Final Results

RNS Number : 5691T
T2 Income Fund Limited
09 June 2009
 



T2 Income Fund Limited ('T2' or the 'Company')

 

Annual Accounts


T2 Income Fund Limited (the 'Company'), a closed-ended Guernsey exempt

investment company, announces its results for the year ended 31 December 2008.


Copies of the annual report are being posted to shareholders and copies will be

available from the company's website at http://www.t2income.com/ and the registered office at 2nd FloorRegency CourtGlategny EsplanadeSt. Peter PortGuernsey GY1 3NQChannel Islands.



For further information, please contact:

Patrick Conroy

T2 Income Fund Limited

+1 203 983-5282


Philip Secrett

Nominated Adviser

Grant Thornton UK LLP

+44 (0) 207 383 5100


Michael Wentworth Stanley

JP Morgan Cazenove

+44 (0) 207 588 2828


CHAIRMAN'S STATEMENT


Attached please find the Accounts of T2 Income Fund Limited (the 'Company') for the one year period ended 31 December 2008.


The year 2008 was a very harsh and difficult year in the global credit markets. Accordingly, the Company, as well as many other investment companies, was required to adjust to rapidly changing conditions. In the face of unprecedented dislocations in the market, the Company chose to adopt a defensive posture in the management of its portfolio and also, in the interest of prudence, regretfully decided to suspend the Company's dividend.


As of 31 December 2008, the Company had invested assets with a fair value of approximately £126.6 million. The portfolio is comprised of variable rate investments and, on a weighted average basis, carried a spread of approximately 406 basis points over LIBOR at year-end. The Company's Net Asset Value per Share as of 31 December 2008 was £1.25. For the year ended 31 December 2008 the Company recorded a profit, including the combination of net unrealized losses on assets and net unrealized gains on liabilities, of approximately £16.4 million. Basic earnings per share for the year ended 31 December 2008 were approximately £0.38.


The consolidated results of operations for the Company include the impact of carrying its investments and its liabilities at fair value; in our case, the markdowns associated with the change in fair value of the loan notes of our CLO subsidiary (T2 Income Fund CLO I Ltd.,) creates, for financial reporting purposes, an accumulated unrealized (and potentially unrealizable) gain of approximately £82.5 million as of 31 December 2008. This anomaly represents the theoretical gain which would be realized if the Company were able to acquire its own notes in the marketplace at prices equal to the fair values ascribed to the various series of notes (those fair values, on a mark-to-market basis, have been significantly diminished by the distressed sales and/or downgrading of other similar notes and the extreme dislocation of the global credit markets). Notably, the dislocation in the structured credit markets (i.e., the market in which the CLO loan notes would trade) has been significantly more severe than the dislocation in the corporate loan market. Accordingly, the CLO loan notes have been marked down to a greater extent than the loans held in the Company's portfolio causing the NAV to increase significantly for book purposes under IFRS and increasing reported book income under IFRS. If and to the extent that the Company cannot acquire all of the CLO loan notes at their ascribed fair values the CLO loan notes will need to be repaid by the Company at their respective par values (not their fair values), and the unrealized gains on those notes would be reversed. In the view of T2 Advisers, LLC (the 'Adviser'), it may be possible to acquire some small portion of the CLO loan notes at a discount to par value but it is extremely unlikely that a substantial portion of loan notes, let alone all of them, could be so acquired by the Company. Therefore, shareholders should be aware that the Company's realization of the incremental value suggested by the markdowns on the CLO loan notes as of year-end is almost certain to prove to be unattainable and should consider evaluating the NAV and book income reported under IFRS accordingly. On the other side of the issue, we also are required to mark our investments at fair value, and have recorded an accumulated unrealized loss of £70.8 million as of 31 December 2008 as a result of changes in fair value. In a similar way, if we continue to hold these investments to maturity the fair value may return to par if we are repaid in full those amounts. I would also note that, in spite of the fair value markdowns on our investment portfolio, all of our investments thus far continue to pay their scheduled interest and principal, and there have been no payment defaults in our portfolio through 31 December 2008. Of course, it should also be noted that because both the investment portfolio and the CLO loan notes are denominated in US dollars, the strengthening of the USD against the GBP during 2008 has created substantial unrealized FX gains on the investment portfolio, and substantial unrealized FX losses on the CLO loan notes. The net result of all these fair value and FX related changes are reflected in the consolidated financial results. 


In 2007 the Company, through its subsidiary T2 Income Fund CLO I Ltd., issued dollar denominated long-term notes, referred to above, in the amount of approximately US$249.2 million. The CLO loan notes have a twelve year term and a weighted average annual interest rate of LIBOR plus 75 basis points. The CLO loan notes were issued by our CLO subsidiary and contain a variety of covenants, compliance with which is being made very difficult by the deteriorating and volatile market conditions. 


For the quarterly payment period ending December 2008, certain covenant violations occurred, caused in part by ratings downgrades of a number of the CLO's loan assets. The covenant violations reduced the Company's quarterly distribution payment from the CLO subsidiary at that time. However, during this period the portfolio has continued to perform and the CLO subsidiary has been accumulating cash. Such cash could be utilized to acquire new investments and/or make quarterly cash distributions from the CLO subsidiary to the Company, subject to covenant compliance, These quarterly distribution payments could then be utilized to fund future dividends that the Company may declare.  


The Adviser continues to monitor this situation closely, and is hopeful that there may be attractive risk-adjusted investment opportunities that we may avail ourselves of, including the possibility of repurchasing certain of our CLO loan notes. Over time, as we fully assess our prospects, the Board will, of course, consider reinstatement of the dividend at some appropriate level, although there can be no guarantee when, or if, that will happen as it is possible that the Company will remain unable to access cash in the CLO subsidiary indefinitely. The Adviser believes that the credit environment will continue to be very challenging over the coming year.


The total dividends paid from inception in August 2005 through December 2008 were 19.5p per share. As mentioned above, dividends in respect of the periods after June 2008 were suspended as a result of market conditions. The dividends paid during 2008 were as follows:


Month paid
Dividend Per Share
For period ended
March 2008
2.5p
31 December 2007
June 2008
2.5p
31 March 2008
September 2008
2.5p
30 March 2008


We value your support during these difficult times and, although I am retiring upon release of these financial statements, I am sure your new chairman looks forward to reporting on our future progress.



William Tozier

Chairman

June 2009


CONSOLIDATED AND COMPANY INCOME STATEMENTS







Group


Group


Company


Company






Year to


Year to


Year to


Year to






31 December 2008


31 December 2007


31 December 2008


31 December 2007




Notes


GBP


GBP


GBP


GBP














Revenue












Interest income


2


12,528,242


10,821,834


6,468,643


1,389,774


Other income


2


32,588


43,716


32,588


43,716


Dividend income




-


-


-


711,182














Investment Income












Gain/(loss) on financial assets and liabilities at fair value through profit or loss


6










- Realised




(896,251)


1,768,561


832,634


(547,568)


- Unrealised




16,765,411


122,030


16,351,137


3,198,134


Gain/(loss) on foreign currency transactions












- Realised




(1,256,063)


475,301


(1,256,063)


267,496


- Unrealised




(74,727)


78,248


251,913


(248,392)














