Half-year Report

RNS Number : 8161I

CQS New City High Yield Fund Ltd

26 March 2018

 

Date:        26 March 2018

From:       CQS New City High Yield Fund Limited

LEI:          549300KMGN75B0PTWT07

Subject:   Interim Report

Unaudited statement of results for the six months ended 31 December 2017

Chairman's Statement

Highlights for the Six Months to 31 December 2017

·      Net asset value total return of 3.92%.

·      Ordinary share price total return of 2.70%.

·      Dividend yield of 7.1%, based on dividends at an annualised rate of 4.42 pence and a share price of 62.00 pence at 31 December 2017.

·      Ordinary share price at a premium of 5.84% to net asset value at 31 December 2017.

·      £9.0m of equity raised during the period.

Investment and Share Price Performance

The Company's net asset value total return was 3.92% for the six months to 31 December 2017.  The share price total return for the same period was 2.70%, the premium to net asset value at which the Company's shares trade narrowed a little to 5.8%.  The average premium over the six months to 31 December 2017 was 5.81% and over three years 3.87%.

It was always unlikely that last year's very strong returns would be repeated, but the markets have digested political change in the United States, Europe and the United Kingdom.  Ian Francis, your investment manager, discusses the period under review in his review.

Earnings and Dividends

The Company declared two dividends of 0.99 pence in respect of the period, an increase of 1.0% on those declared in respect of the same period last year. In the absence of unforeseen circumstances, the Board expects to follow the same pattern of dividend payments as declared in the last two years and, based on a maintained annualised rate of 4.42 pence and a share price of 60.20 pence at the time of writing, this represents a dividend yield of 7.3%.

Gearing

The Company renewed its existing £30m loan facility with Scotiabank in December 2017 at a current all-in rate of 1.47%. The new facility is on comparable terms with the one that it replaced. £28m was drawn down at 31 December 2017 and the Company had an effective gearing rate of 11.6%.

Rating and Fund Raising

The market continued to attach a premium rating to the shares of your Company throughout the period under review. Taking advantage of this, the Company raised £9.0m from new and existing shareholders during the six months to 31 December 2017, selling the shares out of treasury.  A further £3.1m has been raised since the period end and a balance of 7.4m shares remain in treasury.  As well as a modest increase in net asset value from any issue of shares, existing shareholders can look to benefit from a lower ongoing charges ratio and greater liquidity in the Company's shares.

Board

I am delighted to welcome Caroline Hitch, who joined us on 15 March 2018, to the Board. After a number of years with James Capel and Standard Chartered, Caroline worked for 24 years at HSBC, where she had an investment focus on multi asset portfolios and a strong interest in transparency and governance.  These are skills that complement and deepen the Board's resources and I am delighted that she has chosen to join us.

I recorded our thanks to Adrian Collins, who retired at the AGM, and welcomed John Newlands when I wrote to you in October.  The number of Directors is now six, five of whom have been appointed within the last three years.

Outlook

I said above that markets have digested a considerable amount of political change, but it is politics that continue to give us most cause for concern. Since the period end, equity markets which had looked to a robust United States' economy and a Eurozone that continues to recover strongly have begun to see increased volatility in the face of talk of a trade war.  Bond markets, too, reflect some of the risks, with global bond yields and spreads rising.

Portfolio diversification remains our watchword as we look for opportunities in a world where, in the view of the Federal Reserve at least, a turning point has been reached in the interest rate cycle. 

James G West

Chairman

23 March 2018

Investment Manager's Review

During the last six months it has become more apparent that the British economy is no longer matching either Europe or the United States.

