Annual Financial Report

RNS Number : 5700A

New City High Yield Fund Limited

12 October 2009

 



To:        RNS

Date:     12 October 2009

From:    New City High Yield Fund Limited

 

 

Results for the year ended 30 June 2009

 

·         Net asset value total return of -9.5 per cent since 1 July 2008.

 

·         Ordinary share price total return of -6.5 per cent since 1 July 2008.

 

·         Dividend yield of 8.1 per cent, based on dividends at an annual rate of 3.65p and a share price of 45.25p at 30 June 2009.

 

·         Ordinary share price at a premium of 6.6 per cent to net asset value at 30 June 2009.

 

·         £6.1 million raised in June 2009 through a placing with both existing and new investors.

 

 

Chairman’s Statement

 

Introduction

I am pleased to present the Report and Accounts for the year to 30 June 2009. Last year has been one of unprecedented difficulties in financial markets; your Company’s net asset value total return was -9.5%. Despite this fall, based on both NAV and share price performance, the Company was the best performer within the AIC UK High Income Sector for the last year.

 

Investment Performance

During the year the Company’s net asset value per share fell by 16.8% to 42.45p per share. When this capital measure is adjusted for the payment of dividends totalling 3.57p per share in the year, the net asset value total return was -9.5%. The share price total return was -6.5%. At the year end, the shares were at a premium of 6.6% to net asset value and since then have continued to trade at a premium. This compares favourably with an average discount for the UK High Income Sector of 0.2% at 30 June 2009.

 

Dividends and fund raising

In line with the dividend rate in the prior period, the first three interim dividends, each of 0.85p per share, were paid on 24 November 2008, 20 February 2009 and 29 May 2009. We were pleased to increase the fourth interim dividend from 1.02p to 1.10p per share; this was paid after the year end on 28 August 2009. Based on an annual rate of 3.65p and a share price of 45.25p at the year end, this represents a yield of 8.1 per cent. This has been achieved alongside a further increase in our revenue reserve equivalent to 0.64p per share. 

 

It was pleasing that a share issue, equivalent to 9.9 per cent of the Company’s share capital, was completed in June 2009. This raised £6.1 million from new and existing shareholders and was further evidence of the appeal of the Company’s investment remit.

 

Market and economic background

Since the onset of the credit crisis, action has been taken by many central banks and financial authorities in an attempt to stabilise and stimulate financial markets. These measures would appear to have averted the worst, however challenges lie ahead in funding the cost of these measures and balancing the prospect of inflation against that of a continued recession. Exchange rates have been volatile throughout the year, with sterling declining, in particular against the US dollar and Euro. Sterling has staged somewhat of a recovery since March but when compared to the start of our financial year, was still 17% lower against the US dollar and 7% lower against the Euro. The weakness in sterling has however benefited the Company when its overseas income receipts have been translated into sterling. Despite the difficult economic conditions during the year the investment portfolio has only experienced a small number of companies failing to meet interest payments. To be able to increase the fourth interim dividend despite the challenges in the year was testament to the Investment Manager’s focus on the Company’s income stream.

 

Outlook

While some countries appear to be coming out of recession, for most, economic activity has not yet begun to improve. Conditions will remain difficult into 2010, and whether the stock markets apparently sanguine views of recovery are justified is unclear. There is certainly much further to go in the deleveraging process, and the twin pressures of “Quantative easing” and budget deficits promise to make credit markets interesting. Nonetheless, there are opportunities and the Investment Manager continues to look for attractive investment prospects focussing on companies with solid assets or the ability to generate sustainable cash flows.

 

James G West

Chairman

9 October 2009

 

 

Investment Manager’s Review

 

Background

The last year has been the most devastating in all markets in living memory, with credit markets discounting conditions worse than the great depression of the 1930s.

 

Bad news came thick and fast during the first quarter of our financial year; in the US the two biggest mortgage lenders Fannie Mae and Freddie Mac, were bailed out by the US Treasury. At the same time in the UK we had the run on Northern Rock and subsequent nationalisation. The real bombshell which devastated the markets was the collapse of Lehman Brothers. The enduring effects of this event cannot be overstated; credit was effectively switched off in all markets, commercial paper, prime brokerage, credit lines – overall almost a complete seizure of the interbank lending markets.

