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Close Eur Accelerate (CEAF)

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Tuesday 15 February, 2011

Close Eur Accelerate

Half Yearly Report

RNS Number : 2573B
Close European Accelerated Fund Ltd
15 February 2011
 



 

 

 

Close European Accelerated Fund Limited

 

 

Half-Yearly Financial Report

    for the period ended 31 December 2010 (Unaudited)

Close European Accelerated Fund Limited (the "Company")

 

ABOUT THE COMPANY

 

Close European Accelerated Fund Limited (the "Company") is a Guernsey incorporated, closed-ended investment company.  With the exception of two Management Shares issued for administrative reasons, the Company's issued share capital comprises 39,550,000 Participating Shares (the "Shares") the performance of which is designed to provide investors with a geared capped exposure to the performance of the Dow Jones EuroStoxx 50 Index (the "Index"). 

 

Pursuant to the initial placing and offer for subscription, 36,000,000 Shares were issued at a price of 100p each (the "Issue Price") on 27 July 2005.  Your Board, in conjunction with the Company's Manager, was since the initial placing and offer for subscription of Shares, successful in raising further capital for the Company by the subsequent issue of an additional 3,550,000 new Shares on 21 September 2006 at a price of 107.5p each.  All 39,550,000 Shares in issue rank pari passu, have been admitted to the Official List of the United Kingdom Listing Authority and admitted to trading on the London Stock Exchange.  The Company has an unlimited life but the Shares will be redeemed on or around 29 July 2011 (the "Redemption Date").

 

Investment Objective and Policy

The investment objective of the Company is to provide shareholders on the Redemption Date with a payment per Share which will comprise a capital amount of 100 pence per Share and a growth amount per Share equal to five times any percentage increase in the value of the Index (the "End Value") as at 26 July 2011 (the "End Date") relative to its value (the "Start Value") as at 26 July 2005 (the "Start Date"), such amount being expressed in pence and rounded down to the next half pence, subject to a maximum increase of 67.5 per cent. of the Issue Price, subject to counterparty default.

 

If the End Value is lower than the Start Value, the Shares are designed to repay the full initial subscription amount of 100p per Share on the Redemption Date provided that the value of the Index has not fallen below 50 per cent. of the Start Value at close of business on any Index business day between the Start Date and the End Date (both dates inclusive) (an "Index Barrier Breach").

 

If shareholders hold their Shares until the Redemption Date, and an Index Barrier Breach has occurred and the End Value is not at least equal to the Start Value, the Shares are designed to repay the Issue Price as reduced by the same percentage by which the End Value is less than the Start Value.

 

In accordance with the Company's investment policy, the net proceeds derived by the Company from the issue of Shares and the sale of a Put Option have been invested in a portfolio of debt securities ("Debt Securities") containing embedded derivatives related to the Index at prices relative to the value of the Index on 26 July 2005 of 3,302.98.  Therefore, if the Index rises 13.5 per cent. or more from its Start Value of 3,302.98 on the Start Date, which equates to a level of 3,748.88 or higher as at the End Date, the Shares are designed to return growth of 67.5 per cent. on the Redemption Date.

 

As published in each of the annual and half-yearly financial reports of the Company and as announced on 8 October 2008, the Company currently holds seven Debt Securities, including one issued by Glitnir Banki HF ("Glitnir") and one issued by Kaupthing Bank HF ("Kaupthing").  These two debt securities have a nominal value of £6,000,000 each and in aggregate account for approximately 30 per cent. of the total nominal value of the Company's debt securities. 

 

Whilst recovery rates from issuers that default vary, and in this case are currently unknown, the worst case scenario would see the Company receive nothing from either institution at the maturity of the relevant debt security.  In these circumstances, the Company's assets will be reduced by 30 per cent. and so accelerate asset erosion under the Put option or reduce the redemption proceeds due to shareholders on the redemption of their Shares accordingly. 

 

In the event of both Glitnir and Kaupthing defaulting and having a zero recovery rate and there being no insolvency of any other issuer of debt securities held by the Company or any other event of default or any unforeseen circumstances, if the Index were to fall to a level of approximately 1,002 at close of business on the End Date, the redemption proceeds of the Shares would be zero.  The redemption proceeds per Share per the Company's investment objective will not be known until after the end of the life of the Shares when the closing value of the Index on the End Date is known.

Any claims which are paid may be paid before or after the end of the life of the Shares and in the case of early payment it may not be possible to reinvest the proceeds in debt securities which replicate the investment characteristics of the original Debt Securities.  Any claims which are paid may be paid in currencies other than Sterling and/or in forms other than cash.  Any payments received by the Company may therefore be subject to currency fluctuations and/or other market movements.

As any claims which are paid may be paid after the end of the life of the Shares, your Board is in discussion with its advisors to agree and establish arrangements whereby the Company's entitlement to any future payments from Glitnir and Kaupthing can be held for the benefit of its Shareholders. To give effect to these arrangements it, may be necessary for an Extraordinary General Meeting of all shareholders to be convened in order to vote on proposals to amend the Company's Articles of Association. Assuming the proposal is accepted by shareholders there will be paid to them on the Redemption Date whatever cash entitlement is available for distribution and they will also receive an interest in any future payments from Glitnir and Kaupthing. The Directors will make an announcement with further details to Shareholders as soon as possible

 

Your attention is drawn to the Schedule of Investments of this half-yearly financial report, which shows the assets held by the Company, and note 12(b) to the financial statements, which refers to the credit risk of the issuers of these assets as at the end of the reporting period and as at the date of this report.

 

 

 

Close European Accelerated Fund Limited (the "Company")

MANAGER'S REPORT FOR THE PERIOD ENDED 31 DECEMBER 2010

 

Investment Performance

 

In order to fulfil its investment objective, the Company holds seven Debt Securities, including one issued by Glitnir and one issued by Kaupthing.  These two debt securities have a nominal value of £6,000,000 each and in aggregate account for approximately 30 per cent. of the total nominal value of the Company's Debt Securities.  In the event of a default by an issuer of a debt security purchased by the Company, the Company will rank as an unsecured creditor in respect of sums due from the issuer of such debt security.  In such event, the Company may (in respect of that debt security) receive a lesser amount of money than the amount due pursuant to the terms of the debt security, may actually receive the money at a different time than would otherwise have been the case and the amount received may be zero.  Any losses will be borne by the Company and returns to Shareholders would be significantly adversely affected.

 

The Winding-Up Boards for Glitnir and Kaupthing asked all parties claiming debts of any sort or other rights to submit claims by 26 November 2009 and 30 December 2009 respectively.  Consequently the Company submitted claim forms to each of Glitnir and Kaupthing, claiming £10,050,000 in respect of each one of these debt securities, such amounts being equal to the maximum redemption proceeds of £1.675 per £1 nominal.  The Winding-Up Committee of Kaupthing has written to the Company to advise it accepts ISK 1,125,075,218 (approximately £6.25 million as at 31 December 2010) of the claim.  The Winding-Up Board of Glitnir has postponed a decision on the Company's claim until 14 April 2011.

 

Shareholders should be aware that it is likely that Kaupthing may not pay the Company the full ISK 1,125,075,218 or, indeed, anything at all and that Glitnir may not pay the Company the full amount claimed or anything at all.  Whilst recovery rates from issuers that default vary, and in this case are currently unknown, the worst case scenario would see the Company receive nothing from either institution at the maturity of the relevant debt securities.  The amounts claimed or accepted should not be considered forecasts of the amounts which will be due from Kaupthing or Glitnir on the maturity of the relevant debt securities, nor are they a reflection of the net asset value per Share.  The redemption proceeds per Share as per the Company's investment objective will not be known until after the end of the life of the Company when the closing value of the Index on the End Date is known and may not be the amounts claimed or accepted.

 

Any claims which are paid may be paid before or after the end of the life of the Company and in the case of early payment it may not be possible to reinvest the proceeds in debt securities which replicate the investment characteristics of the original Debt Securities.  Any claims which are paid may be paid in currencies other than Sterling and/or in forms other than cash.  Any payments received by the Company may therefore be subject to currency fluctuations and/or other market movements.