Total Income




27,099,200


13,309,690


22,680,852


4,814,342














Expenses












Management fees


4


2,969,672


2,420,301


2,969,672


2,420,301


Administration and secretarial fees


4


40,000


40,000


40,000


40,000


Custodian fees


4


15,010


15,043


15,010


15,043


Legal and professional fees




99,887


43,806


99,887


43,806


Directors' remuneration


4


64,929


64,919


64,929


64,919


Directors' and officers' insurance




44,236


44,415


44,236


44,415


Audit fees




45,730


40,478


45,730


40,478


Loan note expenses


4


-


3,054,047


-


-


Finance costs


4


6,235,227


5,207,811


-


-


Other expenses




1,166,170


773,287


378,602


436,224














Total Expenses




10,680,861


11,704,107


3,658,066


3,105,186














Profit for the year




16,418,339


1,605,583


19,022,786


1,709,156


















































Basic earnings per share


5


0.3818


0.0396


0.4424


0.0421


Diluted earnings per share


5


0.3662


0.0356


0.4243


0.0379















All of the profit for the period relates to the equity holders of the parent


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


CONSOLIDATED BALANCE SHEET







31 December 2008 


31 December 2007




Notes


GBP


GBP


ASSETS








Non-current assets








Financial assets at fair value through profit or loss 


6 


126,644,228


140,315,881


Note receivable


8


-


500,000






126,644,228


140,815,881


Current assets








Note receivable


8


500,000


-


Trade and other receivables


 8


1,417,933


1,119,113


Cash and cash equivalents


 9


16,158,356


16,078,863






18,076,289


17,197,976










Total assets




144,720,517


158,013,857










EQUITY








Capital and reserves attributable to the Company's equity holders








Share premium


11


5,619,040


5,619,040


Distributable reserve


11


34,800,000


36,200,000


Foreign exchange reserve




2,743,441


138,994


Retained earnings




10,687,402


(2,505,937)










Total equity




53,849,883


39,452,097










LIABILITIES








Non-current liabilities








Loan notes at fair value through profit or loss


10


88,538,096


114,590,180










Current liabilities








Trade and other payables


10


2,332,538


3,971,580










Total liabilities




90,870,634


118,561,760










Total equity and liabilities




144,720,517


158,013,857










Net Asset Value per Share




£1.25


£0.92



The financial statements were approved by the Board of Directors on 8 June 2009 and were signed on its behalf by:


Patrick Francis Conroy

Director


Saul Barak Rosenthal

Director


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


COMPANY BALANCE SHEET







31 December 2008 


31 December 2007




Notes


GBP


GBP


ASSETS








Non-current assets








Financial assets at fair value through profit or loss


6 


614,381


4,227,734


Investment in subsidiary


7


48,625,653


31,365,126


Note receivable


8


-


500,000






49,240,034


36,092,860


Current assets








Note receivable


8


500,000


-


Trade and other receivables


 8


119,628


196,498


Cash and cash equivalents


 9


4,165,697


3,380,265






4,785,325


3,576,763










Total assets




54,025,359


39,669,623










EQUITY








Capital and reserves attributable to the Company's equity holders








Share premium


11


5,619,040


5,619,040


Other reserve




34,800,000


36,200,000


Retained earnings




13,430,843


(2,366,943)










Total equity




53,849,883


39,452,097










LIABILITIES








Current liabilities








Trade and other payables


10


175,476


217,526










Total liabilities




175,476


217,526










Total equity and liabilities




54,025,359


39,669,623










Net Asset Value per Share




£1.25


£0.92



The financial statements were approved by the Board of Directors on 8 June 2009 and were signed on its behalf by:


Patrick Francis Conroy

Director


Saul Barak Rosenthal

Director


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


STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY


Group

Share Capital


Share Premium


Other Reserve**


Foreign Exchange Reserve


Retained Earnings**


Total Equity



GBP


GBP


GBP


GBP


GBP


GBP















Balance at 31 December 2006

-


36,694,149


14,167


35,421


(251,520)


36,492,217















Net proceeds from share issue

-


5,024,891


-


-


-


5,024,891


Transfer to distributable reserve

-


(36,100,000)


36,100,000


-


-


-















Profit for the year

-


-


-


-


1,605,583


1,605,583


Foreign exchange on consolidation

-


-


-


103,573


-


103,573


Total income & expense for the year

-


-


-


103,573


1,605,583


1,709,156















Amortisation of fair value of options

-


-


85,833


-


-


85,833


Dividends paid

-


-


-


-


(3,860,000)


(3,860,000)


Balance at 31 December 2007

-


5,619,040


36,200,000


138,994


(2,505,937)


39,452,097















Net proceeds from share issue

-


-


-


-


-


-


Transfer to distributable reserve

-


-


-


-


-


-















Profit for the year

-


-


-


-


16,418,339


16,418,339


Foreign exchange on consolidation

-


-


-


2,604,447


-


2,604,447


Total income & expense for the year

-


-


-


2,604,447


16,418,339


19,022,786















Settlement of share options

-


-


(1,400,000)


-


-


(1,400,000)


Dividends paid*

-


-


-


-


(3,225,000)


(3,225,000)















Balance at 31 December 2008

-


5,619,040


34,800,000


2,743,441


10,687,402


53,849,883



Company

Share Capital


Share Premium


Other Reserve**


Foreign Exchange Reserve


Retained Earnings**


Total Equity



GBP


GBP


GBP


GBP


GBP


GBP















Balance at 31 December 2006

-


36,694,149


14,167


-


(216,099)


36,492,217















Net proceeds from share issue

-


5,024,891


-


-


-


5,024,891


Transfer to distributable reserve

-


(36,100,000)


36,100,000


-


-


-















Profit for the year

-


-


-


-


1,709,156


1,709,156


Total income & expense for the year

-


-


-


-


1,709,156


1,709,156















Amortisation of fair value of options

-


-


85,833


-


-


85,833


Dividends paid

-


-


-


-


(3,860,000)


(3,860,000)


Balance at 31 December 2007

-


5,619,040


36,200,000


-


(2,366,943)


39,452,097















Net proceeds from share issue

-


-


-


-


-


-


Transfer to distributable reserve

-


-


-


-


-


-















Profit for the year

-


-


-


-


19,022,786


19,022,786


Total income & expense for the year

-


-


-


-


19,022,786


19,022,786















Settlement of share options

-


-


(1,400,000)


-


-


(1,400,000)


Dividends paid*

-


-


-


-


(3,225,000)


(3,225,000)


Balance at 31 December 2008

-


5,619,040


34,800,000


-


13,430,843


53,849,883



*During the year the Company made three dividend payments.  

** Distributable reserves.


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


STATEMENT OF CASHFLOWS






Group


Group


Company


Company






31 December 2008


31 December 2007


31 December 2008


31 December 2007




Notes


GBP


GBP


GBP


GBP














Cash flows from operating activities
























Cash generated from operations


13


(1,388,683)


2,111,936


1,873,835


(1,421,108)


Purchase of investments


6


(21,723,644)


(137,310,167)


-


(10,226,998)


Sale of investments


6


7,244,591


40,750,789


3,528,951


18,877,404














Net cash inflow/(outflow) from operating activities




(15,867,736)


(94,447,442)



5,402,786



7,229,298














Cashflows from investing activities












Payment to subsidiary


6,7


-


-


-


(17,819,912)


Receipt from subsidiary


6,7


-


-


-


8,951,516


Principal received


6


17,967,782


1,670,903


7,646


-














Net cash outflow from investing activities




17,967,782


1,670,903



7,646



(8,868,396)














Cashflows from financing activities












Net proceeds from issue of shares


11


-


5,024,891


-


5,024,891


Warehouse facility




-


(18,874,945)


-


-


Settlement of share options




(1,400,000)


-


(1,400,000)


-


Loan notes




-


121,532,370


-


-


Dividends paid




(3,225,000)


(3,860,000)


(3,225,000)


(3,860,000)














Net cash inflow/(outflow) from financing activities




(4,625,000)


103,822,316



(4,625,000)



1,164,891














Net increase/(decrease) in cash and cash equivalents




(2,524,954)


11,045,777



785,432



(474,207)














Cash and cash equivalents at beginning of year




16,078,863


4,929,513



3,380,265



3,854,472














Foreign exchange gain on consolidation




2,604,447


103,573


-


-














Cash and cash equivalents at end of year




16,158,356


16,078,863


4,165,697


3,380,265



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


NOTES TO THE FINANCIAL STATEMENTS

For the year ended 31 December 2008


1. GENERAL INFORMATION

T2 Income Fund Limited (the 'Company') was incorporated and domiciled in Guernsey, Channel Islands, as a company limited by shares and with limited liability on 9 June 2005. The address of the registered office is 2nd Floor, Regency Court, Glategny Esplanade, St Peter Port, GuernseyGY1 3NQ.


