A copy of the Company's Annual Report will shortly be available on the Company's website (https://ncim.co.uk/cqs-new-city-high-yield-fund-ltd), on the National Storage Mechanism (https://data.fca.org.uk/#/nsm/nationalstoragemechanism) and will also be provided to those shareholders who have requested a printed or electronic copy

 

CQS NEW CITY HIGH YIELD FUND LIMITED

Annual Results Announcement

for the year ended 30 June 2023

 

NAV and share price total return2		12 months to 30 June 2023	12 months to 30 June 2022
NAV1		2.04%	2.04%
Ordinary share price		(0.68)%	1.21%
Capital values		As at 30 June 2023	As at 30 June 2022	% change
Total assets less current liabilities (with the exception of the bank loan facility)		£275.4m	£268.0m	2.76%
NAV per ordinary share1		45.83p	49.30p	(7.04)%
Share price (bid)3		46.60p	51.20p	(8.98)%
Revenue and dividends		12 months to 30 June 2023	12 months to 30 June 2022	% change
Revenue earnings per ordinary share2		4.51p	4.16p	8.41%
Annual dividends per ordinary share2		4.49p	4.48p	0.22%
Dividend cover2		1.00x	0.93x
Revenue reserve per ordinary share (after recognition of annual dividends)2		3.05p	3.26p
Dividend yield2		9.64%	8.75%
Premium2		1.68%	3.86%
Gearing2		11.81%	12.35%
Ongoing charges ratio2		1.16%	1.19%
Dividend history	Rate	xd date	Record date	Payment date
First interim 2023	1.00p	27 October 2022	28 October 2022	25 November 2022
Second interim 2023	1.00p	26 January 2023	27 January 2023	28 February 2023
Third interim 2023	1.00p	27 April 2023	28 April 2023	26 May 2023
Fourth interim 2023	1.49p	27 July 2023	28 July 2023	31 August 2023
Annual dividend per ordinary share	4.49p
First interim 2022	1.00p	28 October 2021	29 October 2021	30 November 2021
Second interim 2022	1.00p	27 January 2022	28 January 2022	25 February 2022
Third interim 2022	1.00p	28 April 2022	29 April 2022	27 May 2022
Fourth interim 2022	1.48p	28 July 2022	29 July 2022	26 August 2022
Annual dividend per ordinary share	4.48p

 

¹  The definition of the terms used can be found in the glossary below.

² A description of the Alternative Performance Measures ("APMs") used above and information on how they are calculated can be found below.

³ Source: Bloomberg

 

Statement from the Chair

 

Key Points

•      NAV total return of 2.04%

•      Ordinary share price total return decline of 0.68%

•      Dividend yield of 9.64%, based on dividends at an annualised rate of 4.49 pence and a share price of 46.60 pence as at 30 June 2023

•      Ordinary share price at a premium of 1.68% at 30 June 2023

•      £24,235,000 of equity issued during the year to 30 June 2023

•      Dividend cover of 1.00x

 

Investment and share price performance

The NAV total return of the Company for this financial period was a positive 2.04% (coincidentally the exact same level as the previous year), thanks to the dividends paid to Shareholders during the year. This outcome was despite a difficult background as rising inflation and interest rates worried investors in the high yield debt markets in which the Company mainly invests. Many investment trusts, particularly those with an income focus, were negatively impacted by this environment with premiums eroded and in many cases, wide discounts appearing. The Company was not immune and the share price premium declined but only modestly (from 3.86% at the close of the last financial year to 1.68% this year) which resulted in a slight fall in the share price total return of 0.68%. In these circumstances, I believe this is a commendable outcome, particularly as the Company's shares remained on a premium and we were able to continue issuing shares (see below). I also believe that the Company's longer term performance remains strong.

 

In the early part of the year under review, the UK debt market was rattled by the short lived "mini budget" which triggered an increase in UK Gilt yields to levels not seen in 15 years. Although they then fell back, investor concerns about the UK, particularly stubborn inflationary pressures, have subsequently pushed yields back up, nearly to the levels seen at the time of the mini budget. Furthermore, the rapid demise of Credit Suisse in March was an issue for the portfolio. The junior debt of Credit Suisse was written down to zero ahead of the Company's equity and this unusual turn of events destabilised the junior debt of banks and financial companies across the UK and Europe and led to bond prices of these instruments being written down. Although the Credit Suisse holding was small, the Company has a material position in other such instruments. The investment manager, Ian "Franco" Francis, gives more detail in his report and believes that these junior debt prices will recover. He discusses the financial year in his review below.

 

Earnings and dividends

Despite this difficult environment, I am pleased to report that the Company's revenue earnings per ordinary share were 4.51 pence for the year to 30 June 2023, which compares to 4.16 pence earned in the same period last year. This 8.41% increase was the result of the Investment Manager being able to take advantage of the decrease in prices to invest in more quality higher yielding bonds as interest rates rose. We also saw the repayment of previous arrears by several positions in the portfolio.

 

The Board decided to increase this year's dividend, albeit marginally, maintaining the Company's record of annual dividend increases which has been unbroken since 2007. The Company declared three interim dividends of 1.00 pence in respect of the period and one interim dividend of 1.49 pence since the year end. The aggregate payment of 4.49 pence per ordinary share represents a 0.22% increase on the 4.48 pence paid last year. It is pleasing to be able to report that this year's total dividend is covered by revenue earnings.

