Annual Financial Report

RNS Number : 0847T

Axiom European Financial Debt Fd Ld

23 March 2021

 

23 March 2021

Axiom European Financial Debt Fund Limited ("Axiom" or the "Company")
Annual Financial Report For the year ended 31 December 2020
Positive total returns and a maintained dividend in a challenging year
Axiom European Financial Debt Fund Limited, a closed-ended Guernsey fund, today announces its Annual Financial Report for the year ended 31 December 2020.
Highlights
	31 December 2020	31 December 2019
Net assets	£87,350,000	£91,284,000
Net asset value ("NAV") per Ordinary Share [1]	95.10p	99.38p
Share price	88.00p	94.00p
Discount to NAV	(7.47)%	(5.41)%
Profit/(loss) for the year	£1,577,000	£13,882,000
Dividend per share declared in respect of the year	6.00p	6.00p
Total return per Ordinary Share (based on NAV) [1]	1.73%	16.98%
Total return per Ordinary Share (based on share price) [2]	0.00%	13.64%
Ordinary Shares in issue at year end	91,852,904	91,852,904

[1]	Please see note 22 for a reconciliation of the NAV per Ordinary Share of 95.10p to the originally announced NAV per Ordinary Share of 95.26p.
[2]	Total return per Ordinary Share has been calculated by comparing the NAV or share price, as applicable, at the start of the year with the NAV or share price, as applicable, plus dividends paid, at the year end.

· Total returns for the year were positive at +1.73%, recovering from a low in March of -19.95%. · Performance was driven by strong H2 (+10.75% versus -7.85% in H1). · Positive returns in eight of the nine months in the latter three quarters. · The strong performance of the last three quarters has extended into 2021. · Maintained dividend of 6.00p per share despite the uncertainty during the year. · The Company expects to be able to continue to meet its dividend target in 2021. · Asset class remains attractive as market conditions improve through 2021 and the Company is ideally placed to capture these opportunities. · Board committed to restarting the Company's Placing Programme and improving the liquidity of the shares.

William Scott, Chairman, commented: "Against the backdrop of an extraordinary year that saw widespread market uncertainty and declines, the Company's total return for the period was positive, a considerable achievement, based on a strong second half and positive returns in eight of the nine months over the last three quarters. "Looking ahead, it is reasonable to expect the pandemic related uncertainty to continue this year and we will also see the evolution of the regulatory framework in Europe continue and the terms under which Britain, along with its financial services sector, will trade with Europe finalised. This means that returns on individual instruments may be more greatly dispersed in the years to come. " Our portfolio remains well-positioned, despite these uncertainties, to deliver on our core investment objective and the strong performance of the last three quarters has extended into 2021. Under the highly experienced management of Axiom AI, we remain positive and continue to believe that the Company is well positioned to capitalise on the opportunities of a recovering market and changing regulatory framework in Europe and, once again, we  thank Shareholders for their continued support. "

 

Gildas Surry, Investment Manager, said: "Despite the constraints of the pandemic, it has created a constructive backdrop for bonds issued by financial institutions as central banks provided significant support measures including cheap funding and capital relief. "Notwithstanding European banks' profitability suffering from the continuing low interest rate environment, they are very attractive in the current market context for bond investors; corporate bonds with a BB+ rating currently offer c.2% income whereas a BB+ bank bond offers a far more attractive c.4%. "The Company continues to be ideally placed, with its closed-ended format and its range of investment sub-strategies, to capture the opportunities arising in the sector, from liquid to less liquid instruments, from small to large issuers, from legacy to new formats, and from senior to equity capital instruments."

Enquiries to:

Axiom Alternative Investments SARL David Benamou Gildas Surry Antonio Roman Jerome Legras www.axiom-ai.com Tel: [phone]

Elysium Fund Management Limited PO Box 650 1st Floor, Royal Chambers St Julian's Avenue St Peter Port Guernsey GY1 3JX [e-mail] Tel: [phone]

MHP Communications Reg Hoare James Bavister Charles Hirst Charlotte Anstey [e-mail] Tel: [phone]

A copy of the Company's Annual Report and Financial Statements for the year ended 31 December 2020 will shortly be available to view and download from the Company's website, http://axiom-ai.com/web/en/axiom-european-financial-debt-fund-limited-2/. Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into or forms part of this announcement.

About Axiom European Financial Debt Fund Limited

General information

Axiom European Financial Debt Fund Limited (the "Company") is an authorised closed-ended Guernsey investment company with registered number 61003. Its Ordinary Shares were admitted to the premium listing segment of the FCA's Official List and to trading on the Premium Segment of the Main Market of the London Stock Exchange (the "Premium Segment") on 15 October 2018 ("Admission"). Prior to this, the Ordinary Shares traded on the Specialist Fund Segment ("SFS") of the London Stock Exchange.

Investment objective

The investment objective of the Company is to provide Shareholders with an attractive return, while limiting downside risk, through investment in the following financial institution investment instruments: · Regulatory capital instruments, being financial instruments issued by a European financial institution which constitute regulatory capital for the purposes of Basel I, Basel II or Basel III or Solvency I or Solvency II; · Other financial institution investment instruments, being financial instruments issued by a European financial institution, including without limitation senior debt, which do not constitute regulatory capital instruments; and · Derivative instruments, being CDOs, securitisations or derivatives, whether funded or unfunded, linked or referenced to regulatory capital instruments or other financial institution investment instruments.

Investment policy

The Company seeks to invest in a diversified portfolio of financial institution investment instruments. The Company focuses primarily on investing in the secondary market, although instruments have been, and may also in the future be, subscribed in the primary market where the Investment Manager, Axiom Alternative Investments SARL ("Axiom"), identifies attractive opportunities. The Company invests its assets with the aim of spreading investment risk. For a more detailed description of the investment policy, please see the Company's Prospectus, which is available on the Company's section of the Investment Manager's website (http://www.axiom-ai.com/web/data/prospectus/ENG/AEFD-prospectus-UK.pdf).

The following text is extracted from the Annual Report and Financial Statements of the Company for the year ended 31 December 2020:

Strategic Report

Chairman's Statement

Results 2020 was an extraordinary year by any standards, both in the real world and in the financial markets. We have witnessed the most significant global public health crisis in many decades - for those of us in the UK, probably since the so-called 'Spanish Flu' of 1918 to 1920 - beyond living memory. We have all followed developments and will be very familiar with the 'lock-downs' and disruption of normal society to a degree that we could not have imagined only a year ago. The effects on industry and commerce have been well-reported elsewhere: the UK, according to government statistics, has suffered the worst contraction of output since 1709 with GDP down 9.9% over the year. Within the headline numbers, some industries - especially those dependent on the free circulation of people - particularly travel, lodging and hospitality have been devastated and survive only on significant governmental intervention - while others which can transition to either home working to deliver services remotely or to internet sales models have survived and, in some instances, even thrived. The effect on public finances has been similar in magnitude to that of the great world wars of the twentieth century. The Company invests in the capital instruments of European financial institutions. One of the early interventions by sector regulators was to force the suspension of equity dividends by banks and insurance companies. This did not extend to the coupon payments on instruments such as those in which the Company invests and so in our case, no great loss of income was suffered. After a promising start to the year, the immediate consequences of the considerable uncertainty as the markets began to try to weigh the likely effects of the pandemic were brutal market declines in the prices of most instruments. The Company's total return in the first half of the year was -7.85% as I reported at the Interim stage. I am pleased to say that the second half was very much better with a total return of +10.75%, to give a modest positive net result over this difficult year of +1.73%. The recovery has been one of steady progress with positive returns in eight of the nine months in the latter three quarters. Further details on the development of key market events and activity in the portfolio are given in the Investment Manager's report. In aggregate, the Company reported a net profit after tax for the year ended 31 December 2020 of £1.6 million (2019: profit of £13.9 million), representing earnings per Ordinary Share of 1.72p (2019: earnings of 15.21p) and the Company's NAV at 31 December 2020 was £87.4 million (95.10p per Ordinary Share) (2019: £91.3 million, 99.38p per Ordinary Share). As is often the case in the closed-ended fund sector, the recovery in the Company's share price lagged the rise in NAV over the second half of the year and hence, over the full year, the share price discount to NAV widened slightly from 5.41% at the end of 2019 to 7.47% at the year end. Although the discount subsequently narrowed back to roughly where it was at the start of 2020, the continued strong recovery in early 2021 has now meant that it has widened again to 10.33% as at the time of writing. Dividends As in prior years, the Company declared four dividends each of 1.50p per Ordinary Share in relation to the year: one was declared after the balance sheet date and was paid on 26 February 2021 to Shareholders on the register at 6 February 2021. During the period, actual payments of 6.00p were made, being the May, August and November dividends of 1.50p each and the 1.50p dividend in respect of the period ended 31 December 2019, which was paid on 28 February 2020. Placing programme and fundraising Shareholders will not be surprised that, given market events during the year, circumstances were not conducive to placing further shares. Nevertheless, we remain committed to expanding the size of the Company to improve the return economics for Shareholders by spreading the burden of the operational costs of the Company over a larger asset base and also improving trading liquidity in our shares. As markets continue to recover, we hope to make progress in this regard. In this context we note that inflows into the Investment Manager's open-ended funds have been good in recent months and we hope to capitalise on that momentum when circumstances permit.

One might be forgiven for thinking that the COVID-19 pandemic is the only challenge facing the world. While it will remain a significant matter for some time to come, there are grounds for cautious optimism that it is becoming, for most countries, a manageable health problem. At the time of writing, the rollout of mass vaccination is beginning to abate the current wave of infections. New variants will require a response of new vaccines and it may also be that there will be modifications required to public behaviour for a long time to come but, all the same, more and more of our economic lives are normalising and will continue to do so. The financial sector was already well-capitalised and resilient after the regulatory capital measures introduced over a decade ago in the wake of the global financial crisis of 2008 and 2009. After the suspension of equity dividends almost a year ago as a prudential measure by regulators, it is now even more well capitalised. In December 2020, the ECB's supervisory body said in a statement that: "a continued prudent approach remains necessary, as the impact of the pandemic on banks' balance sheets has not manifested itself in full at a time when banks are still benefiting from several public support measures, and considering that credit impairments come with a temporal lag", while at the same time indicating that the current moratorium on dividends is likely to come to an end in September 2021. A return to some level of equity dividends implies a relatively secure outlook on the part of regulators for the higher tranches of regulatory capital such as those in which the Company invests. All of this serves to underline the view expressed at the Interim Report stage that while there is likely to be a dispersion of impacts and outcomes for different institutions and quite possibly a rise in defaults by some borrowers, this should not have an existential impact on most banking and other financial issuers. Increased resilience was of course the core goal of the regulatory capital changes over the past several years and the transition to those new standards is part of what the Company was set up to exploit. That transition has continued throughout 2020 and will continue in the years to come. There are, of course, other challenges: Brexit (an apparently unresolved matter for the financial sector), the stressed state of public finances and the implications of the latter for taxation, monetary policy and the potential for inflation or deflation, the climate emergency, the geopolitical tensions between strategic blocs. Several of these are fundamentally political rather than strictly economic matters although their consequences will be profoundly felt economically and in the financial markets. In short, we live in interesting times, as the old saying goes. Our portfolio is well-positioned in terms of yield and duration to deliver on our core investment objective and to continue the recovery of returns since the first quarter of 2020. In a specialist asset class such as that in which we invest, proactive investment managers who have the appropriate specialist skills should enjoy a competitive advantage. With Axiom AI as our Investment Manager, we therefore remain positive and continue to believe the Company is well positioned to capitalise on such opportunities and, once again, we thank Shareholders for their continued support.

William Scott Chairman 22 March 2021

1Net return has been calculated by comparing the NAV at the start of the period with the NAV, plus dividends paid, at the period end.