A new Cayman Islands registered subsidiary company, T2 Income Fund CLO I Ltd., was created on 11 October 2006. Through its ownership of 100% of the preferred shares of T2 Income Fund CLO I Ltd. the Directors consider the CLO to be a wholly owned subsidiary and the operating results are consolidated in these financial statements. The Group is comprised of the 'Company' and the 'CLO'.


Investing Policy

The Group generally invests in syndicated and non-syndicated corporate loans issued by a range of companies, with a focus to date on issuers with a credit rating of B or CCC (S&P). The Group began with a particular focus on technology related companies and continues to leverage the technology-based expertise of its principals. The Group focuses its investments primarily in small to medium sized companies, including those companies traditionally defined as 'middle market.' The Group usually expects to take a senior debt position, and may also invest in senior and junior subordinated debt.


T2 Advisers seeks to take advantage of its current relationships with US and global agent banks and private equity funds to source deals. The Group principally targets companies with experienced management, a significant financial or strategic sponsor or partner, a strong competitive position and positive cash flow.


The Board anticipates that the Group's maximum investment size, at the time of investment, will be limited to 15 per cent of the Group's gross assets; however, the Group may make larger investments and in such circumstances it may seek to syndicate or sell a portion of its initial investment.


The Group may seek additional debt (or raise additional capital through the issuance of its equity) to fund future investments. Any gearing will not be undertaken without the approval of the Board.


The Group's objective is to produce a stable and predictable dividend yield, with long term preservation of net asset value.


2. ACCOUNTING POLICIES

(a) Basis of preparation

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards ('IFRS') and all applicable requirements of Guernsey Company Law.  The financial statements have been prepared under the historical cost convention, apart from the inclusion of non-current asset investments, foreign currency derivatives and non-current liabilities at fair value through profit or loss. The principal accounting policies of the Group and Company have remained unchanged from the previous year and are set out below. 


(b) Basis of consolidation

The consolidated financial statements comprise the financial statements of T2 Income Fund Limited and its subsidiary T2 Income Fund CLO I Ltd. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. The Company carries its investment in the CLO subsidiary at fair value through profit or loss. This is based upon the fair value of the assets and liabilities held by the CLO, which the Directors consider to be indicative of fair value for financial reporting purposes; however, the disparity between the Company's NAV per share, as determined under IFRS, and share price has been recognised by the Directors and is believed to be reflective of significant dislocations in the global credit markets as well as practical limitations on the Company's ability to realise the discount reflected in the fair value of the CLO loan notes, due to the unwillingness of the holders of those notes to execute a transaction at those prices.


(c) Foreign currency translation

(i) Functional and presentation currency

The Financial Statements of the Company are presented in the currency of the primary economic environment in which the entity operates (its functional currency). The Directors have considered the primary economic currency of the Company and considered the currency in which the original finance was raised, distributions made, and ultimately what currency would be returned on a break up basis. The Directors have also considered the currency to which the underlying investments are exposed. On balance, the Directors believe Sterling best represents the functional currency of the Company and Dollars the functional currency of the subsidiary. Therefore the books and records are maintained in Sterling and Dollars respectively and for the purpose of the financial statements the results and financial position of the Group are presented in Sterling, which is the presentation currency of the Group.


(ii) Transactions and balances

Foreign currency transactions are translated into the functional currency 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 Income Statement.


Translation differences on non-monetary items are reported as part of the fair value gain or loss reported in the Income Statement.


(iii) Subsidiary company

The results and financial position of the subsidiary entity that has a functional currency different to the presentation currency is translated into the presentation currency as follows:


1.          assets and liabilities of the Balance Sheet presented are translated at the closing rate at the date of the balance sheet;
 
2.          income and expenses for the Income Statement are translated at average exchange rates for the period (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and
 
3.          all resulting exchange differences are recognised as a separate component of shareholders' equity.


(d) Revenue recognition

Revenue is recognised as follows:


Interest income - recognised on an accruals basis as this relates to bank interest income and coupon interest.


Other income - relates to note receivable interest which is recognised under the effective interest rate method.


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


(e) Expenditure

All expenses are accounted for on an accruals basis. The management fees, administration fees, finance costs and all other expenses (excluding set up expenses which were offset against share premium) are charged through the Income Statement.  


(f) Taxation

The Company is exempt from Guernsey taxation under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989. A fixed annual fee of £600 is payable to the States of Guernsey in respect of this exemption.


(g) Share issue expenses

Share issue expenses of an equity transaction are accounted for as a deduction from equity (net of any income tax benefit) to the extent they are incremental costs directly attributable to the equity transaction that otherwise would have been avoided.


(h) Dividends

Dividend distributions to the Group's shareholders are recognised in the Group's financial statements in the period in which the dividends are paid.


(i) Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held on call with banks, other short term highly liquid investments and bank overdrafts.


(j) Trade and other receivables

Receivables are recognised initially at fair value plus transaction costs that are directly attributable to their acquisition or origination. They are subsequently measured at amortised cost.


(k) Trade and other payables

Payables are recognised initially at fair value and subsequently stated at amortised cost.  


(l) Investments and loan notes

(i) Financial assets and liabilities at fair value through profit or loss

Purchases and sales of all investments are recognised on trade date - the date on which the Group acquires or disposes of the economic benefits of the asset. All investments are initially recognised at fair value, and transaction costs for all financial assets and financial liabilities carried at fair value through profit or loss are expensed as incurred. Investments are derecognised when the rights to receive cash flows from the investments have expired or the Group has transferred substantially all risks and rewards of ownership.


The CLO loan notes were designated at fair value through profit or loss because the purpose of issuing the CLO loan notes was to be able to make investments in syndicated loans which were based upon the same or similar variable interest rates, and the fair value designation avoided an accounting mismatch. The Directors recognise that the magnitude of fair value movement of the CLO loan notes is substantially greater than the movement of the investments, due to variations in the different markets in which these instruments are traded.


The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price. The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. Valuation techniques used include the use of comparable recent arm's length transactions.


For broadly syndicated loans T2 receives market quotes from agent banks on a quarterly basis. In addition, because of the generally limited trading activity in the syndicated loan market, the Investment Manager prepares an analysis of the portfolio companies' recent and projected financial performance as well as other relevant business developments. In those instances where the Investment Manager believes additional analysis is necessary, for example due to a significant change in the market quote without related transaction volume, an outside valuation firm will provide a valuation estimate based upon their proprietary methodologies and techniques. Factors considered in these independent valuation analyses include discounted cash flows, comparable company and comparable transaction analysis, and credit spread analysis based upon the independent valuation firms' view of the implied credit rating of the investment and the corresponding required spread in the marketplace. The Board considers all the information presented to it, including indicative bids, internal analysis, and independent valuations, in order reach, in good faith, their fair value determination.


For bi-lateral loans, an independent third party performs portfolio company evaluations. As part of this independent third party's due diligence they review the following:


-       Audited and/or unaudited historical financial information including the most recent fiscal year.
-       Financial information for the most current period available.
-       Financial forecast prepared by the Portfolio Company.
-       Most current capitalisation table.
-       T2 Investment Committee Memorandum prepared prior to the date of investment.
-       Documents relating to business operations, financial performance and corporate planning.
-       Public filings by the Portfolio Companies.
In assessing the fair value of each investment, a third party valuation firm reviews the following:
-       Recent financial performance including cash flow and profitability on an actual basis compared to plan.
-       Funding history of the company, the implied valuation from the most recent funding and anticipated future funding transactions.
-       The company's capital structure.
-       Recent business events disclosed by the Company.
-       Potential requirement for additional funding.