 

As things stand, the Board intends to follow the same pattern of dividend payments as declared last year and maintain or slightly increase the total level of dividends for the year. Based on an annual rate of 4.49 pence and a share price of 47.40 pence at the time of writing, this represents a dividend yield of 9.47%. As I stress in every report, the Board pays great attention to dividend payments as we understand how much shareholders value this aspect of the Company.

 

Gearing

The Company has a £45,000,000 loan facility with Scotiabank which is due to expire in December 2023. Out of this facility, £35,000,000 was drawn down as at 30 June 2023 and at the time of writing the Company has an effective gearing rate of 13.45%. As interest rates have risen, the cost of borrowing to gear has increased. The Board monitors this on a regular basis to judge whether the benefits of gearing outweigh these costs. At present, we believe that Shareholders will benefit from a modest but meaningful amount of gearing (a notable advantage of closed-ended funds compared to open-ended) and expects to maintain approximately this level of gearing during the next financial year.

 

Share issuance

Taking advantage of the premium rating that the market continued to attach to the Company's shares, £24,235,000 was raised from new and existing shareholders during the financial year, with 47,950,000 ordinary shares issued from the block listing facility. Shares were only issued when the Investment Manager was confident it could invest the additional funds favourably. As well as a modest increase in NAV from any issue of shares, the Board believes that over time, existing Shareholders will benefit from lower ongoing charges and greater liquidity in the Company's shares, all other things being equal.

 

Environmental, Social and Governance ("ESG") statement

The Board's intention is to invest responsibly and to consider the Company's broader impact on society and the environment. We believe the integration of ESG factors in the investment process is consistent with delivering sustainable attractive returns for Shareholders through deeper, more informed investment decisions. The Board has reviewed and agreed the ESG approach adopted by the Company and a summary of this is set out in the Company's Annual Financial Report and Financial Statements.

 

Outlook

With the majority of UK interest rate increases likely to be behind us and inflation showing some signs of moderation, the outlook for Sterling fixed interest securities appears more stable. Nevertheless, potential for turbulent events in the macro economic and geopolitical space remains and although the UK has managed to avoid a recession thus far, concerns linger. In his 'Outlook' report, your investment manager provides a bit more detail on what he is particularly watching. From a revenue perspective the Board maintains a positive outlook, anticipating strong revenue earnings and the ability to sustain the relatively high dividend levels appreciated by our shareholders.

 

Caroline Hitch

Chair

14 September 2023

 

Investment Manager's Review

 

Introduction

All our previously expressed fears about higher inflation and correspondingly higher interest rates came home to roost over the course of our last financial year to 30 June 2023. For a high yielding bond fund, higher interest rates are a mixed blessing. On one hand there are more opportunities to find quality investments in stocks and sectors that have previously been too difficult to invest in as yields have been lower. This has helped the revenue account and we have covered the dividend this year. On the other hand, higher rates put pressure on the operating abilities of companies in the portfolio which can lead to problems. We saw issues in the retail sector with our holding of Matalan Finance 9.5% 18-31/01/2024 and also in the banking sector where the troubles of Credit Suisse affected the portfolio. More details of that are in the portfolio review below. The Company raised new monies this year as we issued shares at a premium.  Proceeds have been invested into a wide range of sectors and the continuing diverse nature of the portfolio has meant that the overall NAV total return for the 12 months to 30 June 2023 is a positive one at a modest 2.04%.

 

Market and economic review

When I wrote the market review for the interim report six months ago, I noted that the period under review from 30 June 2022 to 31 December 2022 was one which most people would want to forget. The seemingly unending litany of woe - weak markets, higher inflation, unstable governments, crippling energy prices and rising interest rates were but a few of the horror stories we saw during the late Summer and Autumn of 2022. With a feeling of déjà vu, we have moved six months further on and it feels hard to be more positive - interest rates have continued to rise and are probably yet to peak in the UK, US and Europe. Inflation in the UK is starting to come down with the last reading at 6.80% but food price inflation remains stubbornly high. The bright spot in the UK has been the service sector which has seen consumer spending continue at elevated levels. Despite all the bad news, we saw some signs of stabilisation towards the end of the year and the forward-looking stock markets managed to eke out a positive return for the six months.

 

The bond markets had a very volatile year. UK 10-year gilts reached a 15 year high at 4.5% at the end of September on the back of former Prime Minister Liz Truss's growth plan which proposed billions of pounds in unfunded tax cuts, shooting up the country's risk premium. 10-year gilt yields then fell back to 3.7% at the end of December 2022 but have risen over the last six months as stubbornly high inflation and weak growth have worried international investors. At the time of writing the UK 10 year gilt yield is at 4.44%. This is an important measure for the bond market as companies wishing to raise money have to reference the gilt yield which pushes their interest costs up.

 

In the US, the economy appears to be proving more resilient to the effects of inflation. Nevertheless the US Federal Reserve has continued to raise interest rates to try and tame inflation. Whether this policy will work remains to be seen.  In Europe, interest rates have risen at a slower pace as EU policy makers worry about anaemic job growth.

 

Portfolio and revenue review

During the period from June to December 2022, there were several bonds called or repaid and we were able to invest the proceeds at higher coupon rates than we have done previously. Good examples of this would be the Barclays AT1 (Additional Tier 1 bond) 7.75% being rolled over into an 8.75% coupon and the Shawbrook Group 7.785% FRN (Floating Rate Note) being called and replaced with a 12.10% coupon. We also took the opportunity in September when sterling was weak to sell some of our US dollar denominated Bombardier 7.5% 2025 bonds and replaced them with more attractive UK and Euro bonds. The Company still has a meaningful exposure to the US$ with 19.09% of the portfolio investment in that currency and a further 13.79% in the Euro and other currencies.