The main knock on from the Brexit vote has been the weakness of Sterling against the Euro and to a lesser extent the US$. This has had two major effects. Firstly inflation, which was already at 2.9% in June and finished the period under review at 3.0%. There is no doubt that these figures were part of the reasons behind the Bank of England's 25bp rate rise in December to 0.5%. Whilst prices were increasing at around 3.0%, household finances continued to be squeezed as wage growth was between 2.1% and 2.5% hitting savings ratios and increasing credit card spending. Further to this, a survey released by the FCA disclosed that 1.4 million credit card holders had only paid their minimum payment for the last three years. This certainly had a negative effect on retail sales over much of the period, with nonfood retail relying even more on the Black Friday and pre-Christmas sales than previously. New car sales too took a pasting, down 11.2% in the month of November with the brunt shouldered by diesel, down 30.6%. The overall figure for calendar year 2017 was down 5.6% for all vehicle sales. So overall, not great for consumers or retail.

The second effect of the weakness in Sterling has been positive. UK factory orders, at plus 17%, are the highest since August 1998 with orders for chemicals, electronics, and transport goods noticeably up. Job creation was good in the period in both services and manufacturing sectors with employment highs being reached in November. Another positive piece of news was the lower than expected Public Sector Borrowing Requirement also announced in November with the year on year figure down by £4.1 bn to £38.5bn, the lowest since 2007.

We remain with our view that the biggest risk to the UK is political and highly influenced by the media with its addiction to having daily headlines on Brexit and Theresa May's position as Prime Minister.

By contrast Europe has continued to expand, be it in Manufacturing, Services, Retail Sales or the 4.1% increase in car sales up to the end of November. This can be evidenced by the composite Purchasing Managers Index data which are at their highest since April 2011 having increased throughout the period. Retail Sales grew consistently with a consecutive nine month rise in like-for-like sales which equals the record run seen in 2006. The coalition talks in Germany, now resolved, will have a greater effect on immigration to Europe rather than the economy. And Europe will not be giving much away in the Brexit talks; why would they? The overall message coming from Europe is that they are in a far better place in the cycle than the UK.

In the United States, away from the noise and tweeting inside the White House, the economy had a very good six months, continuing to add jobs throughout the period with unemployment falling to 4.1%. Add to this productivity improvements of 3%, compensation costs for workers at plus 2.5% against an all items inflation level of 2%, and the net result to the average American worker is that they should be feeling far more comfortable than their UK counterpart. When you add in the tax changes introduced in December by the Trump administration which benefitted the wealthier Americans, it is easy to see why there has been so much froth in equity markets.

For the Company we had several bonds called or tendered for in the period: Aker BP 10.25% 2022 (at 110), Louis Dreyfus 8.25% perpetual, and Old Mutual 7.875% 2025 (at 125). Tizir rolled its bonds into a 9.5% bond of 2022. Other major sale transactions were the top slicing of Unique Pubs 7.395% 2023 and sales of Nextenergy Solar equity, LV 6.5% 2043, Nat West 9% preference, and Nat West 11.5% perpetual. The major purchases were Wittur 8.5% 2023, REA 9% preference, Raven Russia 12% preference, TES Finance 6,75% 2020, New Look 6.5% 2022, Green King Equity, Regional REIT equity, Ardonagh 8.375% 2023, Punch Taverns 7.375% 2025, Hertz 7.375% 2021, Bombardier 7.5% 2025 and Shawbrook 7.875% perpetual. We continue to look for diversity in the investments we make, whilst maintaining our belief in the ongoing strength of the Financials sector.

Ian Francis

New City Investment Managers

23 March 2018

Condensed Income Statement (Unaudited)

For the six months ended 31 December 2017

	Six months ended 31 December 2017
	Notes	Revenue	Capital	Total
		£ '000	£'000	£'000
Capital gains on investments
Gains on investments	3	-	212	212
Exchange gains		-	174	174
Revenue
Income	4	9,443	-	9,443
Total income		9,443	386	9,829
Expenses
Investment management fee	5	(730)	(243)	(973)
Other expenses		(322)	-	(322)
Total expenses		(1,052)	(243)	(1,295)
Profit before finance costs and taxation		8,391	143	8,534
Finance costs
Interest payable and similar charges		(128)	(43)	(171)
Profit before taxation		8,263	100	8,363
Irrecoverable withholding tax		(74)	-	(74)
Profit after taxation		8,189	100	8,289
Earnings per ordinary share (pence)	6	2.17	0.02	2.19

The total column of this statement represents the Company's Income Statement, prepared in accordance with IFRS.  The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in the above statement are derived from continuing operations.