Investment Manager's Report
1- Market developments
January
Financial bonds showed strong resilience at the start of the year, ending the month up despite the renewed risk aversion. Market concerns about the COVID-19 pandemic and its consequences for global growth had a very limited impact on financial securities, as did the UK's exit from the EU. Banks that released their annual results announced rising capital ratios, perhaps in preparation for more difficult 2020 EBA stress tests. Even Deutsche Bank posted results that should have reassured creditors more than shareholders: despite the consecutive decline in its pre-tax earnings, the bank's capital ratio was up 40bps to 13.6%. Capital strengthening, combined with easing regulatory pressure, confirmed the upward trend in payout ratios, as observed at the end of 2019 with the share buybacks of BAWAG Group and UniCredit and the dividend policy announced by Santander. On the regulatory front, for this Supervisory Review and Evaluation Process ("SREP") cycle, the ECB published key messages on business models, governance, non-performing loans ("NPLs"), operational risk, internal capital and liquidity assessments. The overall SREP requirements for CET1 capital remained at the same level as in 2018, at 10.6%. The primary market reached record levels. The Erste Bank 3.375% EUR issue was 10 times oversubscribed. We saw a surprising secondary market upward repricing along with the latest issues announced including Credit Suisse 5.1% in USD, Phoenix 5.625% in USD, Santander 4.375% in EUR and Banco BPM 6.125% in EUR. On the insurers' side, Phoenix issued a USD750 million Restricted Tier 1 ("RT1") with a 5.625% coupon in order to finance the acquisition of ReAssure.
February
The month of February showed some strong declines driven by concerns about the spread of COVID-19, Bernie Sanders' increased popularity as per the opinion polls and the Brexit negotiations (the UK warned of a possible no-deal if no agreement was reached before June). The SubFin index ended the month at 160bps widening by almost 50bps in the last week. Compared to the different asset classes, financial subordinated debt emerged more resistant to the recessive impact of the COVID-19 epidemic. The high capitalisation level of the banks was reassuring, as were the stress test scenarios used by the regulatory authorities, which were much more extreme than the impact estimated by the OECD in connection with the COVID-19 crisis. HSBC presented its restructuring plan, declaring in particular its intention to address its specific Legacy bonds ahead of the 2021 transition period deadline, which was very positive for bondholders. The bank also announced its intention to call its 5.682% Legacy with a reset at 180bps. Standard Chartered announced the call of an Additional Tier 1 ("AT1") with a backend at 489bps. Barclays, on the other hand, did not call its Legacy bond at Libor at 0.71%. In the primary market, ING's issue of a USD750 million AT1 bond was postponed following the departure of its Chief Executive Officer, Ralph Hamers, who left to succeed Sergio Ermotti as Chief Executive Officer at UBS. Finally, the consolidation continued in the financial sector, with Intesa's offer for UBI and Covéa's offer for Partner Re.
March
March saw the rapid spread of COVID-19, which put most European countries into almost complete lockdown. In response to this unprecedented health crisis, all asset classes fell sharply. After its strong widening during the month (peak at 350bps, +100% compared to its level at the end of February), the SubFin index ended the month at 255bps.
However, never before had European banks approached a crisis so well capitalised and the measures announced by the various regulators (SSM, ECB, PRA, etc.) considerably strengthened the capital available to absorb the economic shock: · capital related: (i) provisional suspension or modification of several capital buffers (conservation buffer, 2G pillar, 2R pillar, countercyclical buffer and systemic buffer) allowed the decrease of CET1 requirements by circa 4%; (ii) the suspension of dividends and any exceptional distribution until October 2020, as requested by the regulators (ECB and PRA), made it possible to strengthen the CET1 without impacting AT1 coupon payments as specified by the banks and the supervisor (EBA); · liquidity related: the access conditions to the new TLTRO (medium-term financing with the ECB) were considerably eased on both the collateral and the lending rate (lowered to -0.75%); and · asset quality related: the rules, in particular on NPL provisions and IFRS 9 (financial instrument accounting rules), were relaxed. The state guarantees (EUR300 billion for France, EUR350 billion for Germany, EUR300 billion for the UK, etc.) should have supported banks in rolling over loans. The European Commission explicitly stated that if, despite all these measures, a bank was in difficulty because of the COVID-19 crisis and needed public aid, the guidelines on 'burden sharing' that could penalise subordinated debt holders would not apply. In spite of market volatility, issuers continued buying back their bonds. · ING announced on 15 March 2020, the call of its AT1 6% (USD1 billion) and its Legacy Tier 1 ("T1") 6.125% (USD700 million); · SEB announced on 18 March 2020, the call of its AT1 (EUR1.1 billion); · Lloyds announced on 31 March 2020 a tender offer at 109% on its Legacy T1, at 12% in USD; · Crédit Agricole announced on 2 April 2020, a tender offer on two of its Legacy T1 bonds, their 6.637% and their CMS; and · Vivat announced on 2 April 2020, a tender offer on a senior bond, their 2.375% with a maturity date in 2024. Finally, the primary market quickly reopened despite high volatility. Bond market conditions in the banking sector normalised towards the end of the month, as confirmed by the increasing number of issuances. Credit Suisse issued USD3 billion of senior debt maturing in 2031 with a 4.194% coupon. Several UK banks also came to refinance: Lloyds EUR1.5 billion senior 3.5% 2026, HSBC USD2.5 billion senior 4.95% 2030, RBS EUR1 billion senior 2.75% 2025, Barclays EUR2 billion senior 3.375% 2025 and Standard Chartered USD2 billion senior 4.644% 2031.
April
April was another month of exceptional support measures for the banks, helping to fight the impact of the pandemic on the economy. These translated into a strong rally in subordinated debt (+9% for the Solactive Liquid CoCo bonds index). To defend the positioning of the banks as a solution to the crisis, many regulatory and supervisory 'sweeteners' were offered to banks, all with the same objective of keeping lending activity flowing: temporary suspension of IFRS9 impact on CET1; acceleration of the partial reintegration of software intangibles to CET1; and exemption of central bank balances from the leverage ratio. Our conviction remained unchanged. The banks have never approached a crisis so well capitalised, as confirmed by S&P in their recent analysis 'How COVID-19 Is Affecting Bank Ratings'. The agency referred to three main reasons for the resilience of bank ratings: the generally strong capital and liquidity position of banks globally, supported by a material strengthening in bank regulations over the past 10 years; the diversification in their loan books, that continued to provide relative revenue stability; and the strong fundamentals, not artificially tweaked by years of accommodative monetary policy and abundant liquidity, the opposite of what happened in the corporate sector which allowed weaker companies to access the market.
The banking results season revealed a strong historic trading performance at Investment Banks level, alongside the general pattern of: (i) higher provisioning; (ii) CET1 levels generally in line with consensus with higher RWAs offset by the 2019 dividends' omission; and (iii) increased headroom to MDA. Finally, issuers have continued calling their bonds: Principality Building Society, BCP, Julius Baer and Rabobank all announced the calls of their T1s.
May
The month of May was marked by the easing of the lockdown in many European countries, including Italy. The battery of exceptional measures put in place by regulators and governments to reduce the economic shock of the pandemic continued to expand. This resulted in a strong performance of subordinated debt with the SubFin index closing at 180bps vs. 280bps at the end of April 2020. As the first quarter earnings season ended, we could see that European banks were showing deteriorating profitability but resilient levels of capital. Regulators continued to announce measures to support the banking sector, including a planned Recovery Fund for investments in Europe and amendments to the CRR reform concerning distributions (dividends and coupons) to be voted on in June. The Bank of England and the ECB tried to quantify the risk of losses through desktop stress tests and by taking into account public support plans. They believed that the crisis could seriously deteriorate 2020 profits but that for the majority of European banks capital cushions were sufficient. Liquidity was not a cause for concern in the current environment. Despite strong corporate demand for loans, banks continued to face excess liquidity, to the extent that we saw several banks calling their senior bonds in May 2020. Issuers continued to call their inefficient regulatory instruments: StanChart 5.375% step-up, ABN 2.875% Tier 2 ("T2"). Finally, despite market volatility, the Bank of Ireland successfully issued an AT1 bond. The secondary market remained very active with many senior debt buybacks. It should be noted that the Intesa/UBI merger was still under negotiation. The Monte dei Paschi restructuring plan was validated, which had a very positive impact on the T2 of peripheral countries.
June
The month of June was marked by further easing of lockdown in most European countries. The SubFin index tightened further closing the month at 166bps vs. 180bps at the end of May 2020 and 280bps at the end of April 2020. The CoCo Solaxicc index ended the month at +1.5%. The measures put in place by the central banks were the drivers of this rebound: the TLTRO3 by the ECB with its generous pricing which could reach -1%, or the increase of the BOE's bond purchase programme by GBP100 billion. Meanwhile discussions on Brexit stalled on disagreements about regulatory equivalence of financial services. In Italy, NPL disposals continued with EUR8.5 billion sold by Monte Paschi and more disposals due from UniCredit and Banca Popolare di Sondrio. The merger between Intesa Sanpaolo and UBI was cleared by the regulator, and the insurer Generali acquired 24% in Cattolica. In Spain, Helvetia Assurances acquired 69.4% in the insurer Caser for a price of EUR800 million, two-thirds of which was financed by the issue of a T2 bond. The ECB launched a consultation on consolidation suggesting that regulatory impediments would reduce. Finally, the primary market was very active on the CoCos side (AT1 and RT1). The main issues to mention were RBS (USD1 billion at 6%), Commerzbank (EUR1.25 billion at 6.125%), ABN Amro (EUR1 billion at 4.375%), Nationwide (GBP750 million at 5.75%) and Legal & General (GBP500 million at 5.625%). Issuers continued to call their ineffective regulatory securities. RBS confirmed the call of its USD2 billion 7.5% AT1 and UniCredit exercised the call on its Euro Legacy 9.375%.
July
The month of July was marked by the return of quasi lockdown in different parts of the United States, where COVID-19 was rising sharply, and by the increasing Sino-US tensions, which led to consulate closures. The battery of exceptional measures put in place by regulators and governments to deal with the pandemic continued to reassure the markets, most recently with the difficult agreement between countries on the European Recovery Fund ("ERF"), a fund of EUR750 billion, including EUR390 billion in subsidies, which was awaiting ratification by the European Parliament. Against this backdrop, the SubFin continued to tighten, closing the month at 152bps, more than 130bps tighter than its 280bps level at the end of April 2020. On the regulatory side, the ECB published the results of its 'Vulnerability assessment' conducted on 86 banks, a specific COVID-19 stress test which studied two scenarios, a standard and severe one, reaffirming the solidity of the banks and an adequate level of capitalisation. The cost of risk remains manageable. Despite the increased provisions recorded in quarter 2 2020, European banks surprised on the upside with their CET1 publications. NatWest (ex-RBS) continued to make provisions for risks of 'economic uncertainty' (+GBP2.1 billion in provisions) and reported a CET1 up to 17.2%. Barclays, UBS and Deutsche Bank also maintained comfortable levels of 14.2%, 13.3% and 12.8% respectively. The suspension of dividends, which the ECB would re-examine in December 2020, contributed to this increase, in addition to the 'CRR Quick Fix' regulatory changes and exceptional support measures. The revenue trajectories diverged among universal banks, the sharp drop in retail banking revenues was partially counterbalanced by the rebound in market activities. BNP Paribas posted an exceptional performance in the bond market which beat most of the major Wall Street banks after having issued a profit warning in the first quarter. On the consolidation side, UBI's shareholders finally approved the acquisition by Intesa Sanpaolo. Finally, the CoCos' (AT1 and RT1) primary market remained active. We can mention the issues of UBS (USD750 million at 5.125%), RBI (EUR500 million at 6%), Commerzbank (EUR1.25 billion at 6.125%), BBVA (EUR1 billion at 6%) and Rabobank (EUR1 billion at 4.375%).
August
August was once again shaped by an increase in COVID-19 cases in multiple countries. The only notable macro event was Powell's speech at Jackson Hole where he revealed a more flexible strategy to meet the Fed's inflation and employment goals. In this context, the SubFin continued to tighten, closing the month at 129bps, more than 150bps tighter than its level at the end of April 2020. Overall the latest earnings publications confirmed the key trends that were observed in July: lower retail fees and NII but excellent investment banking revenues, limited increases in NPL ratios with managements guiding towards lower impairments overall in 2020 but with a high discrepancy in provisioning levels, and significantly better than expected capital ratios supported by lower RWAs. A few initial data points showed that ultimate default rates for loans under moratoria should be between a few percentage points for core countries up to over 20% for the riskiest jurisdictions (e.g. Greece), with high dispersion within countries. On the regulators' side, the EBA was expected to publish its opinion on the treatment of legacy debt before the end of the year. The calls of Credit Suisse low-trigger T2 and ABN 5.75% AT1 were announced as expected. Finally, the primary market remained active on CoCos (AT1 and RT1) supported by good quarterly results. One can mention the issues of Barclays (USD1.5 billion at 6.125%), Intesa Sanpaolo in two tranches (EUR750 million at 5.875% and EUR750 million at 5.5%) and Credit Suisse (USD1.5 billion at 5.25%).
September
Despite September being full of adverse geopolitical events, financial securities held out quite well: the developing COVID-19 outbreak, the US presidential election, and Brussels' ultimatum to the UK on Brexit. The SubFin index widened slightly by +9bps, reaching 138bps, after 5 consecutive months of tightening.
Jerome Powell, after revealing a more flexible strategy to meet the Fed's inflation and employment goals in August, announced that the Fed would not raise its rates until 2023, at the earliest. This was another decision reasserting the FOMC's willingness to see inflation exceed 2% first and foremost. In Europe, the new tranche of TLTRO saw EUR175 billion of demand at the BCE on 24 September 2020. On the regulator's side, during a speech in front of the European Banking Federation, Andrea Enria reminded investors that the financial sector had rules in place to deal with NPLs, more quickly and effectively. He also reiterated authorities' support to banks fighting against asset quality deterioration. In the US the Fed extended the buyback and dividend cap it had previously introduced until the end of the year. This had been expected and would apply to any bank with more than USD100 billion in assets. The market overreacted in September to anti-money laundering issues from the banks' suspicious activity reports ("SARs") dating back to the 2011-2016 period, at the behest of the Financial Crimes Enforcement Network ("FinCEN") in the US. On the consolidation side, the announced merger between Caixa and Bankia was expected to create the first banking group in Spain. In Italy, where Intesa was taking over UBI, BPER was preparing the acquisition of more than 500 branches from Intesa before February 2021, financed by a EUR802 million capital increase. In France, SocGen announced it was contemplating the potential merger of its two retail networks, Société Générale and Credit du Nord, to extract synergies. Finally, issuers continued to call their regulatory securities which were no longer efficient as capital. The tender by NatWest (ex-RBS) on its long-call bonds 7.648% and 6.425% was well received by bond holders with respectively 83% and 64% take-up. The primary market continued to see new AT1 issuances with Julius Baer (USD350 million at 4.875%), BAWAG Group (EUR175 million at 5.125%), Commerzbank (EUR500 million at 6.5%) and Svenska Handelsbanken in two tranches (USD500 million at 4.375% and USD500 million at 4.75%).
October
After a new round of lockdowns for several European countries, endless Brexit negotiations and uncertainty about the presidential elections in the US, the SubFin index widened by +10bps reaching 154bps. Financial debt continued to hold up well, on the back of a set of solid quarterly results that beat expectations. The majority of the quarterly results exceeded expectations mainly due to lower than expected provisions, rising capital ratios and lower than expected RWAs. Based on their good fundamentals, several issuers such as Santander and Erste announced their intentions to pay dividends for 2019. Indeed, Rabobank would pay a distribution of additional certificates equal to approximately EUR1.625 per certificate to compensate investors for the four missed quarterly distributions. These announcements remained conditional on the withdrawal of the ECB's ban on distributions, which was expected to be reconsidered in December. On the regulatory side, the EBA published its long-awaited opinion on Legacy instruments on 21 October 2020. The opinion was very clear on the need to clean up the stock of Legacy bonds as soon as possible. Depending on the instruments, three options were presented to manage the so called 'inflection risk', i.e. the risk of the legal and regulatory rankings being completely mixed up, which could threaten eligibility: · Option 1: redemption of the bonds when a call date was available or bond buyback; · Option 2: modification of the terms and conditions of the bonds; · Option 3: in exceptional cases, when options 1 and 2 were not available, keeping the bonds but without using them as capital or MREL. The general philosophy of the EBA's opinion was clear, and should accelerate the number of calls and buybacks but, as always with Legacy bonds, the devil was in the detail and some caveats would apply. The Company's investment adviser has published its analysis on the matter, available via https://mailchi.mp/axiom-ai.com/axiom-monthly-report-2616092.
Finally, issuers continued calling their regulatory securities that were no longer eligible as capital or no longer economically viable. AIB announced the call of its AT1 Opco and Santander of its USD prefs with a floor whose coupon non-payment mechanism could have been an obstacle to the resumption of dividend payments. Rabobank announced a buyback offer on its 6.91% bond callable in 2038. Finally, the primary market saw the first RT1 issued in Italy by UnipolSai (EUR500 million at 6.375%). At the beginning of the month, Caixa Bank (EUR750 million at 5.875%), Nykredit (EUR500 million at 4.125%), Crédit Agricole (EUR750 million at 4%) and Quintet Private Bank Europe SA (EUR125 million at 7.5%) issued on the market.
November
Financial stocks performed strongly in November, driven by announcements of effective and readily available vaccines and the results of the US elections. In the UK, the departure of Dominic Cummings, one of the government's toughest Brexiteers, heralded a close trade agreement. The SubFin tightened 50bps to 113bps marking a record one-month change. The rally was also supported by new adjustments to state aid plans and the anticipation of new support measures by the ECB expected on 10 December 2020, notably for the banking sector. The excellent results of the banks in the third quarter also came as a positive surprise. Asset quality was stable, profits exceeded expectations by more than 30% and capital ratios reached record levels with more than 15% of average CET1. We believed that the positive news on the roll-out of vaccines would lead to a gradual resumption of dividend distributions in 2021. The ECB would decide in December 2020 on the lifting of its ban, which was expected to be a strong catalyst for the financial sector. Continued consolidation and cost reduction were boosting the sector and offered further upside potential. Targets were cheaper, capital was abundant and difficult to distribute: all reasons to engage in synergy-generating operations. Of note was the departure of Jean-Pierre Mustier from UniCredit, which should enable the acquisition of Monte dei Paschi, and the OPA (public offering to buy) launched on Credito Valtellinese by the Crédit Agricole group. On the insurance side, Intact, Canada's leading property and casualty insurer, announced the acquisition of British insurer RSA. Finally, BBVA announced the sale of its US subsidiary to PNC for USD11.6 billion. This capital was expected to be reallocated to buyout operations in Europe, for example on Sabadell. On the regulatory side, on 16 November the PRA published its CFO Letter (a letter to the CFOs of English banks), which took up the EBA's recommendations of 21 October on the need to clean up the stock of 'Legacy' instruments as soon as possible. This publication, from a direct supervisor, had a positive impact on the universe of UK discounted or 'disco' bonds. On the same day, Lloyds announced an exchange offer with a premium of almost 6 points on three legacy 'long calls' bonds with step-ups (7.281%, 7.881% and 13%). Also noteworthy was the tender by Novo Banco on its senior Cayman bonds which had a positive impact on their prices. Finally, the primary market saw the first RT1 issued in Germany by Allianz (two issues of 1.250 million at 2.625% in EUR and 3.5% in USD) and in AT1 format we saw Société Générale (USD1.5 billion at 5.375%), Erste Bank (EUR750 million at 4.250%) and Permanent TSB (EUR125 million at 7.875%).
December
Financial stocks ended the year on a high note, posting solid performance, driven mainly by the Brexit agreement concluded in the last few days of the year. This agreement still seemed a long way off at the beginning of December when the lack of any significant progress, coupled with the status quo in the negotiations on the US stimulus plan, did not encourage major risk taking. The indices tightened very slightly over the month (SubFin from 113bps to 111bps), the main movement being on the cash side. The rally was also supported by the gradual resumption of dividend distributions announced by the ECB for 2021 with a limit set at 15% of 2019-20 profits and 20 points of CET1 until 30 September. In the UK, the PRA ran some stress tests on banks before deciding on distributions. These should not exceed the higher of the following two amounts: 20bps of RWAs at the end of 2020 or 25% of cumulative earnings over eight quarters covering 2019 and 2020.
Overall, capital markets activity ended quarter 4 2020 on solid footing for most banks with revenues of this division still running ahead of consensus suggesting potential for upward revisions of quarter 4 EPS. This positive earnings trend came alongside a continued reduction in the stock of NPLs, as shown by Sabadell, UniCredit and Banco BPM in December 2020. Consolidation and cost reduction also continued in the financial sector. The merger of Unicaja and Liberbank in Spain was formalised and was expected to create the number 5 in the national banking sector once regulatory approvals were obtained. Political pressure was also mounting in Italy for Monte dei Paschi to be acquired by UniCredit. On the regulatory side, the transposition of BRRD2 in France did not go in the direction of the issuers and left the risk of infection unresolved, which further reinforced the interest in cleaning up the stock of 'Legacy' instruments (you can see our note on this subject on the following link: European Banking Authority Opinion on Legacy instruments). BBVA announced in mid-December the call at par of three of its legacy securities. These redemptions confirmed the interest of issuers to clean their legacy securities' stock in the context of the transition period to Basel III. On the insurers' side, the year began with greater regulatory clarity following the publication by EIOPA of its analysis on Solvency II, which reflected the regulator's confidence in the sector. Finally, the primary market for AT1 securities remained open. HSBC (USD1.5 billion at 4.6%) and Credit Suisse (USD1.5 billion at 4.5%) came to seize the right conditions to issue.
2- Investment Objective and Strategy
The Company is a closed-ended fund investing in liabilities issued by European financial institutions, predominantly legacy T1s, T2s, and AT1s across five sub-strategies: · Liquid Relative Value: instruments issued by large and strong quality institutions, with significant liquidity. These can be purchased on either primary or secondary markets. · Less Liquid Relative Value: instruments issued by large and strong quality institutions, with limited liquidity due to past tenders or complex features (secondary market). · Restructuring: instruments issued by institutions in preparation or implementation of a restructuring process (secondary market). · Special Situations: instruments issued by entities in run-off, under a merger process or split between several entities (secondary market). · Midcap Origination: instruments issued by small institutions or small subsidiaries of larger institutions (primary market).
3- Company activity
January
To monetise the strong momentum on the primary market, the Company took part in three new issues in Spain and Italy, two AT1s and one T2, within Liquid Relative Value, while at the same time adding on a position in a Greek T2. In Restructuring, the Company brought its position on Hamburg Commercial Bank to the tender. It also initiated new positions in a small building society and a specialist lender in the UK. In Midcap Origination, the Company sold its position in the Spanish insurer Caser following the announcement of its acquisition by Helvetia and bought Saxo Bank T2 ahead of the call of its AT1 coming on 26 February 2020 (bought at the inception of the Company at 94.00). The Company kept a moderate gearing at 107%, with 6% cash.
February
Prior to the week of 24 February 2020, the Company had reduced its exposure in Liquid Relative Value (Santander and FinecoBank AT1, ASR RT1) and in Restructuring (IPF and Deutsche Bank). Since the start of the correction on 24 February 2020, the Company realised gains on DB and Intesa hedges.
The Company marginally redeployed on seniors (Intrum), T2s (ICG) and, following the correction, which showed no signs of abating, selectively within the Restructuring bucket on UniCredit and Deutsche Bank. Finally, in anticipation of Central Bank reaction, the Company added to its positions in Fixed Perpetuals issued by UK banks. The Company was well positioned ahead of rate cuts with 19% T1 instruments with Long Calls, hence significant duration. As the correction continued, the NAV decreased 4.16% on 9 March 2020 on the back of unprecedented moves across the sector (the iBoxx CoCo Liquid Developed Market AT1 decreased 3.68%). The Company remained liquid with more than 5% cash and 14% Liquid Relative Value instruments. The Company's holding in AT1 was limited to 35%, of which 17% were liquid instruments. Amongst these AT1s, the Company held issuers that were expected to remain resilient in the context of the COVID-19 crisis, such as Saxo Bank and FinecoBank, or benefit from the support measures announced by the BOE, such as Virgin Money, OSB and Shawbrook. The Company also held a significant pocket of liquidity in the form of Senior bonds, Fixed-to-Fixed, as well as other Legacy T1 instruments with no extension risk, amounting to 18% and short positions as credit hedges amounting to 3%.
March
In the context of record drops in valuations across T2 and AT1 instruments, our legacy strategies saw similar moves but on a smaller scale. This resilience, in relative terms, was supported by the specific, sometimes esoteric, language built into legacy bonds. These features resulted in a more defensive credit profile at the instrument level through shorter credit duration, a limited extension risk and restrictive rule-based coupon paying mechanisms. The largest position in the portfolio (Lloyds 13%) lost circa 4.5%, at the low end of the monthly variations observed in sub financials, while still offering more than 600bps for two-year risk on a cumulative coupon. As the sell-off started at the end of February 2020, the Company reduced some discounted bonds and redeployed partly on liquid AT1s, short dated 'callables' and high-coupon legacy bonds. The Company held the SEB 5.25% at the time of their calls (bought at 91 the very morning of the announcement). As the volatility took hold, the Company focused on sourcing high coupon bonds that had fallen around par (Lloyds 12% before its tender), or below par for the Fixed-to-Fixed bonds (BNP 6.5% and Lloyds 6.85%). At the time of the tender announced by Crédit Agricole, the Company also held 10% of similar CMS/disco bonds. The Company closed the month with 6% cash, alongside a 16% allocation to highly liquid instruments.
April
As market valuations stabilised, the Company proceeded to some defensive adjustments to the portfolio. The Company captured the new issue premia on two insurance T2s in Liquid Relative Value, while it reduced its UK exposure in Less Liquid Relative Value. The Company held some small positions in the two illiquid Principality Building Society and BCP bonds that got called. In the Restructuring bucket, the Company added on a defensive T2 issued by a Spanish Caja and invested back into a short dated senior bond issued by a consumer lender at a significant discount. In Special Situations, the Company added on Fortis Cashes whose disqualification post 2021 had been confirmed by the issuer's disclosure. Finally, in Midcap Origination, the Company took part in a new T2 issued by the asset manager Jupiter, as part of an acquisition it committed to in February 2020. The Company remained lightly levered with its investments representing 104% of NAV, and with 7% of cash ready to deploy on further opportunities.
May
In the favourable environment, the Company took part in the new issue of the Bank of Ireland AT1, as well as the two new issues of insurance T2s by Direct Line and Phoenix, all in the Liquid Relative Value bucket. The Company also bought a Virgin Money AT1 at an attractive entry level of 76.50% of nominal value. In Less Liquid Relative Value, the Company realised some gains on Ecclesiastical and NatWest preference shares, as well as on some HSBC Long Calls. In the Restructuring and Midcap Origination buckets, the Company held small positions in BCP legacy instruments and Principality Building Society PIBS that got called at par. They were purchased respectively in 2018 at 54 and during March 2020 between 91 and 96. The Company closed the month slightly levered with its investments representing 103% of NAV and 8% of cash.
June
In this conducive market, the Company limited its appetite on new issues to a Commerzbank AT1. It financed this in the Liquid Relative Value bucket by realising its gains on the UK insurance T2s issued in April 2020. The Company benefited from the call of Banco BPM 9%, one of its top ten positions, within Less Liquid Relative Value. It reinvested some of the proceeds into UK bank preference shares, which together with legacy PIBS represented slightly more than 10% of the portfolio. In Legacy CMS, it switched out of BACA and Aegon into an illiquid French mutual instrument whose language signalled a potential call by 2021. In Restructuring, the Company realised some gains on International Personal Finance and increased its holdings in a Deutsche Bank AT1, following their investor update about loan exposures, and an IKB T2, which was lagging the rebound. In Special Situations, it added on a UBI AT1 as Intesa's bid started its last phase. Finally, in Midcap Origination the Company increased its holdings in a Saxobank AT1 and Jupiter T2 at levels that remained, in our view, defensive. The Company continued to operate with a moderate cash gearing of 108%, which included 7% in cash.
July
As the flows and volatility slowed down into the summer lull and the quarter 2 earnings season, the Company did a limited number of trades. In Liquid Relative Value, it reduced its exposure to UBI AT1 following the convergence with Intesa's AT1 from 160bps to 60bps. In Less Liquid Relative Value, it started building a small position on a legacy bond issued by the Opco entity of a small but profitable UK lender. In Midcap Origination, it reduced its Shawbrook AT1 exposure by switching into the newly issued T2 and added on Onesavings AT1. The Company kept a moderate cash gearing of less than 108% with 8% cash.
August
In the context where positive fundamentals appeared to be fully valued, the Company took profit on positions in the Liquid Relative Value bucket on recent issues like BKIR 7.5% at 106.75 (bought at 100 mid May) and CS 5.25% AT1, and added on Aareal Bank in Germany whose AT1 should be called at the next call date in April 2021. The Company sold its holding in ICG seniors and in Spain, it switched part of its holding in Ibercaja into Abanca. In the Restructuring bucket, the Company reduced its holding in Cajama realising gains from its purchase at 77 in mid April 2020.
Finally, in Midcap Origination, the Company took part in the inaugural issue of 9.625% Contingent Capital Deferred Shares by Ecology Building Society, a small size lender with a  differentiated and resilient business model focusing on sustainable real estate. The Company continued to reduce its cash gearing and its cash investments were down to 100% of NAV.
September
The Company continued to reduce its risk profile selectively with net cash gearing decreasing to 97% of NAV. In Liquid Relative Value, the Company reduced its holdings on Italian and Spanish names and added two German AT1s and switched its BAWAG Group exposure into the newly issued AT1. In Less Liquid Relative Value, the Company reduced its holdings in one UK disco and two fixed perpetuals to increase its exposure to a legacy T1 issued by OneSavings Bank's Opco entity. In Restructuring, the Company sold its position on Monte dei Paschi T2s before the new issuance, hence protecting its gains on the bond. Finally, following a short seller's attack on the German specialist lender Grenke Leasing, the Company took advantage of the volatility by deploying circa 1% on senior bonds at significant discounts.
October
In the absence of any clear direction for valuations, the Company reduced portfolio risk by selling some discos into the EBA opinion publication in Less Liquid Relative Value, while adding on its Cofinga holding at a yield to call of more than 10% (in Special Situations). The Company redeployed risks selectively in Liquid Relative Value on UnipolSai's inaugural RT1, Banco BPM and Aareal Bank AT1s. In Restructuring, the Company sourced some short-dated T2s issued by the first portfolio company of Gamalife insurance consolidator while increasing its holding of Cajamar T2. Finally, in Midcap Origination the Company subscribed to the inaugural AT1 issue by Quintet Private bank at an attractive yield of 7.5% in EUR.
November
In what was a supportive environment for the banking sector, the Company followed the momentum by taking part in the new AT1 issues from NatWest Group and Permanent TSB. In Less Liquid Relative Value, the Company added on some legacy preference shares whose impediment to resolution was reinforced by the PRA CFO Letter and the LIBOR discontinuation. In Restructuring the Company reduced its risk in UniCredit, following the announcement of the CEO leaving, and, in Special Situations, it switched out of Banco BPM, as Crédit Agricole preferred to acquire Crédito Valtellinese, and re-initiated a position on Monte dei Paschi. Towards the end of the month, the Company reduced its risk on AT1s in Liquid Relative Value and Midcap Origination. The Company closed the month with a light gearing of 105.9% and cash available of 9.1%.
December
While the Company realised some gains (Monte bonds sold above 91), it remained fully invested by adding on, in its Restructuring sub-strategy, T2s issued by Gamalife (600bps to December 2022), Piraeus and Bank of Cyprus. In Less Liquid Relative Value, the Company took a rare first loss exposure on a defensive basket of financials limited to 12 months. Finally, in Midcap Origination, the Company reduced its exposure to eSure bonds at 107, having purchased them mid-2019 just below 101. The Company closed the month with a slightly higher gearing of 107% and a reduced cash allocation of 3%; constructively positioned in these conducive market conditions.