 

If the Index has closed down more than 50 per cent. from its Start Value (i.e. below 1,651.49) on any Index Business Day between the Start Date and the End Date then an Index Barrier Breach will have occurred.  In these circumstances, the amount which the Company will be required to pay following the Index Barrier Breach will reduce its assets by an amount which reflects the decline, if any, in the Index between the Start Date and the End Date.  As at the date of this report, an Index Barrier Breach has not occurred.

 

The official closing level of the Index as at 31 December 2010 was 2,797.82.  If the Index closed at this level on the End Date and an Index Barrier Breach has not occurred, the redemption proceeds would be 100 pence subject to there being no counterparty default or any unforeseen circumstances, and in the event of both Glitnir and Kaupthing defaulting and having a zero recovery rate and there being no insolvency of any other issuer of debt securities held by the Company or any other event of default or any unforeseen circumstances, the redemption proceeds would be approximately 69.5 pence, and if the Index were to fall by approximately a further 64 per cent. to a level of approximately 1,002 as at the End Date, the redemption proceeds of the Shares would be zero. 

 

The table below illustrates how the redemption proceeds of the Shares might vary for different ending levels of the Index (1) subject to there being no counterparty default or any unforeseen circumstances, and (2) on the assumption of zero recovery in the event of default of the debt securities issued by Glitnir and Kaupthing and there being no insolvency of any other issuer of debt securities held by the Company or any other event of default or any unforeseen circumstances.

 

 

 

 


If Dow Jones EuroStoxx 50

If Dow Jones EuroStoxx 50


Index never closes below 1,651.49+

Index closed below 1,651.49+

Final EuroStoxx

Redemption

Redemption

Redemption

Redemption

50 Index*

Proceeds (1)

Proceeds (2)

Proceeds (1)

Proceeds (2)

0



0.0

0.0

100



3.0

0.0

200



6.0

0.0

300



9.0

0.0

400



12.0

0.0

500



15.0

0.0

600



18.0

0.0

700



21.0

0.0

800



24.0

0.0

900



27.0

0.0

1,000



30.0

0.0

1,100



33.0

2.5

1,200



36.0

5.5

1,300



39.0

9.0

1,400



42.0

12.0

1,500



45.0

15.0

1,600



48.0

18.0

1,700

100.0

69.5

51.0

21.0

1,800

100.0

69.5

54.0

24.0

1,900

100.0

69.5

57.5

27.0

2,000

100.0

69.5

60.5

30.0

2,100

100.0

69.5

63.5

33.0

2,200

100.0

69.5

66.5

36.0

2,300

100.0

69.5

69.5

39.0

2,400

100.0

69.5

72.5

42.0

2,500

100.0

69.5

75.5

45.0

2,600

100.0

69.5

78.5

48.0

2,700

100.0

69.5

81.5

51.0

2,797.82**

100.0

69.5

84.5

54.0

2,800

100.0

69.5

84.5

54.0

2,900

100.0

69.5

87.5

57.0

3,000

100.0

69.5

90.5

60.0

3,100

100.0

69.5

93.5

63.5

3,200

100.0

69.5

96.5

66.5

3,300

100.0

69.5

99.5

69.5

3,400

114.5

79.5

114.5

79.5

3,500

129.5

90.0

129.5

90.0

3,600

144.5

100.5

144.5

100.5

3,700

160.0

111.5

160.0

111.5

3,800

167.5

116.5

167.5

116.5

3,900

167.5

116.5

167.5

116.5

 

   * As at 26 July 2011

   ** Official closing level of the Dow Jones EuroStoxx 50 Index as at 31 December 2010

   + On any day from 26 July 2005 to 26 July 2011

 

(1) Subject to there being no counterparty default or any unforeseen circumstances

 

(2) The table contemplates default and zero recovery in respect of the debt securities issued by Glitnir and Kaupthing.  The redemption proceeds set out in this table is an example only and not a forecast of actual payments and is subject to there being no insolvency of any other issuer of debt securities held by the Company or any other event of default or any unforeseen circumstances.  The attention of shareholders is drawn to the section headed "Risk Factors" in the Prospectus.

 

Market Review

 

The period under review was a volatile time for the Index which ended up 8.5 per cent. over the period.

 

The first two months of the period were particularly volatile as the Index fell down to just above 2,500, its low of the period, subsequently rising c10 per cent., and then falling significantly in August.  These moves showed investors' changeable views of the strength of the global economic recovery and resurfacing worries surrounding the European sovereign debt crisis, following Greece's debt problems. 

 

September and October were much more stable months for the Index which range traded between 2,700 and 2,900 during this time, as market participants seemed to forget their concerns.  During these months global equity markets were buoyed by positive global economic data and speculation of additional quantitative easing by the US Federal Reserve boosted the Index.  However Ireland's sovereign debt crisis and expectations that a bailout from the European Union ("EU") and the International Monetary Fund would be required, weighed on equity markets, tempering any rises.

 

The Index fell 7.0 per cent. in November as the Irish crisis culminated in a Euro 85 million bailout from the EU.  Despite this, and comments from French and German leaders that this bailout had saved the euro, financial markets looked far from convinced that this would stop contagion spreading to other European countries such as Portugal and Spain.  However the Index recovered its losses at the beginning of December to end the period at 2,792.82, up 8.5 per cent. over the period.

 

The European Central Bank ("ECB") held rates at 1.00 per cent. throughout the period as pressure mounted to stem the worsening sovereign debt crisis in Europe.  Unconventional actions taken by the ECB included a bond purchase programme, although this had a limited effect as the purchases were sterilised i.e. offsetting the purchases through sales of other bonds or money market instruments to keep the overall money supply unaffected.

 

Market Outlook

 

The ECB is currently projecting annual real GDP growth of between 0.7 per cent. and 2.1 per cent. and annual harmonized index of consumer prices (i.e. inflation) of between 1.3 per cent. and 2.3 per cent. in 2011.  The ECB's Governing Council's view is that there is still high uncertainty in the European economic outlook and that the risks remain tilted to the downside. 

 

Uncertainty over the economic outlook may stem in part due to the possibility of contagion and hence further sovereign debt issues in other countries with Europe, and equity markets reactions to this.  European equity markets are also likely to react to any changes in the ECB's interest rates and bond purchase programme.

 

Close Investments Limited

14 February 2011

 


Close European Accelerated Fund Limited (the "Company")

INTERIM MANAGEMENT REPORT FOR THE PERIOD FROM 1 JULY TO 31

DECEMBER 2010

 

Detailed in the section entitled "Investment Objective and Policy", in the Manager's Report and in the notes to the financial statements is a description of important events that have occurred during the first six months of the financial year, their impact on the performance of the Company as shown in the financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year.

 

There were no material related party transactions which took place in the first six months of the financial year.

 

This half-yearly financial report has not been audited or reviewed by auditors pursuant to the Auditing Practices Board guidance on Review of Interim Financial Information.

 

Going Concern

 

The performance of the investments held by the Company over the reporting period and the outlook for the future are described in the Manager's Report.  The Company's financial position, its cash flows and liquidity position are set out in the financial statements and the Company's financial risk management objectives and policies, details of its financial instruments and its exposures to market price risk, credit risk, liquidity risk, portfolio construction risk and interest rate risk are set out at note 12 to the financial statements.

 

As highlighted in the section entitled "Investment Objective and Policy", the Manager's Report and notes 1(k), 5 and 12(d) to the financial statements, during the previous accounting period, the issuers of two of the debt securities, being Glitnir and Kaupthing, suffered severe financial difficulties and were placed into receivership.  The Company has submitted claim forms to each of Glitnir and Kaupthing claiming £10,050,000 in respect of each one of these debt securities, such amounts being equal to the maximum redemption proceeds of £1.675 per £1 nominal.  The amount claimed should not be considered a forecast of the redemption proceeds nor is it a reflection of the net asset value per Share. The redemption proceeds per Share per the Company's investment objective will not be known until after the end of the life of the Shares when the closing value of the Index on the End Date is known and may not be the amount currently claimed.

