in net assets would amount to approximately +/- £2,458,000. The maximum price risk resulting from financial instruments is equal to the £49,154,000 carrying value of investments at fair value through profit or loss.

ii) Foreign currency risk
Foreign currency risk is the risk that the value of a financial instrument will fluctuate because of changes in foreign currency exchange rates. Currency risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the Company's functional currency. The Company invests in securities and other investments that are denominated in currencies other than Sterling. Accordingly, the value of the Company's assets may be affected favourably or unfavourably by fluctuations in currency rates and therefore the Company will necessarily be subject to foreign exchange risks. In order to limit the exposure to foreign currency risk, the Company entered into hedging contracts during the period. At 31 December 2016, the Company held the following foreign currency forward contracts:

Maturity date		Amount to be sold			Amount to be purchased
8 March 2017		€34,000,000			£29,022,000
8 March 2017		US$13,400,000			£10,617,000
8 March 2017		DKK13,500,000			£1,548,000
8 March 2017		CA$1,110,000			£662,000
8 March 2017		US$7,500,000			€7,154,000

As at 31 December 2016 a proportion of the net financial assets of the Company were denominated in currencies other than Sterling as follows:

	Investments at fair value through profit or loss	Receivables	Cash and cash equivalents	Exposure		Foreign currency forward contract	Net exposure
	£'000	£'000	£'000	£'000		£'000	£'000
Euro	20,651	495	2,613	23,759		(22,902)	857
US Dollars	15,318	137	92	15,547		(16,938)	(1,391)
Danish Krone	1,084	19	457	1,559		(1,548)	11
Canadian Dollars	646	10	39	695		(670)	25
	------------	------------	------------	------------		------------	------------
	37,699	661	3,201	41,561		(42,058)	(497)
	------------	------------	------------	------------		------------	------------

Other future foreign exchange hedging contracts may be employed, such as currency swap agreements, futures contracts and options. There can be no certainty as to the efficacy of any hedging transactions. At 31 December 2016, if the exchange rates had strengthened/weakened by 5% against Sterling with all other variables remaining constant, net assets at 31 December 2016 would have decreased/increased by £25,000.

ii) Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments. The Company is exposed to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial instruments and cash flow. However, due to the fixed rate nature of the majority of the bonds, cash and cash equivalents of £6,152,000 and investment in bonds of £7,878,000 were the only interest bearing financial instruments subject to variable interest rates at 31 December 2016. Therefore, if interest rates had increased/decreased by 50 basis points, with all other variables remaining constant, the change in the value of interest cash flows of these assets in the period would have been £41,000/£(64,000).

	Fixed interest	Variable interest	Non-interest bearing	Total
	£'000	£'000	£'000	£'000
Financial assets
Investments in bonds at fair value through profit or loss	34,796	7,878	6,471	49,145
Collateral accounts for derivative financial instruments at fair value through profit or loss	-	-	4,548	4,548
Other receivables	-	-	812	812
Cash and cash equivalents	-	6,152	-	6,152
	------------	------------	------------	------------
Total financial assets	34,796	14,030	11,831	60,657
	------------	------------	------------	------------
Financial liabilities
Derivative financial liabilities at fair value through profit or loss	(2,238)	-	(181)	(2,419)
Other payables and accruals	-	-	(241)	(241)
	------------	------------	------------	------------
Total financial liabilities	(2,238)	-	(422)	(2,660)
	------------	------------	------------	------------
Total interest sensitivity gap	32,558	14,030	11,409	57,997
	------------	------------	------------	------------

It is estimated that the fair value of the bonds at 31 December 2016 would increase/decrease by +/-£521,000 (1.06%) if interest rates were to change by 50 basis points. The Investment Manager manages the Company's exposure to interest rate risk, paying heed to prevailing interest rates and economic conditions, market expectations and its own views as to likely movements in interest rates. Although it has not done so to date, the Company may implement hedging and derivative strategies designed to protect investment performance against material movements in interest rates. Such strategies may include (but are not limited to) interest rate swaps and will only be entered into when they are available in a timely manner and on terms acceptable to the Company. The Company may also bear risks that could otherwise be hedged where it is considered appropriate. There can be no certainty as to the efficacy of any hedging transactions.

