Interim Results
T2 Income Fund Limited
26 September 2007
T2 Income Fund Limited
Consolidated Interim Financial Statements
For the six month period ended 30 June 2007
CHAIRMAN'S STATEMENT
Attached please find the Accounts of T2 Income Fund Limited (the 'Company') for
the six-month period ended 30 June 2007.
I am pleased to report that, as of 30 June 2007, the Company had invested assets
of approximately £103.2 million. The investments in the portfolio, on a weighted
average basis, bear an interest rate of 9.3%, which is approximately 400 basis
points over LIBOR.
The Company is fully invested and is leveraging its assets to make new
investments. In 2006 the Company, through its subsidiary T2 Income Fund CLO I
Ltd., established a credit facility of up to the equivalent of approximately
£100 million (US$200 million) with Merrill Lynch Capital Corporation. With
this credit facility, the Company was able to accelerate its rate of deploying
capital. During the first and second quarters of 2007 the Company made
approximately £73.5 million of new investments. As of 30 June 2007, the Company
had drawn £80.0 million under the facility.
On 19 July 2007, T2 Income Fund CLO I Ltd. completed the sale of the equivalent
of approximately £125 million (US$250 million) of long-term notes to refinance
the credit facility that had been established with Merrill Lynch. The Notes have
a twelve year term and a weighted average interest rate of LIBOR plus 75 basis
points. The net proceeds of the Notes (after repayment of the Merrill Lynch
credit facility) will be used to make new investments.
Following the very severe declines across global credit markets recently, and
with the significant widening of credit spreads throughout our transaction
pipeline, T2 Advisers, LLC (the 'Adviser') believes that the current credit
environment represents a very strong opportunity to invest the Company's
capital. The Adviser notes that those expanded spreads have not, thus far, been
accompanied by any apparent diminishment in credit quality across those markets
in which we invest. At the same time, continued volatility in those markets
(especially in terms of secondary market values) represents an additional
challenge that the Adviser is considering as it continues to build the
portfolio.
Following our Shareholders' vote in favour of the proposal, on 15 June 2007
approval was received from the Royal Court of Guernsey 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.
On 25 June 2007, 5,000,000 Ordinary Shares of no par value were issued at
£1.0175 per Share resulting in gross proceeds of approximately £5.1 million. Net
proceeds of this placing were used to make new investments. During the period 1
July through 31 August, the Company deployed approximately £15.8 million of
additional capital for new investments.
On 16 August 2007 the Directors declared a dividend of 2.5p per share in respect
of the second quarter of 2007. This brings the total dividends paid from the
period of inception in August 2005 through September 2007 to 9.5p per share.
The Company's dividend history is:
Dividend
Month paid Per share For period ended
July 2006 1.0p 30 June 2006
October 2006 1.5p 30 September 2006
February 2007 2.0p 31 December 2006
May 2007 2.5p 31 March 2007
September 2007 2.5p 30 June 2007
Total 9.5p
William Tozier
Chairman
For more information:
Patrick Conroy Philip Secrett
T2 Income Fund Limited Nominated Adviser
+1 203 983-5282 Grant Thornton Corporate Finance
+44 (0) 207 383 5100
CONSOLIDATED INCOME STATEMENT
Unaudited Unaudited Audited
Period to Period to Year to
30 June 2007 30 June 2006 31 December 2006
Notes GBP GBP GBP
Revenue
Interest income 2 4,204,278 1,146,407 2,950,030
Other income 2 23,391 - 36,814
Investment Income
(Loss)/gain on financial assets and 5
liabilities at fair value through
profit or loss
- Realised (694,334) (99,505) (248,633)
- Unrealised 84,813 (490,597) (1,835,169)
Gain/(loss) on foreign currency
transactions
- Realised 118,084 9,131 295,151
- Unrealised 279,470 (1,529) 129,740
Total Income 4,015,702 563,907 1,327,933
Expenses
Management fees 4 916,137 372,750 298,751
Administration and secretarial fees 4 20,000 19,835 40,000
Custodian fees 4 7,439 7,437 15,000
Legal and professional fees 19,543 9,477 25,455
Directors' remuneration 4 32,500 32,500 65,000
Directors' and officers' insurance 22,393 20,952 43,485
Audit fees 20,704 17,325 39,001
Finance costs 4 1,483,978 - 104,215
Other expenses 145,217 98,849 200,502
Total Expenses 2,667,911 579,125 831,409
Profit/(loss) for the period 1,347,791 (15,218) 496,524
Basic earnings per share 13 0.0353 (0.0004) 0.0131
Diluted earnings per share 13 0.0318 (0.0004) 0.0118
The accompanying notes form an integral part of these financial statements.