As of December 2008, there were no bi-lateral loans in the Group's portfolio.


The fair value of the loan notes is determined primarily by reference to a mid-market value report provided by the independent broker-dealer which makes the market in the CLO notes. Due to the very limited trading activity in this security, and the significant dislocations which have occurred in the credit markets generally and in the CLO markets in particular, the Directors consider the mid-market value report to be the best indicator of fair value for the notes. The mid-market value report reflects the proprietary analysis of the broker-dealer, specifically considering the cash flows projections of the T2 CLO subsidiary, the credit quality of the investments included in the CLO, and the credit spread required by the marketplace for CLO notes with these particular characteristics. The Directors also consider any trading activity in the CLO notes, if any, as well as other indicators of value based upon discussions between the Investment Manager and the few holders of the notes. The Directors believe that the mid-market value report is the best reflection of fair value of the notes, consistent with the requirements of IFRS, and is consistent with the other factors which have been taken into consideration.


Gains and losses arising from changes in the fair value of the financial assets and liabilities at fair value through profit or loss are included in the Income Statement in the period in which they arise.  


(ii) Derivative Financial Instruments

Derivatives are categorised as financial assets or liabilities held for trading and valued at fair value through profit or loss.


(iii) Subsidiary

Investment in subsidiary is initially recorded at cost. The Company carries its investment in the CLO subsidiary at fair value through profit or loss. This is based upon the fair value of the assets and liabilities held by the CLO, which the Directors consider to be indicative of fair value for financial reporting purposes. Through its ownership of 100% of the preferred shares of T2 Income Fund CLO I Ltd the Directors consider the CLO to be a wholly owned subsidiary and the operating results are consolidated in these financial statements.


(m) Critical accounting estimates and judgements in applying accounting policies

The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group also makes assumptions on the classification of financial assets.


Unlisted Debt Securities

The Group can invest in financial instruments which are not quoted in active markets. Fair values are determined by using valuation techniques. Where valuation techniques, such as the Market Capitalization Approach, are used to determine fair values they are carried out by an independent valuation firm specifically engaged by the Group to carry out the valuations. Changes in assumptions could affect the reported fair value of financial instruments. See note 6 for carrying amount at year end.


Because the Group's portfolio investments are generally not traded in active markets, fair value determinations are based upon additional information, including internal analysis and projections as well as independent valuation work performed by outside firms, beyond the indicative quotes which are generally also available for portfolio investments. These other analyses rely upon observable data including comparable transactions, interest rates and credit spreads.


The Group's liabilities likewise are not traded in active markets, and the independent analysis which provides the basis for the fair value determination is based, in part, upon observable market data including interest rates and credit spreads. The fair value change in the Group's liabilities substantially exceeded the change in the investment portfolio, even though both are related to interest rates generally, because the assumptions relative to the value of CLO liabilities specifically include the assumptions about credit quality of the individual component companies of the CLO investment portfolio, the anticipated cash flow from those investments, and the resulting possibility of covenant defaults which could dramatically effect the sustainability of the CLO structure and therefore the fair value of the loan notes.


 (n) New standards
The following interpretations to published standards are mandatory for accounting periods beginning on or after 1 January 2008 but they are not relevant to the company’s operations:
 
-       IFRIC 14, 'IAS 19 – the limit on a defined benefit asset, minimum funding requirements and their interaction' (effective from 1 January 2008).
-        IFRIC 12, 'Service concession arrangements' (effective from 1 January 2008)
-        IFRIC 13, 'Customer loyalty programmes' (effective from 1 July 2008).
 
New standards and interpretations have been published that are mandatory for the Group's accounting periods beginning on or after 1 January 2009 or later periods and which the Group has not early adopted:
 
-       IAS 23 (Amendment), 'Borrowing costs' (effective from 1 January 2009)
-       IFRS 8, 'Operating segments' (effective from 1 January 2009). IFRS 8 replaces IAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131, 'Disclosures about segments of an enterprise and related information'.
-       IAS 1 (Revised), “Presentation of financial statements” (effective from 1 January 2009).
-       IFRS 2 (Amendment), “Share-based payment” (effective from 1 January 2009).
-       IAS 32 (Amendment), “Financial instruments: Presentation”, and IAS 1 (Amendment), “Presentation of financial statements” – “Puttable financial instruments and obligations arising on liquidation” (effective from 1 January 2009).
-       IFRS 1 (Amendment) “First time adoption of IFRS”, and IAS 27 “Consolidated and separate financial statements” (effective from 1 January 2009).
-       IAS 27 (Revised) “Consolidated and separate financial statements” (effective from 1 July 2009).
-       IFRS 3 (Revised), “Business combinations” (effective from 1 July 2009).
-       IFRS 5 (Amendment), “Non-current assets held-for-sale and discontinued operations” (effective from 1 July 2009).
-       IAS 28 (Amendment), “Investments in associates” (effective from 1 January 2009).
-       IAS 36 (Amendment), “Impairment of assets” (effective from 1 January 2009).
-       IAS 38 (Amendment), “Intangible assets” (effective from 1 January 2009).
-       IAS 19 (Amendment), “Employee benefits” (effective from 1 January 2009).
-       IAS 39 (Amendment), “Financial instruments: Recognition and measurement” (effective from 1 January 2009).
-       IAS 16 (Amendment), “Property, plant and equipment” (effective from 1 January 2009).
-       IAS 27 (Amendment), “Consolidated and separate financial statements” (effective from 1 January 2009).
-       IAS 28 (Amendment), “Investment in associates” (effective from 1 January 2009).
-       IAS 29 (Amendment), “Financial reporting in hyperinflationary economies” (effective from 1 January 2009).
-       IAS 31 (Amendment), “Interest in joint ventures” (effective from 1 January 2009).
-       IAS 40 (Amendment), “Investment property” (effective from 1 January 2009).
-       IAS 41 (Amendment), “Agriculture” (effective from 1 January 2009).
-       IAS 20 (Amendment), 'Accounting for government grants and disclosure of government assistance' (effective from 1 January 2009).
-       IFRIC 15, “Agreements for construction of real estates” (effective from 1 January 2009).
 
The Directors anticipate that the adoption of these standards and interpretations in future periods will not have a material impact on the financial statements of the company.


(o) Share based payments

Share options are valued in accordance with IFRS2. In accordance with IFRS2, the value of the options is based upon an estimate of the fair value of the services received. See note 11.


3. FINANCIAL RISK MANAGEMENT

(1) Financial risk factors

The Group is exposed to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The risk management policies employed by the Group to manage these risks are discussed below. The primary objectives of the financial risk management function are to establish risk limits, and then ensure that exposure to risks stays within these limits. The operational and legal risk management functions are intended to ensure proper functioning of internal policies and procedures to minimise operational and legal risks.


Significant accounting policies

Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 2 to the Financial Statements.


Capital Risk Management

The Group has sought to achieve an attractive risk adjusted return by investing in debt securities, consisting primarily of senior debt across multiple industries.


The Group intends to invest primarily in companies with attractive fundamental characteristics including experienced management, a significant financial or strategic sponsor or partner, a strong competitive position and positive cash flow.


The capital structure of the Group consists of cash and cash equivalents and equity attributable to equity holders, comprising share premium, distributable reserves and retained earnings. The Group does not have any externally imposed capital requirements. At 31 December 2008 the Group had total equity of GBP53,849,883 (2007:GBP39,452,097).


The Group manages its capital to ensure that its objective is met. It does this by investing available cash whilst maintaining sufficient liquidity to meet on-going expenses and dividend payments.


The Investment Manager ensures that not more than 15% of the Group's gross assets are invested in any one investment. Consistent with shareholder approval obtained in December 2006, the Group may apply leverage up to 500%, or five times, the net asset value of the Group. Leverage is the ability to incur indebtedness for the purpose of making investments. The Group has incurred indebtedness (approximately US$249.2 million) through its CLO subsidiary in the form of long-term notes.