4- Portfolio (as at 31 December 2020)
Strategy allocation (as a % of total net assets)1
Liquid Relative Value	12.4%
Less Liquid Relative Value	23.2%
Restructuring	26.7%
Special Situations	11.0%
Midcap Origination	27.6%

Denomination (as a % of total net assets)1
EUR	57.6%
GBP	41.8%
USD	1.4%

Portfolio Breakdown (as a % of total net assets)
By Securities External Rating1			By country1
BBB	20.3%		UK	41.8%
BB	32.6%		Germany	11.6%
B	12.2%		France	8.6%
below B	7.7%		Italy	5.2%
NR	33.9%		Portugal	5.0%
			Austria	4.7%
By maturity1			Ireland	4.5%
<1 year	8.1%		Netherlands	4.5%
1-3 years	29.4%		Belgium	4.3%
3-5 years	30.9%		Spain	3.2%
5-7 years	9.7%		Denmark	2.9%
7-10 years	4.1%		Greece	1.9%
>10 years	18.6%		Cyprus	1.0%
			Luxembourg	0.9%
By subordination1
Additional Tier 1	37.9%
Legacy Tier 1	36.6%
Tier 2	15.0%
Senior	1.4%
1Splits adjusted for single assets

5- Company metrics (as at 31 December 2020)
Share price and NAV
Share price (mid) (GB pence)	88.00
NAV per share (daily) (GB pence)	95.10
Dividends paid over last 12 months (GB pence)	6.00
Shares in issue	91,852,904
Market capitalisation (GBP mn)	80.83
Total net assets (GBP mn)	87.35
Premium / (Discount)	(7.47)%

Portfolio information	31 December 2020	31 December 2019
Modified duration	4.54	4.53
Sensitivity to credit	5.51	5.51
Positions	85	93
Average price1	104.56	105.63
Running yield	5.76%	5.36%
Yield to perpetuity2	6.67%	6.51%
Yield to call3	8.51%	6.26%
Gross Assets	113.4%	117.0%
Net gearing = (Gross assets - Collateral) / Net assets	107.0%	112.4%
Investments / Net Assets	104.0%	105.8%
Cash	3.0%	6.7%
Collateral	6.4%	4.6%
Net Repo / Net Assets	-0.1%	4.9%
CDS / Net Assets	56.7%	64.6%

Net Return4
1 month	3 months	6 months	1 year	3 years5	Since launch5
1.48%	7.13%	10.75%	1.73%	2.69%	4.60%

Monthly performance
	Jan %	Feb %	Mar %	Apr %	May %	Jun %	Jul %	Aug %	Sep %	Oct %	Nov %	Dec %	Annual %
2015											0.19	-1.48	-1.29
2016	-4.02	-4.59	3.57	1.16	2.62	-1.97	2.83	1.69	-0.21	2.06	-1.60	1.91	2.92
2017	2.67	0.93	1.12	2.01	1.72	-1.41	1.86	0.58	1.76	2.72	1.31	2.92	16.14
2018	3.12	-0.70	-1.95	1.14	-5.84	-1.14	1.60	-1.26	2.43	-1.54	-2.68	-1.44	-8.00
2019	3.36	2.30	0.29	2.53	-1.59	2.29	0.30	0.75	0.97	2.22	1.77	1.12	16.98
2020	1.99	-0.87	-19.95	5.24	3.68	4.27	1.90	1.88	-0.32	0.53	5.03	1.48	1.73

1Bonds only. 2The yield to perpetuity is the yield of the portfolio converted in GBP with the hypothesis that securities are not reimbursed and kept to perpetuity.3The yield to call is the yield of the portfolio converted in GBP at the anticipated reimbursement date of the bonds. 4Net return has been calculated by comparing the NAV at the start of the period with the NAV, plus dividends paid, at the period end. Past performance does not guarantee future results. 5Annualised performance.

6- NAV evolution
Date	NAV	Share price (mid)	NAV + dividends	Share price (mid) + dividends
05/11/2015	97.97	101.50	97.97	101.50
27/11/2015	98.19	101.50	98.19	101.50
31/12/2015	96.74	101.50	96.74	101.50
29/01/2016	92.85	101.50	92.85	101.50
26/02/2016	88.24	101.25	88.59	101.60
24/03/2016	91.39	96.50	91.74	96.85
29/04/2016	92.45	96.50	92.80	96.85
27/05/2016	93.87	95.50	95.22	96.85
30/06/2016	92.02	95.50	93.37	96.85
29/07/2016	94.62	93.50	95.97	94.85
26/08/2016	94.72	94.50	97.57	97.35
30/09/2016	94.52	95.50	97.37	98.35
28/10/2016	96.47	95.50	99.32	98.35
25/11/2016	93.43	93.50	97.78	97.85
31/12/2016	95.21	92.50	99.56	96.85
31/01/2017	97.75	92.50	102.10	96.85
28/02/2017	97.01	95.00	103.01	101.00
31/03/2017	98.10	100.50	104.10	106.50
28/04/2017	100.07	99.50	106.07	105.50
31/05/2017	100.29	101.50	107.79	109.00
30/06/2017	98.88	97.50	106.38	105.00
31/07/2017	100.72	97.50	108.22	105.00
31/08/2017	99.80	96.00	108.80	105.00
29/09/2017	101.56	98.00	110.56	107.00
31/10/2017	104.32	98.25	113.32	107.25
30/11/2017	104.19	102.50	114.69	113.00
31/12/2017	104.43	105.25	114.93	115.75
31/01/2018	107.69	108.50	118.19	119.00
28/02/2018	105.44	107.00	117.44	119.00
29/03/2018	103.38	106.00	115.38	118.00
30/04/2018	104.56	105.50	116.56	117.50
31/05/2018	96.95	102.50	110.45	116.00
30/06/2018	95.84	102.50	109.34	116.00
31/07/2018	97.37	102.00	110.87	115.50
31/08/2018	94.64	98.75	109.64	113.75
28/09/2018	96.94	97.00	111.94	112.00
31/10/2018	95.45	94.00	110.45	109.00
30/11/2018	91.39	93.00	107.89	109.50
31/12/2018	90.08	88.00	106.58	104.50
31/01/2019	93.11	90.00	109.61	106.50
28/02/2019	93.72	89.50	111.72	107.50
29/03/2019	93.99	86.50	111.99	104.50
30/04/2019	96.37	90.50	114.37	108.50
31/05/2019	93.34	92.50	112.84	112.00
30/06/2019	95.48	92.75	114.98	112.25
31/07/2019	95.77	87.50	115.27	107.00
30/08/2019	94.99	84.00	115.99	105.00
30/09/2019	95.91	84.25	116.91	105.25
31/10/2019	98.04	89.50	119.04	110.50
30/11/2019	98.28	90.50	120.78	115.00
31/12/2019	99.38	94.00	121.88	116.50
31/01/2020	101.36	94.00	123.86	116.50
28/02/2020	98.98	92.00	122.98	116.00
31/03/2020	79.23	75.00	103.23	99.00
30/04/2020	83.38	76.50	107.38	100.50
29/05/2020	84.95	73.50	110.45	99.00
30/06/2020	88.58	88.00	114.08	113.50
31/07/2020	90.26	86.00	115.76	111.50
31/08/2020	90.46	79.00	117.46	106.00
30/09/2020	90.17	80.00	117.17	107.00
30/10/2020	90.65	87.50	117.65	114.50
30/11/2020	93.71	81.50	122.21	110.00
31/12/2020	95.10	88.00	123.60	116.50