 

There were two major disappointments in the portfolio to report. Firstly, Matalan Finance 9.5% 18-31/01/2024 underwent a refinancing of its various bonds and equities in early 2023 and unfortunately our position was reduced to zero. This reduced the NAV by 1.20%. Secondly, we had a small position in Credit Suisse 31/12/2049 FRN AT1 which was written to zero in March 2023 following a forced take-over of Credit Suisse by Union Bank of Switzerland ("UBS"). This affected the NAV by 0.30% but the forced write-down to zero ahead of equity holders was unprecedented and rocked the bond markets.  AT1 holdings are the junior debt of banks and financial institutions and are normally ranked higher than shareholder equity. The AT1 market is spooked at the possibility of being ranked lower than equity and caused the bond prices of these instruments to fall sharply. The Company's portfolio is exposed to around 18.00% in AT1 holdings in companies such as Barclays and Deutsche Bank and on average the prices of those securities have been marked down by between 5.00% and 10.50%. We believe these positions to be robust and will recover and regulators in the UK have taken pains to state that the situation that arose in Switzerland with Credit Suisse would not occur here. We have added to some of our investments at attractive prices.

 

New entries into the top 10 this year are Barclays Plc 22-15/12/2170 FRN in the global banking sector and Albion Financing 8.75% 21-15/04/2027 which is the financing company for Aggreko, a global provider of power and temperature control solutions.

 

For the year to 30 June 2023, the revenue account earnings were 4.51 pence compared to 4.16 pence for the same period last year. Earnings per share have improved as we have invested at slightly higher yields and received repayment of historic arrears from the REA preference shares we hold. It is noticeable that as markets settle around current levels, there are more opportunities to invest, particularly as UK Gilt yields have elevated which pushes up the coupons paid by companies when they issue debt instruments priced at a margin over the relevant UK Gilt. In our regular discussions with Shareholders, the revenue and dividends are topics of crucial importance and the ability of any portfolio company to pay its coupon or expected dividend is one of the major indicators we follow.

 

Outlook

The economic outlook for the UK will be affected by several factors in the months ahead. These include any continued rise in interest rates, how fast inflation continues to fall towards Government targets and whether the UK falls back into recession. Another factor we look at is the UK housing market, how resilient prices are over the next 12 months and whether the recent weakness is set to continue. Finally, as we approach the end of 2024, the prospect of the general election with a possible (at this time according to polls) change of Government makes us look at how policies could change.

 

Globally, a lot will depend on the world's two biggest economies, the USA and China. The USA economy is moving along nicely but there will be a lot of political factors to consider in the run up to the 2024 Presidential elections. The Chinese macro-economic picture looks horrible with major weakness in the property sector which is 30% of their GDP.

 

As regards markets affecting the Company, we believe that we are nearing the top of the interest rate cycle and that we will see a recovery in capital values of higher yielding bonds in the next year or so which would positively impact the ability of companies to refinance debt. But a word of caution: all of this can be affected by external influences.

 

Ian "Franco" Francis

New City Investment Managers

14 September 2023

 

Classification of Investment Portfolio

As at 30 June 2023

 

By currency	2023 Total investments %	2022 Total investments %
Sterling	67.12	62.16
US dollar	19.09	23.59
Euro	11.59	12.14
Swedish krona	1.69	1.52
Norwegian krone	0.35	0.40
Canadian dollar	0.09	0.12
Australian dollar	0.07	0.07
Total investments	100.00	100.00
By asset class	2023 Total investments %	2022 Total investments %
Fixed income securities1	82.80	81.14
Equity shares2	17.20	18.86
Total investments	100.00	100.00

¹Fixed income securities include fixed and floating rate securities, convertible securities and preference shares.

²Equity shares include investment funds.

 

Classification of Investment Portfolio by Sector

As at 30 June 2023

 

	2023 Total investments %	2022 Total investments %
Financials	44.21	36.88
Energy	21.47	21.82
Consumer staples	9.55	8.96
Consumer discretionary	6.98	4.91
Industrials	6.50	10.80
Information technology	6.22	10.10
Real estate	3.17	4.27
Materials	1.90	2.26
Total investments	100.00	100.00

 

Investment Portfolio

As at 30 June 2023

 