 

The knock on in the UK was a horrible sight to see, with huge runs on Bank shares, leading to the partial nationalisation of RBS, Lloyds Bank’s opportunistic purchase of HBOS and the subsequent partial nationalisation of this group. Barclays managed to hold on to its independent status with the help of some Middle Eastern investors. 

 

The resultant responses from Governments and central banks was concerted and unprecedented both in terms of the size of funds committed and the slashing of interest rates to levels never seen in modern times. To focus on the UK, the OECD is forecasting that the UK Budget deficit will hit 14% of GDP in 2010. Even if the UK reduces Government borrowing by 1% of GDP per year for the next seven years, it will still have a debt to GDP ratio of 125% by 2017, one of the largest in the OECD.

 

The forecast Gilt issuance for 2010 is some £220 billion, 50% higher than in 2008/09 or, more scarily, 4½  times that of 2007/08. The newly named “Quantative Easing”, or as we used to call it “Printing Money”, seems to be having a positive effect. Whether or not this is the source of major future inflation, we wait and see. The above shows quite the scale of funds which have been put to use in the UK alone and quite how long it is going to take us to repay the resultant debt. 

 

Even with this vast stimulus the Banks are still not keen to lend on the cash they are holding. One of the results has been the immense widening in credit spreads, this is shown by the levels of the ITRAXX S9 Crossover Index. At the end of August 2008, this index was at a margin of 549 basis points, it peaked at a margin of 1,302 basis points when the market bottomed in March 2009 and then rallied strongly to the year end when it was at a margin of 894 basis points. Further evidence of the turmoil has been volatility of sterling in the currency markets. Against the US dollar, sterling started the financial year within a whisker of $2 to the pound, falling fairly consistently through to mid March 2009 when it touched $1.375 to the pound before rallying to $1.647 at our year end. Against the Euro, the volatility was greater, falling from €1.26 at the end of June 2008 to €1.025 on 30 December 2008 before rallying to €1.174 at the end of our financial year. 

 

Investment Performance

The share price total return for the Company over the year was -6.5%, which was a good result when compared to our peer group within the AIC UK High Income sector and given stock market declines. Despite this, we are looking to further improve the performance of the investment portfolio in the coming months. The prime objective is to produce a safe income stream whilst taking advantage of the continuing volatile markets to invest in stocks which have been over-sold in relation to their underlying fundamentals of ongoing visible cash-flow and strong asset backing. 

 

During the most depressed months in the market, September and October, the NAV fell by 20%. This was due to the indiscriminate mark down of prices and the widening of market quotes (we value based on the market bid prices). In the top ten holdings core stocks such as Balfour Beatty Convertible Cumulative Preference shares performed well showing a gain of 1% on the year and Brit Insurance 8.5% Convertible was redeemed at par on 31 December 2008. Antares Energy 10% Convertible 2013 returned to the top ten through the quality of its assets being proven in recent drilling results at Yellow Rose in Texas and the holdings in REA and Athabasca Group also performed well.

 

Investment Activity

As previously mentioned, the Brit Insurance 8.5% Convertible was redeemed in December 2008. Other realisations of note were the London Mining 11.5% 2012 bond which was called subsequent to the company selling its Brazilian asset and Xinhua Finance 10% 2011 had a partial repayment also following asset sales. 

 

In terms of acquisitions we added to First Hydro Finance 9% First Mortgage Debenture 2021 and opened a position in Care First Group 11.8% First Mortgage Debenture 2014 (a division of BUPA Carehomes). Towards the end of the year, new positions in Aberdeen Asset Management 7.9% Perpetual, Clerical Medical 4.25% Perpetual and Scottish Widows 5 ⅛ Perpetual were also added to the portfolio. 

 

Outlook

Whilst the outlook for markets may not be as grim as last year, we do not see a major recovery any time soon. We are still very focused on the maintenance of the income and preservation of capital.  To this end the portfolio will continue to maintain its foreign currency exposure without being committed too much to any one currency or economy.