No operations were acquired or discontinued during the period.

There is no comprehensive income as all income is recorded in the Income Statement above.

Condensed Income Statement (Unaudited)

For the six months ended 31 December 2016

	Six months ended 31 December 2016
	Notes	Revenue	Capital	Total
		£ '000	£'000	£'000
Capital gains on investments
Gains on investments	3	-	10,022	10,022
Exchange gains		-	143	143
Revenue
Income	4	10,077	-	10,077
Total income		10,077	10,165	20,242
Expenses
Investment management fee	5	(679)	(226)	(905)
Other expenses		(338)	(10)	(348)
Total expenses		(1,017)	(236)	(1,253)
Profit before finance costs and taxation		9,060	9,929	18,989
Finance costs
Interest payable and similar charges		(125)	(42)	(167)
Profit before taxation		8,935	9,887	18,822
Irrecoverable withholding tax		(132)	-	(132)
Profit after taxation		8,803	9,887	18,690
Earnings per ordinary share (pence)	6	2.42	2.72	5.14

The total column of this statement represents the Company's Income Statement, prepared in accordance with IFRS.  The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in the above statement are derived from continuing operations.

No operations were acquired or discontinued during the period.

There is no comprehensive income as all income is recorded in the Income Statement above.

Condensed Income Statement (Audited)

For the year ended 30 June 2017

	Year ended 30 June 2017
	Notes	Revenue	Capital	Total
		£'000	£'000	£'000
Capital gains on investments
Gains on investments	3	-	13,978	13,978
Exchange gains		-	189	189
Revenue
Income	4	19,490	-	19,490
Total income		19,490	14,167	33,657
Expenses
Investment management fee	5	(1,390)	(463)	(1,853)
Other expenses		(666)	(53)	(719)
Total expenses		(2,056)	(516)	(2,572)
Profit before finance costs and taxation		17,434	13,651	31,085
Finance costs
Interest receivable		1	-	1
Interest payable and similar charges		(250)	(83)	(333)
Profit before taxation		17,185	13,568	30,753
Irrecoverable withholding tax		(215)	-	(215)
Profit after taxation		16,970	13,568	30,538
Earnings per ordinary share (pence)	6	4.66	3.73	8.39

The total column of this statement represents the Company's Income Statement, prepared in accordance with IFRS.  The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in the above statement are derived from continuing operations.

No operations were acquired or discontinued during the year.

There is no comprehensive income as all income is recorded in the Income Statement above.

Condensed Balance Sheet

As at 31 December 2017

		As at	As at	As at
		31 December 2017	31 December 2016	30 June 2017
	Notes	(unaudited)	(unaudited)	(audited)
		£'000	£'000	£'000
Non-current assets
Investments held at fair value		247,383	227,389	232,097
Current assets
Other receivables		4,813	4,953	4,015
Cash and cash equivalents		1,861	1,626	6,831
		6,674	6,579	10,846
Total assets		254,057	233,968	242,943
Current liabilities
Bank loan facility	7	(28,000)	(25,000)	(25,000)
Other payables		(222)	(246)	(268)
Total liabilities		(28,222)	(25,246)	(25,268)
Net assets		225,835	208,722	217,675
Stated capital and reserves
Stated capital account		168,646	155,410	159,647
Special distributable reserve		50,385	50,385	50,385
Capital reserve		(8,657)	(12,438)	(8,757)
Revenue reserve		15,461	15,365	16,400
Equity shareholders' funds		225,835	208,722	217,675
Net asset value per ordinary share (pence)	9	58.58	57.47	58.77

Condensed Statement of Changes in Equity

For the six months ended 31 December 2017 (unaudited)