CONSOLIDATED BALANCE SHEET
Unaudited Unaudited Audited
30 June 2007 30 June 2006 31 December 2006
Notes GBP GBP GBP
ASSETS
Non-current assets
Financial assets at fair value through 5 103,164,736 14,511,480 53,978,368
the profit or loss account
Note receivable 6 500,000 - 500,000
103,664,736 14,511,480 54,478,368
Current assets
Trade and other receivables 6 1,274,639 210,352 610,946
Cash and cash equivalents 7 16,473,978 22,279,321 4,929,513
17,748,617 22,489,673 5,540,459
Total assets 121,413,353 37,001,153 60,018,827
EQUITY
Capital and reserves attributable to the Company's equity holders
Share premium 9 5,619,040 36,694,149 36,694,149
Other reserve 36,119,167 9,167 14,167
Foreign exchange reserve (128,131) - 35,421
Retained earnings (613,729) 186,738 (251,520)
Total equity 40,996,347 36,890,054 36,492,217
LIABILITIES
Non-current liabilities
Warehouse facility 8 79,979,911 - 22,374,308
Current liabilities
Trade and other payables 8 437,095 111,099 1,152,302
Total liabilities 80,417,006 111,099 23,526,610
Total equity and liabilities 121,413,353 37,001,153 60,018,827
Net Asset Value per Share £0.95 £0.97 £0.96
The accompanying notes form an integral part of these financial statements.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Share Share Other Foreign Retained Total
Capital Premium Reserve Exchange Earnings Equity
Reserve
GBP GBP GBP GBP GBP GBP
Balance at 31 December 2005 - 36,694,149 4,167 - 201,956 36,900,272
Loss for the period - - - - (15,218) (15,218)
Foreign exchange on - - - - -
consolidation
-
Total income & expense for - - - (15,218) (15,218)
the period
-
Amortisation of fair value - - 5,000 - 5,000
of options
-
Balance at 30 June 2006 - 36,694,149 9,167 - 186,738 36,890,054
Profit for the period - - - - 511,742 511,742
Foreign exchange on - - - - 35,421
consolidation
35,421
Total income & expense for - - - 511,742 547,163
the period
35,421
Amortisation of fair value - - 5,000 - 5,000
of options
-
Dividends paid - - - - (950,000) (950,000)
Balance at 31 December 2006 - 36,694,149 14,167 35,421 (251,520) 36,492,217
Net proceeds from share - 5,024,891 - - - 5,024,891
issue
Transfer to distributable - (36,100,000) 36,100,000 - - -
reserve
Profit for the period - - - - 1,347,791 1,347,791
Foreign exchange on - - - - (163,552)
consolidation
(163,552)
Total income & expense for - - - 1,347,791 1,184,239
the period
(163,552)
Amortisation of fair value - - 5,000 - 5,000
of options
-
Dividends paid - - - (1,710,000) (1,710,000)
-
Balance at 30 June 2007 - 5,619,040 36,119,167 (128,131) (613,729) 40,996,347
The accompanying notes form an integral part of these financial statements.