(a) Market risk

The Group's exposure to market risk is comprised mainly of movements in the Group's investments. The investment portfolio is managed within parameters disclosed in the Group's offering memorandum. All investments present a risk of loss of capital.


At 31 December 2008, the Group's market risk is affected by three main components: changes in actual market prices, interest rate and foreign currency movements. Interest rates and foreign currency movements are covered at (b) and (c) below.  


The following details the Group's sensitivity to a 5% increase and decrease in the market prices, with 5% being the sensitivity rate used when reporting price risk to key management and represents management's assessment of the possible change in market price.


If market prices had increased by 5% with all other variables held constant, this would have increased net assets attributable to holders of equity shares by approximately GBP1,905,306 (2007:GBP1,286,285), due to the increase in the fair value of financial assets at fair value through profit or loss by GBP6,332,211 (2007:GBP7,015,794) offset by the increase in the fair value of the financial liabilities at fair value through profit or loss by GBP4,426,905 (2007:GBP5,729,509). Conversely, if market prices had decreased by 5%, this would have decreased net assets attributable to holders of equity shares by approximately GBP1,905,306 (2007:GBP1,286,285), due to the decrease in the fair value of financial assets at fair value through profit or loss by GBP6,332,211 (2007:GBP7,015,794) offset by the decrease in the fair value of the financial liabilities at fair value through profit or loss by GBP4,426,905 (2007:5,729,509).


(b) Interest rate risk

Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates. The Group has exposure to interest rate risk because it has borrowed to fund investments. The exposure arises on the difference between the rate of interest the Group is required to pay on borrowed funds and the rate of interest which it receives on the debt securities in which it invests. Interest rate risk is comprised of two elements: spread risk and rate risk.


The Group is exposed to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. The Group's cash balances, debt instruments and loan notes are open to interest rate risk.


The Group may, but is not required to, hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts.


The table below summarises the Group's exposure to interest rate risk.  




Floating rate



Fixed rate


Non- interest

Bearing





Financial


Financial


Financial





Assets


Assets


Assets


Total


At 31 December 2008

GBP


GBP


GBP


GBP


Assets









Financial assets at fair value through profit or loss

126,644,228


-


-


126,644,228


Note receivable

-


500,000


-


500,000


Trade and other receivables

-


-


1,417,933


1,417,933


Cash and cash equivalents

16,158,356


-


-


16,158,356


Total assets

142,802,584


500,000


1,417,933


144,720,517











Liabilities









Loan notes

88,538,096


-


-


88,538,096


Trade and other payables

-


-


2,332,538


2,332,538


Total liabilities

88,538,096


-


2,332,538


90,870,634


Total interest sensitivity gap

54,264,488


500,000


(914,605)


53,849,883





Floating rate



Fixed rate


Non- interest

Bearing





Financial


Financial


Financial





Assets


Assets


Assets


Total


At 31 December 2007

GBP


GBP


GBP


GBP


Assets









Financial assets at fair value through profit or loss

140,315,881


-


-


140,315,881


Note receivable

-


500,000


-


500,000


Trade and other receivables

-


-


1,119,113


1,119,113


Cash and cash equivalents

16,078,863


-


-


16,078,863


Total assets

156,394,744


500,000


1,119,113


158,013,857











Liabilities









Loan notes

114,590,180


-


-


114,590,180


Trade and other payables

-


-


3,971,580


3,971,580


Total liabilities

114,590,180


-


3,971,580


118,561,760


Total interest sensitivity gap

41,804,564


500,000


(2,852,467)


39,452,097



A 200 basis point increase or decrease is used when reporting interest spread risk internally and represents management's assessment of the possible change in interest spreads, and 50 basis points is used when reporting interest rate risk.


At 31 December 2008, should the interest spread have lowered by 200 basis points with all other variables remaining constant, the decrease in net assets attributable to holders of equity for the year would amount to approximately GBP4,648,060 (2007: GBP2,466,100). If the interest spread had risen by 200 basis points, the increase in net assets attributable to holders of equity would amount to approximately GBP4,648,060 (2007: GBP2,466,100).


At 31 December 2008, should interest rates have lowered by 50 basis points with all other variables remaining constant, the increase in net assets attributable to holders of equity for the year would amount to approximately GBP302,970 (2007: reduction in net assets GBP206,996). If the interest rate had risen by 50 basis points, the decrease in net assets attributable to holders of equity would amount to approximately GBP302,970 (2007: increase in net assets GBP206,996).


(c) Currency risk

Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. The Group may make investments in currencies other than Sterling. To the extent that it does, the Group will be exposed to a potentially adverse currency risk. Changes in the rate of exchange may affect the value of the Group's investments, and the level of income that it receives from those investments.


Foreign currency denominated financial assets and liabilities, translated into GBP at the closing rate, are as follows:


31 December 2008

Assets

USD


EUR


GBP


Total


Financial assets at fair value through profit or loss account

126,644,228


-


-


126,644,228


Cash and cash equivalents

16,158,356


-


-


16,158,356


Trade and other receivables

1,329,598


-


588,335


1,917,933


Total assets

144,132,182


-


588,335


144,720,517


Liabilities









Trade and other payables

90,781,834


-


88,800


90,870,634


Total currency sensitivity gap

53,350,348


-


499,535


53,849,883



31 December 2007

Assets

USD


EUR


GBP


Total


Financial assets at fair value through profit or loss account

137,374,272


2,941,609


-


140,315,881


Cash and cash equivalents

15,907,649


100,259


70,955


16,078,863


Trade and other receivables

1,049,316


-


569,797


1,619,113


Total assets

154,331,237


3,041,868


640,752


158,013,857


Liabilities









Trade and other payables

118,474,858


-


86,902


118,561,760


Total currency sensitivity gap

35,856,379


3,041,868


553,850


39,452,097



At 31 December 2008, had the exchange rate between the US dollar, EUR and GBP increased or decreased by 5%, with all other variables held constant, the increase or decrease respectively in net assets attributable to holders of equity shares would amount to approximately GBP2,156,562 (2007: GBP36,454).


In accordance with the Group's policy, the Investment Manager monitors the Group's currency position on a regular basis, and the Board of Directors reviews it on a quarterly basis.


(d) Credit risk

Credit risk arises when a failure by counterparties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the balance sheet date. The Group invests primarily in senior debt, senior subordinated debt and junior subordinated debt. The maximum investment size, at the time of the investment, will generally be limited to 15% of the Group's Gross Assets. However, the Group may make larger investments and it may seek to syndicate or sell down a portion of any such investment, after it has been acquired.


The Group has established a credit rating system. The purpose of the rating system is to monitor the credit quality of T2's investment portfolio on both an individual and portfolio basis and the future on-going monitoring required.


Portfolio by rating category


2008


2007


1


22%


2%


2


50%


77%


3


28%


21%


4


0%


0%


5


0%


0%


Total


100%


100%



Credit Ratings Level

Ratings Criteria Methodology (1)


(General Parameters)

1

Company is performing ahead of expectations and / or outperforming financial covenant requirements and this trend is expected to continue.

2

Full repayment of principal and interest is expected.

3

Closer monitoring is required. Full repayment of principal and interest is expected.

4

A reduction of interest income has occurred or is expected to occur. No loss of principal is expected.

5

A loss of some portion of principal is expected. (2)


(1)     The above methodology outlines the general parameters adopted to determine ratings, and other facts and circumstances may be considered when determining an appropriate Credit Ratings Level.

(2)      An estimate of the potential amount of principal loss will be determined on a quarterly basis.


None of the Group's financial assets are secured by collateral or other credit enhancements.


In respect of trade and other receivables, the Group is not exposed to any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics.


The credit risk for liquid funds and other short-term financial assets is considered negligible, since the counterparties are reputable banks with high quality external credit ratings.