		Stated	Special
		capital	distributable	Capital	Revenue
		account	reserve	reserve	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000
At 1 July 2017		159,647	50,385	(8,757)	16,400	217,675
Total comprehensive income for the period:
Profit for the period		-	-	100	8,189	8,289
Transactions with shareholders recognised directly in equity:
Dividends paid	2	-	-	-	(9,128)	(9,128)
Issue of shares		8,999	-	-	-	8,999
At 31 December 2017		168,646	50,385	(8,657)	15,461	225,835

For the six months ended 31 December 2016 (unaudited)

		Stated	Special
		capital	distributable	Capital	Revenue
		account	reserve	reserve	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000
At 1 July 2016		154,397	50,385	(22,325)	15,370	197,827
Total comprehensive income for the period:
Profit for the period		-	-	9,887	8,803	18,690
Transactions with shareholders recognised directly in equity:
Dividends paid	2	-	-	-	(8,808)	(8,808)
Issue of shares		1,013	-	-	-	1,013
At 31 December 2016		155,410	50,385	(12,438)	15,365	208,722

For the year ended 30 June 2017 (audited)

			Stated	Special
			capital	distributable		Capital		Revenue
			Account	reserve		reserve		reserve		Total
	Notes		£'000	£'000		£'000		£'000		£'000
At 1 July 2016			154,397	50,385		(22,325)		15,370		197,827
Total comprehensive income for the year:
Profit for the year			-	-	13,568		16,970		30,538
Transactions with owners recognised directly in equity:
Dividends paid		2	-	-	-		(15,940)		(15,940)
Issue of shares			5,250	-	-		-		5,250
At 30 June 2017			159,647	50,385	(8,757)		16,400		217,675

Condensed Cash Flow Statement

For the six months ended 31 December 2017

	Six months	Six months
	ended	ended	Year ended
	31 December 2017 (unaudited)	31 December 2016 (unaudited)	30 June 2017 (audited)
	£'000	£'000	£'000
Operating activities
Profit before finance costs and taxation	8,534	18,989	31,085
Gains on investments	(212)	(10,022)	(13,978)
Effective yield	(461)	(414)	(558)
Exchange gains	(174)	(143)	(189)
Increase in other receivables	(798)	(1,001)	(63)
(Decrease)/increase in other payables	(46)	(10)	10
Net cash inflow from operating activities before interest and taxation	6,843	7,399	16,307
Interest paid	(157)	(167)	(331)
Irrecoverable withholding tax paid	(74)	(132)	(215)
Net cash inflow from operating activities	6,612	7,100	15,761
Investing activities
Purchases of investments	(46,372)	(35,807)	(91,438)
Sales of investments	31,745	30,735	85,759
Net cash outflow from investing activities	(14,627)	(5,072)	(5,679)
Financing activities
Equity dividends paid	(9,128)	(8,808)	(15,940)
Drawdown of bank loan facility	3,000	-	-
Issue of ordinary shares	8,999	1,013	5,250
Net cash inflow/(outflow) from financing activities	2,871	(7,795)	(10,690)
Decrease in cash and cash equivalents	(5,144)	(5,767)	(608)
Cash and cash equivalents at the start of the period	6,831	8,201	8,201
Movement on bank overdraft	-	(951)	(608)
Cashflow	(5,144)	(5,767)	(951)
Exchange gains	174	143	189
Cash and cash equivalents at the end of the period*	1,861	1,626	6,831

*Net debt includes cash held at bank and bank loan facility.

Notes to the Accounts

1.   Basis of Preparation

The unaudited interim results which cover the six month period to 31 December 2017 have been prepared in accordance with International Accounting Standard ('IAS') 34 'Interim Financial Reporting', and the accounting polices as set out in the statutory accounts of the Company for the year ended 30 June 2017.

Going concern

The condensed consolidated financial statements have been prepared on the going concern basis.  In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council.  After making enquiries, and bearing in mind the nature of the Company's business and assets, the Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future.  For this reason, they continue to adopt the going concern basis in preparing the financial statements.