STATEMENT OF CASHFLOWS
Unaudited Unaudited Audited
Period to Period to Year to
30 June 2007 30 June 2006 31 December 2006
Notes GBP GBP GBP
Cashflows from operating activities
Cash generated from/(used in) 10 2,295,502 449,819 (2,014,562)
operations
Net cash inflow/(outflow) from 2,295,502 449,819
operating activities
(2,014,562)
Cashflows from investing activities
Purchase of investments (73,531,037) (16,098,318) (59,465,371)
Sale of investments 21,698,514 2,233,527 8,307,610
Principal received 160,992 - 983,235
Net cash outflow from investing (51,671,531) (13,864,791) (50,174,526)
activities
Cashflows from financing activities
Net proceeds from issue of shares 5,024,891 - -
Warehouse facility 57,605,603 - 22,374,308
Dividends paid (1,710,000) - (950,000)
Net cash inflow from financing 60,920,494 - 21,424,308
activities
Net increase/(decrease) in cash and 11,544,465 (13,414,972) (30,764,780)
cash equivalents
Cash and cash equivalents at beginning 4,929,513 35,694,293 35,694,293
of period/year
Cash and cash equivalents at end of 16,473,978 22,279,321 4,929,513
period/year
The accompanying notes form an integral part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS
1. GENERAL INFORMATION
T2 Income Fund Limited (the 'Company') was incorporated and domiciled in
Guernsey, Channel Islands, as a company limited by shares on 9 June 2005. The
address of the registered office is Regency Court, Glategny Esplanade, St Peter
Port, Guernsey, Channel Islands, GY1 3NQ.
A new Cayman Islands registered subsidiary company, T2 Income Fund CLO I Ltd.
(the 'CLO'), was created on 11 October 2006. Through its ownership of 100% of
the preferred shares of the CLO the Directors consider the CLO to be a wholly
owned subsidiary and the operating results are consolidated in these financial
statements. The consolidated financial statements are referred to in these
financial statements as the Group. The Group is comprised of the 'Company' and
the 'CLO'.
2. ACCOUNTING POLICIES
(a) Basis of preparation
The interim financial information as at and for the six month periods ended 30
June 2007 and 30 June 2006 is unaudited and does not constitute statutory
accounts for the purposes of the Companies (Guernsey) Law, 1994. The figures
for the year ended 31 December 2006 have been extracted from the statutory
accounts. The auditors' report on those financial statements was unmodified.
The consolidated financial statements of the Group have been prepared in
accordance with International Financial Reporting Standards ('IFRS') as adopted
by the European Union and all applicable requirements of Guernsey Company Law.
The financial statements have been prepared under the historical cost convention
as modified by the revaluation of investments at fair value through the Income
Statement.
(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.
(c) Foreign currency translation
(i) Functional and presentation currency
The Financial Statements of the Group 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 US Dollars the functional
currency of the subsidiary. Therefore the books and records are maintained in
Sterling and US 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 closing fees which are recognised when they fall due.
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 at 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
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 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. This information is reviewed by T2 management and used to
price the portfolio companies.
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.
Financial assets and liabilities at fair value through profit or loss
(continued)
- 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.
- Company's capital structure.
- Recent business events disclosed by the Company.
- Potential requirement for additional funding.
Gains and losses arising from changes in the fair value of the financial assets
at fair value through profit or loss are included in the income statement in the
period in which they arise.
(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 independant valuation firm
specifically engaged by the Group to carry out the valuations. Changes in
assumptions could affect the reported fair value of financial instruments.
(n) New standards
New standards and interpretations have been published that are mandatory for the
Group's accounting periods beginning on or after 1 January 2007 or later periods
and which the Group has not early adopted:
The Group has not early adopted the new standard IFRS 8 (Operating Segments),
therefore no additional disclosures have been made.
(o) Share based payments
Share options are valued in accordance with IFRS2 on an estimate of the fair
value of the services received.
3. FINANCIAL RISK MANAGEMENT
(1) Financial risk factors
The Group is exposed to interest rate risk, credit risk, liquidity risk and
currency risk arising from the financial instruments it holds. 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.
(a) 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 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.
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 warehouse facility 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.
(b) 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.
(c) 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 and related equity securities until maturity of the debt, the Group
does not expect realisation events to occur in the near term.
(d) Currency risk
Currency risk is the risk that the value of financial instruments will fluctuate
due to changes in foreign exchange rates. The Group does make substantial
investments in currencies other than Sterling (primarily in US Dollars). 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.
The Group has entered into currency hedging transactions to minimise this risk
(see note 14).