(e) Liquidity risk

Liquidity risk is the risk that arises when the maturity of assets and liabilities does not match. As the Group's investments will not generally be in publicly traded securities, they are likely to be subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities. The illiquidity of the Group's investments may make it difficult for them to be sold quickly if the need arises. Since the Group intends to invest in debt securities with a term of up to seven years, and hold investments in debt securities until maturity of the debt, the Group does not expect realisation events to occur in the near term.


The table below analyses the Group's financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts in the table are the contractual undiscounted cash flows, assuming interest rates in effect at the year end. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant.




Current


Non-Current





within


6 to 12


1 to 5


later


No stated



6 months


months


years


than 5 years


maturity


At December 2008











Loan notes

4,704,711


4,704,711


37,637,684


223,163,401


-


Trade and other payables

2,332,538


-


-


-


-


Total financial liabilities

7,037,249


4,704,711


37,637,684


223,163,401


-


At 31 December 2007











Loan notes

3,856,328


3,856,328


30,850,626


176,193,334


-


Trade and other payables

3,971,580


-


-


-


-


Total financial liabilities

7,827,908


3,856,328


30,850,626


176,193,334


-



(2)     Fair value estimation

The fair values of the Group's short-term trade receivables and payables approximate their carrying amounts at the balance sheet date.


4. FUND EXPENSES

Management fee

The Investment Manager, T2 Advisers, LLC, is entitled to receive an annual fee payable quarterly in advance. The management fee is calculated based on 2% of the average value of the Company's gross assets at the most recently completed calendar quarter and the projected gross assets as of the end of the current calendar quarter.


Total fees charged for the year ended 31 December 2008 amounted to GBP2,969,672 (2007:GBP2,420,301). The total amount due and payable at the year end amounted to GBP nil (2007:GBP12,725).


Administration and secretarial fees

The Administrator and Secretary, Butterfield Fulcrum Group (Guernsey) Limited, is entitled to an annual fee for its services, as administrator and secretary, of 0.075% of the Net Asset Value of the Group, calculated on the last business day of each quarter and payable quarterly in arrears. The fee is subject to a minimum of GBP40,000 per annum. They are also due a fixed accounting fee of GBP10,000 per annum plus a fixed fee of GBP5,000 for their registrar services.


Total Administration and secretarial fees (excluding accounting and registrar fees) charged for the year ended 31 December 2008 amounted to GBP40,000 (2007:GBP40,000). The total amount due and payable at the year end amounted to GBP10,000 (2007:GBP10,000).


Custodian fees

The Custodian, Butterfield Bank (Guernsey) Limited is entitled to custody fees of 0.02% of the Net Asset Value of the Group subject to a minimum of GBP15,000 per annum. The fee is payable quarterly in arrears.


Total fees charged for the year ended 31 December 2008 amounted to GBP15,010 (2007:GBP15,043). The total amount due and payable at the year end amounted to GBP7,520 (2007:GBP3,750).


Directors fees

The current level of fees for the Chairman of the Board of Directors of the Group is GBP25,000 per annum, and GBP20,000 each for non-executive directors.  


Total fees charged to the Group for the year ended 31 December 2008 amounted to GBP64,929 (2007:GBP64,919). The total amount due and payable at the year end amounted to GBP16,250 (2007:GBP16,321).


Loan note expenses

Total loan note expenses for 2008 was GBPnil (2007:GBP3,054,047). These costs are the transaction costs that were incurred as a direct result of the raising and issuing of the loan notes raised and issued during 2007.


Finance costs

Total finance costs for 2008 was GBP6,235,227 (2007:GBP5,207,811). These finance costs are for interest paid to Merrill Lynch for the Warehouse facility GBP nil (2007: GBP1,686,232) and interest due to the loan note holders GBP6,235,227 (2007: GBP3,521,579). The liability for the Warehouse facility was repaid on 19 July 2007 and replaced with long-term notes. Long-term notes outstanding at 31 December 2008 were GBP88,538,096 (2007: GBP114,590,180).


5. EARNINGS PER SHARE

Earnings per share has been calculated by dividing the profit attributable to ordinary share holders GBP16,418,339 Group, GBP19,022,786 Company (2007:GBP1,605,583 Group, GBP1,709,156 Company) by the weighted average number of ordinary shares outstanding during the year 43,000,000 (2007:40,589,041). Fully diluted profit per share has been calculated by dividing the profit attributable to ordinary share holders of GBP16,418,339 Group, GBP19,022,786 Company (2006: GBP1,605,583 Group, GBP1,709,156 Company), by the weighted average number of ordinary shares outstanding during the year adjusted for the effects of all dilutive potential ordinary shares 44,836,065 (2007:45,098,934).


Basic earnings per share

Date


No. of shares



No. of days

Weighted average no. of shares

01/01/08 & 31/12/08


43,000,000



366




43,000,000











01/01/07


38,000,000



176




18,323,288

25/06/07


43,000,000



189




22,265,753






365




40,589,041


Diluted earnings per share

Date


Fully diluted no. of shares



No. of days

Weighted average no. of shares











01/01/08


47,777,777



111




14,489,982

21/04/08


  43,555,555



255




30,346,083






366




44,836,065











01/01/07


42,222,222



176




20,359,208

25/06/07


47,777,777



189




24,739,726






365




45,098,934




2008

No. of shares


2007

No. of shares


Weighted average number of ordinary shares for the purposes of basic earnings per share


43,000,000



40,589,041



Effect of dilutive potential ordinary shares:






Share options


1,836,065


4,509,893


Weighted average number of ordinary shares for the purposes of diluted earnings per share


44,836,065



45,098,934



6. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT AND LOSS



Group


Group


Company


Company



2008


2007


2008


2007



GBP


GBP


GBP


GBP











Listed debt securities

28,102,380


30,063,114


-


-


Unlisted debt securities

98,541,848


110,252,767


614,381


4,227,734


Investment in subsidiary

-


-


48,625,653


31,365,126



126,644,228


140,315,881


49,240,034


35,592,860


Realised (loss)/gains recognised on financial assets and liabilities at fair value through profit or loss (1)









Realised (loss)/gain on investments

(896,251)


(1,730,802)


832,634


(547,568)


Realised gain on warehouse facility

-


3,499,363


-


-



(896,251)


1,768,561


832,634


(547,568)


Unrealised gains recognised on financial assets and liabilities at fair value through profit or loss (2)









Unrealised (loss)/gain on financial assets

(9,286,677)


(6,820,160)


16,351,137


3,198,134


Unrealised gain on financial liabilities

26,052,088


6,942,190


-


-



16,765,411


122,030


16,351,137


3,198,134





Group


Group


Company


Company



2008


2007


2008


2007



GBP


GBP


GBP


GBP











Opening open of financial assets

148,937,826


55,780,153


4,064,098


27,387,224


Purchases

21,723,644


137,310,167


-


10,226,998


Sales

(7,244,591)


(40,750,789)


(3,528,951)


(18,877,404)


Realised (loss)/gain on sale of investments 

(896,251)


(1,730,802)


832,634


(547,568)


Transfer to subsidiary

-


-


-


(14,125,152)


Capital repayments

(17,967,782)


(1,670,903)


(7,646)


-


Cost of investments at year end

144,552,846


148,937,826


1,360,135


4,064,098


Unrealised (loss)/gain at year end

(17,908,618)


(8,621,945)


(745,754)


163,636


Closing value at year end

126,644,228


140,315,881


614,381


4,227,734


 

(1)     For the year ended 31 December 2008 the Group had a realised loss of GBP896,251 (2007: realised gain of  
         GBP1,768,561) which comprised a realised loss on investments of GBP896,251 (2007:GBP1,730,802) and a realised 
         gain on warehouse facility of GBPnil (2007: GBP3,499,363).