2.   Dividends

Amounts recognised as distributions to equity holders in the period:

	Six months ended 31 December 2017		Six months ended 31 December 2016		Year ended 30 June 2017
		Rate		Rate		Rate
	£'000	(pence)	£'000	(pence)	£'000	(pence)
In respect of the previous period:
Fourth interim dividend	5,392	1.45	5,246	1.45	5,246	1.45
In respect of the period under review:
First interim dividend	3,736	0.99	3,562	0.98	3,563	0.98
Second interim dividend	-	-	-	-	3,563	0.98
Third interim dividend	-	-	-	-	3,568	0.98
	9,128	2.44	8,808	2.43	15,940	4.39

        A second interim dividend in respect of the year ending 30 June 2018 of 0.99p per ordinary share was paid on 28 February 2018 to shareholders on the register on 27 January 2018. In accordance with International Financial Reporting Standards ('IFRS') this dividend has not been included as a liability in these accounts.

3.     Investment Gains

 Included within gains on investments for the period ended 31 December 2017 are realised gains of £47,000 (31 December 2016: £86,000 at 30 June 2017: £1,897,000) and unrealised gains of £165,000 (31 December 2016: £9,936,000 at 30 June 2017: £12,081,000).

4.     Income

        The breakdown of income for the period was as follows:

	Six months ended 31 December 2017		Six months ended 31 December 2016		Year ended       30 June 2017
		£'000		£'000		£'000
Income from investments:
Dividend income		815		953		2,177
Interest on fixed interest securities		8,628		9,124		17,313
Total income		9,443		10,077		19,490

5.     Investment Management Fee

The Company's investment manager is CQS which has delegated this function to NCIM.  The contract between the Company and CQS may be terminated by either party giving not less than 12 months' notice of termination.  CQS receive a basic monthly fee at the rate of 0.8 per cent per annum of the Company's total assets (less current liabilities other than bank borrowings), payable in arrears up to and including £200,000,000 and 0.7 per cent per annum above this.  During the period investment management fees of £973,000 were incurred, of which £166,000 were payable at the period end.

6.     Earnings per Ordinary Share

       The revenue earnings per ordinary share is based on the net profit after taxation of £8,189,000 (31 December 2016: £8,803,000 and 30 June 2017: £16,970,000) and on a weighted average of 378,077,258 (31 December 2016: 363,161,029 and 30 June 2017: 364,129,724) ordinary shares in issue throughout the period.

The capital return per ordinary share is based on a net capital gain of £100,000 (31 December 2016: a net capital gain of £9,887,000 and 30 June 2017: a net capital gain of £13,568,000) and on a weighted average of 378,077,258 (31 December 2016: 363,161,029 and 30 June 2017: 364,129,724) ordinary shares in issue throughout the period.

7.     Bank Loan Facility

	December 2017	December 2016	June 2017
	£'000	£'000	£'000
Bank loan facility	28,000	25,000	25,000

The Company has a short term loan facility with Scotiabank due to expire 18 December 2018.

As at the period end the unsecured loan facility had a limit of £30 million of which £28 million was drawn down as at 31 December 2017.

8.     Stated Capital Account

Authorised

The authorised share capital of the Company is represented by an unlimited number of ordinary shares of no par value.

Allotted, called up and fully-paid	Number of
	Ordinary shares	£'000
Total issued share capital at 1 July 2017	370,374,417	159,647
1,500,000 ordinary shares of no par value issued on 4 July 2017 at 62.5p	1,500,000	938
3,500,000 ordinary shares of no par value issued on 2 August 2017 at 61.5p	3,500,000	2,152
2,000,000 ordinary shares of no par value issued on 24 August 2017 at 62.1p	2,000,000	1,242
2,400,000 ordinary shares of no par value issued on 30 October 2017 at 62.0p	2,400,000	1,488
1,250,000 ordinary shares of no par value issued on 2 November 2017 at 62.5p	1,250,000	775
2,000,000 ordinary shares of no par value issued on 17 November 2017 at 61.25p	2,000,000	1,225
1,250,000 ordinary shares of no par value issued on 5 December 2017 at 61.5p	1,250,000	769
1,250,000 ordinary shares of no par value issued on 18 December 2017 at 61.5p	1,250,000	769
Issue costs		(359)
Total issued share capital at 31 December 2017	385,524,417	168,646

The balance of shares left in Treasury as at 31 December 2017 was 12,747,441.