30 June 2007
Assets USD EUR GBP Total
Financial assets at fair value through p&l 100,466,773 2,697,963 - 103,164,736
account
Cash and cash equivalents 9,950,638 - 6,523,340 16,473,978
Trade and other receivables 1,328,408 (63,411) 509,642 1,774,639
Total assets 111,745,819 2,634,552 7,032,982 121,413,353
Liabilities
Trade and other payables 80,324,626 - 92,380 80,417,006
Total Equity 31,421,193 2,634,552 6,940,602 40,996,347
30 June 2006
Assets USD EUR GBP Total
Financial assets at fair value through p&l 14,511,480 - - 14,511,480
account
Cash and cash equivalents 123,269 692,185 21,463,867 22,279,321
Trade and other receivables 198,193 - 12,159 210,352
Total assets 14,832,942 692,185 21,476,026 37,001,153
Liabilities
Trade and other payables - - 111,099 111,099
Total Equity 14,832,942 692,185 21,364,927 36,890,054
31 December 2006
Assets USD EUR GBP Total
Financial assets at fair value through p&l 49,060,856 4,917,512 - 53,978,368
account
Cash and cash equivalents 2,826,963 130,412 1,972,138 4,929,513
Trade and other receivables 574,186 35,675 501,085 1,110,946
Total assets 52,462,005 5,083,599 2,473,223 60,018,827
Liabilities
Trade and other payables 23,270,769 - 255,841 23,526,610
Total Equity 29,191,236 5,083,599 2,217,382 36,492,217
(e) Market risk
The Group's exposure to market risk is based upon changes in the fair value of
the Group's investments (see Note 2(l)). The investment portfolio is managed
within parameters disclosed in the Group's offering memorandum.
(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. For the period from the Company's admission to
trading on AIM until the quarter end following six months from the date of
admission, the management fee was calculated based on 2% of the initial value of
the Company's gross assets upon admission. Thereafter, the management fee is
calculated based on 2% of the average value of the Company's gross assets at the
most recently completed calender quarter and the projected gross assets as of
the end of the current calendar quarter.
Total fees charged for the period ended 30 June 2007 amounted to GBP916,137,
(June 2006:GBP372,750). The total amount due and payable at the period end
amounted to GBP(1,756) (December 2006:GBP57,207).
Administration and secretarial fees
The Administrator and Secretary, Butterfield Fund Services (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 period ended 30 June 2007 amounted to GBP20,000 (June
2006:GBP19,835). The total amount due and payable at the period end amounted to
GBP20,000 (December 2006:GBP20,000).
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 period ended 30 June 2007 amounted to GBP7,439 (June
2006:GBP7,437). The total amount due and payable at the period end amounted to
GBP5,588 (December 2006:GBP3,780).
Directors remuneration
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 period ended 30 June 2007 amounted to
GBP32,500 (June 2006:GBP32,500). The total amount due and payable at the period
end amounted to GBP16,250 (December 2006:GBP16,250).
Finance costs
Total finance costs for the period ended 30 June 2007 were GBP1,483,978 (June
2006:GBPnil). These finance costs are for interest paid to Merrill Lynch for
the Warehouse facility. The liability of the warehouse facility as of 30 June
2007 was GBP79,979,911 (December 2006:GBP22,374,308).
5. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
Unaudited Unaudited Audited
Period to Period to Year to
30 June 2007 30 June 2006 31 December 2006
GBP GBP GBP
Listed debt securities 29,399,740 - 8,127,281
Unlisted debt securities 73,764,996 14,511,480 45,851,087
103,164,736 14,511,480 53,978,368
(Loss)/Gains recognised in relation to
financial assets at fair value through profit
or loss
- realised (694,334) (99,505) (248,633)
- unrealised (1) (1,790,829) (490,597) (1,835,169)
(2,485,163) (590,102) (2,083,802)
Unaudited Unaudited Audited
Period to Period to Year to
30 June 2007 30 June 2006 31 December 2006
GBP GBP GBP
Opening value of financial assets 55,780,153 5,854,260 5,854,260
Purchases 73,531,037 11,447,467 59,465,371
Sales (21,698,514) (2,233,527) (8,307,610)
Realised loss on sale of investments (694,334) (99,505) (248,633)
Capital repayments (160,992) - (983,235)
Cost of investments at period/year end 106,757,350 14,968,695 55,780,153
Unrealised (loss)/gain at period/year end (2) (3,592,614) (457,215) (1,801,785)
Closing value at period/year end 103,164,736 14,511,480 53,978,368
(1) For the period to 30 June 2007 the Group had an unrealised gain on financial
assets and liabilities at fair value through profit or loss of GBP84,813. This
is comprised of an unrealised loss on financial assets of GBP1,790,829 and an
unrealised gain on liabilities of GBP1,875,642.