(2)  
    For the year ended 31 December 2008 the Group had an unrealised gain on financial assets and liabilities at fair 
           value through the profit and gain of GBP16,765,411 (2007: GBP122,030). This is comprised of an unrealised loss on
           financial assets of GBP9,286,676 (2007: GBP6,820,160) and an unrealised gain on liabilities of GBP26,052,087
           (2007:GBP6,942,190).


7. INVESTMENT IN SUBSIDIARY




Company


 Company 




2008


2007




 GBP 


GBP








Opening value of Investment in subsidiary


29,928,228


6,934,680


Additions at cost


-


22,993,548


Cost of Investment in subsidiary at year end


29,928,228


29,928,228


Unrealised gain on net assets transferred to subsidiary


18,697,425


1,436,898


Closing fair value of Investment in subsidiary


48,625,653


31,365,126



The cost of the investment is represented by the net assets transferred to the subsidiary.


The Company from time to time makes asset transfers between the Company, T2 Income Fund Limited, and the subsidiary, T2 Income Fund CLO I Ltd. 


8. TRADE AND OTHER RECEIVABLES



Group


Group


Company


Company



2008


2007


2008


2007



GBP


GBP


GBP


GBP











Accrued bank interest

118


32,312


-


-


Loan interest receivable

1,384,117


1,060,213


85,930


169,909


Prepaid expenses

33,698


26,588


33,698


26,589



1,417,933


1,119,113


119,628


196,498


Current assets









Note receivable

500,000


-


500,000


-


Non current assets









Note receivable

-


500,000


-


500,000



The GBP500,000 note receivable relates to a promissory note due for payment in 2009 from T2 Advisers, LLC, the Company's Investment Manager. This note, which is subject to certain conditions, was signed on 5 December 2006 and is subject to interest of 8% per annum, compounded annually. The promissory note is recognised in the financial statements as the Directors, having reviewed the conditions pertaining to the promissory note, deem that receipt of payment is virtually certain.


9. CASH AND CASH EQUIVALENTS



Group


Group


Company


Company



2008


2007


2008


2007



GBP


GBP


GBP


GBP











Call account

16,158,356


16,078,863


4,165,697


3,380,265



For the purposes of the Cash Flow Statement, the above items represent the year end cash and cash equivalents.


10. TRADE AND OTHER PAYABLES


Group


Group


Company


Company



2008


2007


2008


2007


Current liabilities

GBP


GBP


GBP


GBP


Due to Subsidiary

-


-


76,778


56,440


Management fees

-


12,725


-


12,725


Administrator's fees

10,000


10,000


10,000


10,000


Custodian's fees

7,520


3,750


7,520


3,750


Audit fees

40,000


35,204


40,000


35,204


Directors' fees

16,250


16,321


16,250


16,321


Finance cost (1)

2,038,708


3,556,392


-


-


Unrealised loss on forward exchange contracts

-


5,266


-


5,266


Other accruals

220,060


331,922


24,928


77,820



2,332,538


3,971,580


175,476


217,526




Group


Group


Company


Company



2008


2007


2008


2007


Non current liabilities









Loan notes

88,538,096


114,590,180


-


-



On 21 November 2006 T2 Income Fund CLO I Ltd. entered into a credit and warehouse agreement (the 'Agreement') by and among Merrill Lynch Capital Corp., T2 Income Fund CLO I Ltd. (as the Issuer), T2 Advisers, LLC (as the Collateral Manager) and T2 Income Fund Limited. The facility amount was US$200,000,000. Interest due to Merrill Lynch was calculated daily on the total amount at 1 month LIBOR plus 50 basis points. Merrill Lynch provided funding of 80% of the par value of loans assigned to T2 Income Fund CLO I Ltd.


On 19 July 2007 the Warehouse facility was repaid and loan-notes were issued in the amount of US$309,050,000 with a twelve year term. The 'Indenture' dated 19 July 2007 is among T2 Income Fund CLO I Ltd as the 'Issuer', T2 Income Fund CLO I LLC as the 'Co-Issuer' and The Bank of New York Mellon as the 'Trustee'.

 

(1)     Interest on the loan-notes is calculated on a weighted average interest rate of LIBOR plus 75 basis points.


11. SHARE CAPITAL

The Company has the power to issue an unlimited number of ordinary shares of no par value.


On incorporation two Ordinary Shares were issued at 100p each to the subscribers to the Memorandum of Association of the Company. On Admission to the AIM on 5 August 2005 the Company repurchased these Ordinary Shares.


On Admission to the AIM on 5 August 2005 the Company allotted 38,000,000 fully paid Ordinary Shares.


During 2007 5,000,000 Ordinary Shares of no par value were issued at 101.75p per Share.


Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds, net of tax.  


On 15 June 2007 Court approval was received to reduce the issued share premium of the Company by an amount of £0.95 per share and that the aggregate of such reduction be credited as a distributable reserve.


The distributable reserve may be applied in any manner in which the Company's profits available for distribution are able to be applied, including the purchase of the Company's own shares and the payment of dividend.


The Investment Manager, T2 Advisers LLC, was granted options to purchase 4,222,222 Ordinary Shares at the Placing Price, as reduced by dividends paid per share, subject to the Company achieving certain performance criteria as follows:


The Investment Manager options vested and became exercisable in respect of 50 per cent immediately on conclusion of the first three month period during which the Company paid dividends on the Shares in an aggregate amount during that three month period equal to or exceeding 8 per cent of the Initial Offer Price on an annualised basis (the hurdle rate). The remaining 50 per cent vested and became exercisable immediately on conclusion of the twelve month period following the date specified above.


On 23 February 2007 the hurdle rate was met. Accordingly on 31 March 2007 the options on 2,111,111 of these Ordinary shares became vested. The remaining options for 2,111,111 Ordinary shares vested on 31 March 2008.


Effective 21 April 2008, the options to acquire 4,222,222 ordinary shares were cancelled in consideration of a one-off cash payment by the Company to the Investment Advisor of £1.4 million. The amount of the payment was determined by the Board with reference to the present value of the options, with the application of a further discount, and after consultation with the Company's nominated advisor.


The Investment Manager has been granted options to purchase 555,555 Ordinary Shares at 101.75p per Share, based upon the 5,000,000 Ordinary Shares issued in June 2007, in accordance with the terms of the Investment Manager Agreement.


In accordance with IFRS2, the value of the options was based upon an estimate of the fair value of the services received. The Company believes that the fair value can be determined by a comparison to a performance-based incentive fee program, which arrangements are common practice in the industry, because the option program was similarly intended to compensate the Investment manager for achieving superior returns. The fair value estimate was based, in good faith, upon the present value of a hypothetical performance-based incentive fee, assuming a fee of 20% of the excess return above an 8% hurdle rate over a ten-year period; the fair value of the options was determined to be £100,000. For the year ending 31 December 2008 the Company charged £nil (2006: £85,833) to expenses representing the amortisation of the fair value of the options.


The calculation of fair value is sensitive to a number of assumptions, including the average interest rate on investments, the pace of investment activity, the amount and cost of leverage, if any, and expenses. It should be noted that the actual value of the options may ultimately be substantially greater or less than the fair value calculated. If actual financial performance is significantly better than the assumptions used in the calculation of fair value, the options could be worth several million pounds; to the extent that the performance criteria is not achieved, the options would expire worthless.


Share Capital









31 December 2008


31 December 2007

Ordinary shares - nil par value



  Shares in issue

Shares in issue







Balance at start year



  43,000,000


38,000,000

Issued during the year



-


  5,000,000

Balance at end year



43,000,000


43,000,000










 31 December 2008 


 31 December 2007 

Share Premium



 GBP 


 GBP 

Balance at start year



5,619,040


  36,694,149

Issued during year



-


5,087,500

Issue costs



-


(62,609)

Transfer to distributable reserves



-


  (36,100,000)

Balance at end year



5,619,040


  5,619,040


12. NET ASSET VALUE PER SHARE

The net asset value per Ordinary Share is calculated by dividing the net assets at the year end of GBP53,849,883 (2007:GBP39,452,097) by the Ordinary Shares in issue at the end of the year being 43,000,000 (2007:43,000,000).