Company	Sector	Valuation £'000	Total investments %
Galaxy Finco Ltd 9.25% 31/07/2027	Financials	12,346	4.64
Co-Operative Fin 25/04/2029 FRN	Financials	11,952	4.49
Shawbrook Group 22-08/06/2171 FRN	Financials	11,917	4.48
Aggregated Micro 8% 17/10/2036	Energy	11,110	4.18
Virgin Money FRN PERP	Financials	10,811	4.06
REA Finance 8.75% 31/08/2025	Consumer staples	8,592	3.23
Stonegate Pub 8.25% 31/07/2025	Consumer discretionary	8,326	3.13
Barclays Plc 22-15/12/2170 FRN	Financials	8,262	3.11
Albion Financing 8.75% 21-15/04/2027	Industrials	7,724	2.90
Diversified Energy Co Plc	Energy	7,187	2.71
Top ten investments		98,227	36.93
Inspired Enterta 7.875% 21-01/06/2026	Information technology	7,021	2.64
Mangrove Luxco Ltd 7.775% 19-09/10/2025	Financials	6,792	2.55
Boparan Finance 7.625% 30/11/2025	Consumer staples	6,666	2.51
Just Group Plc 31/12/2059 FRN	Financials	6,605	2.48
Euronav NV	Energy	6,553	2.46
American Tanker 7.75% 02/07/2025	Energy	6,455	2.43
Azerion Holdings 7.25% 28/04/2024	Information technology	5,174	1.95
Transocean Inc 11.5% 20-30/01/2027	Energy	4,904	1.84
TVL Finance 9% 20-15/01/2025	Financials	4,884	1.84
VPC Specialty Lending Invest	Financials	4,636	1.73
Top twenty investments		157,917	59.36
Garfunkelux Hold 7.75% 20-01/11/2025	Financials	4,568	1.72
RL Finance No6 23-25/11/2171 FRN	Financials	4,417	1.66
Lloyds Banking 29/12/2049 FRN	Financials	4,211	1.58
M&G Plc	Financials	4,211	1.58
Arrow Bidco Llc 9.5% 15/03/2024	Consumer discretionary	4,197	1.58
Shamaran 12% 21-30/07/2025	Energy	4,063	1.53
Ithaca Energy N 9% 21-15/07/2026	Energy	4,014	1.51
REA Holdings Plc PREF	Consumer staples	3,986	1.50
Co-op Wholesale 7.5% 11-08/07/2026	Consumer staples	3,871	1.46
Enquest Plc 7% 15/10/2023	Energy	3,581	1.34
Top thirty investments		199,036	74.82
Stonegate Pub 8% 20-13/07/2025	Consumer discretionary	3,274	1.23
Phoenix Group Holdings Plc	Financials	3,191	1.20
Welltec A/S 9.5% 01/12/2022	Energy	3,191	1.20
Summer BC Holdco 9.25% 19-31/10/2027	Industrials	3,152	1.18
Deutsche Bank AG 30/05/2049 FRN	Financials	3,060	1.15
Channel Island Property Fund	Real estate	2,880	1.08
Coburn Resources 12% 20/03/2026	Materials	2,807	1.06
Barclays Plc 29/12/2049 FRN	Financials	2,703	1.02
Bidco Rely 23-12/05/2026 FRN	Financials	2,581	0.97
Booster Precisio 22-28/11/2026 SR	Industrials	2,576	0.97
Top forty investments		228,451	85.88
Doric Nimrod Air Three Ltd	Industrials	2,380	0.89
RM Infrastructure Income Plc	Financials	2,176	0.82
HDL Debenture 10.375% 93-31/07/2023	Real estate	2,100	0.79
First Quantum 7.5% 01/04/2025	Materials	2,052	0.77
Quilter Plc 23-18/04/2033 FRN	Financials	2,034	0.76
Tufton Oceanic Assets Ltd	Financials	1,894	0.71
Bluewater Hold 12% 22-10/11/2026	Energy	1,805	0.68
Gaming Innovation 11/06/2024 FRN	Information technology	1,797	0.68
NewRiver REIT plc	Real estate	1,655	0.62
Hipgnosis Songs Fund Ltd	Consumer discretionary	1,592	0.61
Top fifty investments		247,936	93.21
Greenfood AB 21-04/11/2025 FRN	Consumer staples	1,486	0.56
Kent Global Plc 10% 28/06/2026	Energy	1,363	0.51
Eurobank Ergasia 22-06/12/2032 Frn	Financials	1,343	0.50
Skill Bidco APS 23-02/03/2028 FRN	Industrials	1,231	0.46
Cabonline GR 22-19/04/2026 FRN	Information technology	1,223	0.46
Palace Capital Plc	Real estate	1,099	0.41
West Bromwich BS 18-20/08/2170	Financials	1,072	0.40
N0r5ke Viking 21-03/05/2024 FRN	Information technology	918	0.35
Independent Oil 20/09/2024 FRN	Energy	867	0.33
REA Trading 9.5% 21-30/06/2024	Consumer discretionary	863	0.33
Top sixty investments		259,401	97.52
Navigator Holdings 8% 10/09/2025	Energy	773	0.29
REA Holdings Plc 7.5% 30/06/2026	Consumer staples	732	0.28
Regional REIT Ltd	Real estate	693	0.26
Marex Group 22-30/12/2170 FRN	Financials	585	0.22
Hoist Finance AB 31/12/2060 FRN	Financials	548	0.21
Harbour Energy Plc	Energy	546	0.21
West Bromwich BS 11% 18-12/04/2038	Financials	454	0.17
Croma Security Solutions Group	Information technology	420	0.16
Secured Income Fund Plc	Financials	321	0.11
New Look Pik Facility16.5% 09/11/2025	Consumer discretionary	307	0.11
Top seventy investments		264,780	99.54
Other investments (38)		1,231	0.46
Total investments		266,011	100.00

 

Notes:
FRN - Floating Rate Note
PERP - Perpetual
PREF - Preference shares
REIT - Real Estate Investment Trust

 