The Winding-Up Committee of Kaupthing has since written to the Company to advise that it accepts ISK 1,125,075,218 (approximately £6.25 million as at 31 December 2010) of the claim. The Winding-Up Board of Glitnir has postponed a decision on the Company's claim until 14 April 2011.  As such, the value of the debt instruments issued by Glitnir cannot be ascertained with any degree of certainty.          

Although at the time of writing Kaupthing has accepted ISK 1,125,075,218 of the claim the situation still remains unclear. The Manager and Board of directors consider it likely that Glitnir and Kaupthing may not pay in full on their obligations and in the worst case scenario may pay nothing at all.  

 

In the event the Company receives a lesser amount of money than the amount due pursuant to the terms of the debt security or in the event the amount received may be zero, any losses will be borne by the Company and return to Shareholders would be significantly adversely affected. Any claims which are paid may be paid before or after the end of the life of the Company and in the case of early payment it may not be possible to reinvest the proceeds in debt securities which replicate the investment characteristics of the original Debt Securities.  Any claims which are paid may be paid in currencies other than Sterling and/or in forms other than cash.  Any payments received by the Company may therefore be subject to currency fluctuations and/or other market movements.

The Company holds a debt security issued by the Portuguese state-owned bank, Caixa Geral De Depositos S.A. ("Caixa") with a nominal value of £6million.  On 14 July 2010 Moody's lowered its long-term counterparty credit rating to A1 from Aa3 with a stable outlook, following its downgrade of the Portuguese sovereign debt rating to A1 on 13 July 2010.  Subsequently, on 9 December 2010 Moody's placed the senior unsecured debt ratings of Caixa on negative outlook.  Similarly, on 3 December 2010 Standard and Poor's ("S&P") placed Caixa's long and short term credit ratings on creditwatch with negative implications, maintaining its rate of A-.  S&P noted that Portugal's macroeconomic challenges and difficult external financing conditions will put pressure on the banks' operating environment and that the country's ambitious austerity plan will, in S&P's opinion, likely lead the economy back into recession in 2011 and limit growth prospects thereafter.

 

 The Board monitors credit risk and will consider further action if the credit rating of an issuer falls below A3 or A- as ranked by Moodys and S&P respectively.  

In the event of a default by an issuer of a debt security purchased by the Company the Company would rank as an unsecured creditor in respect of sums due from the issuer of such debt security. In such an event the Company may (in respect of that debt security receive a lesser amount (if any) and at a different time than the proceeds anticipated at the maturity of the debt security. Any losses would be borne by the Company and returns to shareholders would be significantly adversely affected.

  

As disclosed in the section entitled "Investment Objective and Policy", the notes to the financial statements and the schedule of investments, the Company has sold a Put Option to J.P. Morgan Chase Bank N.A (the "Put Option Counterparty").  The performance of the Put Option is linked to the performance of the Index.  At an Index value of 3,302.98 or above at the close of business on 26 July 2011, or if the Index has never closed below 1,651.49 during the calculation period from 26 July 2005 to 26 July 2011 (an "Index Barrier Breach"), the Put Option will be worth £Nil at maturity.  If the Index has closed below 1,651.49 over the calculation period and the Index is still below 3,302.98 at 26 July 2011, the Put Option will be worth a percentage of the notional value, being £39,550,000, equivalent to the percentage fall in the level of the Index over the calculation period.  As at the accounting reference date and as at the date of this report no Index Barrier Breach had occurred.

 

The Company's contingent liability to the Put Option Counterparty under the Put Option sold to the Put Option Counterparty will not crystallise until the Put Option's scheduled maturity date of 28 July 2011.  Such contingent liability under the Put Option will be calculated based on the level of the Index as at 26 July 2011.  As the contingent liability under the Put Option cannot be quantified and does not crystallise until 26 July 2011, the directors do not consider that such contingent liability renders the Company insolvent at this time.  Only in the event that the value of the Put Option based on the level of Index as at 26 July 2011 exceeds the value of the Company's assets on that date might the Company be rendered insolvent.

 

As disclosed in the section entitled "Investment Objective and Policy" and note 12(c) to the financial statements, upon the issue of Shares in July 2005 the Company created a cash reserve (the "Expense Provision") in the amount of 2.10 per cent. of the amount raised by the issue of such shares (the "Initial Gross Proceeds") plus £440,000, such amount being estimated in the opinion of the directors upon the advice of the Administrator to be sufficient

to meet the operating expenses reasonably expected to be incurred over the life of the Company. 

 

Upon the issue of additional Shares in September 2006, an additional 2.10 per cent. of the proceeds of that issue of additional Shares was set aside to cover the increase in the Manager's fee which resulted from that issue of additional Shares, all other expenses being either fixed for the life of the Shares or deemed unlikely to increase materially as a result of this issue of additional Shares.

 

After making enquiries, the directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future.  Accordingly, they continue to adopt the going concern basis in preparing this half-yearly financial report.

 

Responsibility Statement

The Board of directors jointly and severally confirm that, to the best of their knowledge:

(a)        The financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

(b)        This Interim Management Report includes or incorporates by reference:

 

(i)         an indication of important events that have occurred during the first six months of the financial year and their impact on the financial statements;


(ii)        a description of the principal risks and uncertainties for the remaining six months of the financial year;

(iii)       confirmation that there were no related party transactions in the first six months of the current financial year that have materially affected the financial position or the performance of the Company during that period; and

changes in the related parties transactions described in the last annual report that could have a material effect on the financial position or performance of the Company in the first six months of the current financial year.

 

Charles Tracy                                                             Peter Niven    

Director                                                                       Director

14 February 2011



Close European Accelerated Fund Limited (the "Company")

 

UNAUDITED STATEMENT OF COMPREHENSIVE INCOME

for the period ended 31 December 2010

 


Notes

1 Jul 2010 to

31 Dec 2010

GBP


1 Jul 2009 to

31 Dec 2009

GBP






Net movement in unrealised appreciation on





investments

5

931,255


4,258,506






Unrealised depreciation on value of Put Option


4,551,164


4,989,535






Operating expenses

2

(190,108)


(197,874)






Net gain for the period attributable to shareholders


5,292,311


9,050,167













Pence


Pence

Earnings per Share for the period

4

13.38


22.88

 

 

In arriving at the results for the financial period, all amounts above relate to continuing operations.

 

There is no other comprehensive income in the period

 

Reconciliation of earnings per Share for investment purposes to earnings per Share per the financial statements:

 


Pence


Pence

Earnings per Share for investment purposes

13.86


23.38

Adjustment to include expenses on an accruals basis

(0.48)


(0.50)

Earnings per Share per the financial statements

13.38


22.88

 

In accordance with International Financial Reporting Standards ("IFRS"), expenses should be attributed to the period to which they relate.  The adjustment to expenses to reflect the application of this accruals basis reduces the earnings per Share of the Company by 0.48 pence.

 

The earnings per Share for investment purposes represents the earnings per Share attributable to Shareholders in accordance with the Prospectus, which recognises all expenses of the Company up to and including the date that the redemption proceeds becomes payable.