(2) The Group hedges the risk of loss on investments from changes in foreign
exchange rates through the use of forward exchange contracts, as well as the
offsetting gain from current liabilities held in the same foreign currencies.
6. TRADE AND OTHER RECEIVABLES
Unaudited Unaudited Audited
Period to Period to Year to
30 June 2007 30 June 2006 31 December 2006
GBP GBP GBP
Accrued bank interest 41,355 7,354
6,138
Loan interest receivable 513,343 194,141 444,417
Prepaid expenses 9,642 8,857 28,106
Unrealised gain on forward exchange contracts 710,299 - 132,285
1,274,639 210,352
610,946
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.
The change in unrealised gain on forward exchange contracts of GBP578,014 from
31 December 2006 to 30 June 2007 is a component of the gain/(loss) on foreign
currency transactions - unrealised of GBP279,470 on the consolidated income
statement. The unrealised gain on forward exchange contracts is partially
offset by an unrealised loss of GBP298,544 on foreign cash balances.
7. CASH AND CASH EQUIVALENTS
Unaudited Unaudited Audited
Period to Period to Year to
30 June 2007 30 June 2006 31 December 2006
GBP GBP GBP
Call account 16,473,978 1,010,695 4,929,513
Fixed deposit - 20,453,172 -
Foreign currency accounts - 815,454 -
16,473,978 22,279,321 4,929,513
For the purposes of the Cash Flow Statement, the above items represent the year
end cash and cash equivalents. Cash and cash equivalents include an unrealised
loss on foreign cash balances of GBP298,544 in the period to 30 June 2007.
8. TRADE AND OTHER PAYABLES
Unaudited Unaudited Audited
Period to Period to Year to
30 June 2007 30 June 2006 31 December 2006
GBP GBP GBP
Current liabilities
Due to RBC - -
896,461
Management fees (1,756) 6,829 57,207
Administrator's fees 20,000 10,315 20,000
Custodian's fees 5,588 7,437 3,780
Audit fees 15,429 19,825 28,500
Directors' fees 16,250 16,250 16,250
Finance cost 344,715 - 86,788
Other accruals 36,869 50,443 43,316
437,095 111,099
1,152,302
Non current liabilities
Warehouse facility 79,979,911 - 22,374,308
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 is US$200,000,000.
Merrill Lynch provides funding of 80% of the par value of loans assigned to T2
Income Fund CLO I Ltd. Interest due to Merrill Lynch is calculated daily on the
total funded amount at 1 month LIBOR plus 50 basis points.
Under the terms of the Agreement, the Issuer pledged to Merrill Lynch, as
security for obligations of the Issuer and the Collateral Manager to Merrill
Lynch, and grants to Merrill Lynch a first priority continuing security interest
in, lien on and right of sell-off against all of the Issuer's assets including
the Issuer's right, title and interest in the loans assigned. Such grants were
made to Merrill Lynch to secure the payment of all amounts due to Merrill Lynch
and compliance by the Issuer with the provision of the Agreement.
9. 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 the period 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 Investment manager, T2 Advisers, LLC, has been 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 will vest and become exercisable in respect of 50
per cent immediately on conclusion of the first three month period during which
the Company pays 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 will vest
and become 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 are scheduled to vest on 31 March 2008.