 

The Company repaid half of its loan facility in June and had a 10% capital raising at the end of the year.  This has enabled the managers to focus on the portfolio and not to worry about the whims and vagaries of the Bankers, putting the portfolio in a good position going forward.

 

We remain confident that the Company will be able to present another positive report this time next year. 

 

Richard Lockwood/ Ian Francis

New City Investment Managers Limited

 

 

* ITRAXX Crossover Index is composed of 50 European sub-investment grade entities.

 

 

 

Audited Income Statement

For the year ended 30 June 2009

 

	Year ended 30 June 2009
		£ ’000	£’000	£’000
	Notes	Revenue	Capital	Total
Capital losses on investments
Losses on investments		-	(12,627)	(12,627)
Exchange losses		-	(299)	(299)
Revenue
Investment Income		7,880	-	7,880
		7,880	(12,926)	(5,046)
Expenses
Investment management fee		(454)	(151)	(605)
Other expenses		(371)	(9)	(380)
Total expenses		(825)	(160)	(985)
Profit/(loss) before finance costs and taxation		7,055	(13,086)	(6,031)
Finance costs
Interest payable and similar charges		(637)	(212)	(849)
Profit/(loss) before taxation		6,418	(13,298)	(6,880)
Irrecoverable withholding tax		(189)	-	(189)
Profit/(loss) after taxation		6,229	(13,298)	(7,069)
Earnings/(loss) per ordinary share (pence)	2	4.46p	(9.53)p	(5.07)p

 

 

The total column of this statement represents the Company’s Income Statement, prepared in accordance with IFRS (refer to notes 1 and 6). The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.

 

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

 

No operations were acquired or discontinued in the year.

 

 

Audited Income Statement

For the period from 17 January 2007* to 30 June 2008

 

 

	Period from 17 January 2007* to             30 June 2008
		£’000	£’000	£’000
	Notes	Revenue	Capital	Total
Capital losses on investments
Losses on investments		-	(4,858)	(4,858)
Exchange losses		-	(153)	(153)
Revenue
Investment Income		9,685	-	9,685
		9,685	(5,011)	4,674
Expenses
Investment management fee		(666)	(222)	(888)
Other expenses		(462)	(6)	(468)
Total expenses		(1,128)	(228)	(1,356)
Profit/(loss) before finance costs and taxation		8,557	(5,239)	3,318
Finance costs
Interest payable and similar charges		(1,069)	(356)	(1,425)
Profit/(loss) before taxation		7,488	(5,595)	1,893
Irrecoverable withholding tax		(161)	-	(161)
Profit/(loss) after taxation		7,327	(5,595)	1,732
Earnings/(loss) per ordinary share (pence)	2	5.62p	(4.29)p	1.33p

 

 

*The Company was incorporated on 17 January 2007 and launched on 7 March 2007.

 

 

 

 

Audited Balance Sheet

 

		As at	As at
		30 June 2009	30 June 2008
	Notes	£’000	£’000
Non-current assets
Investments held at fair value		62,161	83,461
Current assets
Other receivables		2,384	2,400
Cash and cash equivalents		9,206	2,103
		11,590	4,503
Total assets		73,751	87,964
Current liabilities
Bank loan		(8,000)	(16,000)
Other payables		(670)	(840)
Total liabilities		(8,670)	(16,840)
Net assets		65,081	71,124
Share capital and reserves
Stated capital account		29,455	23,452
Special distributable reserve		50,385	50,385
Capital reserve		(18,893)	(5,595)
Revenue reserve		4,134	2,882
Equity shareholders’ funds		65,081	71,124
Net asset value per ordinary share (pence)	3	42.45p	51.03p

 

 

 

 

Audited Statement of Changes in Equity

For the year ended 30 June 2009

 

		Stated	Special
		capital	distributable	Capital	Revenue
		account	reserve+	reserve	reserve#	Total
		£’000	£’000	£’000	£’000	£’000
At 1 July 2008		23,452	50,385	(5,595)	2,882	71,124
(Loss)/profit for the year		-	-	(13,298)	6,229	(7,069)
Dividends paid		-	-	-	(4,977)	(4,977)
Issue of shares		6,003	-	-	-	6,003
At 30 June 2009		29,455	50,385	(18,893)	4,134	65,081