Close European Accelerated Fund Limited (the "Company")

 

UNAUDITED STATEMENT OF FINANCIAL POSITION

as at 31 December 2010

 


Notes

31 Dec 2010

GBP


30 Jun 2010

GBP

NON-CURRENT ASSETS










Unquoted financial assets designated as at fair value





through profit or loss

5

-


30,372,072






CURRENT ASSETS










Unquoted financial assets designated as at fair value





through profit or loss

5

31,303,327


-

Receivables

6

93,651


165,957

Cash and cash equivalents


246,006


373,942








31,642,984


539,899






CURRENT LIABILITIES










Payables - due within one year

7

1,221,874


16,335








1,221,874


16,335

 

 





NET CURRENT ASSETS


30,421,110


523,564






TOTAL ASSETS LESS CURRENT LIABILITIES


30,421,110


30,895,636

(excluding net assets attributable to shareholders)










Payables - due after one year (excluding net assets





attributable to shareholders)

7

-


5,766,837






NET ASSETS ATTRIBUTABLE TO SHAREHOLDERS


30,421,110


25,128,799






SHARES IN ISSUE


39,550,000


39,550,000








Pence


Pence

NAV PER SHARE


76.92


63.54

 

Reconciliation of NAV per Share for investment purposes to NAV per Share per the financial statements:

 



31 Dec 2010

 


30 Jun 2010

 

 


Pence


Pence

NAV per Share for investment purposes

76.07


62.21

Adjustment to include expenses on an accruals basis

0.85


1.33

NAV per Share per the financial statements

76.92


63.54

 

In accordance with IFRS, expenses should be attributed to the period to which they relate.  The adjustment to expenses to reflect the application of this accruals basis increases the NAV per Share of the Company by 0.85 pence.

 

The NAV per Share for investment purposes represents the NAV per Share attributable to Shareholders in accordance with the Prospectus, which recognises all expenses of the Company up to and including the date that the redemption proceeds becomes payable.

 

The financial statements were approved by the Board of Directors on 14 February 2011 and are signed on its behalf by:

Charles Tracy                                                    Peter Niven                                                       

Director                                                             Director


Close European Accelerated Fund Limited (the "Company")

 

UNAUDITED STATEMENT OF CASH FLOWS

for the period ended 31 December 2010

 


1 Jul 2010

to 31 Dec 2010

GBP


1 Jul 2009

to 31 Dec 2009

GBP

Operating activities








Net gain for the period attributable to shareholders

5,292,311


9,050,167

Less Unrealised appreciation on investments

(931,255)


(4,258,506)

Less: Unrealised depreciation on value of Put Option

(4,551,164)


(4,989,535)

Less: Interest received

(512)


(193)

(Decrease) / increase in accrued expenses

(10,134)


6,674

Decrease in prepayments and accrued income

72,306


73,807





Net cash outflow from operating activities

(128,448)


(117,586)





Investing activities








Interest received

512


193





Net cash inflow from investing activities

512


193





Cash and cash equivalents at beginning of period

373,942


616,104





Decrease in cash and cash equivalents

(127,936)


(117,393)





Cash and cash equivalents at end of period

246,006


498,711

 


Close European Accelerated Fund Limited (the "Company")

 

UNAUDITED STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO SHAREHOLDERS

for the period ended 31 December 2010

 

 

 


Share Capital

GBP


Share Premium

GBP


Accumulated

Losses

GBP


 

Total

GBP









Balance as at 1 July 2010

3,957


39,812,295


(14,687,453)


25,128,799









Net gain for the period








attributable to shareholders

-


-


5,292,311


5,292,311









Balance as at 31 December








2010

3,957


39,812,295


(9,395,142)


30,421,110

 

 

 


Share Capital

GBP


Share Premium

GBP


Accumulated

Losses

GBP


 

Total

GBP









Balance as at 1 July 2009

3,957


39,812,295


(21,023,975)


18,792,277









Net gain for the period








attributable to shareholders

-


-


6,336,522


6,336,522









Balance as at 30 June 2010

3,957


39,812,295


(14,687,453)


25,128,799

 


Close European Accelerated Fund Limited (the "Company")

 

UNAUDITED NOTES TO THE FINANCIAL STATEMENTS

as at 31 December 2010

 

1          ACCOUNTING POLICIES

 

(a)        Basis of Preparation

The financial statements have been prepared in conformity with IFRS which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB") and International Financial Reporting Interpretations Committee ("IFRIC") and applicable Guernsey law.  As the Company's participating Shares are due for redemption within the next twelve months, the financial statements have been prepared on a realisable value basis. The directors do not anticipate costs of liquidation to be material. Such costs will be borne out of the Expense Provision described in note 8 to the financial statements.

 

The following Standards or Interpretations that are expected to affect the Company have been issued but not yet adopted by the Company as shown below.  Other Standards or Interpretations issued by the IASB and the IFRIC are not expected to affect the Company:

 

IFRS 7 Financial Instruments Disclosures effective for annual periods beginning on or after 1 July 2011.

 

IFRS 9 Financial Instruments Classification and Measurement effective for annual periods beginning on or after 1 January 2013.

 

IFRS 24 Related Party Disclosures effective for annual periods beginning on or after 1 January 2011.

 

The directors have considered the above and are of the opinion that the above Standards and Interpretations are not expected to have an impact on the Company's financial statements except for the presentation of additional disclosures and changes to the presentation of components of the financial statements.  These items will be applied in the first financial period for which they are required.

 

(b)        Taxation

The Company has been granted exemption under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 from Guernsey Income Tax, and is charged an annual fee of £600.

 

(c)        Expenses

All expenses are accounted for on an accruals basis.

 

(d)        Debt Issue Costs

The debt issue costs incurred amounted to £810,000 on the initial share issue and a further £79,609 on the share issue on 21 September 2006.  Because the Company's participating shares are redeemable on or around 29 July 2011, they are required to be classified as debt instruments under IAS 32.  Consequently, issue costs are required to be amortised over the life of the instrument.

 

(e)        Interest Income

Interest income is accounted for on an accruals basis.

 

(f)         Cash and Cash Equivalents

Cash at bank and short term deposits which are held to maturity are carried at cost.  Cash and cash equivalents are defined as call deposits, short term deposits and highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value.  For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash and deposits at bank.

 

(g)        Investments

All investments and derivative financial instruments are classified as "at fair value through profit or loss".  Investments are initially recognised at cost, being the fair value of the consideration given, excluding transaction costs associated with the investment.  After initial recognition, investments are measured at fair value, with unrealised gains and losses on investments being recognised in the Statement of Comprehensive Income.  Fair value is the amount for which the financial instruments could be exchanged, or a liability settled, between knowledgeable willing parties in an arms length transaction.  Fair value also reflects the credit quality of the issuers of the financial instruments.

 

Valuations of the Company's investments are based on valuations provided to the Company by Future Value Consultants Limited ("the Valuer").  These valuations are intended to be an indication of the fair value of those investments, including an issuer's credit risk designed to reflect the best estimation of the price at which they could be sold, even though there is no guarantee that a willing buyer might be found if the Company chose to sell the relevant investment.

 

The indicative fair values of the investments are based on an approximation of the market level of the investments.  As the investments are not traded in an active market, the indicative fair value was determined by using valuation techniques.  The Valuer used a variety of methods and made assumptions that were based on market conditions existing at the reporting date.

 

Valuation techniques used may include the use of comparable recent arm's length transactions (where available), discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants.

 

Models use observable data, to the extent practicable.  However, areas such as credit risk, volatilities and correlations require the Valuer to make estimates.  Changes in assumptions about these factors could affect the reported fair value of financial instruments.

 

During the year ended 30 June 2009 two of the issuers of the Company's Debt Securities, Glitnir and Kaupthing, suffered severe financial difficulties and were placed into receivership.

 

Therefore for the purposes of valuation these investments had no Credit Default Swap spreads at the reporting date.  As a result, the Valuer used pricing information about comparable and publicly available debt securities issued by Glitnir and Kaupthing in order to estimate the effect of credit risk on the valuation of the debt securities.

 

In the previous interim financial statements, the directors exercised their judgement in the best interests of both shareholders and creditors to value these investments at £nil.  Based on new market data and recent announcements by both Glitnir and Kaupthing, for this period and the year ended 30 June 2010 it was the directors' opinion that the values ascribed to these two debt securities by the Valuer comply with the definition of fair value as defined by IFRS and are therefore more appropriate.