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 period 30 June 2007 the Company charged £5,000 (June 2006: £5,000) 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
Shares in GBP
issue
Ordinary shares
Shares in issue as at 30 June 2006 and 31 December 38,000,000 -
2006
Issued during the period 5,000,000 -
Shares in issue as at 30 June 2007 43,000,000 -
Six months to Six months to Year to
30 June 2007 30 June 2006 31 December
2006
Share Premium GBP GBP GBP
Balance at start period/year 36,694,149 36,694,149 36,694,149
Issued during period/year 5,087,500 - -
Issue costs (62,609) - -
Transfer to distributable reserves (36,100,000) - -
Balance at end period/year 5,619,040 36,694,149 36,694,149
10. CASH GENERATED FROM OPERATIONS
Unaudited Unaudited Audited
Period to Period to Year to
30 June 2007 30 June 2006 31 December 2006
GBP GBP GBP
Profit/(loss) for the period/year 1,347,791 (15,218) 496,524
Adjustments for:
Realised/Unrealised loss arising on adjustment 2,485,163 590,102
to fair value of investments
2,083,802
Amortisation of fair value of options 5,000 5,000 10,000
Foreign exchange on consolidation (163,552) - 35,421
Changes in working capital:
Trade and other receivables (663,693) (169,912) (1,070,506)
Trade and other payables (715,207) 39,847 (3,569,803)
Cash inflow/(outflow) from operations 2,295,502 449,819 (2,014,562)
11. 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 Country of Nature of Percentage
Incorporation incorporation holding holding
T2 Income Fund CLO I Ltd. 11 October 2006 Cayman Islands Direct 100%
12. RELATED PARTY TRANSACTIONS
Saul Rosenthal is a member of BDC Partners which owns T2 Advisers, LLC.
Saul Rosenthal and Patrick Conroy are officers of T2 Advisers, LLC.
Patrick Firth is a director of the Administrator, Butterfield Fund Services
(Guernsey) Limited.
The following transactions were carried out with related parties:
Unaudited Unaudited Audited
Period to Period to Year to
30 June 2007 30 June 2006 31 December 2006
GBP GBP GBP
Amounts incurred during the year to related
parties
Fees due to P Conroy as Chief Financial Officer 25,000 25,000 50,000
to the Company
Fees due to the Investment Manager, T2 916,137 372,750 798,751
Advisers, LLC
Fees due from the Investment Manager, T2 - - (500,000)
Advisers, LLC
Expense reimbursement due to BDC Partners, LLC 62,541 16,509 28,912
Amounts due to related parties
Fees due to P Conroy as Chief Financial Officer 4,167 4,167 4,167
to the Company
Fees due to the Investment Manager, T2 (1,756) 6,829 57,207
Advisers, LLC
Amounts due from related parties
Fees due from the Investment Manager, T2 500,000 - 500,000
Advisers, LLC
The Investment manager has been granted options giving it the right to acquire
4,222,222 Ordinary Shares at the Placing Price (GBP1.00) as reduced by dividends
paid per share, subject to the Company achieving certain performance criteria,
refer note 9.
The Investment Manager has also been granted options giving it the right to
acquire 555,555 Ordinary Shares at the price of GBP1.0175 per Share, based upon
the 5,000,000 Ordinary Shares issued in June 2007, in accordance with the terms
of the Investment Manager Agreement.
Directors shareholdings in Company
Saul Rosenthal has a beneficial interest in 1,319,445 ordinary shares (2006:
1,055,556) in the Company as at 30 June 2007. 1,194,445 shares relate to share
option plan (ref note 9) and 125,000 shares relate to a purchase of shares
during the period. This is equal to a beneficial interest of 2.8% based on the
Share Capital as at that date when diluted by the number of Ordinary Shares
subject to the option.
13. EARNINGS PER SHARE
Earnings per share has been calculated by dividing the profit attributable to
ordinary shareholders GBP1,347,791 (June 2006:GBP(15,218) December 2006:
GBP496,524) by the weighted average number of ordinary shares outstanding during
the period 38,138,121 (June 2006 and December 2006:38,000,000). Fully diluted
profit per share has been calculated by dividing the profit attributable to
ordinary share holders of GBP1,347,791 (June 2006: GBP(15,218) December 2006:
GBP496,524), by the weighted average number of ordinary shares outstanding
during the period adjusted for the effects of all dilutive potential ordinary
shares 42,375,690 (June 2006 and December 2006:42,222,222).