 

 

 

 

Audited Statement of Changes in Equity

For the period from 17 January 2007* to 30 June 2008

 

		Stated	Special
		capital	distributable	Capital	Revenue
		Account	reserve+	reserve	reserve#	Total
		£’000	£’000	£’000	£’000	£’000
At 17 January 2007 (date of incorporation)		-	-	-	-	-
Issue of shares		74,445	-	-	-	74,445
Transfer to special distributable  reserve		(50,993)	50,993	-	-	-
Launch costs		-	(596)	-	-	(596)
Cost of reduction in stated      capital account		-	(12)	-	-	(12)
(Loss)/profit for the period		-	-	(5,595)	7,327	1,732
Dividends paid		-	-	-	(4,445)	(4,445)
At 30 June 2008		23,452	50,385	(5,595)	2,882	71,124

 

*The Company was incorporated on 17 January 2007 and launched on 7 March 2007.

 

# The balance on the revenue reserve of £4,134,000 (2008: £2,882,000) is available for paying      

   dividends.

 

+ The balance on the special distributable reserve of £50,385,000 (2008: £50,385,000) is treated as distributable profits available to be used for all purposes permitted by Jersey company law including the buying back of shares, the payment of dividends and the payment of preliminary expenses.

 

 

 

Audited Cash Flow Statement

 

	Year	Period from
	Ended	17 January 2007*
	30 June 2009	to 30 June 2008±
	£’000	£’000
Operating activities
(Loss)/profit before finance costs and  taxation	(6,031)	3,318
Losses on investments	12,627	4,858
Exchange losses	299	153
Decrease/(increase) in other receivables	418	(1,165)
Increase in other payables	28	137
Net cash inflow from operating activities before interest and taxation	7,341	7,301
Interest paid	(986)	(1,180)
Irrecoverable withholding tax paid	(198)	(152)
Net cash inflow from operating activities	6,157	5,969
Investing activities
Purchase of investments	(17,641)	(57,322)
Sales of investments	26,159	34,649
Net cash inflow/(outflow) from investing activities	8,518	(22,673)
Financing
Equity dividends paid	(4,977)	(4,445)
(Repayment)/drawdown of bank loan	(8,000)	2,000
Issue of ordinary shares	5,704	21,599
Expenses of share issues and launch  costs	-	(714)
Cost of reduction in stated capital account	-	(12)
Net cash (outflow)/inflow from financing	(7,273)	18,428
Increase in cash and cash equivalents	7,402	1,724
Cash and cash equivalents at the start of the year/period	2,103	-
Exchange losses	(299)	(153)
Cash inflow from transfer of cash from New City High Yield Trust plc †	-	532
Cash and cash equivalents at the end of the year/period	9,206	2,103

 

^† On 6 March 2007 the net assets of New City High Yield Trust plc which totalled £52,964,000 were transferred in specie to New City High Yield Fund Limited. Cash of £532,000 and investments with a market value of £66,432,000 were received and a loan of £14 million due to Allied Irish Bank was also novated and transferred to the Company.

 

^± The cash flow statement above has been presented in accordance with IFRS. Until 30 June 2008 the Company reported its results in accordance with UK GAAP. Note 6 provides a reconciliation of the cash flow statement previously presented under UK GAAP to IFRS.

 

 *The Company was incorporated on 17 January 2007 and launched on 7 March 2007.

 

 

 

Principal Risks and Uncertainties

 

The Company’s assets consist principally of listed fixed interest securities and its principal risks are therefore market-related. The Company is also exposed to currency risk in respect in respect of the markets in which it invests. Other risks include the following:

 

·         External risks – any events or developments which can affect the general level of share prices including, for instance, terrorism, disease, protectionism, inflation or deflation, economic recessions and movements in interest rates.

 

·         Investment and strategic – incorrect strategy, asset allocation (including use of gearing), diversification and stock selection could all lead to poor returns for shareholders.