7- Outlook
The pandemic has resulted in a constructive backdrop for bonds issued by financial institutions as central banks provided significant support measures such as cheap funding and capital relief. On top of these measures, fiscal and monetary support in the form of government guaranteed loans and direct transfers helped contain the economic impact while lowering the stress on corporates and smaller businesses. Despite their profitability suffering from the continuing low interest rate environment, European banks stand as very attractive in the current market context for bond investors. Corporate bonds with a BB+ rating currently offer c.2% income whereas a BB+ bank bond offers a far more attractive c.4%. Tougher regulation since the GFC made financial institutions less profitable but more solvent and thus better able to pay back the capital and income on the bonds they have issued. The progressive roll-out of Basel IV will further strengthen the solvency of the sector. In parallel, we see profitability trending higher due to tailwinds from M&A, restructuring and digitalisation. We believe that continued consolidation and cost efficiency improvements in 2021 should boost the sector and provide further upside potential. During lockdown, bank customers, and banks themselves, were able to see the advantages of online banking. We believe the crisis will expedite the digitalisation of banks, leading to cost and efficiency advantages. As seen earlier this year, rising inflation expectations should provide a welcome relief to interest rate margin pressures and improve the ability of customers to repay their loans. This positive interest rate sensitivity should drive bank and insurance equities higher while mitigating the impact on subordinated capital. In addition, financial bonds often display short fixed coupon periods and generally reset to a variable index periodically. This can result in an incentive for issuers to repay early, in addition to the regulatory features of the bonds, or market perception concerns. Recent issuer activity confirms that despite continued macro-economic uncertainty, regulators are still actively encouraging banks to recycle their legacy instruments ahead of the December 2021 grandfathering deadline: at the end of 2020, NatWest and Lloyds announced tenders with generous premia on their legacy with long dated calls, while DZ Bank, Unicredit and BNP Paribas just announced the call of their SPV legacies at par. The Company continues to be ideally placed, with its closed-ended format and its range of investment sub-strategies, to capture the opportunities arising in the sector, from liquid to less liquid instruments, from small to large issuers, from legacy to new formats, and from senior to equity capital instruments.
Gildas Surry Axiom Alternative Investments SARL 22 March 2021	Antonio Roman Axiom Alternative Investments SARL 22 March 2021

Investment Portfolio as at 31 December 2020
		£'000	% of NAV
Investments in capital instruments at fair value through profit or loss
Bonds
Cofinga Funding Two LP 1.050% Perp		2,776	3.18
OneSavings Bank PLC 9.125% 05/25/22		2,535	2.90
FinecoBank SPA 5.875% Perp		2,475	2.83
Shawbrook Group PLC 7.875% Perp		2,466	2.82
Just Group PLC 8.125% 10/26/29		2,293	2.62
Lloyds Bank PLC 13.000% Perp		2,176	2.49
Promontia MMB SASu 8.000% Perp		2,128	2.44
Coventry Building Society 12.125% Perp		2,109	2.41
Commerzbank AG 6.125% Perp		2,106	2.41
Van Lanschot NV 6.750% Perp		2,060	2.36
Permanent TSB PLC 8.625% Perp		1,982	2.27
BNP Paribas Fortis SA 1.459% Perp		1,881	2.15
OneSavings Bank PLC 4.599% Perp		1,865	2.14
CYBG PLC 8.750% Perp		1,861	2.13
eSure Group PLC 6.750% 12/19/24		1,757	2.01
Ageasfinlux SA 0.833% Perp		1,737	1.99
NIBC Bank NV 6.000% Perp		1,676	1.92
Volksbank Wien AG 7.750% Perp		1,652	1.89
Banco de Credito Social Cooperativo SA 7.750% 06/07/22		1,602	1.83
Deutsche Bank AG 7.125% Perp		1,464	1.68
Quintet Private Bank Europe SA 7.500% Perp		1,451	1.66
Piraeus Bank SA 9.750% 06/26/24		1,431	1.64
Saxo Bank A/S 8.125% Perp		1,431	1.64
Aareal Bank AG 6.849% Perp		1,429	1.64
Bank of Scotland PLC 13.625% Perp		1,332	1.53
International Personal Finance PLC 9.750% 11/12/25		1,256	1.44
Jupiter Fund Management PLC 5.875% Perp		1,242	1.42
IKB Deutsche Industriebank AG 4.000% 01/31/28		1,232	1.41
Bank of Scotland PLC 7.281% Perp		1,226	1.40
UnipolSai Assicurazioni SpA 6.375% Perp		1,170	1.34
Banco Comercial Portugues SA 9.250% Perp		1,105	1.27
Gamalife - Cia de Seguros de Vida SA 1.659% 12/19/22		1,104	1.26
Novo Banco SA 3.500% 02/19/43		1,061	1.21
BA-CA Finance Cayman Ltd 0.000% Perp		1,042	1.19
Skipton Building Society 12.875% Perp		1,019	1.17
Saxo Bank A/S 5.500% 07/03/29		962	1.10
Grenke Finance PLC 1.625% 04/05/24		932	1.07
Abanca Corp Bancaire SA 7.500% Perp		929	1.06
BAWAG Group AG 5.125% Perp		913	1.04
Bank of Ireland 13.375% Perp		861	0.99
Virgin Money UK PLC 8.000% Perp		815	0.93
Bank of Cyprus PLC 9.250% 01/19/27		805	0.92
IKB Funding Trust I 0.962% Perp		767	0.88
TSB Group Holdings PLC 7.875% Perp		744	0.85
Caixa Economica Montepio Geral 5.000% Perp		720	0.82
Bank of Scotland PLC 9.375% Perp		675	0.77
Cassa di Risparmio di Asti SpA 9.250% Perp		668	0.77
HSB Group Inc 1.147% 07/15/27		666	0.76
Novo Banco SA Luxembourg 0.000% 04/16/46		654	0.75
AnaCap Financial Europe SA 5.000% 08/01/24		633	0.73
Grenke Finance PLC 1.500% 04/09/21		627	0.72
Novo Banco SA 02/12/49		601			0.69
Lloyds Bank PLC 0.308% Perp		542			0.62
Sainsburys Bank PLC 6.000% 11/23/27		519			0.59
Louvre Bidco SAS 5.375% 09/30/24		519			0.59
Grenke Finance PLC 1.000% 04/05/23		491			0.56
GNB Cia de Securos de Vida SA 2.959% Perp		472			0.54
Newcastle Building Society 10.750% Perp		469			0.54
Metro Bank PLC 9.500% 10/08/25		461			0.53
Shawbrook Group PLC 9.000% 10/10/30		451			0.52
National Westminster Bank PLC 11.500% Perp		444			0.51
Natwest Group PLC 5.125% Perp		418			0.48
Nationwide Building Society 2.488% Perp		313			0.36
West Bromwich Building Society 2.000% Perp		276			0.32
RZB Finance Jersey III Ltd 0.000% Perp		275			0.31
Leeds Building Society 13.375% Perp		271			0.31
Ecology Building Society 9.625% Perp		266			0.31
Ulster Bank Ireland DAC 11.750% Perp		208			0.24
National Westminster Bank PLC 11.500% Perp		196			0.22
Alpha Group Jersey Ltd 1.312% Perp		182			0.21
Banco Popular Espanol SA 8.000% 07/29/21		-			-
Banco Popular Espanol SA 8.250% 10/19/21		-			-
Popular Capital SA Perp		-			-
Popular Capital SA 6.000% Perp		-			-
		------------			------------
		78,877			90.30
Other capital instruments
National Westminster Bank PLC 9.000% Perp		1,262			1.44
Bank of Ireland 12.625% Perp		722			0.83
RSA Insurance Group PLC 7.375% Perp		664			0.76
Lloyds Banking Group PLC 9.750% Perp		641			0.73
Ecclesiastical Insurance Group PLC 8.625% Perp		481			0.55
Standard Chartered PLC 7.375% Perp		406			0.47
Standard Chartered PLC 8.250% Perp		297			0.34
Santander UK PLC 8.625% Perp		116			0.13
		------------			------------
		4,589			5.25
		------------			------------
Total investments in capital instruments at fair value through profit or loss		83,466			95.55
Derivative financial assets at fair value through profit or loss
Sale and repurchase agreement in respect of Royal Bank of Scotland Group PLC 0.563% Perp	1,313			1.50
Sale and repurchase agreement in respect of Stichting AK Rabobank Certificaten 0.000% Perp	1,047			1.20
Sale and repurchase agreement in respect of Stichting AK Rabobank Certificaten 0.000% Perp	1,037			1.19
Sale and repurchase agreement in respect of Société Générale SA 0.335% Perp	480			0.55
GBP/EUR foreign currency forward	415			0.48
GBP/USD foreign currency forward	360			0.41
Markit iTraxx Europe Subordinated Financial Index 12/20/21	135			0.16
BNP Paribas SA Senior CDS 12/20/26	133			0.15
Markit iTraxx Europe Subordinated Financial Index 06/20/22	93			0.11
Lloyds Bank PLC Senior CDS 06/20/22	55			0.06
Standard Chartered Bank Senior CDS 12/20/21	40			0.05
Markit iTraxx Europe Subordinated Financial Index 12/20/25	25			0.03
Danske Bank A/S Subordinated CDS 12/20/23	21			0.02
ING Bank NV Subordinated CDS 12/20/21	21			0.02
Intesa Sanpaola SpA Senior CDS 12/20/21	21			0.02
Lloyds Bank PLC Subordinated CDS 12/20/21	20			0.02
Intesa Sanpaolo SpA Subordinated CDS 12/20/21	16			0.02
Markit iTraxx Europe Subordinated Financial Index 12/20/21	10			0.01
CDS option in respect of Markit iTraxx Europe Senior Financial Index 12/20/25	10			0.01
UniCredit SpA Subordinated CDS 12/20/22	5			0.01
	------------			------------
Derivative financial assets at fair value through profit or loss	5,257			6.02
Derivative financial liabilities at fair value through profit or loss
Sale and repurchase agreement in respect of Shawbrook Group PLC 7.875% Perp	(1,980)			(2.27)
Sale and repurchase agreement in respect of Cofinga Funding Two LP 1.050% Perp	(1,644)			(1.88)
Sale and repurchase agreement in respect of FinecoBank SPA 5.875% Perp	(1,504)			(1.72)
Sale and repurchase agreement in respect of Van Lanschot NV 6.750% Perp	(1,355)			(1.55)
Sale and repurchase agreement in respect of Just Group PLC 8.125% 10/26/29	(1,285)			(1.47)
Sale and repurchase agreement in respect of Volksbank Wien AG 7.750% Perp	(1,144)			(1.31)
Sale and repurchase agreement in respect of CYBG PLC 8.750% Perp	(1,037)			(1.19)
Sale and repurchase agreement in respect of BNP Paribas Fortis SA 1.459% Perp	(851)			(0.98)
Sale and repurchase agreement in respect of NIBC Bank NV 6.000% Perp	(810)			(0.93)
Sale and repurchase agreement in respect of Louvre Bidco SAS 5.375% 09/30/24	(571)			(0.65)
United Kingdom of Great Britain and Northern Ireland Senior CDS 06/20/23	(66)			(0.08)
Lloyds Banking Group PLC Senior CDS 06/20/22	(51)			(0.06)
Lloyds Banking Group PLC Senior CDS 06/20/22	(30)			(0.03)
CDS option in respect of Markit iTraxx Europe Senior Financial Index 12/20/25	(3)			(0.00)
	------------			------------
Derivative financial liabilities at fair value through profit or loss	(12,331)			(14.12)
Related party fund investments
Axiom Global CoCo UCIT ETF USD-hedged	3,011			3.45
Axiom Global CoCo UCIT ETF GBP-hedged	1,089			1.25
Axiom Equity Class Z	666			0.76
	------------			------------
Related party fund investments	4,766			5.46
Other assets and liabilities
Short position in respect of Royal Bank of Scotland Group PLC 0.563% Perp	(1,360)			(1.55)
Short position in respect of Société Générale SA 0.335% Perp	(521)			(0.60)
Collateral accounts for derivative financial instruments at fair value through profit or loss	5,905			6.76
Cash and cash equivalents	4,297			4.92
Other receivables and prepayments	1,995			2.28
Other payables and accruals	(2,134)			(2.44)
Bank overdrafts	(1,650)			(1.89)
Collateral accounts for derivative financial instruments at fair value through profit or loss	(340)			(0.39)
	------------			------------
Other assets and liabilities	6,192			7.09
	------------			------------
Net assets	87,350			100.00
	------------			------------

 

Principal Risks and Uncertainties

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

Macroeconomic risk

Adverse changes affecting the global financial markets and economy as a whole, and in particular European financial debt markets, may have a material negative impact on the performance of the Company's investments. In addition, the Company's non-Pounds Sterling investments may be affected by fluctuations in currency exchange rates. Prices of financial and derivative instruments in which the Company invests are subject to significant volatility due to market risk. The Company may use derivatives, including options, short market indices, credit default swaps ("CDS"), and others, to mitigate market-related downside risk, but the Company is not committed to maintaining market hedges at any time. The Company has a systematic hedging policy with respect to currency risk. Subject only to the availability of suitable arrangements, the assets denominated in currencies other than Pounds Sterling are hedged by the Company (to a certain extent) by using currency forward agreements to buy or sell a specified amount of Pounds Sterling on a particular date in the future. Historically, foreign exchange hedging has undermined many closed-ended investment funds, as a result of sharp movements in the foreign exchange rates leaving large hedging losses which could not be met as assets were illiquid and banks were under severe balance sheet strain and could not offer forbearance on facilities in breach.   The Company is exposed to foreign exchange hedging risks (see note 24) but this risk is mitigated by the following: -  Based on the worst case scenario observed in monthly spot movements in the past 10 years, our worst case expected hedging loss on expiry would be 4.33% of NAV; -  Our portfolio trading liquidity is such that it would take one day, in normal circumstances, to liquidate sufficient assets to meet such an anticipated worst case loss; and -  In "stressed" markets, we estimate it would take three days to raise such liquidity.   COVID-19 Pandemic The effect of COVID-19 has been profound with the UK, which according to government statistics, is facing its worst contraction in output for over 300 years. The impact on some sectors has been devastating whilst others have thrived. The full effects will take time to flow through fully and manifest themselves in the balance sheets of banks. It is pleasing to note that the recovery in the economy seems at present to be quicker than might have been feared. We must, however, recognise the possibility that there will be further future "waves" and variants of the COVID virus and it will be some time before the pandemic can be declared "over". As the COVID-affected countries come out of lockdown and try to restart their economies and bring them back to a normal level, the authorities continue to deploy the measures deemed necessary. As for the banks, they continue to be part of the solution and the authorities expect them to continue playing their role in lending to the economy. For this, the banks are offered the funding they can wish for at a negative cost from the ECB through the targeted longer-term refinancing operations ("TLTROs"), and are granted a significant relief in their capital requirements through the capital requirements regulation ("CRR") quick fix and in their risk-weighted assets ("RWAs") through the state guarantees. In this context, we can only express reservations on the near-term outlook for the banking sector and its capacity to restart paying out capital to equity investors. However, non-equity capital instruments continue to offer a vast array of opportunities.

At the height of the lockdowns in Guernsey, the UK, France and Luxembourg, the Administrator and Investment Manager showed that they were able to work remotely without any significant negative impact on the Company's operations. The impact of the various vaccines has yet to be seen, but there is light at the end of the COVID-19 pandemic tunnel, and it is expected that (as vaccine programmes are rolled out globally) the risk to the Company from the pandemic will continue to decrease throughout 2021.

Brexit The UK left the EU on 31 January 2020, and the subsequent 11 month transition period ended on 31 December 2020.  The UK's ongoing relationship with the EU is now governed by the EU Withdrawal Agreement and a Trade and Cooperation Agreement ("TCA") agreed on 24 December 2020.  The end of the transition period and the certainty of there being a TCA in place has reduced the risk that the uncertainty of Brexit created. However, although the immediate uncertainty arising from Brexit has reduced, the impact over the next three years of Brexit on European financial securities is yet to be seen.

Investment risk

There are certain risks associated with the Company's investment activities that are largely a result of the Company's investment policy (e.g. a portfolio concentrated on European financial debt) and certain investment techniques which are inherently risky (e.g. short selling). There are numerous risks associated with having a concentrated portfolio and the primary risk management tool used by the Company is the extensive research performed by the Investment Manager prior to investment, along with the ongoing monitoring of a position once held in the Company's portfolio. The Board reviews portfolio concentration and receives a detailed overview of the portfolio positions quarterly, and more frequently if necessary.