All the above share issues were allotted from Treasury.

9.     Net Asset Value per Ordinary share

The net asset value per ordinary share is based on net assets at the period end of £225,835,000 (31 December 2016: £208,722,000 and 30 June 2017: £217,675,000) and on 385,524,417 (31 December 2016: 363,524,417 and 30 June 2017: 370,374,417) ordinary shares, being the number of ordinary shares in issue at the period end.

10.   Related Parties

The following are considered related parties: the Board of Directors ("the Board") and CQS/New City Investment Managers ("the Investment Manager").

All transactions with related parties are carried out on an arms length basis.

There are no other transactions with the Board other than aggregated remuneration for services as Directors.  There are no outstanding balances to the Board at the period end.

Details of the fee arrangement with the Investment Manager are disclosed in note 5.

11.   Financial Information

These are not statutory accounts in terms of Section 434 of the Companies Act 2006 and have not been audited or reviewed by the Company's auditors.  The information for the year ended 30 June 2017 has been extracted from the latest published financial statements which received an unqualified audit report and have been filed with the Registrar of Companies.  No statutory accounts in respect of any period after 30 June 2017 have been reported on by the Company's auditors or delivered to the Registrar of Companies.

The interim report for the six months ended 31 December 2017 will be posted to shareholders and made available on the website www.ncim.co.uk.  Copies may also be obtained from the Company's registered office, Ordnance House, 31 Pier Road, St. Helier, Jersey, JE4 8PW, Channel Islands.

12.   Post Balance Sheet Event

There were four share issues of shares from Treasury post the period end.

On 3 January 2018, 1,250,000 ordinary shares were allotted at a price of 62.00p.

On 10 January 2018, 1,250,000 ordinary shares were allotted at a price of 62.00p.

On 18 January 2018, 1,250,000 ordinary shares were allotted at a price of 62.10p.

On 26 January 2018, 1,250,000 ordinary shares were allotted at a price of 61.30p.

The balance of ordinary shares left in Treasury following these allottments is 7,427,441.

Directors' Statement of Principal Risks and Uncertainties

The Company's assets consist principally of listed fixed interest securities and its principal risks are therefore market related.  The Company is also exposed to currency risk in respect of the markets in which it invests. Other key risks faced by the Company relate to investment and strategy, market, financial, earnings and dividend, operational, gearing, key person, regulatory and political matters.  These risks, and the way in which they are managed, are described in more detail under the heading 'Principal risks and risk management' within the Directors' Report and Business Review contained within the Company's annual report and accounts for the year ended 30 June 2017.  The Company's principal risks and uncertainties have not changed materially since the date of that report and are not expected to change materially for the rest of the Company's financial year.

Directors' Responsibility Statement in Respect of the Interim Report

We confirm that to the best of our knowledge:

·      the condensed set of financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;

·      the Chairman's Statement and Investment Manager's Review includes a fair review of the information required by the Disclosure Guidance and Transparency Rules ('DTR') 4.2.7R, being an indication of important events that have occurred during the first six months of the financial year and their impact on the financial statements;

·      the Directors' Statement of Principal Risks and Uncertainties shown above is a fair review of the information required by DTR 4.2.7R; and

·      the condensed set of financial statements include a fair review of the information required by DTR 4.2.8R, being related party transactions that have taken place in the first six months of the financial year and that have materially affected the financial position or performance of the Company during that period, and any changes in the related party transactions described in the last Annual Report that could do so.

On behalf of the Board

J G West

Chairman

23 March 2018

 

END

 

 

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