 

·         Regulatory – breach of regulatory rules could lead to suspension of the Company’s Stock Exchange listing, financial penalties or a qualified audit report. 

 

·         Operational – failure of the Investment Manager’s systems or disruption to the Investment Manager’s business, or that of third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders’ confidence.

 

·         Financial – inadequate controls by the Investment Manager or other third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of laws, rules or regulations.

 

The Board seeks to mitigate and manage these risks through continual review, policy-setting and reliance upon contractual obligations. It also regularly monitors the investment environment and the management of the Company’s investment portfolio, and applies the principles detailed in the internal control guidance issued by the Financial Reporting Council.

 

 

Statement of Directors’ Responsibilities in Respect of the Annual Financial Report

 

In accordance with Chapter 4 of the Disclosure and Transparency Rules, the Directors confirm that to the best of their knowledge, in respect of the annual report for the year ended 30 June 2009, of which this statement of results is an extract:

 

·         The financial statements, have been prepared in accordance with applicable International Financial Reporting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;

 

·         The Chairman’s Statement and Investment Manager’s Review include a fair review of the important events that have occurred during the financial year and their impact on the financial statements;

 

·         ‘Principal Risks and Risk Management’ includes a description of the Company's principal risks and uncertainties; and

 

·         Note 8 and the Annual Report includes details of related party transactions that have taken place during the financial year.

 

 

On behalf of the Board

 

JG West

Chairman

9 October 2009

 

 

 

Notes (audited)

 

1.     The annual results which cover the year to 30 June 2009 have, for the first time, been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the International Accounting Standards Board (IASB). The accounting policies adopted under IFRS are not materially different from those previously adopted under UK Generally Accepted Accounting Practice (“UK GAAP”). The transition to IFRS has not resulted in a change to the net asset value or return per share that would have been reported under UK GAAP. 

 

The disclosures required by IFRS1 ‘First Time Adoption of International Financial Reporting Standards’ (‘IFRS1’) concerning the transition from UKGAAP to IFRS are given in note 6.

2.     Earnings per ordinary share

        The revenue earnings per ordinary share is based on the net profit after taxation of £6,229,000(2008: £7,327,000) and on 139,595,523 (2008: 130,471,218) ordinary shares, being the weighted average number of ordinary shares in issue during the year.

        The capital loss per ordinary share is based on a net capital loss of £13,298,000(2008: £(5,595,000)) and on 139,595,523 (2008: 130,471,218) ordinary shares, being the weighted average number of ordinary shares in issue during the year.

 

3.     Net asset value per ordinary share

        The net asset value per ordinary share is based on net assets of £65,081,000 (2008: £71,124,000) and on 153,303,028 (2008: 139,366,428) ordinary shares, being the number of ordinary shares in issue at the year end.

 

4.     Dividends

        A fourth interim dividend in respect of the year ended 30 June 2009 of 1.1p per ordinary share was paid on 28 August 2009 to shareholders on the register on 31 July 2009. In accordance with IFRS this dividend has not been included as a liability in these accounts and will be recognised in the period in which it is paid.

 

5.          Stated capital account

 

13,936,600 ordinary shares were issued at a price of 43.75p per share pursuant to a placing on 25 June 2009 and raised £6.1 million. The total issued share capital at 30 June 2009 was 153,303,028 (2008: 139,366,428).

 

6.     Explanation of transition to IFRS

        Due to the implementation of the Disclosure and Transparency Rules which applied to the Company from 1 July 2008, the Company has adopted IFRS. Until 30 June 2008 the company reported its results in accordance with UK GAAP. The transition to IFRS has not changed how transactions and balances are recorded in the Income Statement and Balance Sheet due to the convergence between UK GAAP and IFRS.

a)     Reconciliation of equity/net assets

        Had the Company reported its results under IFRS at the end of the comparable ‘year end’ (30 June 2008) the net assets would have been unchanged from those previously reported under UK GAAP.

 

b)     Reconciliation of the Income Statement

        Had the Company reported its results under IFRS at the end of the comparable ‘year end’ (30 June 2008) the return on ordinary activities would have been unchanged from that previously reported under UK GAAP.