Ten Largest Holdings

	Valuation 30 June 2022 £'000	Purchases £'000	Sales £'000	Revaluation gain/(loss) £'000	Valuation 30 June 2023 £'000
Galaxy Finco Ltd  9.25% 31/07/2027 A specialist provider of warranties for consumer electric products.	12,774	405	-	(833)	12,346
Co-Operative Finance 25/04/2029 FRN A retail and commercial bank in the United Kingdom.	8,616	2,979	-	357	11,952
Shawbrook Group 22-08/06/2171 FRN A holding company of Shawbrook Bank Limited, a specialist lending and savings bank serving consumers in the UK.	-	13,066	-	(1,149)	11,917
Aggregated Micro 8% 17/10/2036 A British company using small scale, established technologies to convert wood and waste into energy in the form of heat and electricity.	10,900	470	(279)	19	11,110
Virgin Money FRN PERP A British banking company concentrating on UK Retail and small and medium enterprises regional banking services.	12,188	-	-	(1,377)	10,811
REA Finance 8.75% 15-31/08/2025 Cultivator of oil palms in the Indonesian province of East Kalimantan and producer of crude palm oil and palm products from fruit harvested from oil palms.	8,592	-	-	-	8,592
Stonegate Pub 8.25% 20-31/07/2025 Operator of various formats ranging from high-street pubs and traditional country inns to local community pubs, student pubs and late-night bars and venues in the UK.	8,308	-	-	18	8,326
Barclays Plc 22-15/12/2170 FRN A global financial services provider engaged in retail banking, credit cards, wholesale banking, investment banking, wealth management and investment management services.	-	8,676	-	(414)	8,262
Albion Financing 8.75% 21-15/04/2027 A financing company for Aggreko which is a global provider of power and temperature control solutions to customers.	7,221	-	-	503	7,724
Diversified Energy Co Plc Energy Company focusing on US natural gas.	7,490	1,435	-	(1,738)	7,187
	76,089	27,031	(279)	(4,614)	98,227

 

Strategic Review

 

Introduction

This review is part of a Strategic Report being presented by the Company and is designed to provide information primarily about the Company's business and results for the year ended 30 June 2023. It should be read in conjunction with the Statement from the Chair and the Investment Manager's Review above, which give a detailed review of the investment activities for the year and look to the future.

 

Principal activity and status

The Company is a closed-ended investment company and was incorporated with limited liability in Jersey under the Companies (Jersey) Law 1991 on 17 January 2007, with registered number 95691. In addition, the Company constitutes and is regulated as a collective investment fund under the Collective Investment Funds (Jersey) Law 1988.

 

The Company's ordinary shares are listed on the Official List maintained by the Financial Conduct Authority ("FCA") and admitted to trading on the Main Market of the London Stock Exchange ("LSE").

 

Investment policy

The Company invests predominantly in fixed income securities, including, but not limited to, preference shares, loan stocks, corporate bonds (convertible and/or redeemable) and government stocks. The Company also invests in equities and other income yielding securities.

 

Exposure to higher yielding securities may also be obtained by investing in other closed-ended investment companies and open-ended collective investment schemes.

 

There are no defined limits on countries, size or sectors, therefore the Company may invest in companies regardless of country, size or sector and accordingly, the Company's portfolio is constructed without reference to the composition of any stock market index or benchmark.

 

The Company may, but is not obliged to, invest in derivatives, financial instruments, money market instruments and currencies for the purpose of efficient portfolio management.

 

There are no defined limits on listed securities and, accordingly, the Company may invest up to 100% of total assets in any particular type of listed security.

 

The Company may acquire securities that are unlisted or unquoted at the time of investment, but which are about to be convertible, at the option of the Company, into securities which are listed or traded on a stock exchange. The Company may continue to hold securities that cease to be listed or traded if the Investment Manager considers this appropriate. The Board has established a maximum investment limit in this regard of 10% (calculated at the time of any relevant investment) of the Company's total assets. In addition, the Company may invest up to 10% (calculated at the time of any relevant investment) of its total assets in other securities that are neither listed nor traded at the time of investment.

 

The Company will not invest more than 10% (calculated at the time of any relevant investment) of its total assets in other collective investment undertakings (open-ended or closed-ended).

 

The Board has established a maximum investment limit whereby, at the time of investment, the Company may not invest more than 5% of its total investments in the same investee company.

 

The Company uses gearing and the Board has set a current limit that gearing will not exceed 25% of Shareholders' funds at the time of borrowing. This limit is reviewed from time to time by the Board.

 

The Investment Manager expects that the Company's assets will normally be fully invested. However, during periods in which changes in economic circumstances, market conditions or other factors so warrant, the Company may reduce its exposure to securities and increase its positions in cash, money market instruments and derivative instruments in order to seek protection from stock market falls or volatility.

Investment approach

Investments are typically made in securities which the Investment Manager has identified as undervalued by the market and which it believes will generate above average income returns relative to their risk, thereby also generating the scope for capital appreciation. In particular, the Investment Manager seeks to generate capital growth by exploiting the opportunities presented by the fluctuating yield base of the market and from redemptions, conversions, reconstructions and take-overs.

 

Performance measurement and Key Performance Indicators ("KPIs")

The Board uses a number of performance measures to monitor and assess the Company's success in meeting its objectives and to measure its progress and performance. The KPIs are as follows:

 

·      Dividend yield and dividend cover

The Company pays four quarterly dividends each year and accordingly, the Board reviews the Company's dividend yield and dividend cover on a quarterly basis. For the year ended 30 June 2023, the Company's dividend yield was 9.64% (2022: 8.75%) based upon a share price of 46.60 pence (bid price) as at 30 June 2023 (2022: 51.20 pence) and its dividend cover was 1.00x (2022: 0.93x).