Counterparty risk

The Company has credit and operational risk exposure to its counterparties which will require it to post collateral to support its obligations in connection with forwards and other derivative instruments. Cash pending investment or held on deposit will also be held with counterparties. The insolvency of a counterparty would result in a loss to the Company which could be material. In order to mitigate this risk the Company seeks to trade only with reputable counterparties that the Investment Manager believes to be creditworthy. The Investment Manager negotiates its International Swaps and Derivatives Association ("ISDA") agreements to include bilateral collateral agreements. In addition, cash held is only with financial institutions with short term credit ratings of A-1 (Standard & Poor's) or P-1 (Moody's) or better. Exposure to counterparties is monitored by the Investment Manager and reported to the Board each quarter.

Credit risk

The Company may use leverage to meet its investment objectives. The Company will also use forward contracts to hedge its non-Pounds Sterling assets. In order to do this, it will need to have in place credit lines with one or more financial institutions.   Due to market conditions or other factors, credit lines may be withdrawn and it might not be possible to put in place alternative arrangements. As such, the ability to meet the Company's investment objective and/or hedging strategy may not be met.   The Investment Manager monitors the use of credit lines and reports to the Board each quarter.

Share price risk

The Company is exposed to the risk that its shares may trade at a significant discount to NAV or that the market in the shares will be illiquid. To mitigate this risk the Company increased the frequency of the publication of its NAV to daily and has retained the Broker to maintain regular contact with existing and potential shareholders. In addition, the Company may instigate a share buyback programme in an attempt to reduce the discount. The Board monitors the trading activity of the shares on a regular basis and addresses the premium/discount to NAV at its regular quarterly meetings. From 1 January 2020 to 31 December 2020, the Company's shares traded at an average discount to NAV of 8.29% (2019: 6.26% discount to NAV).  The premium rose to 3.60% on 18 March 2020 as markets dropped following the rapid spread of COVID-19, which resulted in most European countries being put into lockdown.  Tumultuous trading conditions continued, resulting in the price of the Company's shares falling to a discount to NAV of 17.03% on 5 June 2020, which coincided with the easing of lockdown restrictions in many European countries and the expansion of measures put in place by regulators and governments.  At the year end the shares traded at a 7.47% discount to NAV (2019: 5.41% discount).  The level of discount continues to be monitored by all parties with a view to introducing methods to improve the position, if necessary.

Regulatory risk

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

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

Reputational risk

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

Environmental, Employee, Social and Community Issues

As an investment company, the Company does not have any employees or physical property, and most of its activities are performed by other organisations. Therefore, the Company does not combust fuel and does not have any greenhouse gas emissions to report from its operations, nor does it have direct responsibility for any other emission producing sources. Environmental, Social and Governance ("ESG") Policy The Board believes that all companies have a duty to consider their impact on the community and the environment. The Directors, Administrator, Company Secretary and external auditor are all based in Guernsey and Board meetings are held in Guernsey, thus negating the need for long commutes or flights to/from Board meetings, and thereby minimising the negative environmental impact of travel to/from Board meetings. When making investment decisions, the Investment Manager uses three main mechanisms to integrate ESG criteria: · Its in-house database and tools dedicated to ESG, as described in its ESG policy which is available on their website https://axiom-ai.com/web/en/regulatory-information/); · Engagement with management or investor relations teams to get additional information; and · Information published in annual reports or other regulatory filings (such as TCFD or sustainability reports). Axiom AI's Investment Committee is ultimately responsible for the progress of ESG integration by the investment teams, under the supervision of Axiom AI's Executive Committee. In addition to the ESG policy, Axiom AI maintains an exclusion list. Investments in securities issued by a firm on that exclusion list are prohibited. If a name is added to the exclusion list and the securities are already in the portfolios, the portfolio manager must divest the securities, in a way that is not harmful to holders (no fire sale). The list is mainly based on the lists established by recognized key players, such as the Norwegian government pension fund. The list was introduced in order to formalise the Investments Manager's desire not to invest in any company engaged in activities that do not correspond to our values and our requirements in terms of sustainable development. Companies can be excluded, for example because they produce controversial weapons, such as the ones covered by the Ottawa and Oslo Conventions (anti-personnel mines, cluster munitions). This list is regularly reviewed and amended.

Gender Diversity

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

Key Performance Indicators

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

Dividends per Ordinary Share

As set out in the Prospectus, the Company intends to distribute all of its income from investments, net of expenses, by way of dividends on a quarterly basis. The Company may retain income for distribution in a subsequent quarter to that in which it arises in order to smooth dividend amounts or for the purposes of efficient cash management. The Company announced dividends of £5,511,000 (6.00p per Ordinary Share) for the year ended 31 December 2020 (2019: 6.00p per Ordinary Share) (see note 6 for further details). The Company has met the 6.00p dividend per share target each year since inception and expects to continue to be able to pay out dividends of this level in the future.

NAV and total return

In line with the Prospectus, the Company is targeting a net total return on invested capital of approximately 10% p.a. over a seven year period. The Company achieved a total return of 1.73% in the year ended 31 December 2020 (2019: +16.98%). The total return from inception to 31 December 2020 was 4.60% p.a., which is below the long term target return of 10% p.a. net of operating expenses. Although, the future rate of return and dividends cannot be guaranteed, together with the Investment Manager, the Board believes that the Company's long-term target return will be achievable in the future. The Board regularly monitors the premium/discount of the price of the Ordinary Shares to the NAV per share. Should the discount of share price to NAV become unacceptable to the Board, the Company may buy back some of its shares. Accordingly, the Board puts forward a proposal to Shareholders at the Annual General Meeting to renew the authority to buy back shares. At 31 December 2020 the share price was 88.00p (2019: 94.00p), a 7.47% discount to NAV (2019: 5.41% discount).

Promoting the Success of the Company

The following disclosure outlines how the Directors have had regard to the matters set out in Section 172(1)(a) to (f) of the Companies Act 2006. Although, as a Guernsey company, the Company is not required to directly comply with the Companies Act 2006, Section 172 is considered as a requirement of the AIC Code of Corporate Governance with which the Company complies (see the Corporate Governance Report (in the Annual Report and Financial Statements) for further details).

The Board considers the needs of a number of stakeholders when considering the long-term future of the Company. The key stakeholders with which the Board has liaised during the year ended 31 December 2020 were: · Shareholders; and · Key service providers.

Shareholders

The Company's significant Shareholders at the year end can be found in the Directors' Report (in the Annual Report and Financial Statements). When making principal decisions it is considered imperative to analyse the views of the Company's investors, to ensure that there may continue to be a supply of capital enabling the Company to continue to expand its shareholder base, realise its potential for growth and achieve its long-term investment objective (as disclosed in the Overview and Investment Strategy). The key performance indicators, detailed above, have been considered on an ongoing basis as part of the Board's decision making process. Details of how the Director's communicate with Shareholders can be found in the Corporate Governance Report (in the Annual Report and Financial Statements). Other than the routine engagement with investors regarding strategy and performance, Board composition and absence of a nomination committee were discussed with investors. Following these discussions, the Board considered its current size and structure in detail and concluded that it was not currently appropriate to expand the Board or establish additional committees beyond the introduction of formal Management Engagement and Nomination and Remuneration Committees although this would be kept under review.

Key service providers

Details of the Company's key service providers can be found in the material contracts section of the Directors' Report (in the Annual Report and Financial Statements). The key service providers, including the Investment Manager, are fundamental to the Company's ability to continue in the same state as any changes could disrupt the expected timeliness of information provided to the markets. In turn this would be likely to have a detrimental impact on the Company's reputation. Reputational risk is discussed further in the Principal Risks and Uncertainties. The Board considers the performance of the Investment Manager to be imperative to the success of the Company and therefore, reviews the performance of the Investment Manager at each Board meeting. The Investment Manager and Administrator provide the Board with documentation for consideration at the meetings to assist with their review of performance and the Investment Manager also provides a verbal report to the Board. The Directors raise any queries they have at these meetings with the Investment Manager to help ensure the successful implementation of the investment objective and success of the Company. The Board has continuous access to all of the Company's key service providers and has open two-way communication with them. Key aspects of discussion with these service providers, other than those regarding Company performance and strategy, were in respect of fees payable to these providers. Following these discussions, no fee arrangements were amended in the year ended 31 December 2020.

William Scott

Chairman

22 March 2021

Statement of Comprehensive Income
for the year ended 31 December 2020
	Note	Year ended 31 December 2020	Year ended 31 December 2019
		£'000	£'000
Income
Capital instrument income		4,975	4,445
Credit default swap income		581	600
Bank interest receivable		15	7
		------------	------------
Total income		5,571	5,116
		------------	------------
Investment gains and losses on investments held at fair value through profit or loss
Realised (losses)/gains on disposal of capital instruments and other investments	15	(200)	1,179
Movement in unrealised gains on capital instruments and other investments	15	958	4,815
Realised losses on derivative financial instruments	18	(713)	(439)
Movement in unrealised (losses)/gains on derivative financial instruments	18	(1,346)	5,299
		------------	------------
Total investment gains and losses		(1,301)	10,854
		------------	------------
Expenses
Loss on foreign currency		(1,307)	(603)
Investment management fee	8a	(753)	(796)
Other expenses	12	(267)	(279)
Interest payable and similar charges	11	(139)	(51)
Administration fee	8b	(132)	(128)
Directors' fees	8f	(95)	(95)
Performance fee	8a	-	(136)
		------------	------------
Total expenses		(2,693)	(2,088)
		------------	------------
Profit for the year attributable to the Owners of the Company		1,577	13,882
		------------	------------
Earnings per Ordinary Share: basic and diluted	14	1.72p	15.21p
		------------	------------
All of the items in the above statement are derived from continuing operations. The Company does not have any income or expenses that are not included in profit for the year. Therefore, the profit for the year is also the total comprehensive income for the year. The accompanying notes form an integral part of these financial statements.

Statement of Changes in Equity
for the year ended 31 December 2020
	Note			Distributable reserves and total
				£'000
Opening balance at 1 January 2019				76,976
Profit for the year ended 31 December 2019				13,882
Contributions by and distributions to Owners
Ordinary Shares issued	21			5,941
Share issue costs				(100)
Dividends paid	6			(5,415)
				------------
At 31 December 2019				91,284
Profit for the year ended 31 December 2020				1,577
Contributions by and distributions to Owners
Dividends paid	6			(5,511)
				------------
At 31 December 2020				87,350
				------------
The share capital has not been presented separately in the above Statement of Changes in Equity as the Ordinary Shares have no par value, and hence the share capital is £nil. The accompanying notes form an integral part of these financial statements.

Statement of Financial Position
as at 31 December 2020
		Note	As at 31 December 2020	As at 31 December 2019
			£'000	£'000
Assets
Investments in capital instruments at fair value through profit or loss		15, 19	83,466	85,924
Other investments at fair value through profit or loss		15, 19	4,766	7,764
Collateral accounts for derivative financial instruments at fair value through profit or loss		16,18	5,905	4,999
Derivative financial assets at fair value through profit or loss		18	5,257	3,909
Other receivables and prepayments		17	1,995	1,625
Cash and cash equivalents			4,297	6,102
			------------	------------
Total assets			105,686	110,323
			------------	------------
Current liabilities
Derivative financial liabilities at fair value through profit or loss		18	(12,331)	(16,434)
Short positions covered by reverse sale and repurchase agreements		15, 19	(1,881)	(1,336)
Collateral accounts for derivative financial instruments at fair value through profit or loss		16,18	(340)	(803)
Other payables and accruals		20	(2,134)	(466)
Bank overdrafts			(1,650)	-
			------------	------------
Total liabilities			(18,336)	(19,039)
			------------	------------
Net assets			87,350	91,284
			------------	------------
Share capital and reserves
Share capital		21	-	-
Distributable reserves			87,350	91,284
			------------	------------
Total equity holders' funds			87,350	91,284
			------------	------------
Net asset value per Ordinary Share: basic and diluted		22	95.10p	99.38p
These financial statements were approved by the Board of Directors on 22 March 2021 and were signed on its behalf by:
William Scott Chairman 22 March 2021	John Renouf Director 22 March 2021
The accompanying notes form an integral part of these financial statements.

Statement of Cash Flows
for the year ended 31 December 2020
	Note	Year ended 31 December 2020	Year ended 31 December 2019
		£'000	£'000
Cash flows from operating activities
Net profit before taxation		1,577	13,882
Adjustments for:
Foreign exchange movements		1,307	603
Total investment losses/(gains) at fair value through profit or loss		1,301	(10,854)
Capital instrument income		(4,975)	(4,445)
CDS income		(581)	(599)
Interest on sale and repurchase agreements		88	2
Cash flows relating to financial instruments:
Payment (to)/from collateral accounts for derivative financial instruments	16	(1,369)	4,727
Purchase of investments at fair value through profit or loss		(62,114)	(65,848)
Sale of investments at fair value through profit or loss		68,071	63,417
Premiums received from selling credit default swap agreements	18	4,293	1,658
Premiums paid on buying credit default swap agreements	18	(4,511)	(2,982)
Purchase of foreign currency derivatives	18	(204,876)	(324,487)
Close-out of foreign currency derivatives	18	204,573	325,345
Purchase of bond futures	18	(1,751)	(2,336)
Sale of bond futures	18	1,735	1,384
Proceeds from sale and repurchase agreements	18	34,679	63,360
Payments to open reverse sale and repurchase agreements	18	(11,999)	(2,678)
Payments for closure of sale and repurchase agreements	18	(38,953)	(64,283)
Proceeds from closure of reverse sale and repurchase agreements	18	9,329	3,694
Opening of short positions		10,157	3,374
Closure of short positions		(8,002)	(3,609)
Opening of options		(29)	-
Cash paid during the year for interest		(1,651)	(819)
Cash received during the year for interest		6,986	5,290
Cash received during the year for dividends		225	228
		------------	------------
Net cash inflow from operating activities before working capital changes		3,531	4,024
Decrease in other receivables and prepayments		2	11
Decrease in other payables and accruals		(170)	(137)
		------------	------------
Net cash inflow from operating activities		3,363	3,898
Cash flows from financing activities
Proceeds from issue of Ordinary Shares		-	5,941
Share issue costs paid	23	-	(165)
Dividends paid	6	(5,511)	(5,415)
		------------	------------
Net cash (outflow)/inflow from financing activities		(5,511)	361
		------------	------------
(Decrease)/increase in cash and cash equivalents		(2,148)	4,259
Cash and cash equivalents brought forward		6,102	2,446
Effect of foreign exchange on cash and cash equivalents		(1,307)	(603)
		------------	------------
Cash and cash equivalents carried forward *		2,647	6,102
		------------	------------
* Cash and cash equivalents at the year end includes bank overdrafts that are repayable on demand and form an integral part of the Company's cash management. The accompanying notes form an integral part of these financial statements.

Notes to the Financial Statements for the year ended 31 December 2020

1.  General information

The Company was incorporated as an authorised closed-ended investment Company, under the Companies (Guernsey) Law, 2008 on 7 October 2015 with registered number 61003. Its Ordinary Shares were admitted to trading on the Premium Segment of the main market of the London Stock Exchange and to the premium listing segment of the FCA's Official List on 15 October 2018 (prior to this, the Ordinary Shares traded on the Specialist Fund Segment ("SFS") of the London Stock Exchange).

Investment objective

The investment objective of the Company is to provide Shareholders with an attractive return, while limiting downside risk, through investment in the following financial institution investment instruments: · Regulatory Capital Instruments, being financial instruments issued by a European financial institution which constitute regulatory capital for the purposes of Basel I, Basel II or Basel III or Solvency I or Solvency II; · Other financial institution investment instruments, being financial instruments issued by a European financial institution, including without limitation senior debt, which do not constitute Regulatory Capital Instruments; and · Derivative Instruments, being CDOs, securitisations or derivatives, whether funded or unfunded, linked or referenced to Regulatory Capital Instruments or Other financial institution investment instruments.

Investment policy

The Company seeks to invest in a diversified portfolio of financial institution investment instruments. The Company will focus primarily on investing in the secondary market although instruments may also be subscribed in the primary market where the Investment Manager, Axiom, identifies attractive opportunities. The Company will invest its assets with the aim of spreading investment risk.

2.  Statement of compliance

a)  Basis of preparation

These financial statements present the results of the Company for the year ended 31 December 2020. The comparative figures stated were for the year ended 31 December 2019. These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union. These financial statements are presented in Sterling, which is also the Company's functional currency (please see notes 3b and 4i for further details). All amounts are rounded to the nearest thousand.

b)  Going concern

After making reasonable enquiries, and assessing all data relating to the Company's liquidity, including its cash resources, income stream and Level 1 investments, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future and do not consider there to be any threat to the going concern status of the Company (see the going concern section and viability statement in the Directors' Report (in the Annual Report and Financial Statements) for further information). Therefore, the financial statements have been prepared on a going concern basis.

c)  Basis of measurement

The financial statements have been prepared on a historical cost basis, except for certain financial instruments, which are measured at fair value through profit or loss.

d)  Use of estimates and judgements

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses.