 

Different assumptions regarding these factors, combined with different valuation techniques and models used, could lead to different valuations of the financial instruments produced by different parties.  As at the reporting date, valuation data provided by J.P. Morgan Securities Limited, for the Debt Securities only, was £3,391,127 lower (Jun 2010: £1,980,757 lower) than that provided by the Valuer.  It should be noted however, that a value has been ascribed by the Valuer to the debt instruments issued by Glitnir and Kaupthing, but these debt securities have not been valued by J.P. Morgan Securities Limited.



 

 

The investments will be derecognised on their redemption date.  Gains and losses on the sale of investments will be taken to the Statement of Comprehensive Income.

 

(h)        Put Option

The Put Option was initially recognised at the fair value of the consideration received on the date of sale, and was included within payables falling due after more than one year.  After initial recognition, the Put Option is measured at fair value with unrealised gains and losses being recognised in the Statement of Comprehensive Income.  The Put Option will be derecognised at expiry on 26 July 2011, and has therefore been included within current liabilities.

 

(i)         Trade Date Accounting

All "regular way" purchases and sales of financial assets are recognised on the "trade date", i.e. the date that the entity commits to purchase or sell the asset.  Regular way purchases or sales are purchases or sales of financial assets that require delivery of the asset within the timeframe generally established by regulation or convention in the market place.

 

(j)         Critical accounting estimates and judgements

Management make critical accounting estimates and judgements concerning the future.  The resulting accounting estimates will, by definition, seldom equal the related actual results.  The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the financial period are outlined below:

 

            Fair value of derivative financial instruments

The Company has invested in a portfolio of Debt Securities containing embedded derivatives related to the Dow Jones EuroStoxx 50 Index.  As the investments are not traded in an active market, the fair value, based on valuations provided by the Valuer, was determined by using valuation techniques.  The Valuer used a variety of methods and made assumptions that were based on market conditions existing at the reporting date.

 

During the year ended 30 June 2009, the issuers of two of the Debt Securities held by the Company, being Glitnir and Kaupthing, suffered severe financial difficulties.

 

On 8 October 2008 the government of Iceland announced that "the Icelandic Financial Services Authority, Fjármálaeftirlitið (FME) had decided to take over the powers invested in Glitnir's shareholders meeting and Glitnir's Board of Directors". The FME has appointed a receivership committee which has assumed the role of the Board of Directors.  By law, the action of appointing a receivership committee does not have the effect of creating a default under any loan documents.

 

On 9 October 2008, the Icelandic FME announced it had taken control of Kaupthing under powers granted by the Icelandic Parliament and appointed a receivership committee.

 

The debt securities issued by Glitnir and Kaupthing held by the Company are senior unsecured debt. This means that they fall behind the Icelandic government, liquidators and any secured creditors in terms of repaying capital, but before or pari passu with all other creditors.  In the event of default, debt security holders would likely get back some money at the "recovery rate" but in a worst case scenario may receive nothing at all.  In practice the recovery rate is likely to be above zero, but it is not possible to assign a recovery rate to the notes at this point in time.

 

(k)        Segmental Reporting

In the opinion of the directors the Company is engaged in a single segment of business, being investment business in the United Kingdom.

 

(l)         Going Concern

After making enquiries, the directors have a reasonable expectation that the Company has adequate resources to continue in operational existence until the redemption of the Company's participating Shares, which is due to take place within the next twelve months.  The directors believe the Company is well placed to manage its business risks successfully despite the current economic climate.  Accordingly, the directors have adopted the going concern basis in preparing the financial information.

 

2

OPERATING EXPENSES






1 Jul 2010

to 31 Dec 2010

GBP


1 Jul 2009

to 31 Dec 2009

GBP







Amortisation of debt issue costs

76,304


76,304


Investment management fees (1)

70,251


70,251


Administration fees

11,090


11,090


Directors' remuneration

7,500


7,500


Registration fees

3,477


3,914


Directors' & Officers' Insurance

4,267


3,960


Audit fees

-


4,000


Annual fees

13,186


12,200


Other operating expenses

4,545


8,848








190,620


198,067







Less: Interest earned on expense provision bank





account

(512)


(193)








190,108


197,874

 

(1) The Manager is entitled to receive a fee from the Company at an annual rate of 0.35% of the Initial Gross Proceeds.

 

3          DIRECTORS' REMUNERATION

 

The Prospectus provides that each director will be paid a fee of £5,000 per annum by the Company.  This remuneration will remain fixed over the life of the Company.

 

4          EARNINGS PER SHARE

 

The earnings per Share is based on the net gain for the period of £5,291,311 (2009: £9,050,167) and on 39,550,000 Shares (2009: 39,550,000 Shares), being the weighted average number of Shares in issue during the period.

 



 

 

5

INVESTMENTS



31 Dec 2010

GBP


30 Jun 2010

GBP


UNQUOTED FINANCIAL ASSETS DESIGNATED AT





FAIR VALUE THROUGH PROFIT OR LOSS










Portfolio cost

39,889,380


39,889,380







Unrealised depreciation on valuation brought forward

(9,517,308)


(12,850,827)







Unrealised appreciation on valuation for the period

931,255


3,333,519







Unrealised depreciation on valuation carried forward

(8,586,053)


(9,517,308)







Closing valuation

31,303,327


30,372,072

 

Valuations of investments are based on valuations provided by the Valuer.  The provided valuations were derived from proprietary models based upon well-recognised financial principles and reasonable estimates about relevant future market conditions using suitable inputs derived from market data such as interest rates, credit default swap spreads, foreign exchange and forward foreign exchange rates, Dow Jones EuroStoxx 50 Index levels and the implied volatilities of EuroStoxx options.

 

To comply with the definition of fair value as defined by IFRS, the Valuer was engaged to provide valuations of the investments, taking account of the current counterparty credit risk of the issuers of the Debt Securities held by the Company.

 

As detailed in note 1(g) and 1(j) to the financial statements and in respect of Glitnir and Kaupthing in this reporting period and in the year ended 30 June 2010 financial statements, the directors have used the valuations provided by the Valuer based on limited market price information on instruments judged by the Valuer to be reasonably comparable.  In the previous interim financial statements, the directors exercised their judgement in the best interest of both shareholders and creditors to value these two investments at £nil which valuations differ from the valuations provided by the Valuer.

 

The performance of the financial assets is based on the closing level of the Dow Jones EuroStoxx 50 Index on 29 July 2011.  If the Dow Jones EuroStoxx 50 Index closes above 3,302.98 the instruments are designed to give a return of five times the performance up to a maximum return of 67.5% of the capital.

 

Valuation data provided by the Valuer to the Company is provided for informational purposes only and does not represent an offer to buy or sell the Debt Securities by the Valuer or any other party. The valuations provided are an indication of market levels and do not imply that they can be sold at the valuation price.  They are based on assumptions and data the Valuer considers in its judgement reasonable, but an alternative valuer might arrive at different valuations for the same investments.

 

The Investments held by the Company have been classified as Level 2, except for the two investments in notes issued by Glitnir and Kaupthing, which have been classified as Level 3.  This is in accordance with the fair value hierarchy.

 



 

 

Details of the value of each classification are listed in the table below.  Values are based on the market value of the investment as at the reporting date:

 


Investments

31 Dec 2010

Market Value

GBP


30 Jun 2010

Market Value

GBP







Level 2

27,955,411


27,784,705


Level 3

3,347,916


2,587,367







Total

31,303,327


30,372,072

 

There have been no transfers between Level 2 and Level 3 of the fair value hierarchy during the period under review.

 

The following table shows a reconciliation of all the movements in the fair value of financial instruments categorised within Level 3 between the beginning and the end of the reporting period.

 



31 Dec 2010

 

Unquoted financial assets designated as at fair value through the profit or loss

 


30 Jun 2010

 

Unquoted financial assets designated as at fair value through the profit or loss

 


Level 3

GBP


GBP







Opening balance at 1 July

2,587,367


-







Total gains and losses recognised in





Statement of Comprehensive Income

760,549


2,587,367







Closing balance as 31 December

3,347,916


2,587,367

 

Unrealised gains and losses on investments are recognised in the Statement of Comprehensive Income.  There have been no sales, purchases or realised gains on the investments during the period under review.