 

·      Revenue earnings and dividends per ordinary share

The Company has opted to follow the AIC Statement of Recommended Practice ("SORP") and in accordance with the provisions of the AIC SORP, distinguishes its profits derived from revenue and capital items. The Company declares and pays its dividend out of only the revenue profits of the Company. The revenue earnings, whether generated this year or in previous years and held in revenue reserves, represent the total available funds that the Directors are able to make a dividend payment from. The Board reviews revenue forecasts on a quarterly basis in order to determine the quarterly dividend. In respect of the current financial year, the Company declared dividends of 4.49 pence per ordinary share (2022: 4.48 pence) out of revenue earnings per ordinary share of 4.51 pence per ordinary share (2022: 4.16 pence).

·      Ongoing charges

The ongoing charges ratio represents the Company's management fee and all other operating expenses incurred by the Company expressed as a percentage of the average Shareholders' funds over the year. The Board regularly reviews the ongoing charges and monitors all Company expenses. The ongoing charges ratio for the year ended 30 June 2023 was 1.16% (2022: 1.19%).

 

The Board measures the Company's performance by reviewing the KPIs against their expectations of performance from their knowledge of the industry sector.

 

These KPIs fall within the definition of APMs under guidance issued by the European Securities and Markets Authority. Additional information explaining how these are calculated is set out in the APMs section below.

 

Going concern

The Company does not have a fixed winding-up date and therefore, unless Shareholders vote to wind-up the Company, Shareholders will only be able to realise their investment through the secondary market.

 

At each AGM of the Company, Shareholders are given the opportunity to vote on an ordinary resolution to continue the Company as an investment company. If any such resolution is not passed, the Board will put forward proposals at an extraordinary general meeting to either liquidate or otherwise reconstruct or reorganise the Company. Given the performance of the Company, input from the Company's major Shareholders and its Broker and considering that 98% of the Shareholder's votes at the last AGM held on 1 December 2022, were in favour of the continuation of the Company, the Board considers it likely that Shareholders will vote in favour of continuation at the forthcoming AGM.

 

The Company's existing loan facility as detailed below is due to expire on 17 December 2023 after which it is anticipated the Company will take out a new facility on comparable terms. After making enquiries of the Investment Manager and having considered the Company's investment objective, nature of the investment portfolio, loan facility, expenditure projections and impact of the current geo-political and market uncertainty on the Company, the Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the Financial Statements, notwithstanding that the Company is subject to an annual continuation vote as described above. 

 

 

Social, community, human rights, employee responsibilities and environmental policy

The Directors recognise that their first duty is to act in the best financial interests of the Company's Shareholders and to achieve good financial returns against acceptable levels of risk, in accordance with the objectives of the Company. In asking the Company's Investment Manager to deliver against these objectives, they have also requested that the Investment Manager take into account the broader social, ethical and environmental issues of companies within the Company's portfolio, acknowledging that companies failing to manage these issues adequately run a long-term risk to the sustainability of their businesses.

 

Greenhouse gas emissions

The Board recognises its impact on the environment, including greenhouse gas emissions, through the underlying portfolio companies which it invests in. The Board requested that ESG factors be incorporated into the Company's investment strategy and further details on ESG can be found in the Company's Annual Financial Report and Financial Statements.

 

Modern slavery

The Company would not fall into the scope of the UK Modern Slavery Act 2015 (as the Company does not have any turnover derived from goods and services) if it was incorporated in the UK. Furthermore, as a closed-ended investment company, the Company has a non-complex structure, no employees and its supply chain is considered to be low risk given that suppliers are typically professional advisers based in either the Channel Islands or the UK. Based on these factors, the Board determined that it is not necessary for the Company to make a slavery and human trafficking statement.

 

By Order of the Board

 

Caroline Hitch

Chair

14 September 2023

 

 

Statement of Directors' Responsibilities in respect of the Annual Report and Financial Statements

 

The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the Financial Statements in accordance with the International Financial Reporting Standards ("IFRS") as adopted by the EU and applicable law.

 

Under Companies (Jersey) Law 1991, the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing these Financial Statements, the Directors are required to:

 

·      select suitable accounting policies and then apply them consistently;

·      make judgements and estimates that are reasonable, relevant and reliable;

·      state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the Financial Statements;

·      assess the Company's ability to continue as a going concern, disclosing, as applicable, matters relating to going concern; and

·      use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the Financial Statements comply with Companies (Jersey) Law, 1991. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. The Financial Statements are published on the www.ncim.co.uk website, which is a website maintained by the Company's Investment Manager. Legislation in Jersey governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.

 

Responsibility statement of the Directors in respect of the Annual Financial Report

We confirm that to the best of our knowledge:

 

·      the Financial Statements, prepared in accordance with the IFRS as adopted by the EU, give a true and fair and balanced view of the assets, liabilities, financial position and profit or loss of the Company; and

 

·      the Strategic Report and Directors' Report include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that the Company faces.

 

We consider the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's position and performance, business model and strategy.