Judgements made by management in the application of IFRS that have a significant effect on the financial statements and estimates with a significant risk of material adjustment are discussed in note 4.

3.  Significant accounting policies

a)  Income and expenses

Bank interest, capital instrument income and credit default swap income is recognised on an accruals basis. Dividend income is recognised when the right to receive payment is established. Capital instrument income comprises bond interest and dividend income. All expenses are recognised on an accruals basis. All of the Company's expenses (with the exception of share issue costs, which are charged directly to the distributable reserve) are charged through the Statement of Comprehensive Income in the period in which they are incurred.

b)  Foreign currency

Foreign currency transactions are translated into Sterling using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Comprehensive Income. The exchange rates used by the Company as at 31 December 2020 were £1/€1.1185, £1/US$1.3670, £1/DKK8.3263, £1/CA$1.7422 and £1/SGD1.8061 (2019: £1/€1.1825, £1/US$1.3257, £1/DKK8.8323, £1/CA$1.7226 and £1/SGD1.7841).

c)  Taxation

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

d)  Financial assets and liabilities

The financial assets and liabilities of the Company are investments in capital instruments at fair value through profit or loss, other investments at fair value through profit or loss, collateral accounts for derivative financial instruments, cash and cash equivalents, other receivables, derivative financial instruments and other payables. In accordance with IFRS 9, the Company classifies its financial assets and financial liabilities at initial recognition into the categories of financial assets and financial liabilities as discussed below. In applying that classification, a financial asset or financial liability is considered to be held for trading if: · It is acquired or incurred principally for the purpose of selling or repurchasing it in the near term; or · On initial recognition, it is part of a portfolio of identified financial instruments that are managed together and for which, there is evidence of a recent actual pattern of short-term profit-taking; or · It is a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument).

Financial assets The Company classifies its financial assets as subsequently measured at amortised cost or measured at fair value through profit or loss on the basis of both: · The business model for managing the financial assets; and · The contractual cash flow characteristics of the financial asset. A financial asset is measured at fair value through profit or loss if: · Its contractual terms do not give rise to cash flows on specified dates that are solely payments of principal interest ("SPPI") on the principal amount outstanding; or · It is not held within a business model whose objective is either to collect contractual cash flows, or to both collect contractual cash flows and sell; or · At initial recognition, it is irrevocably designated as measured at fair value through profit or loss when doing so eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases. The Company includes in this category: · Instruments held for trading. This category includes equity instruments and debt instruments which are acquired principally for the purpose of generating a profit from short-term fluctuations in price. This category also includes derivative financial assets at fair value through profit or loss. · Debt instruments. These include investments that are held under a business model to manage them on a fair value basis for investment income and fair value gains. Financial liabilities A financial liability is measured at fair value through profit or loss if it meets the definition of held for trading. The Company includes in this category, derivative contracts in a liability position and equity and debt instruments sold short since they are classified as held for trading. Derivative financial instruments, including credit default swap agreements, foreign currency forward contracts, bond future contracts and sale and repurchase agreements are recognised initially, and are subsequently measured at, fair value. Sale and repurchase agreements are recognised at fair value through profit or loss as they are generally not held to maturity and so are held for trading. Derivative financial instruments are classified as assets when their fair value is positive or as liabilities when their fair value is negative. Derivative assets and liabilities arising from different transactions are offset only if the transactions are with the same counterparty, a legal right of offset exists, and the parties intend to settle the cash flows on a net basis. These financial instruments are classified at fair value through profit or loss upon initial recognition on the basis that they are part of a group of financial assets which are managed and have their performance evaluated on a fair value basis, in accordance with investment strategies and risk management of the Company. Recognition The Company recognises a financial asset or a financial liability when, and only when, it becomes a party to the contractual provisions of the instrument. Purchases and sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the marketplace are recognised on the trade date, i.e. the date that the Company commits to purchase or sell the asset.

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

e)  Collateral accounts for derivative financial instruments at fair value through profit or loss

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

f)  Receivables and prepayments

Receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Company includes in this category other short-term receivables.

g)  Cash and cash equivalents

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

h)  Payables and accruals

Trade and other payables are carried at payment or settlement amounts. When payables are received in currencies other than the reporting currency, they are carried forward, translated at the rate prevailing at the year end date.

i)  Share capital

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

j)  Distributable reserves

All income and expenses, foreign exchange gains and losses and investment gains and losses of the Company are allocated to the distributable reserve.

k)  NAV per share and earnings per share

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

l)  Changes in accounting policy and disclosures

The accounting policies adopted are consistent with those of the previous financial period. The Company adopted the following new and amended relevant IFRS in the period:

IFRS 7	Financial Instruments: Disclosures (amendments regarding pre-replacement issues in the context of the IBOR reform)
IFRS 9	Financial Instruments (amendments regarding pre-replacement issues in the context of the IBOR reform)
IAS 1	Presentation of Financial Statements (amendments regarding the definition of material)
IAS 8	Accounting Policies, Changes in Accounting Estimates and Errors (amendments regarding the definition of material)

The adoption of these accounting standards did not have any effect on the Company's Statement of Financial Position or equity.

m)  Accounting standards issued but not yet effective

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

		Effective date
IFRS 9	Financial Instruments (amendments resulting from Annual Improvements to IFRS Standards 2018-2020)	1 January 2022
IAS 1	Presentation of Financial Statements (amendments regarding the classification of liabilities)	1 January 2022
IAS 37	Provisions, Contingent Liabilities and Contingent Assets (amendments regarding the costs to include when assessing whether a contract is onerous)	1 January 2022

4.  Use of judgements and estimates

The preparation of the Company's financial statements requires the Directors to make judgements, estimates and assumptions that affect the reported amounts recognised in the financial statements and disclosure of contingent liabilities. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability in future periods. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods. Judgements In the process of applying the Company's accounting policies, management has made the following judgement which had a significant effect on the amounts recognised in the financial statements: i)  Determination of functional currency The performance of the Company is measured and reported to investors in Sterling. Although the majority of the Company's underlying assets are held in currencies other than Sterling, because the Company's capital is raised in Sterling, expenses are paid in Sterling and the Company hedges substantially all of its foreign currency risk back to Sterling, the Directors consider Sterling to be the Company's functional currency. The Directors do not consider there to be any other judgements that have had a significant impact on the financial statements. Estimates and assumptions The Company based its reporting date assumptions and estimates on parameters available when the financial statements were approved. However, existing circumstances and assumptions about future developments may change due to market changes or circumstances arising beyond the control of the Company. Such changes are reflected in the assumptions when they occur.

i)  Valuation of financial assets and liabilities The Company uses the expertise of the Investment Manager to assess the prices of investments at the valuation date. The majority of the prices can be independently verified with reference to external data sources, however a minority of investments cannot be verified by reference to an external source and the Investment Manager secures an independent valuation with reference to the latest prices traded within the market place. These independent valuations take the form of quotes from brokers. For further information on the assumptions and inputs used to fair value the financial instruments, please see note 19.

5.  Segmental reporting

In accordance with IFRS 8, Operating Segments, it is mandatory for the Company to present and disclose segmental information based on the internal reports that are regularly reviewed by the Board in order to assess each segment's performance. Management information for the Company as a whole is provided internally for decision making purposes. The Company does compartmentalise different investments in order to monitor compliance with investment restrictions, however the performance of these allocations does not drive the investment decision process. The Directors' decisions are based on a single integrated investment strategy and the Company's performance is evaluated on an overall basis. Therefore, the Directors are of the opinion that the Company is engaged in a single economic segment of business for all decision making purposes and no segmental reporting is required. The financial results of this segment are equivalent to the results of the Company as a whole.

6.  Dividends

As set out in the Prospectus, the Company intends to distribute all of its income from investments, net of expenses, by way of dividends on a quarterly basis. The Company may retain income for distribution in a subsequent quarter to that in which it arises in order to smooth dividend amounts or for the purposes of efficient cash management. The Company has declared the following dividends during the year ended 31 December 2020:

	Total dividend declared in respect of earnings	Amount per Ordinary Share
	£'000
Dividends declared and paid in the year	5,511	6.00p
Less, dividend declared in respect of the prior year that was paid in 2020	(1,378)	(1.50)p
Add, dividend declared out of the profits of the year but paid after the year end:	1,378	1.50p
	------------	------------
Dividends declared in respect of the year	5,511	6.00p
	------------	------------

The Company declared the following dividends during the year ended 31 December 2019:

	Total dividend declared in respect of earnings	Amount per Ordinary Share
	£'000
Dividends declared and paid in the year	5,415	6.00p
Less, dividend declared in respect of the prior year that was paid in 2019	(1,282)	(1.50)p
Add, dividend declared out of the profits of the year but paid after the year end:	1,378	1.50p
	------------	------------
Dividends declared in respect of the year	5,511	6.00p
	------------	------------

In accordance with IFRS, dividends are only provided for when they become a contractual liability of the Company. Therefore, during the year a total of £5,511,000 (2019: £5,415,000) was incurred in respect of dividends, none of which was outstanding at the reporting date. The fourth dividend declared out of the profits for the year of £1,378,000 had not been provided for at 31 December 2020 as, in accordance with IFRS, it was not a liability of the Company at that date.

7.  Related parties

Details of the relationships between the Company and its related parties, being the Investment Manager and the Directors, are disclosed in notes 8a and 8f. Details of the relationships between the Company and its other advisors and service providers (the Administrator, the Broker, the Registrar and the Depositary) are also disclosed in note 8. As at 31 December 2020, the Company had holdings in the following investments which were managed by the Investment Manager:

	31 December 2020			31 December 2019
	Holding	Cost	Value	Holding	Cost	Value
		£'000	£'000		£'000	£'000
Axiom Global CoCo UCIT ETF USD-hedged	35	2,984	3,011	35	2,984	2,898
Axiom Global CoCo UCIT ETF GBP-hedged	10	1,000	1,089	20	2,000	2,092
Axiom Equity Class Z	500	467	666	-	-	-
Axiom Contingent Capital - Class E	-	-	-	2,450	2,462	2,774

During the year, the Company: · purchased 500 units in Axiom Equity Class Z for £467,000; · sold 2,450 units in Axiom Contingent Capital - Class E for £2,150,000, realising a loss of £312,000; and · sold 10 units in Axiom Global CoCo UCIT ETF GBP-hedged for £1,033,000, realising a gain of £33,000.

During the year ended 31 December 2019, the Company: · purchased 70 units in UC AXI Global CoCo Bonds UCITS for £6,040,000; · purchased 35 units in Axiom Global CoCo UCIT ETF USD-hedged for £2,985,000; · purchased 20 units in Axiom Global CoCo UCIT ETF GBP-hedged for £2,000,000; · sold 669 units in Axiom Contingent Capital - Class E for £703,000, realising a gain of £31,000; and · sold 70 units in UC AXI Global CoCo Bonds UCITS for £6,679,000, realising a gain of £639,000.

The Directors are not aware of any ultimate controlling party.

8.  Key contracts

a)  Investment Manager

The Company has entered into an Investment Management Agreement with Axiom under which the Company receives investment advice and management services. Management fee Under the terms of the Investment Management Agreement, a management fee is paid to the Investment Manager quarterly in arrears. The quarterly fee is calculated by reference to the following sliding scale: i.  where NAV is less than or equal to £250 million, 1% per annum of NAV; ii.  where NAV is greater than £250 million but less than or equal to £500 million, 1% per annum of NAV on the first £250 million and 0.8% per annum of NAV on the balance; and iii.  where NAV is greater than £500 million, 0.8% per annum of NAV, in each case, plus applicable VAT. In respect of the management fee calculation above, any related party holdings are deducted from the NAV.

If in any quarter (other than the final quarter) of any accounting period the aggregate expenses of the Company (excluding management fees, performance fees, interest charged on sale and repurchase agreements, bank charges and withholding tax) during such quarter exceed an amount equal to one-quarter of 1.5% of the average NAV of the Company during such quarter (such amount being a "Quarterly Expenses Excess"), then the management fee payable in respect of that quarter shall be reduced by the amount of the Quarterly Expenses Excess, provided that the management fee shall not be reduced to an amount that is less than zero and no sum will be payable by the Investment Manager to the Company in respect of the Quarterly Expenses Excess. If in the final quarter of any accounting period the aggregate expenses of the Company during such accounting period exceed an amount equal to 1.5% of the average NAV of the Company during such accounting period (such amount being an "Annual Expenses Excess"), then the management fee payable in respect of that quarter shall be reduced by the amount of the Annual Expenses Excess. If such reduction would not fully eliminate the Annual Expenses Excess (the amount of any such shortfall being a "Management Fee Deduction Shortfall"), the Investment Manager shall pay to the Company an amount equal to the Management Fee Deduction Shortfall (a "Management Fee Deduction Shortfall Payment") as soon as is reasonably practicable. During the year, a total of £753,000 (2019: £796,000) was incurred in respect of Investment Management fees, of which £185,000 was payable at the reporting date (2019: £189,000).

Under the terms of the Investment Management Agreement, if at any time there has been any deduction from the management fee as a result of the Quarterly Expenses Excess or Annual Expenses Excess (a "Management Fee Deduction"), and during any subsequent quarter: i.  all or part of the Management Fee Deduction can be paid; and/or ii.  all or part of the Management Fee Deduction Shortfall payment can be repaid, by the Company to the Investment Manager without: iii.  in any quarter (other than the final quarter) of any accounting period the aggregate expenses of the Company during such quarter exceeding an amount equal to one-quarter of 1.5% of the average NAV of the Company during such quarter; or iv.  in the final quarter of any accounting period the aggregate expenses of the Company during such accounting period exceeding an amount equal to 1.5% of the average NAV of the Company during such accounting period, then such payment and/or repayment shall be made by the Company to the Investment Manager as soon as is reasonably practicable. The Quarterly Expenses Excess and Annual Expenses Excess for the year was £12,000 (2019: £2,000), and at 31 December 2020 the Quarterly Expenses Excess and Annual Expenses Excess which could be payable to the Investment Manager in future periods was £737,000 (2019: £725,000) (see note 27). Performance fee The Investment Manager is entitled to receive from the Company a performance fee subject to certain performance benchmarks. The fee is payable as a share of the Total Shareholder Return ("TSR") where TSR for this purpose is defined as: i.  the NAV (on a per share basis) at the end of the relevant accounting period; plus ii.  the total of all dividends and other distributions made to Shareholders since 5 November 2015 (being the date of the Company's original admission to the SFS) divided by the average number of shares in issue during the period from 5 November 2015 to the end of the relevant accounting period. The performance fee, if any, is equal to 15% of the TSR in excess of a weighted average hurdle equal to a 7% per annum return. The performance fee is subject to a high water mark. The fee, if any, is payable annually and calculated on the basis of audited accounts of the Company.

50% of the performance fee will be settled in cash. The balance will be satisfied in shares, subject to certain exceptions where settlement in shares would be prohibited by law or would result in the Investment Manager or any person acting in concert with it incurring an obligation to make an offer under Rule 9 of the City Code, in which case the balance will be settled in cash. Assuming no such requirement, the balance of the performance fee will be settled either by the allotment to the Investment Manager of such number of new shares credited as fully paid as is equal to 50% of the performance fee (net of VAT) divided by the most recent practicable NAV per share (rounded down to the nearest whole share) or by the acquisition of shares in the market, as required under the terms of the Investment Management Agreement. All shares allotted to (or acquired for) the Investment Manager in part satisfaction of the performance fee will be subject to a lock-up until the date that is 12 months from the end of the accounting period to which the award of such shares related. At 31 December 2020, a performance fee of £1,000 (2019: £136,000) was payable by the Company in respect of the year ended 31 December 2019. No performance fee was payable in respect of the year ended 31 December 2020. During the year, the Company paid the Investment Manager £135,000, in settlement of the 2019 performance fee, 50% of which was subsequently used to purchase 81,141 shares in the Company.

b)  Administrator and Company Secretary

Elysium has been appointed by the Company to provide day to day administration services to the Company, to calculate the NAV per share as at the end of each calendar month and to provide company secretarial functions required under the Law. Under the terms of the Administration Agreement, the Administrator is entitled to receive a fee of £110,000 per annum, which is subject to an annual adjustment upwards to reflect any percentage change in the retail prices index over the preceding year. In addition, the Company pays the Administrator a fee for work undertaken in connection with the daily NAV, subject to a maximum aggregate amount of £10,000 per annum. During the year, a total of £132,000 (2019: £128,000) was incurred in respect of Administration fees of which £33,000 (2019: £32,000) was payable at the reporting date.

c)  Broker

Winterflood Securities Limited ("Winterflood") has been appointed to act as Corporate Broker ("Broker") for the Company, in consideration for which the Company pays Winterflood an annual retainer fee of £35,000 per annum. For the year to 31 December 2020, the Company incurred Broker fees of £37,000 (2019: £37,000) of which £6,000 was payable at the year end date (2019: £6,000).

d)  Registrar

Link Market Services (Guernsey) Limited is Registrar of the Company. Under the terms of the Registrar Agreement, the Registrar is entitled to receive from the Company certain annual maintenance and activity fees, subject to a minimum fee of £5,500 per annum. During the year, a total of £20,000 (2019: £19,000) was incurred in respect of Registrar fees, of which £3,000 was payable at 31 December 2020 (2019: £1,000).

e)  Depositary

CACEIS Bank France has been appointed by the Company to provide depositary, settlement and other associated services to the Company. Under the terms of the Depositary Agreement, the Depositary is entitled to receive from the Company: i.  an annual depositary fee of 0.03% of NAV, subject to a minimum annual fee of €25,000; ii.  a safekeeping fee calculated using a basis point fee charge based on the country of settlement and the value of the assets; and iii.  an administration fee on each transaction, together with various other payment/wire charges on outgoing payments. During the year, a total of £39,000 (2019: £34,000) was incurred in respect of depositary fees, of which £6,000 was payable at the reporting date (2019: £13,000). CACEIS Bank Luxembourg is entitled to receive a monthly valuation agent fee from the Company in respect of the provision of certain accounting services which will, subject to a minimum monthly fee of €2,500, be calculated by reference to the following tiered sliding scale: i.  where NAV is less than or equal to €50 million, 0.05% per annum of NAV; ii.  where NAV is greater than €50 million but less than or equal to €100 million, 0.04% per annum of NAV; and iii.  where NAV is greater than €100 million, 0.03% per annum of NAV, in each case, plus applicable VAT. During the period, a total of £40,000 (2019: £42,000) was incurred in respect of valuation agent fees paid to CACEIS Bank Luxembourg, of which £10,000 was payable at 31 December 2020 (2019: £14,000).

f)  Directors' remuneration

William Scott (Chairman) is paid £35,000 per annum (2019: £35,000), John Renouf (Chairman of the Audit Committee) is paid £32,500 per annum (2019: £32,500), and Max Hilton is paid £27,500 per annum (2019: £27,500). The Directors are also entitled to reimbursement of all reasonable travelling and other expenses properly incurred in the performance of their duties. During the year, a total of £95,000 (2019: £95,000) was incurred in respect of Directors' fees, none of which was payable at the reporting date (2019: £nil). No bonus or pension contributions were paid or payable on behalf of the Directors.