13. CASH GENERATED FROM OPERATIONS


Group


Group


Company


Company



2008


2007


2008


2007



GBP


GBP


GBP


GBP











Profit for the year

16,418,339


1,605,583


19,022,786


1,709,156


Adjustments for:









Realised (gain)/loss arising on adjustment to financial assets and liabilities

896,251


(1,768,561)


(832,634)


547,568


Unrealised (gain)/loss arising on adjustment to financial assets and liabilities

(16,765,411)


(122,030)


(16,351,137)


(3,198,134)


Amortisation of fair value of options

-


85,833


-


85,833


Changes in working capital:









Trade and other receivables

(298,820)


(508,167)


76,870


282,042


Trade and other payables

(1,639,042)


2,819,278


(42,050)


(847,573)


Cash inflow/(outflow) from operations

(1,388,683)


2,111,936


1,873,835


(1,421,108)



14. CONSOLIDATED SUBSIDIARY UNDERTAKING

Through its 100% ownership of preferred shares in T2 Income Fund CLO I Ltd., the Directors consider the following entity as a wholly owned subsidiary of the Company and its results and financial position are included within the consolidated results of the Company.



Date of incorporation

Country of incorporation


Nature of holding


Percentage holding

T2 Income Fund CLO I Ltd.


11 October 2006

Cayman Islands


Direct


100%


15. RELATED PARTY TRANSACTIONS

Saul Rosenthal is a member of BDC Partners which owns T2 Advisers, LLC., the Investment Manager.

Saul Rosenthal and Patrick Conroy are officers of T2 Advisers, LLC., the Investment Manager.

Patrick Firth is a director of the Administrator, Butterfield Fulcrum Group (Guernsey) Limited.


The following transactions were carried out with related parties in addition to the related party transactions disclosed in note 4:


Group


Group


Company


Company



2008


2007


2008


2007



GBP


GBP


GBP


GBP


Amounts incurred during the year to related parties









  Fees due to P Conroy as Chief Financial Officer to the Company

75,137


99,495



75,137


99,495


Fees due to the Investment Manager, T2 Advisers, LLC

2,969,672


2,420,301



2,969,672


2,420,301


 Reimbursement due to BDC Partners, LLC

185,720


193,974


185,720


193,974




Group


Group


Company


Company



2008


2007


2008


2007



GBP


GBP


GBP


GBP


Amounts due to related parties at the year end








  Fees due to P Conroy as Chief Financial Officer to the Company

6,250


54,165


6,250


54,165


Due to subsidiary in relation to Wall Street Office system

-


-


56,440


56,440


 Fees due to the Investment Manager, T2 Advisers, LLC

-


12,725


-


-


Amounts due from related parties at the year end








Note receivable from the Investment Manager, T2 Advisers, LLC

500,000


500,000


500,000


500,000



Directors shareholdings in Company

Saul Rosenthal has a beneficial interest in 263,889 ordinary shares (2007: 1,319,445) in the Company as at 31 December 2008. Through his ownership interest in T2 Advisers, LLC, the Investment Manager, Mr Rosenthal has an interest of 138,889 shares (2007: 1,194,445) related to the share option plan (re note 11), and 125,000 shares (2007: 125,000) relate to a purchase of shares during 2007 for his own account. As at 31 December 2008, this was equal to a beneficial interest of 0.6% based on the Share Capital as at that date when diluted by the number of Ordinary Shares subject to the option.


On 18 February 2009, Saul Rosenthal acquired 700,000 ordinary shares through Privet Acquisition LLC, a company in which Mr Rosenthal owns a 50% interest. Following this acquisition, Mr Rosenthal has a pro-rata beneficial interest in 475,000 ordinary shares, representing 1.1% of the Company's issued share capital.  


16. POST BALANCE SHEET EVENTS

On 18 February 2009, New Star Management Limited increased their interest in the Company to 9,100,000 ordinary shares. This represents 21.16% of the total voting rights of the Company.


On 25 February 2009, the Group sold their entire position in Harrah's B-1 (par value US$5,000,000). This realised a loss on sale of GBP320,773.


In April 2009, the Group made a purchase in Community Health (par value US$4,000,000) at 90.00 and Aramark (par value US$4,000,000) at 90.75.


In May 2009, the Group made a purchase in Huish Detergents Inc. (par value US$4,000,000) at 91.25.


On 1 June 2009, the Board of Directors approved the appointment of Geoffrey Miller as a non-executive director of the Board, and the retirement from the Board of William Tozier, Saul Rosenthal and Patrick Conroy effective on the later to occur of the publication of the Group's financial statements and the confirmation of the Guernsey Financial Services Commission.


T2 Income Fund Limited


Portfolio Statement of the Group

For the year ended 31 December 2008



Fair Value


% of net assets


GBP



Atlantic Inertial

2,104,092


3.91%

4437667 Canada Inc. (Mold Master)

2,439,108


4.53%

Attachmate

2,956,620


5.49%

Broadlane

1,642,539


3.05%

Cavalier Telephone

2,059,449


3.82%

Conner Steel

2,330,173


4.33%

Corel

4,813,727


8.94%

CPM Holdings

2,018,019


3.75%

DTN

2,308,464


4.29%

Emdeon Business Services LLC

3,003,353


5.58%

Express Energy

1,822,899


3.39%

First Data Corp B1 Term Loan

3,847,510


7.14%

Ford

2,431,382


4.52%

Georgia Pacific LLC

2,459,163


4.57%

Getty Images

3,346,875


6.22%

Harrahs B-1

1,967,704


3.65%

HCA TL-A

2,769,070


5.14%

Houghton

2,642,160


4.91%

Hudson Products Holdings Inc.

2,634,906


4.89%

Inverness Medical

2,297,770


4.27%

InfoNXX

3,953,619


7.34%

Infor Global

1,961,707


3.64%

Investools

4,373,516


8.12%

Koosharem Corp 1st Lien Credit

614,381


1.14%

Koosharem (Select Remedy) 2nd

926,244


1.72%

Krispy Kreme

2,695,295


5.01%

Lyondell B-2

1,519,997


2.82%

Macrovision

2,430,326


4.51%

Merrill Corp

260,720


0.48%

MR Default

1,679,131


3.12%

NameMedia, Inc.

2,737,564


5.08%

NPC 1st lien

1,331,398


2.47%

NPC 2nd lien

1,097,770


2.04%

Navisite

1,489,879


2.77%

Nuvox

3,406,106


6.33%

Oshkosh Trucks

2,109,590


3.92%

PAETEC Holding Corp.

2,213,967


4.11%

Peacock Engineering

2,007,131


3.73%

Pegasus

5,730,817


10.64%

Prodigy Health 1st lien

2,622,308


4.87%

Prodigy Health 2nd lien

686,106


1.27%

Proquest

4,709,434


8.75%

QA Direct Holdings, LLC

1,951,225


3.62%

Realogy

5,078,748


9.43%

Sirsi Dynix

1,089,262


2.02%

SkillSoft

1,904,720


3.54%

Stratus Technologies

3,108,912


5.77%

Sunquest Holdings(Misys)

2,010,566


3.73%

Topps Co. Inc.

1,852,487


3.44%

TravelCLICK Acquisition Co

2,309,434


4.29%

TVC

2, 004,733


3.72%

VS Holdings (CBA Group)

109,126


0.20%

Workflow

1,430,819


2.66%

X-rite 1st Lien

1,342,207


2.49%

Total financial assets at fair value through profit or loss

126,644,228


235.18%

Cash balances

16,158,356


30.01%

Other net liabilities

(88,952,701)


-165.19%

Net Assets

53,849,883


100.00%




This information is provided by RNS
The company news service from the London Stock Exchange
 
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