 

6

RECEIVABLES



31 Dec 2010

GBP


30 Jun 2010

GBP




Prepayments

93,651


165,957








93,651


165,957

 



 

 

7

PAYABLES (amounts falling due within one year)



31 Dec 2010

GBP


30 Jun 2010

GBP




Accrued administration fees

1,868


1,808


Accrued registration fees

572


604


Accrued audit fees

-


8,500


Other accrued expenses

3,761


5,423


Expense provision

239,803


242,417


Less: Prepaid expense provision (see Note 8)

(239,803)


(242,417)








6,201


16,335

 


FINANCIAL LIABILITIES

31 Dec 2010

GBP


30 Jun 2010

GBP




Fair value of the Put Option

1,215,673


5,766,837








1,215,673


5,766,837

 

The performance of the Put Option is linked to the performance of the Dow Jones EuroStoxx 50 Index.  At an Index value of 3,302.98 or above at the close of business on 26 July 2011, or if the Index has never closed below 1,651.49 during the calculation period from 26 July 2005 to 26 July 2011, the Put Option will be worth £Nil at maturity.  If the Index has closed below 1,651.49 over the calculation period and the Index is still below 3,302.98 at 26 July 2011, the Put Option will be worth a percentage of the notional value, being £39,550,000, equivalent to the percentage fall in the level of the Dow Jones EuroStoxx 50 Index over the calculation period.

 

The Put Option is not exercisable until the maturity date of 26 July 2011.

 

The fair value of the Put Option is based on the valuation provided by the Valuer.  There is no active market regarding the Put Option.

 

J.P. Morgan Chase Bank N.A., in its capacity as the Put Option counterparty (the "Put Option Counterparty"), has security over the financial assets held by the Company for payment of any monies owed upon expiry or termination of the Put Option contract.

 

The proceeds from the sale of the Put Option were £3,292,880.

 

The Put Option written by the Company has been classified as Level 2.  This is in accordance with the fair value hierarchy.

 

Details of the value of each classification are listed in the table below.  Values are based on the market value of the financial instruments at the reporting date.

 


Put Option

31 Dec 2010

Market Value

GBP


30 Jun 2010

Market Value

GBP




Level 2

1,215,673


5,766,837

 

There have been no transfers between Level 2 and Level 3 of the fair value hierarchy during the period.



 

 

8

PAYABLES (amounts falling due after one year)



31 Dec 2010

GBP


30 Jun 2010

GBP




Expense provision

-


115,190


Less: Prepaid expense provision

-


(115,190)








-


-






 

The prepaid expense provision represents monies set aside to meet the on-going, annual and redemption expenses of the Company, as set out in the Prospectus.

 

If, at the Redemption Date, there is any surplus remaining from the expense provision (together with accrued interest thereon), this surplus will revert to the Manager.  In the event of redemption or repurchase of all of the Shares, or upon a winding-up of the Company, in each case prior to the Redemption Date, any balance of the expense provision (together with accrued interest thereon) other than the investment management fee will also revert to the Manager.

 

9

SHARE CAPITAL







Authorised

SHARES


GBP







Unclassified shares of 0.01p each

100,000,000


10,000


Management shares of £1.00 each

100


100










10,100

 

 


Issued

31 Dec 2010


30 Jun 2010







Participating shares - fully paid

39,550,000


39,550,000


Management shares - fully paid

2


2







Number of shares in issue

39,550,002


39,550,002

 


Issued Share Capital

31 Dec 2010

GBP


30 Jun 2010

GBP







Participating shares - fully paid

3,955


3,955


Management shares - fully paid

2


2








3,957


3,957

 

 


The issues of Participating Shares took place as follows:







Date of issue

Number

of Shares


Price per

Share Pence


Amount

Received GBP









27 July 2005

36,000,000


100.00


36,000,000


21 September 2006

3,550,000


107.50


3,816,250

 

The redemption proceeds for the Shares on a winding-up are detailed within this Report.

 

Shares are redeemable on or around 29 July 2011.  The Company is closed-ended and therefore shareholders have no right to request the Company to repurchase their Shares or to redeem them prior to the redemption date.  If the Company is wound up prior to the redemption date, shareholders will be entitled to the net asset value of the Shares on the winding up date.  No dividends will be paid on the Shares.

 

Management shares are not redeemable, do not carry any right to dividends and in a winding up rank only for a return of the amount of paid up capital after return of capital on Shares and nominal shares.  Given the immateriality of the management shares to the net assets of the Company, they have been included in net assets attributable to participating shareholders.

 

10

SHARE PREMIUM



31 Dec 2010

GBP


30 Jun 2010

GBP







Opening and closing balance

39,812,295


39,812,295

 

11         FINANCIAL INSTRUMENTS

 

The Company's main financial instruments comprise:

 

(a)        Cash and cash equivalents that arise directly from the Company's operations;

 

(b)        Debt securities whose performance is based on the performance of the Dow Jones EuroStoxx 50 Index.  Details of these investments are shown in the Schedule of Investments.

 

(c)        The Company has also sold a Put Option, whose performance is based on the Dow Jones EuroStoxx 50 Index.  Details of the Put Option contract are shown in Note 7.

 

12         FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

 

The main risks arising from the Company's financial instruments are market price risk, credit risk, liquidity risk, portfolio construction risk, interest rate risk and currency risk.  The Board regularly reviews and agrees policies for managing each of these risks and these are summarised below:

 

(a)        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.  The Manager actively monitors market prices and reports to the Board as to the appropriateness of the prices used for valuation purposes.  A list of investments held by the Company is shown in the Schedule of Investments.

 

            Details of the Company's Investment Objective and Policy are given within this Report.

 

Price sensitivity

The following details the Company's sensitivity to a 10% increase and decrease in the final market prices of its constituent financial assets and liabilities.

 

The final redemption value of the Shares is determined by reference to the level of the Dow Jones EuroStoxx 50 Index (the "Index") on 26 July 2011 and at that date, if the Index stands at 3,748.89 (the "Index Cap Level"), the maximum redemption entitlement of 167.5 pence per Share will have been reached; any further increase in the level of the Index will cause no further increase in the redemption entitlement.

 

On 31 December 2010 the Index stood at 2,792.82, a fall of 15.44% since the Start Date.

 

During the period from the Start Date to 31 December 2010 the Index had not closed below 1,651.49, being 50% of the Start Value.  As the Index would need to decline by more than 40.87% from its level as at 31 December 2010 for the redemption proceeds to be less than 100.0 pence per Share and further as the Index would need to rise by more than 25.50% as at the End Date for the redemption proceeds to be more than 100.0 pence per Share, as at 31 December 2010 the Company had no material sensitivity to either a 10% increase or decrease in the level of the Index, all provided that no counterparty defaults on its obligations to the Counterparty and no Index Barrier Breach.

 

Similarly, in the event of both Glitnir and Kaupthing defaulting and having a zero recovery rate and there being no insolvency of any other issuer of Debt Securities held by the Company or any other event of default or any unforeseen circumstances and no Index Barrier Breach,  the Index would need to decline by more than 40.87% from its level as at 31 December 2010 for the redemption proceeds to be less than 69.5  pence per Share and further the Index would need to rise by more than 25.50% as at the End Date for the redemption proceeds to be more than 69.5 pence per Share. Hence as at 31 December 2010 the Company had no material sensitivity to either a 10% increase or decrease in the level of the Index.

 

(b)        Credit Risk

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Company.

 

At the date of this report and at the reporting date, five of the seven issuers carried an investment grade credit rating.  The following table details the aggregate investment grade of the debt instruments in the portfolio based on the valuations of the investments at 31 December 2010 (30 June 2010 for the comparative period), as rated by Moody's Investor Services Inc. ("Moody's"):

 

Rating

14 February 2011

31 Dec 2010

30 Jun 2010





Aaa

0.00%

0.00%

0.00%

Aa

78.60%

78.60%

100.00%

A

21.40%

21.40%

0.00%

 

* Based on the value of the Company's investments at 31 December 2010.