9.  Key management and employees

Other than the Non-Executive Directors, the Company has had no employees since its incorporation.

10.  Auditor's remuneration

Grant Thornton was appointed to act as the Company's external auditor with effect from 19 August 2020, replacing the Company's previous auditor EY. For the year ended 31 December 2020, total fees charged by Grant Thornton, together with amounts accrued at 31 December 2020, amounted to £37,000 (2019 total fee payable to EY: £43,000), all of which related to audit services. As at 31 December 2020, £22,000 was due to Grant Thornton (2019: £30,000 due to EY).

11.  Interest payable and similar charges
	Year ended 31 December 2020	Year ended 31 December 2019
	£'000	£'000
Bank interest	41	48
Interest payable on sale and repurchase agreements	88	2
Commission	10	1
	------------	------------
	139	51
	------------	------------

12.  Other expenses
	Year ended 31 December 2020	Year ended 31 December 2019
	£'000	£'000
PR expenses	41	43
Valuation agent fees	40	42
Depositary fees (note 8e)	39	34
Other expenses	38	53
Audit fees (note 10)	37	43
Broker fees (note 8c)	37	37
Registrar fees (note 8d)	20	19
Legal fees	15	8
	------------	------------
	267	279
	------------	------------

13.  Taxation

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

14.  Earnings per Ordinary Share

The earnings per Ordinary Share of 1.72p (2019: earnings of 15.21p) is based on a profit attributable to owners of the Company of £1,577,000 (2019: profit of £13,882,000) and on a weighted average number of 91,852,904 (2019: 91,256,658) Ordinary Shares in issue since 1 January 2020. There are no dilutive shares and there is no difference between the basic and diluted earnings per share.

15.  Investments at fair value through profit or loss
Movements in gains/(losses) in the year
	31 December 2020				31 December 2019
	Unrealised	Realised	Total		Unrealised	Realised		Total
	£'000	£'000	£'000		£'000	£'000		£'000
Investments in capital instruments	925	340	1,265		4,575	467		5,042
Other investments	(3)	(279)	(282)		402	670		1,072
Short positions covered by reverse sale and repurchase agreements	36	(261)	(225)		(162)	42		(120)
	------------	------------	------------		------------	------------		------------
	958	(200)	758		4,815	1,179		5,994
	------------	------------	------------		------------	------------		------------
Closing valuations
				31 December 2020			31 December 2019
				£'000			£'000
Investments in capital instruments				83,466			85,924
Other investments				4,766			7,764
Short positions covered by reverse sale and repurchase agreements				(1,881)			(1,336)
				------------			------------
Investments at fair value through profit or loss				86,351			92,352
				------------			------------

Investments in capital instruments at fair value through profit or loss comprise mainly of investments in bonds, and also preference shares, structured notes and other securities that have a similar income profile to that of bonds. The other investments at fair value through profit or loss consist of investments in open ended funds managed by the Investment Manager (see note 7) to obtain diversified exposure on bank equities. As at 31 December 2020, the Company had fourteen (2019: ten) open sale and repurchase agreements, including four (2019: one) reverse sale and repurchase agreements (see note 18). The reverse sale and repurchase agreements were open ended and were used to cover the sale of capital instruments (the short positions noted above). The fair value of the capital instruments subject to sale and repurchase agreements (excluding the short positions) at 31 December 2020 was £19,582,000 (2019: £19,596,000). The fair value net of the short positions was £17,701,000 (2019: £18,260,000).

16.  Collateral accounts for derivative financial instruments at fair value through profit or loss
	31 December 2020	31 December 2019
	£'000	£'000
JP Morgan	4,896	3,660
Credit Suisse	599	585
Goldman Sachs International	410	754
CACEIS Bank France	-	-
	------------	------------
	5,905	4,999
CACEIS Bank France - negative balance	(340)	(803)
	------------	------------
Net balance on collateral accounts held by brokers	5,565	4,196
	------------	------------
With respect to derivatives, the Company pledges cash and/or other liquid securities ("Collateral") to third parties as initial margin and as variation margin. Collateral may be transferred either to the third party or to an unaffiliated custodian for the benefit of the third party. In the case where Collateral is transferred to the third party, the third party pursuant to these derivatives arrangements will be permitted to use, reuse, lend, borrow, hypothecate or re-hypothecate such Collateral. The third parties will have no obligation to retain an equivalent amount of similar property in their possession and control, until such time as the Company's obligations to the third party are satisfied. The Company has no right to this Collateral but has the right to receive fungible, equivalent Collateral upon the Company's satisfaction of the Company's obligation under the derivatives.

17.  Other receivables and prepayments
	31 December 2020	31 December 2019
	£'000	£'000
Accrued capital instrument income receivable	1,468	1,591
Due from sale of capital instrument	484	-
Interest due on credit default swaps	26	15
Prepayments	17	15
Interest due on collateral held by brokers	-	4
	------------	------------
	1,995	1,625
	------------	------------

18.  Derivative financial instruments

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

	Year ended  31 December 2020	Year ended 31 December 2019
	£'000	£'000
Opening balance	1,016	(2,419)
Premiums received from selling credit default swap agreements	(4,293)	(1,658)
Premiums paid on buying credit default swap agreements	4,511	2,982
Movement in unrealised (losses)/gains in the year	(465)	1,972
Realised (losses)/gains in the year	(321)	139
	------------	------------
Outstanding asset due on credit default swaps	448	1,016
	------------	------------
Credit default swap assets at fair value through profit or loss	595	1,398
Credit default swap liabilities at fair value through profit or loss	(147)	(382)
	------------	------------
Outstanding asset due on credit default swaps	448	1,016
	------------	------------

Interest paid or received on the credit default swap agreements has been accounted for in the Statement of Comprehensive Income as it has been incurred or received. At the year end, £26,000 (2019: £15,000) of interest on credit default swap agreements was due to the Company. Collateral totalling £5,905,000 (2019: £4,999,000) was held in respect of the credit default swap agreements.

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

	Year ended 31 December 2020	Year ended 31 December 2019
	£'000	£'000
Opening balance	1,219	(1,329)
Purchase of foreign currency derivatives	204,876	324,487
Closing-out of foreign currency derivatives	(204,573)	(325,345)
Movement in unrealised (losses)/gains in the year	(444)	2,548
Realised (losses)/gains in the year	(303)	858
	------------	------------
Net assets on foreign currency forwards	775	1,219
	------------	------------
Foreign currency forward assets at fair value through profit or loss	775	1,219
Foreign currency forward liabilities at fair value through profit or loss	-	-
	------------	------------
Net assets on foreign currency forwards	775	1,219
	------------	------------

Bond futures
A bond future contract involves a commitment by the Company to purchase or sell bond futures for a predetermined price, with payment and delivery of the bond future at a predetermined future date.
	Year ended 31 December 2020	Year ended 31 December 2019
	£'000	£'000
Opening balance	-	(7)
Purchase of bond futures	1,751	2,336
Sale of bond futures	(1,735)	(1,384)
Movement in unrealised gains in the year	-	88
Realised losses in the year	(16)	(1,033)
	------------	------------
Balance payable on bond futures	-	-
	------------	------------
Bond future assets at fair value through profit or loss	-	-
Bond future liabilities at fair value through profit or loss	-	-
	------------	------------
Balance payable on bond futures	-	-
	------------	------------

Sale and repurchase agreements

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

	Year ended 31 December 2020	Year ended 31 December 2019
	£'000	£'000
Opening balance	(14,760)	(14,955)
Opening of sale and repurchase agreements	(34,679)	(63,360)
Opening of reverse sale and repurchase agreements	11,999	2,678
Closing-out of sale and repurchase agreements	38,953	64,283
Closing-out of reverse sale and repurchase agreements	(9,329)	(3,694)
Movement in unrealised (losses)/gains in the year	(415)	691
Realised losses in the year	(73)	(403)
	------------	------------
Total liabilities on sale and repurchase agreements	(8,304)	(14,760)
	------------	------------
Sale and repurchase assets at fair value through profit or loss	3,877	1,292
Sale and repurchase liabilities at fair value through profit or loss	(12,181)	(16,052)
	------------	------------
Total liabilities on sale and repurchase agreements	(8,304)	(14,760)
	------------	------------

Interest paid on sale and repurchase agreements has been accounted for in the Statement of Comprehensive Income as it has been incurred. At 31 December 2020 £nil (2019: £nil) interest on sale and repurchase agreements was payable by the Company.

Options

An option offers the buyer the opportunity to buy or sell an underlying asset at a stated price within a specified timeframe.

	Year ended 31 December 2020	Year ended 31 December 2019
	£'000	£'000
Opening balance	-	-
Opening of options	29	-
Movement in unrealised losses in the year	(22)	-
Realised losses in the year	-	-
	------------	------------
Balance receivable on options	7	-
	------------	------------
Option assets at fair value through profit or loss	10	-
Option liabilities at fair value through profit or loss	(3)	-
	------------	------------
Balance receivable on options	7	-
	------------	------------

Offsetting of derivative financial instruments The Company presents the fair value of its derivative assets and liabilities on a gross basis, no such assets or liabilities have been offset in the Statement of Financial Position. Certain derivative financial instruments are subject to enforceable master netting arrangements, such as ISDA master netting agreements, or similar agreements that cover similar financial instruments. The similar agreements include derivative clearing agreements, global master repurchase agreements, global master securities lending agreements, and any related rights to financial collateral. The similar financial instruments and transactions include derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, securities borrowing, and securities lending agreements. The Company's agreements allow for offsetting following an event of default, but not in the ordinary course of business, and the Company does not intend to settle these transactions on a net basis or settle the assets and liabilities on a simultaneous basis.

The table below sets out the carrying amounts of recognised capital instruments and short position(s) which could be offset under the applicable derivative agreements (as described above) as at 31 December 2020:

	Gross carrying amount before offsetting	Amounts offset in accordance with offsetting criteria	Net amount presented in Statement of Financial Position	Effect of remaining rights of offset that do not meet the criteria for offsetting in the Statement of Financial Position - Cash held as collateral	Net exposure
	£'000	£'000	£'000	£'000	£'000
Financial assets
Derivatives	5,257	-	5,257	(1,792)	3,465
Collateral accounts for derivative financial instruments (note 16)	5,905	-	5,905	(147)	5,758
	------------	------------	------------	------------	------------
Total assets	11,162	-	11,162	(1,939)	9,223
	------------	------------	------------	------------	------------
Financial liabilities
Derivatives	(12,331)	-	(12,331)	11,760	(571)
Collateral accounts for derivative financial instruments (note 16)	(340)	-	(340)	-	(340)
	------------	------------	------------	------------	------------
Total liabilities	(12,671)	-	(12,671)	11,760	(911)
	------------	------------	------------	------------	------------

The table below sets out the carrying amounts of recognised capital instruments and short position(s) which could be offset under the applicable derivative agreements (as described above) as at 31 December 2019:

	Gross carrying amount before offsetting	Amounts offset in accordance with offsetting criteria	Net amount presented in Statement of Financial Position	Effect of remaining rights of offset that do not meet the criteria for offsetting in the Statement of Financial Position - Cash held as collateral	Net exposure
	£'000	£'000	£'000	£'000	£'000
Financial assets
Derivatives	3,909	-	3,909	(1,292)	2,617
Collateral accounts for derivative financial instruments (note 16)	4,999	-	4,999	(352)	4,647
	------------	------------	------------	------------	------------
Total assets	8,908	-	8,908	(1,644)	7,264
	------------	------------	------------	------------	------------
Financial liabilities
Derivatives	(16,434)	-	(16,434)	16,404	(30)
Collateral accounts for derivative financial instruments (note 16)	(803)	-	(803)	-	(803)
	------------	------------	------------	------------	------------
Total liabilities	(17,237)	-	(17,237)	16,404	(833)
	------------	------------	------------	------------	------------

19.  Fair value of financial instruments at fair value through profit or loss

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

At 31 December 2020, the financial assets and liabilities designated at fair value through profit or loss were as follows:

	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Traded/listed capital instruments at fair value through profit or loss	83,018	448	-	83,466
Other investments at fair value through profit or loss (note 7)	4,766	-	-	4,766
Credit default swap assets	-	595	-	595
Credit default swap liabilities	-	(147)	-	(147)
Other derivative financial assets	-	4,662	-	4,662
Other derivative financial liabilities	-	(12,184)	-	(12,184)
Short positions covered by sale and repurchase agreements	-	(1,881)	-	(1,881)
	------------	------------	------------	------------
	87,784	(8,507)	-	79,277
	------------	------------	------------	------------

At 31 December 2019, the financial assets and liabilities designated at fair value through profit or loss were as follows:

	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Traded/listed capital instruments at fair value through profit or loss	83,460	2,464	-	85,924
Other investments at fair value through profit or loss (note 7)	2,092	5,672	-	7,764
Credit default swap assets	-	1,398	-	1,398
Credit default swap liabilities	-	(382)	-	(382)
Other derivative financial assets	-	2,511	-	2,511
Other derivative financial liabilities	-	(16,052)	-	(16,052)
Short position covered by sale and repurchase agreement	-	(1,336)	-	(1,336)
	------------	------------	------------	------------
	85,552	(5,725)	-	79,827
	------------	------------	------------	------------

Level 1 financial instruments include listed capital instruments at fair value through profit or loss, unlisted open ended funds and bond future contracts, which have been valued at fair value by reference to quoted prices in active markets. No unobservable inputs were included in determining the fair value of these investments and, as such, alternative carrying values for ranges of unobservable inputs have not been provided. Level 2 financial instruments include broker quoted bonds, credit default swap agreements, foreign currency forward contracts, sale and repurchase agreements and options. Each of these financial investments are valued by the Investment Manager using market observable inputs. The fair value of the other investments are based on the market price of the underlying securities.

The model used by the Company to fair value credit default swap agreements prices a credit default swap as a function of its schedule, deal spread, notional value, credit default swap curve and yield curve. The key assumptions employed in the model include: constant recovery as a fraction of par, piecewise constant risk neutral hazard rates and default events being statistically independent of changes in the default-free yield curve. The fair values of the derivative financial instruments are based on the forward foreign exchange rate curve. The sale and repurchase agreements have been valued by reference to the notional amount, expiration dates and rates prevailing at the valuation date. The options were valued using the relevant options prices curve.

Transfers between levels Transfers between levels during the year are determined and deemed to have occurred at each financial reporting date. There were no investments classified as Level 3 during the year, and no transfers between levels in the year. See notes 15, 16 and 18 for movements in instruments held at fair value through profit or loss.