Credit risk
Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company, resulting in a financial loss to the Company. At 31 December 2016, credit risk arose principally from investment in bonds of £49,145,000, cash and cash equivalents of £6,152,000 and balances held as collateral for derivative financial instruments at fair value through profit or loss of £4,548,000. The Company seeks to trade only with reputable counterparties that the Investment Manager believes to be creditworthy. The Investment Manager manages the Company's credit risk by investing in a diverse portfolio of bonds, in line with the Prospectus. At 31 December 2016, the bond rating profile of the portfolio as detailed in the Investment Manager's Report was as follows:

				Percentage
A				2.82
BBB				17.07
BB				54.11
B				14.10
CCC and below				6.49
No rating				5.40
				------------
				100.00
				------------
The cash pending investment may be held without limit with a financial institution with a credit rating of A-1 (Standard & Poor's) or P-1 (Moody's) to protect against counterparty failure.

The Company may implement hedging and derivative strategies designed to protect against credit risk. Such strategies may include (but are not limited to) credit default swaps and will only be entered into when they are available in a timely manner and on terms acceptable to the Company. The Company may also bear risks that could otherwise be hedged where it is considered appropriate. There can be no certainty to the efficacy of hedging transactions. Due to the Company's investment in credit default swap agreements the Company is exposed to additional credit risk as a result of possible counterparty failure. The Company has entered into ISDA contracts with Credit Suisse, JP Morgan and Goldman Sachs, rated BBB+, BBB+ and A- respectively. At 31 December 2016, the overall net exposure to these counterparties was 3.79% of NAV. The collateral held at each counterparty is disclosed in note 15.

Liquidity risk
Liquidity risk is defined as the risk that the Company will encounter difficulties in realising assets or otherwise raising funds to meet financial commitments. The principal liquidity risk is contained in unmatched liabilities. The liquidity risk at 31 December 2016 was low since the ratio of cash and cash equivalents to unmatched liabilities was 26:1.

In addition, the Company diversifies the liquidity risk through investment in bonds with a variety of maturity dates, as follows:

				Percentage
Less than 1 year				23.90
1 to 3 years				26.97
3 to 5 years				15.79
5 to 7 years				12.30
7 to 10 years				13.54
More than 10 years				7.50
				------------
				100.00
				------------

As at 31 December 2016, the Company's liabilities fell due as follows:
				Percentage
1 to 3 months				17.14
3 to 6 months				-
6 to 12 months				-
1 to 3 years				6.06
3 to 5 years				76.80
				------------
				100.00
				------------

23. Capital management policy and procedures

The Company's capital management objectives are:

· to ensure that it will be able to meet its liabilities as they fall due; and

· to maximise its total return primarily through the capital appreciation of its investments.

Pursuant to the Company's Articles of Incorporation, the Company may borrow money in any manner. However, the Board has determined that the Company should borrow no more than 20% of direct investments.

The Board, with the assistance of the Investment Manager, monitors and reviews the structure of the Company's capital on an ad hoc basis. This review includes:

· how funds could be returned to Shareholders;

· the current and future levels of gearing;

· the need to buy back Ordinary Shares for cancellation or to be held in treasury, which takes account of the difference between the NAV per share and the share price; and

· the current and future dividend policy.

The Company uses sale and repurchase agreements to increase the gearing of the Company. The Company did not have any open sale and repurchase agreements at 31 December 2016.

As disclosed in the Statement of Financial Position, at 31 December 2016, the total equity holders' funds were £58,010,000.

24. Capital commitments

The Company holds a number of derivative financial instruments which, by their very nature, give rise to capital commitments post 31 December 2016. These are as follows:

· At the period end, the Company had sold 17 credit default swap agreements for a total of £2,541,000, each receiving quarterly interest. The exposure of the Company in relation to these agreements at the period end date was £52,387,000. Collateral of £4,435,000 at 31 December 2016 for these agreements was held.

· At the period end the Company had committed to five foreign currency forward contracts dated 8 March 2017 to buy £41,849,000 and €7,154,000 (£6,098,000). At 31 December 2016, the Company could have affected the same trades and purchased £42,059,000 and €7,131,000 (£6,079,000), giving rise to a loss of £190,000.

· At 31 December 2016, the Company had taken a long position maturing on 29 March 2017, committing the Company to a purchase of a gilt future for £3,088,000.

25. Contingent assets and contingent liabilities

There were no contingent assets or contingent liabilities in existence at the period end.

26. Events after the financial reporting date

On 18 January 2017, the Company declared a dividend of 1.65p per Ordinary Share for the period from 1 October 2016 to 31 December 2016, which (in accordance with IFRS) was not provided for at 31 December 2016, out of the profits for the period ended 31 December 2016 (see note 6). This dividend was paid on 24 February 2017.

-- ENDS --

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