 

The Board monitors credit risk and will consider further action if the credit rating of an issuer falls below A- or A3 as ranked by Standard & Poor's and Moody's respectively.

 

On 8 October 2008 and 9 October 2008 the credit ratings of Glitnir and Kaupthing respectively were downgraded to a speculative grade and were subsequently withdrawn, so that as at the date of signing, at the reporting date and in the comparative period these were not included in the table. Credit risk was mitigated at launch by the Company purchasing the Debt Securities from six different issuers.  At the time of purchase three of the issuers were rated by Moody's at grade Aa and the remaining three were rated by Moody's at grade A.  Following the additional issue of Shares in September 2006 the Company purchased a debt security that was rated by Moody's at grade Aa.

 

The credit risk on cash transactions and transactions involving derivative financial instruments is mitigated by transacting with counterparties that are regulated entities subject to prudential supervision, or with high credit ratings assigned by international credit rating agencies.

 

The Company's financial assets exposed to credit risk are as follows:

 



31 Dec 2010

GBP


30 Jun 2010

GBP







Unquoted financial assets designated as at fair





value through profit or loss

31,303,327


30,372,072







Receivables

93,651


165,957







Cash and cash equivalents

246,006


373,942








31,642,984


30,911,971

 

 

(c)        Liquidity Risk

Liquidity risk is the risk that the Company will encounter difficulty in realising assets or otherwise raising funds to meet financial commitments.  The Company's main financial commitments are its ongoing operating expenses and any cash settlement due to the Put Option Counterparty on the maturity of the Put Option, scheduled to occur on 26 July 2011.

 

Upon the issue of the Shares in July 2005 the Company created a cash reserve (the "Expense Provision") in the amount of 2.10% of the amount raised by the issue of the Shares (the "Initial Gross Proceeds") plus £440,000, such amount being estimated in the opinion of the directors upon the advice of the Administrator to be sufficient to meet the operating expenses reasonably expected to be incurred over the life of the Shares.  Upon the issue of additional Shares in September 2006 an additional 2.10% of the proceeds of that issue of additional Shares was set aside to cover the increase in the Manager's fee which resulted from that issue of additional Shares, all other expenses being either fixed for the life of the Company or deemed unlikely to increase materially as a result of this issue of additional Shares.

 

At each quarterly Board meeting and at the end of each financial period the directors review the Expense Provision against the expected future expenses (other than the Manager's fee) of the Company.  To the extent that the directors consider that the Expense Provision is less than 150 per cent of the expected future expenses of the Company (other than the Manager's fee), the directors may, having first consulted the Manager, at their discretion reduce the amount of investment management fees payable to the Manager (subject to a maximum reduction of 50 per cent) in order to re-establish the 150 per cent cover.

 

If at any time during the life of the Company, notwithstanding the arrangements summarised above, the Expense Provision is exhausted then, subject to the relevant excess expenses having been agreed by the Manager, the Manager will make good such shortfall from its own resources, subject to a maximum in each of the first five annual financial periods of 0.25 per cent of the Initial Gross Proceeds and in the last financial period preceding the Redemption Date, of a maximum amount of £100,000.  Should these expenses exceed this cap the return to Shareholders will be adversely impacted.  The directors do not anticipate that the expenses will exceed the Expense Provision.

 

 

The Euro Medium Term Notes (the "Debt Securities") purchased by the Company mature on 28 July 2011 (the "Maturity Date") and are due to be redeemed at their notional face value plus five times the performance increase between 26 July 2005 and 26 July 2011 in the EuroStoxx 50 Index, capped at an amount equal to 67.50% of the notional face value, so that the aggregate maturity proceeds are expected to be between £39,550,000 if the EuroStoxx 50 Index closes on 26 July 2011 at or below its starting value on 26 July 2005 of 3,302.98 and a maximum of £66,246,250 if the EuroStoxx closes at or above 3,748.89 on 26 July 2011, all provided that no counterparty defaults on its obligations to the Company.

 

Provided that none of the issuers of the Debt Securities defaults on its obligation to pay the maturity proceeds on the Maturity Date, the minimum maturity proceeds of £39,550,000 due are intended to satisfy the maximum payment due to be made by the Company to the Put Option Counterparty on the maturity of the Put Option of £39,550,000.

 

The directors and the Manager monitor the credit ratings of all issuers of the Debt Securities.  In the event of any downgrading in the long-term credit rating of any issuer below A- or A3, as determined by S&P and/or Moody's respectively, the Company may in its absolute discretion seek to sell the relevant Debt Securities to third party purchasers and to reinvest the proceeds in the purchase of debt securities of another issuer such that the new debt securities will replicate as closely as possible the terms and conditions of the original Debt Securities.  The directors will only seek to sell the relevant Debt Securities if they consider on the advice of the Manager that such would be in the best interest of the Company and its shareholders.  In the event of such sales, if the purchase of such Debt Securities is not possible, the directors may reinvest such proceeds as they see fit in investments which, in the opinion of the directors, as nearly as is practicable, replicate the investment characteristics of the Debt Securities sold and so that the proceeds are invested, as nearly as is practicable, in accordance with the Company's stated investment objective.  As at the date of signing, the reporting date and in the previous period, five of the seven issuers of the Debt Securities carried an investment grade credit rating.  Two of the seven issuers of the Debt Securities carried a speculative grade credit rating.

 

No assurance can be given that the Company will be able to sell the Debt Securities, for the reasons described above or on a winding-up of the Company, at a favourable price or at all.  Even if the Company is able to sell such Debt Securities, the sale of the Debt Securities may result in a lower return than would have been the case if the long term credit rating of the issuer of the relevant Debt Securities had not been downgraded and the original Debt Securities had been retained and were redeemed on the maturity date.

 

The table below details the residual contractual maturities of financial liabilities:

 


As at 31 December 2010

1-3 months

GBP


6-12 months

GBP


Over 1 year

GBP


Total

GBP











Accrued expenses

6,201


-


-


6,201


Derivative financial









instruments

-


1,215,673


-


1,215,673











Total

6,201


1,215,673


-


1,221,874

 

 


As at 30 June 2010

1-3 months

GBP


6-12 months

GBP


Over 1 year

GBP


Total

GBP











Accrued expenses

16,335


-


-


16,335


Derivative financial









instruments

-


-


5,766,837


5,766,837











Total

16,335


-


5,766,837


5,783,172

 

d)         Portfolio Construction Risk

            Portfolio construction risk arises when the intended balance or resultant effect of movements in value of assets and liabilities is disturbed because of some unintended external event.

 

            In the case of the Company's investment portfolio there is an intended balance between the aggregate nominal value of the debt instruments held and the nominal value of the Put Option and, if one or more of the debt instrument issuers were to default, in part or in total, there will not be a corresponding reduction in the value of the Put Option.  Thus, if such an issuer default did occur and there was an index barrier breach which caused the Put Option to take effect, the default would cause an acceleration in the reduction of the final redemption value of a Share such that it will fall to zero well before the index reaches nil.

 

            As disclosed in note 1(j) above, in October 2008, the FME took control of both Glitnir and Kaupthing and appointed a receivership committee in each.

 

            The debt securities issued by Glitnir and Kaupthing held by the Company are senior unsecured debt.  In the event of a default by Glitnir or Kaupthing, MTN holders would likely get back some money at the "recovery rate" rather than zero.  In practice the recovery rate is likely to be above zero, but it is not possible to assign a recovery rate to the notes at this point in time.

 

           

Although at the time of writing the situation remains unclear, the Manager and Board of directors consider it likely that Glitnir and Kaupthing may not pay in full on their obligations and in the worst case scenario may pay nothing at all.  It should also be noted that the timing and amount of recovery (if any) from Glitnir and Kaupthing debt securities is currently uncertain.  Therefore the redemption proceeds per Share per the Company's investment objective will not be known for some time after the scheduled end of the life of the Shares.