 

On behalf of the Board

 

Caroline Hitch

Chair

14 September 2023

 

 

Statement of Comprehensive Income

For the year ended 30 June 2023

 

		Year ended 30 June 2023			Year ended 30 June 2022
	Notes	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Net capital gains/(losses)
Losses on financial assets at fair value	9	-	(17,988)	(17,988)	-	(14,459)	(14,459)
Foreign exchange (loss)/gain1		-	(252)	(252)	-	61	61
Revenue
Investment income	2	26,229	-	26,229	22,362	-	22,362
Total Income		26,229	(18,240)	7,989	22,362	(14,398)	7,964
Expenses
Investment management fee	3	(1,591)	(530)	(2,121)	(1,595)	(531)	(2,126)
Other expenses	4	(647)	(89)	(736)	(772)	(75)	(847)
Total expenses		(2,238)	(619)	(2,857)	(2,367)	(606)	(2,973)
Profit/(loss) before finance income/(costs) and taxation		23,991	(18,859)	5,132	19,995	(15,004)	4,991
Finance income/(costs)
Interest income		124	-	124	1	-	1
Interest expense	5	(1,167)	(389)	(1,556)	(456)	(152)	(608)
Profit/(loss) before taxation		22,948	(19,248)	3,700	19,540	(15,156)	4,384
Irrecoverable withholding tax	6	(505)	-	(505)	(377)	-	(377)
Profit/(loss) after taxation and total comprehensive income/(loss)		22,443	(19,248)	3,195	19,163	(15,156)	4,007
Basic and diluted earnings/(losses) per ordinary share (pence)	8	4.51p	(3.87)p	0.64p	4.16p	(3.29)p	0.87p

 

¹ Excludes foreign exchange gains and losses on financial assets at fair value through profit and loss which are presented within losses on financial assets at fair value.

 

The total column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with IFRS as adopted by the EU (refer to note 1). The supplementary revenue return and capital return columns are both prepared under guidance published by the AIC.

 

There is no other comprehensive income as all income is recorded in the Statement of Comprehensive Income above.

 

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

 

No operations were acquired or discontinued in the year.

 

The accompanying notes below are an integral part of these Financial Statements.

 

Statement of Financial Position

As at 30 June 2023

 

	Notes	As at 30 June 2023 £'000	As at 30 June 2022 £'000
Non-current assets
Financial assets at fair value through profit or loss	9	266,011	263,393
Current assets
Debtors and other receivables	10	7,010	3,819
Cash and cash equivalents		6,597	3,985
		13,607	7,804
Total assets		279,618	271,197
Non-current liabilities
Bank loan	11	-	(33,000)
Current liabilities
Bank loan	11	(35,000)	-
Creditors and other payables	12	(4,187)	(3,211)
Total liabilities		(39,187)	(36,211)
Net asset value		240,431	234,986
Stated capital and reserves
Stated capital account	13	244,884	220,649
Special distributable reserve		50,385	50,385
Capital reserve		(70,858)	(51,610)
Revenue reserve		16,020	15,562
Equity Shareholders' funds		240,431	234,986
Net asset value per ordinary share (pence)	15	45.83p	49.30p

 

The Financial Statements were approved by the Board of Directors and authorised for issue on 14 September 2023 and were signed on its behalf by:

 

Caroline Hitch

Chair

14 September 2023

 

The accompanying notes below are an integral part of these Financial Statements.

 

Statement of Changes in Equity

For the year ended 30 June 2023

 

	Notes	Stated capital account1 £'000	Special distributable reserve2 £'000	Capital reserve1 £'000	Revenue reserve3 £'000	Total   £'000
At 1 July 2022		220,649	50,385	(51,610)	15,562	234,986
Total comprehensive  income for the year:
Profit/(loss) for the year		-	-	(19,248)	22,443	3,195
Transactions with owners recognised directly in equity:
Dividends paid	7	-	-	-	(21,985)	(21,985)
Net proceeds from issue of shares	13	24,235	-	-	-	24,235
At 30 June 2023		244,884	50,385	(70,858)	16,020	240,431

 

For the year ended 30 June 2022

 

	Notes	Stated capital account1 £'000	Special distributable reserve2 £'000	Capital reserve1 £'000	Revenue reserve3 £'000	Total   £'000
At 1 July 2021		203,416	50,385	(36,454)	16,831	234,178
Total comprehensive  income for the year:
Profit/(loss) for the year		-	-	(15,156)	19,163	4,007
Transactions with owners recognised directly in equity:
Dividends paid	7	-	-	-	(20,432)	(20,432)
Net proceeds from issue of shares	13	17,233	-	-	-	17,233
At 30 June 2022		220,649	50,385	(51,610)	15,562	234,986

¹ Following a change in Companies (Jersey) Law 1991 effective 27 June 2008, dividends can be paid out of any capital account of the Company subject to certain solvency restrictions. However, it is the Company's policy to account for revenue items and pay dividends, drawing where necessary from a separate revenue reserve.

 

² The balance on the special distributable reserve of £50,385,000 (2022: £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 ordinary shares, the payment of dividends and the payment of preliminary expenses.

 

³ The balance on the revenue reserve of £16,020,000 (2022: £15,562,000) is available for paying dividends.

 

The accompanying notes below are an integral part of these Financial Statements.