14. COMMITMENTS
At the balance sheet date the following commitments in respect of forward
foreign exchange contracts existed:
Unrealised
Contract amount - GBP Buy Sell (loss)/profit
7,785,920 EUR GBP (38,173)
186,918 EUR GBP 1,433
186,918 EUR GBP 1,433
(5,168,000) EUR GBP (41,870)
(112,311) EUR GBP (1,020)
(111,804) EUR GBP (513)
27,632,791 USD GBP 728,302
709,543 USD GBP 12,020
709,543 USD GBP 12,020
4,511,504 USD GBP 27,422
700,525 USD GBP 3,001
1,002,707 USD GBP 6,244
710,299
15. POST BALANCE SHEET EVENTS
On 16 August 2007 a dividend of GBP 1,075,000 (2.5p per share), relating to the
period 1 April 2007 to 30 June 2007, was announced with a payment date of 24
September 2007.
On 19 July 2007 the Company's subsidiary, T2 Income Fund CLO I Ltd., completed
the sale of approximately GBP 125 million of long-term notes ('Notes') to
refinance the credit facility that had been established with Merrill Lynch. The
net proceeds of the Notes (after repayment of the Merrill Lynch credit facility)
will be used to make new investments.
Since the period end on 30 June 2007 the Group has made a number of new
investment purchases, these are detailed below:
24-7-2007 $9,000,000 SelectRemedy
25-7-2007 $4,500,000 Nuvox
3-8-2007 $5,000,000 Connor Steel
14-8-2007 $1,000,000 SkillSoft
15-8-2007 $2,000,000 Wimar Landco
20-8-2007 $3,000,000 Wimar Landco
21-8-2007 $1,000,000 Wimar Landco
21-8-2007 $4,000,000 CPM Holdings
24-8-2007 $2,000,000 Atlantic Inertial Systems
6-9-2007 $2,000,000 InfoNxx
19-9-2007 $5,000,000 Inverness Medical
20-9-2007 £3,000,000 Atlantic Inertial Systems
Paydown
13-7-2007 $4,987,500 Paetec
Portfolio Statement of the Group
As at 30 June 2007
Fair Value % of net assets
GBP
Attachmate Corp 4,472,871 10.91%
Cavalier Telephone Inc 6,000,835 14.64%
CBA 3,331,374 8.13%
Corel Primary Corp 5,915,391 14.43%
DTN 2,484,929 6.06%
Express Energy 4,484,055 10.94%
Ford 4,478,435 10.92%
INFONXX Inc 2,478,701 6.05%
Infor Global Solutions Inc 2,980,941 7.27%
Investools 4,484,082 10.94%
Krispy Kreme 3,105,493 7.58%
Merrill Communications LLC 4,528,922 11.05%
Metrologic instruments Inc 3,000,584 7.32%
MR Default 1,003,911 2.45%
Nova 2,697,963 6.58%
NPC Inc 3,968,007 9.68%
Navisite 2,005,381 4.89%
Nuvox 502,591 1.23%
One Communications Corp 2,509,840 6.12%
Paetec 2,488,034 6.07%
Peacock Engineering 1,494,694 3.65%
Pegasus 5,466,843 13.33%
Prodigy Health Group Inc 3,975,867 9.70%
Proquest 4,461,689 10.88%
Realogy 5,918,988 14.44%
Sirsi Corp 894,574 2.18%
Skillsoft 2,497,384 6.09%
Stratus Technologies Inc 3,117,059 7.60%
TVC 1,997,906 4.87%
Tribune 2,422,650 5.91%
Workflow Management Inc 1,991,853 4.86%
X-rite Inc 2,002,889 4.88%
Total financial assets at fair value through profit or loss 103,164,736 251.65%
Cash balances 16,473,978 40.18%
Other net liabilities (78,642,367) -191.83%
Net Assets 40,996,347 100.00%
This information is provided by RNS
The company news service from the London Stock Exchange
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