 

(e)        Interest Rate Risk

            The Company holds cash on fixed deposit, the return on which is subject to fluctuations in market interest rates.  All fixed deposits mature within three months.

 

The weighted average effective interest rate for cash and bank balances as at 31 December 2010 was 0.43% (June 2010: 0.34%).

 

None of the other assets or liabilities of the Company attract or incur interest.

 

Interest rate sensitivity

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair value of financial instruments.  Except for cash set aside to meet expenses, the Company's assets and liabilities are expected to be held until the Redemption Date.

 

If interest rates had been 100 basis points higher and all other variables were held constant, the Company's increase in net assets attributable for the period ended 31 December 2010 would have been £1,230 greater (Jun 2010: £3,739) due to an increase in the amount of interest receivable on the bank balances.

 

If interest rates had been 100 basis points lower and all other variables were held constant, the Company's net assets attributable for the period ended 31 December 2010 would have been £1,230 less (Jun 2010: £3,739) due to a decrease in the amount of interest receivable on the bank balances.

 

The Company's sensitivity to interest rates is lower in December 2010 than in June 2010 because of a decrease in the amount of cash balances.

 

(f)         Currency Risk

As both the Shares and the Debt Securities are Sterling-denominated, shareholders investing for Sterling returns will not be exposed to direct currency risk.  The value of the underlying securities comprising the Index may be affected by changes in the economic, political or social environment in Europe, as well as globally, including changes in exchange rates.

 

(g)        Capital Management

The investment objective of the Company is to provide shareholders, on the Redemption Date, with a payment which will comprise a capital amount of 100p per Share and a growth amount per Share equal to five times any percentage increase in the value of the Index (the "End Value") as at 26 July 2011 (the "End Date") relative to its value (the "Start Value") as at 26 July 2005 (the "Start Date"), such amount being expressed in pence and rounded down to the next half pence, subject to a maximum increase of 67.5 per cent of the issue price of 100 pence per Share.

 

The Company has an unlimited life but the Shares will be redeemed on or around 29 July 2011.  Until then the Company has a fixed capital.

 

(h)        Collateral

Under the terms of a Pledge Agreement dated 2 August 2005 and the amendment dated 18 September 2006 entered into between the Company and the Put Option Counterparty, the Company has pledged the Debt Securities, and all rights, title and interest therein, and any and all proceeds resulting from the sale or repayment of the Debt Securities as security for the Company's contingent liability under the Put Option sold to the Put Option Counterparty, further details of which are shown at Note 8.  The collateral is held by a custodian in a segregated account in Euroclear.  Where there is an event of default in respect of the Company under the Put Option, the Put Option Counterparty will be entitled to enforce its security over the Debt Securities.

 

13         RELATED PARTIES

 

Anson Fund Managers Limited is the Company's Administrator and Secretary, Anson Registrars Limited is the Company's Registrar, Transfer Agent and Paying Agent and Anson Administration (UK) Limited is the UK Transfer Agent.  John R Le Prevost is a director of Anson Fund Managers Limited, Anson Registrars Limited and Anson Administration (UK) Limited.  £14,567 (Dec 2009: £15,004) of costs were incurred by the Company with these related parties in the period, of which £2,440 (Jun 2010: £2,412) was due to these related parties as at 31 December 2010. 


Close European Accelerated Fund Limited (the "Company")

 

UNAUDITED SCHEDULE OF INVESTMENTS

as at 31 December 2010

 


NOMINAL


VALUATION


TOTAL NET

DEBT SECURITIES PORTFOLIO

HOLDINGS


GBP


ASSETS %







BNP Paribas 0% EMTN 28 July 2011

6,000,000


6,136,250


20.17%







Caixa Geral de Depositos 0% EMTN 28 July 2011

6,000,000


5,983,219


19.67%







Erste Bank 0% EMTN 28 July 2011

6,000,000


6,116,734


20.11%







Glitnir Banki HF 0% EMTN 28 July 2011

6,000,000


1,739,377


5.72%







Kaupthing Bank HF 0% EMTN 28 July 2011

6,000,000


1,608,539


5.29%







KBC IFIMA 0% EMTN 28 July 2011

6,000,000


6,106,309


20.07%







RBS 0% EMTN 28 July 2011

3,550,000


3,612,899


11.88%










31,303,327


102.91%

 

 

The Company has also sold a Put Option, details of which are shown below.

 


NOTIONAL


VALUATION




HOLDING


GBP









JPM EuroStoxx 50 Put Option expiring 28 July 2011

39,550,000


(1,215,673)





Close European Accelerated Fund Limited (the "Company")

 

UNAUDITED SCHEDULE OF INVESTMENTS

as at 30 June 2010

 


NOMINAL


VALUATION


TOTAL NET

DEBT SECURITIES PORTFOLIO

HOLDINGS


GBP


ASSETS %







BNP Paribas 0% EMTN 28 July 2011

6,000,000


6,116,022


24.34%







Caixa Geral de Depositos 0% EMTN 28 July 2011

6,000,000


5,891,769


23.45%







Erste Bank 0% EMTN 28 July 2011

6,000,000


6,080,125


24.20%







Glitnir Banki HF 0% EMTN 28 July 2011

6,000,000


986,606


3.93%







Kaupthing Bank HF 0% EMTN 28 July 2011

6,000,000


1,598,761


6.36%







KBC IFIMA 0% EMTN 28 July 2011

6,000,000


6,111,936


24.32%







RBS 0% EMTN 28 July 2011

3,550,000


3,584,853


14.27%










30,372,072


120.87%

 

 

The Company has also sold a Put Option, details of which are shown below.

 


NOTIONAL


VALUATION




HOLDING


GBP









JPM EuroStoxx 50 Put Option expiring 28 July 2011

39,550,000


(5,766,837)



 


Close European Accelerated Fund Limited (the "Company")

 

SHAREHOLDER INFORMATION

 

The Company's Participating Shares are listed on the London Stock Exchange.  Company announcements and daily market closing prices of Shares are available on Reuters, Bloomberg and on-line on the web.  The ISIN of the Shares is GB00B0DB8N84 and the London Stock Exchange mnemonic is CEAF.

 

SHARE DEALING

Shares may be dealt in directly through a stockbroker or professional adviser acting on an investor's behalf.  The buying and selling of shares may be settled through CREST.

 

SHAREHOLDER ENQUIRIES

The Company's registrar is Anson Registrars Limited in Guernsey and they can be contacted on 01481 711301.


Close European Accelerated Fund Limited (the "Company")

Registered in Guernsey No 43314

 

DIRECTORS AND SERVICE PROVIDERS

 

Directors

Charles Tracy (Chairman)

Peter Niven

John R Le Prevost

 

Manager

Close Investments Limited

(Authorised and Regulated by the Financial Services Authority)

10 Exchange Square

Primrose Street

London

England EC2A 2BY

Administrator and Secretary

Anson Fund Managers Limited

PO Box 405

Anson Place, Mill Court

La Charroterie

St Peter Port

Guernsey GY1 3GF



Principal Bankers

Royal Bank of Scotland International Limited

Royal Bank Place

1 Glategny Esplanade

St Peter Port

Guernsey  GY1 4BQ



Auditors

Saffery Champness

La Tonnelle House

Les Banques

St Sampson

Guernsey  GY1 3HS



Registrar, Transfer Agent

and Paying Agent

Anson Registrars Limited

PO Box 426

Anson Place

Mill Court, La Charroterie

St Peter Port

Guernsey  GY1 3WX

UK Transfer Agent

Anson Administration (UK) Limited    

3500 Parkway

Solent Business Park

Whiteley, Fareham

Hampshire

England  PO15 7AL

Corporate Broker

Matrix Corporate Capital LLP

One Vine Street, London

England, W1J 1EJ

Registered Office of the Company

Anson Place

Mill Court

La Charroterie

St Peter Port

Guernsey  GY1 1EJ

 


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