 

c)     Reconciliation of the Cash Flow Statement for the period from 17 January 2007 to 30 June 2008

                                                                                                     Previously        Effect of

                                                                                                        reported   transition to

                                                                                 Reference    UKGAAP             IFRS           IFRS

                                                                                             £’000            £’000           £’000

Net cash inflow from operating activities                     (i)            7,301          (1,332)            5,969

Servicing of finance                                                  (i)          (1,180)            1,180                  –

Taxation                                                                  (i)             (152)               152                  –

Equity dividends paid                                               (ii)          (4,445)            4,445                  –            

Capital expenditure and financial investment                         (22,673)                  –        (22,673)            

Financing                                                               (ii)          22,873          (4,445)         18,428              

Increase in cash                                                                   1,724                  –           1,724              

        The above reconciliations show the re-allocation of amounts within the Cash Flow Statement but the actual cash flows remain unchanged.

        Reference to reconciling items:

(i)     Loan interest paid and withholding tax paid is now shown under operating activities rather than servicing of finance and taxation.

(ii)    Equity dividends paid are now disclosed under financing.

 

7.     Financial Instruments

 

The Company’s financial instruments comprise its investment portfolio, cash balances, bank loan and debtors and creditors that arise directly from its operations. As an investment company the Company holds a portfolio of financial assets in pursuit of its investment objective. The Company uses flexible borrowing for short term purposes, and to seek to enhance the returns to shareholders, when considered appropriate by the Investment Manager.

Investments held are valued at fair value. For listed securities this is either bid price or the last traded price depending on the convention of the exchange on which the investment is listed. Unlisted investments are valued by the Directors on the basis of all the information available to them at the time of valuation. The fair value of all other financial assets and liabilities is represented by their carrying value in the Balance Sheet. The fair value of the loan is not materially different from the carrying value in the Balance Sheet.

 

The main risks that the Company faces arising from its financial instruments are:

 

(i) market price risk, being the risk that the value of investment holdings will fluctuate as a result of changes in market prices caused by factors other than interest rate or currency rate movements;

(ii) interest rate risk, being the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates;

(iii) foreign currency risk, being the risk that the value of investment holdings, investment purchases, investment sales and income will fluctuate because of movements in currency exchange rates;

(iv) credit risk, being 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; and

(v) liquidity risk, being the risk that the Company may not be able to liquidate quickly its investments.

 

Market price risk

Market price risk arises mainly from uncertainty about future prices of financial instruments held.

It represents the potential loss the Company might suffer through holding market positions in the face of price movements. To mitigate the risk the Board’s investment strategy is to select investments for their fundamental value. Stock selection is therefore based on disciplined accounting, market and sector analysis, with the emphasis on long term investments. An appropriate spread of investments is held in the portfolio in order to reduce both the statistical risk and the risk arising from factors specific to a country or sector. The Investment Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to consider investment strategy.

 

 

Interest rate risk

Financial assets

Bond and preference share yields, and their prices, are determined by market perception as to the appropriate level of yields given the economic background. Key determinants include economic growth prospects, inflation, the Government’s fiscal position, short term interest rates and international market comparisons. The Investment Manager takes all these factors into account when making any investment decisions as well as considering the financial standing of the potential investee company. Returns from bonds and preference shares are fixed at the time of purchase, as the fixed coupon payments are known, as are the final redemption proceeds. Consequentially, if a bond is held until its redemption date, the total return achieved is unaltered from its purchase date. However, over the life of a bond the market price at any given time will depend on the market environment at that time. Therefore, a bond sold before its redemption date is likely to have a different price to its purchase level and a profit or loss may be incurred.

 

Floating rate

When the Company retains cash balances they are held in floating rate deposit accounts. The benchmark rate which determines the interest payments received on interest bearing cash balances is the UK bank base rate, which was 0.5 per cent at 30 June 2009.

 

Financial liabilities

The Company finances its operations through its bank loan. The Company has borrowed in sterling at a fixed rate of interest. The Board sets borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis.