20.  Other payables and accruals
	31 December 2020	31 December 2019
	£'000	£'000
Due for purchase of capital instrument	1,833	-
Investment management fee (note 8a)	185	189
Administration fee (note 8b)	33	32
Audit fees (note 10)	22	30
Other accruals	16	31
Share issue costs	14	14
Valuation agent fees (note 8e)	10	14
Depositary fees (note 8e)	6	13
Broker fee (note 8c)	6	6
Accrued interest payable on capital instrument short positions	5	-
Registrar fees (note 8d)	3	1
Performance fee (note 8a)	1	136
	------------	------------
	2,134	466
	------------	------------

21.  Share capital
	31 December 2020			31 December 2019
	Number	£'000		Number	£'000
Authorised:
Ordinary Shares of no par value	Unlimited	-		Unlimited	-
	------------	------------		------------	------------
Allotted, called up and fully paid:
Ordinary Shares of no par value	91,852,904	-		91,852,904	-
	------------	------------		------------	------------
Issued share capital
			Number of shares	Price per share	Gross proceeds £'000
Shares in issue as at 31 December 2018			85,452,024
4 February 2019			6,400,880	92.81p	5,941
			------------
Shares in issue as at 31 December 2019, 31 December 2020 and 22 March 2021			91,852,904

The Ordinary Shares carry the right to receive all dividends declared by the Company. Shareholders are entitled to all dividends paid by the Company and, on a winding up, provided the Company has satisfied all of its liabilities, the Shareholders are entitled to all of the surplus assets of the Company. Shareholders will be entitled to attend and vote at all general meetings of the Company and, on a poll, will be entitled to one vote for each Ordinary Share held.

22.  Net asset value per Ordinary Share

The net asset value per Ordinary Share is based on the net assets attributable to owners of the Company of £87,350,000 (2019: £91,284,000), and on 91,852,904 (2019: 91,852,904) Ordinary Shares in issue at the year end. The net asset value of 95.10p per Ordinary Share disclosed in these financial statements is 0.16p lower than the net asset value of 95.26p per Ordinary Share announced on 5 January 2021 as a result of a £146,000 under-accrual in the original net asset value. This under-accrual did not affect any other NAVs per Ordinary Share that were announced in the year.

23.  Changes in liabilities arising from financing activities

The Company did not raise any capital from the placing of new shares in the year. In the year ended 31 December 2019, the Company raised £5,941,000 through the placing of 6,400,880 new Ordinary Shares of no par value. In 2019 share issue costs of £100,000 were incurred in relation to the placings, and at the year end £14,000 of the issue costs were outstanding. Taking into account the movement in share issue costs outstanding, the 2019 cash flows in relation to share issue costs were £165,000.

24.  Financial instruments and risk management

The Company invests its assets with the aim of spreading investment risk. Risk is inherent in the Company's activities, but it is managed through a process of ongoing identification, measurement and monitoring. The Company is exposed to market risk (which includes currency risk, interest rate risk and price risk), credit risk and liquidity risk from the financial instruments it holds. Risk management procedures are in place to minimise the Company's exposure to these financial risks, in order to create and protect Shareholder value.

Risk management structure

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

Risk concentration

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

Market risk

i)  Price risk

Price risk exposure arises from the uncertainty about future prices of financial instruments held. It represents the potential loss that the Company may suffer through holding positions in the face of price movements. The investments in capital instruments, unlisted open ended funds, and bond futures at fair value through profit or loss (notes 15, 18 and 19) are exposed to price risk and it is not the intention to mitigate the price risk. At 31 December 2020, if the valuation of these investments at fair value through profit or loss had moved by 5% with all other variables remaining constant, the change in net assets would amount to approximately +/- £4,318,000 (2019: +/- £4,618,000). The fair value of financial instruments exposed to price risk at 31 December 2020 was £86,351,000 (2019: £92,352,000).

ii)  Foreign currency risk

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

31 December 2020
Maturity date	Amount to be sold	Amount to be purchased
21 January 2021	€43,000,000	£38,889,000
21 January 2021	US$10,500,000	£8,047,000
31 December 2019
Maturity date	Amount to be sold	Amount to be purchased
16 January 2020	€40,470,000	£35,146,000
16 January 2020	US$11,175,000	£8,686,000
16 January 2020	€8,000,000	£6,859,000
16 January 2020	DKK7,297,000	£845,000
16 January 2020	US$1,012,000	£771,000

At the year end a proportion of the net financial assets of the Company were denominated in currencies other than Sterling as follows:
	Investments at fair value through profit or loss	Receivables	Cash and cash equivalents	Exposure	Foreign currency forward contract	Net exposure
	£'000	£'000	£'000	£'000	£'000	£'000
31 December 2020
Euro	45,147	936	1,665	47,748	(38,473)	9,275
US Dollars	4,694	2	2,632	7,328	(7,687)	(359)
Danish Krone	-	-	-	-	-	-
Canadian Dollars	-	-	-	-	-	-
Singaporean Dollars	-	-	-	-	-	-
	------------	------------	------------	------------	------------	------------
	49,841	938	4,297	55,076	(46,160)	8,916
	------------	------------	------------	------------	------------	------------
31 December 2019
Euro	41,044	1,024	1,156	43,224	(41,060)	2,164
US Dollars	8,746	34	1,118	9,898	(9,200)	698
Danish Krone	-	-	832	832	(827)	5
Canadian Dollars	-	-	-	-	-	-
Singaporean Dollars	-	-	-	-	-	-
	------------	------------	------------	------------	------------	------------
	49,790	1,058	3,106	53,954	(51,087)	2,867
	------------	------------	------------	------------	------------	------------

Other future foreign exchange hedging contracts may be employed, such as currency swap agreements, futures contracts and options. There can be no certainty as to the efficacy of any hedging transactions. At 31 December 2020, if the exchange rates had strengthened/weakened by 5% against Sterling with all other variables remaining constant, net assets at 31 December 2020 would have decreased/increased by £446,000 (2019: £143,000).

iii)  Interest rate risk

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments. The Company is exposed to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial instruments and cash flow. A large number of the capital instruments bear interest at a fixed rate, but capital instruments to the value of £59,355,000 (2019: £61,945,000), cash and cash equivalents, net of overdrafts, of £2,647,000 (2019: £6,102,000), collateral account balances of £5,565,000 (2019: £4,196,000) and short positions of £1,881,000 (2019: £1,336,000) were the only interest bearing financial instruments subject to variable interest rates at 31 December 2020. Therefore, if interest rates had increased/decreased by 50 basis points, with all other variables remaining constant, the change in the value of interest cash flows of these assets in the year would have been +/-£309,000 (2019: +/-£352,000).

	Fixed interest	Variable interest	Non-interest bearing	Total
31 December 2020	£'000	£'000	£'000	£'000
Financial assets
Investments at fair value through profit or loss	16,001	59,355	12,876	88,232
Cash and cash equivalents	-	4,297	-	4,297
Collateral accounts for derivative financial instruments at fair value through profit or loss	-	5,905	-	5,905
Derivative financial assets at fair value through profit or loss	4,472	-	785	5,257
Other receivables	-	-	1,995	1,995
	------------	------------	------------	------------
Total financial assets	20,473	69,557	15,656	105,686
	------------	------------	------------	------------
Financial liabilities
Bank overdrafts	-	(1,650)	-	(1,650)
Collateral accounts for derivative financial instruments at fair value through profit or loss	-	(340)	-	(340)
Derivative financial liabilities at fair value through profit or loss	(12,328)	-	(3)	(12,331)
Short positions covered by sale and repurchase agreements	-	(1,881)	-	(1,881)
Other payables and accruals	-	-	(2,134)	(2,134)
	------------	------------	------------	------------
Total financial liabilities	(12,328)	(3,871)	(2,137)	(18,336)
	------------	------------	------------	------------
Total interest sensitivity gap	8,145	65,686	13,519	87,350
	------------	------------	------------	------------
	Fixed interest	Variable interest	Non-interest bearing	Total
31 December 2019	£'000	£'000	£'000	£'000
Financial assets
Investments at fair value through profit or loss	13,822	61,945	17,920	93,687
Cash and cash equivalents	-	6,102	-	6,102
Collateral accounts for derivative financial instruments at fair value through profit or loss	-	4,999	-	4,999
Derivative financial assets at fair value through profit or loss	2,690	-	1,219	3,909
Other receivables	-	-	1,621	1,621
	------------	------------	------------	------------
Total financial assets	16,512	73,046	20,760	110,318
	------------	------------	------------	------------
Financial liabilities
Bank overdrafts	-	-	-	-
Collateral accounts for derivative financial instruments at fair value through profit or loss	-	(803)	-	(803)
Derivative financial liabilities at fair value through profit or loss	(16,434)	-	-	(16,434)
Short positions covered by sale and repurchase agreements	-	(1,336)	-	(1,336)
Other payables and accruals	-	-	(466)	(466)
	------------	------------	------------	------------
Total financial liabilities	(16,434)	(2,139)	(466)	(19,039)
	------------	------------	------------	------------
Total interest sensitivity gap	78	70,907	20,294	91,279
	------------	------------	------------	------------

It is estimated that the fair value of the fixed interest and non-interest bearing capital instruments of £28,877,000 (2019: £31,742,000) at 31 December 2020 would increase/decrease by +/-£656,000 (0.74%) (2019: +/-£721,000 (0.77%)) if interest rates were to change by 50 basis points. The Investment Manager manages the Company's exposure to interest rate risk, paying heed to prevailing interest rates and economic conditions, market expectations and its own views as to likely movements in interest rates. Although it has not done so to date, the Company may implement hedging and derivative strategies designed to protect investment performance against material movements in interest rates. Such strategies may include (but are not limited to) interest rate swaps and will only be entered into when they are available, in a timely manner, and on terms acceptable to the Company. The Company may also bear risks that could otherwise be hedged where it is considered appropriate. There can be no certainty as to the efficacy of any hedging transactions.

Credit risk

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company, resulting in a financial loss to the Company. At 31 December 2020, credit risk arose principally from investment in capital instruments of £83,466,000 (2019: £85,924,000), cash and cash equivalents of £4,297,000 (2019: £6,102,000), balances held as collateral for derivative financial instruments at fair value through profit or loss of £5,905,000 (2019: £4,999,000), foreign currency forward assets of £775,000 (2019: £1,219,000) and investments in sale and repurchase assets of £3,877,000 (2019: £1,292,000). The Company seeks to trade only with reputable counterparties that the Investment Manager believes to be creditworthy. The credit rating of cash and collateral counterparties is sufficient that no expected credit loss or provision for impairment is considered necessary. The Investment Manager manages the Company's credit risk by investing in a diverse portfolio of capital instruments, in line with the Prospectus. At 31 December 2020, the capital instrument rating profile of the portfolio was as follows:

	31 December 2020	31 December 2019
	Percentage	Percentage
A	-	-
BBB	20.07	19.22
BB	32.28	38.33
B	12.11	9.15
Below B	7.56	8.21
No rating	27.98	25.09
	------------	------------
	100.00	100.00
	------------	------------

The investments without a credit rating correspond to issuers that are not rated by an external rating agency. Although no external rating is available, the Investment Manager considers and internally rates the credit risk of these investments, along with all other investments. The internal risk score is based on the Investment Manager's fundamental view (stress test, macro outlook, solvency, liquidity risk, business mix, and other relevant factors) and is determined by the Investment Manager's risk committee. The risk grades are mapped to an external Baseline Credit Assessment, and any discrepancy of more than two notches is monitored closely. The cash pending investment may be held without limit with a financial institution with a credit rating of A-1 (Standard & Poor's) or P-1 (Moody's) to protect against counterparty failure.

The Company may implement hedging and derivative strategies designed to protect against credit risk. Such strategies may include (but are not limited to) credit default swaps and will only be entered into when they are available in a timely manner and on terms acceptable to the Company. The Company may also bear risks that could otherwise be hedged where it is considered appropriate. There can be no certainty as to the efficacy of hedging transactions. Due to the Company's investment in credit default swap agreements the Company is exposed to additional credit risk as a result of possible counterparty failure. The Company has entered into ISDA contracts with Credit Suisse, JP Morgan and Goldman Sachs, all rated A+. At 31 December 2020, the overall net exposure to these counterparties was 5.11% (2019: 7.01%) of NAV. The collateral held at each counterparty is disclosed in note 16.

Liquidity risk

Liquidity risk is defined as the risk that the Company will encounter difficulties in realising assets or otherwise raising funds to meet financial commitments. The principal liquidity risk is contained in unmatched liabilities. The liquidity risk at 31 December 2020 was low since the ratio of cash and cash equivalents (net of overdrafts) to unmatched liabilities was 17:1 (2019: 13:1).

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

	31 December 2020	31 December 2019
	Percentage	Percentage
Less than 1 year	7.99	4.91
1 to 3 years	29.24	36.37
3 to 5 years	30.62	27.85
5 to 7 years	9.62	7.80
7 to 10 years	4.15	6.47
More than 10 years	18.38	16.60
	------------	------------
	100.00	100.00
	------------	------------

As at 31 December 2020, the Company's liquidity profile was such that 67.4% of capital instruments were realisable within one day (2019: 66.5%), 29.5% was realisable within one week (2019: 33.5%) and the remaining 3.1% was realisable within one month (2019: nil). As at the year end, the Company's liabilities fell due as follows:

	31 December 2020	31 December 2019
	Percentage	Percentage
1 to 3 months	93.55	54.99
3 to 6 months	-	-
6 to 12 months	-	-
1 to 3 years	6.45	15.73
3 to 5 years	-	29.28
	------------	------------
	100.00	100.00
	------------	------------

25.  Capital management policy and procedures

The Company's capital management objectives are: · to ensure that it will be able to meet its liabilities as they fall due; and · to maximise its total return primarily through the capital appreciation of its investments. Pursuant to the Company's Articles of Incorporation, the Company may borrow money in any manner. However, the Board has determined that the Company should borrow no more than 20% of direct investments. The Company uses sale and repurchase agreements to increase the gearing of the Company. As at 31 December 2020 the Company had fourteen (2019: ten) open sale and repurchase agreements, four (2019: one) being reverse sale and repurchase agreements, committing the Company to make a total repayment of £12,182,000 post the year end (2019: £16,052,000). As a result of the reverse sale and repurchase agreements the Company was due to receive £3,877,000 after the year end (2019: £1,292,000). The raising of capital through the placing of shares forms part of the capital management policy. See note 21 for details of the Ordinary Shares issued since incorporation. As disclosed in the Statement of Financial Position, at 31 December 2020 the total equity holders' funds were £87,350,000 (2019: £91,284,000).

26.  Capital commitments

The Company holds a number of derivative financial instruments, which, by their very nature, give rise to capital commitments post 31 December 2020. These are as follows: · At 31 December 2020, the Company had sold twelve (2019: fourteen) credit default swap agreements for a total of £677,000 (2019: £931,000), each receiving quarterly interest. The exposure of the Company in relation to these agreements at the year end date was £571,000 (2019: £1,096,000). Collateral of £5,905,000 for these agreements was held at 31 December 2020 (2019: £4,999,000). · At the year end the Company had committed to two (2019: five) foreign currency forward contracts dated 21 January 2021 to buy £46,936,000 (2019: £52,306,000). At 31 December 2020, the Company could have effected the same trades and purchased £46,161,000 (2019: £51,087,000), giving rise to a gain of £775,000 (2019: gain of £1,219,000). · At the year end, the Company held ten (2019: nine) open sale and repurchase agreements (this excludes the four open reverse sale and repurchase agreements (2019: one)) committing the Company to make a total repayment of £12,255,000 (2019: £16,405,000).

27.  Contingent assets and contingent liabilities

In line with the terms of the Investment Management Agreement, as detailed in note 8a, should the Company's NAV reach a level at which the TER reduced to less than 1.5% of the average NAV in a future accounting period then the Quarterly Expenses Excess and Annual Expenses Excess totalling £737,000 at 31 December 2020 (2019: £725,000) would become payable to the Investment Manager, to the extent that the total expenses including any repayment did not exceed 1.5% of the average NAV for that period. For the £737,000 (2019: £725,000) Expenses Excess to start becoming payable, the Company's NAV would need to increase by c.7.5% from the 31 December 2020 NAV. For a significant amount to become payable within the foreseeable future, the NAV would have to increase considerably. The Directors consider that it is possible, but not probable, that an increase in the NAV leading to a significant payment of the Expenses Excess will be achieved in the foreseeable future. Accordingly, the possible payment to the Investment Manager has been treated as a contingent liability in the financial statements. There were no other contingent assets or contingent liabilities in existence at the year end.

28.  Events after the financial reporting date

On 25 January 2021, the Company declared a dividend of 1.50p per Ordinary Share for the period from 1 October 2020 to 31 December 2020, which (in accordance with IFRS) was not provided for at 31 December 2020, out of the profits for the year ended 31 December 2020 (note 6). This dividend was paid on 26 February 2021.

As described in the Chairman's Statement, Principal Risks and Uncertainties and the Director's Report (in the Annual Report and Financial Statements), the COVID-19 pandemic is a significant risk to the global economy. The Company's net asset value in the last year has been materially impacted by the volatility in the investment markets due to the effects of the COVID-19 pandemic. The situation continues to change rapidly, so the full impact cannot yet be fully understood, but the Company will continue to monitor the situation closely.

-- ENDS --

 

END

 

 

FR DKBBPPBKDFNB