At the year end, the Company had borrowings of £8,000,000 from Allied Irish Bank.

 

Fixed rate

The Company holds fixed interest investments and has fixed interest liabilities.

 

Foreign currency risk

The Company invests in overseas securities and may hold foreign currency cash balances which give rise to currency risks. It is not the Company’s policy to hedge this risk on a continuing basis but it may do so from time to time.

 

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. The Investment Manager has in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis. The carrying amounts of financial assets best represents the maximum risk exposure at the balance sheet date. Credit risk on unlisted instruments is considered to be part of market price risk.

 

Credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the acceptable credit quality of the brokers issued. The Board monitors the quality of service provided by the brokers used to further mitigate this risk.

 

The cash held by the Company and all the assets of the Company which are traded on a recognised exchange are held by HSBCBank plc (‘HSBC’), the Company’s custodian. Bankruptcy or insolvency of the custodian may cause the Company’s rights with respect to the cash and securities held by the custodian to be delayed or limited. The Board monitors the Company’s risk by reviewing the custodian’s internal control reports.

Should the credit quality or the financial position of HSBC deteriorate significantly the Investment Manager will move the cash holdings to another bank.

 

There were no significant concentrations of credit risk to counterparties at 30 June 2009. No individual investment exceeded 7.7 per cent of the net assets attributable to the Company’s shareholders at 30 June 2009.

 

Liquidity risk

The Company’s financial instruments include investments in unlisted investments which are not traded in an organised public market and which generally may be illiquid. As a result, the Company may not be able to liquidate these investments at an amount close to their fair value.

The Company’s listed securities are considered to be readily realisable.

 

The Company’s liquidity risk is managed on an ongoing basis by the Investment Manager in accordance with policies and procedures in place as described in the Directors’ Report. The Company’s overall liquidity risks are monitored on a quarterly basis by the Board.

 

The Company maintains sufficient cash and readily realisable securities to pay accounts payable and accrued expenses.

 

8.    Related parties

 

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

 

Mr G Ross, a Director, is a Director of the Company Secretary and Administrator, R&H Fund Services (Jersey) Limited which receives fees from the Company. Administration fees for the year were £15,000 (2008: £22,000).

Mr G Ross is also a Director of the Registrar, Computershare Investor Services (Jersey) Limited which receives fees from the Company. Registrar fees for the year were £16,000 (2008: £14,000).

Intelli Corporate Finance Limited (“ICF”) provides advisory and brokerage services to the Company. Mr A Collins, a Director, is a Director of Midas Capital plc, which was the parent company of ICF until 1 October 2009 when ICF was acquired by Canaccord Adams Ltd. Mr J. West, a Director, is Chairman of Canaccord Adams Ltd.

 

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

 

9.    Bank loan

 

       During the year, the Company had an unsecured bank loan facility of £18 million with Allied Irish Bank under which a loan of £16 million had been drawn down. £8 million was repaid on 17 June 2009 and accordingly £8 million was outstanding at the year end. At 30 June 2009 the bank loan facility had also been reduced to £8 million.

 

A further £3 million was repaid on 28 August 2009, and on 9 October 2009 the Allied Irish Bank loan was fully repaid. On the same date, the Company drew down £5 million under a new bank facility with HSBC Bank plc which allows up to 20 per cent of the value of shareholders’ funds to be borrowed.

 

10.   Financial information

 

These are not full statutory accounts for the year ended 30 June 2009.  The full audited annual report and accounts for the year ended 30 June 2009 will be sent to shareholders in October 2009 and will be delivered to the Registrar of Companies following the Company’s Annual General Meeting. The full audited accounts for the period ended 30 June 2008, which were unqualified, have been lodged with the Registrar of Companies.

11.    The report and accounts for the year ended 30 June 2009 will be made available on the website www.ncim.co.uk. Copies may also be obtained from the Company's registered office, Ordnance House, 31 Pier Road, St. Helier, Jersey, JE4 8PW, Channel Islands

Enquiries:

Richard Lockwood, New City Investment Managers:                  020 7201 5365

Graeme Ross, Company Secretary:                                         01534 825 200

 

END

 

 

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