 

Cash Flow Statement  

For the year ended 30 June 2023

 

	Notes	Year ended 30 June 2023 £'000	Year ended 30 June 2022 £'000
Operating activities
Profit before taxation1		3,700	4,384
Adjustments to reconcile profit before taxation to net cash flows:
Realised losses/(gains) on financial assets at fair value through profit or loss	9	1,273	(3,631)
Unrealised losses on financial assets at fair value through profit or loss	9	16,715	18,090
Effective interest adjustment	9	(243)	(154)
Foreign exchange loss/(gain)		252	(61)
Finance costs1		1,432	607
Purchase of financial assets at fair value through profit or loss2		(77,242)	(110,433)
Proceeds from sale of financial assets at fair value through profit or loss3		57,170	85,833
Changes in working capital
Increase in other receivables		(3,191)	(508)
Increase in other payables		657	2,266
Irrecoverable withholding tax paid		(505)	(377)
Net cash generated from/(used in) operating activities		18	(3,984)
Financing activities
Dividends paid	7	(21,985)	(20,432)
Drawdown of bank loan	11	2,000	-
Finance costs		(1,404)	(595)
Proceeds from issuance of ordinary shares4	13	24,235	17,508
Net cash generated from/(used in) financing activities		2,846	(3,519)
Increase/(decrease) in cash and cash equivalents		2,864	(7,503)
Cash and cash equivalents at the start of the year		3,985	11,427
Exchange (loss)/gain		(252)	61
Cash and cash equivalents at the end of the year		6,597	3,985

 

¹ For the comparative year, in accordance with IAS 7 Statement of Cash Flows, the Cash Flow Statement has been re-presented to start with 'profit before taxation' of £4,384,000 instead of 'profit before finance income/costs and taxation' of £4,991,000. Subsequently, 'finance costs' of £607,000 have been added under 'Adjustments to reconcile profit before taxation to net cash flows'.

Included within profit before taxation is dividend income of £4,964,000 (2022: £3,684,000) and interest income of £21,265,000 (2022: £18,678,000).

² Amounts due to brokers as at 30 June 2023 relating to purchases of financial assets at fair value through profit amounted to £904,000 (2022: £613,000).

³ Amounts due from brokers as at 30 June 2023 relating to sales of financial assets at fair value through profit amounted to £nil (2022: £nil).

⁴ Amounts due on new share issuance not yet received as at 30 June 2023 amounted to £nil (2022: £nil).

 

The accompanying notes below are an integral part of these Financial Statements.

 

Notes to the Financial Statements

 

1 Accounting Policies

(a) Basis of accounting

These Financial Statements have been prepared in accordance with IFRS as adopted by the EU and in accordance with the guidance set out in the SORP: Financial Statements of Investment Trust Companies and Venture Capital Trusts issued by the AIC in November 2014 and updated most recently in July 2022 with consequential amendments. Notwithstanding that the Company is not an investment trust company, given the purpose of the Company and certain similar characteristics, the Company has chosen to follow the guidance set out in the SORP where it is consistent with the requirements of IFRS.

 

The functional and reporting currency of the Company is pound sterling because that is the primary economic environment in which the Company operates. The Financial Statements and notes are presented in pound sterling and are rounded to the nearest thousand except where otherwise indicated.

 

The Financial Statements have been prepared on the historical cost basis, except that investments are stated at fair value and categorised as financial assets at fair value through profit or loss.

 

Going concern

At each AGM of the Company, Shareholders are given the opportunity to vote on an ordinary resolution to continue the Company as an investment company. If any such resolution is not passed, the Board will put forward proposals at an extraordinary general meeting to liquidate or otherwise reconstruct or reorganise the Company. Given the performance of the Company, input from the Company's major Shareholders and its Broker and considering that 98% of the Shareholder's votes at the last AGM held on 1 December 2022, were in favour of the continuation of the Company, the Board considers it likely that Shareholders will vote in favour of continuation at the forthcoming AGM.

 

The Company's existing loan facility as detailed below, is of an amount of up to £45,000,000 and is due to mature on 17 December 2023 after which it is anticipated the Company will take out a new facility on comparable terms. After making enquiries of the Investment Manager and having considered the Company's investment objective, nature of the investment portfolio, loan facility, expenditure projections and the impact of the current geo-political and market uncertainty on the Company, the Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors continue to adopt the going concern basis in preparing the Financial Statements, notwithstanding that the Company is subject to an annual continuation vote as described above. 

 

Accounting developments

Standards and amendments to existing standards effective in current year

There were no new standards, amendments or interpretations that are effective for the financial year beginning 1 July 2022 which the Directors consider to have a material impact on the Financial Statements of the Company.

 

Standards and amendments becoming effective in future periods

The following standards become effective in future accounting periods and have not been adopted by the Company:

 

Standards	Effective for periods beginning on or after
·      IFRS 17 Insurance Contracts	1 January 2023
·      Amendments to IFRS 17	1 January 2023
·      Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2)	1 January 2023
·      Definition of Accounting Estimate (Amendments to IAS 8)	1 January 2023
·      Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction - Amendments to IAS 12 Income Taxes	1 January 2023
·      Initial Application of IFRS 17 and IFRS 9 - Comparative Information (Amendments to IFRS 17)	1 January 2023
·      Classification of liabilities as current or non-current (Amendments to IAS 1)	1 January 2024
·      Lease Liability in a Sale and Leaseback (Amendments to IFRS 16)	1 January 2024
·      Non-current Liabilities with Covenants (Amendments to IAS 1)	1 January 2024
·      Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)	Optional

 

The Directors believe that the application of these amendments and interpretations will not materially impact the Company's Financial Statements when they become effective.

 

Critical accounting estimates and judgements

The preparation of the Financial Statements necessarily requires the exercise of judgement both in application of accounting policies which are set out below and in the selection of assumptions used in the calculation of estimates. These estimates and judgements are reviewed on an ongoing basis and are continually evaluated based on historical experience and other factors. However, actual results may differ from these estimates.

 

The valuation of financial assets involves estimation and judgements. The major part of the Company's financial assets is its financial assets held at fair value through profit or loss which are valued by reference to listed and quoted bid prices, however some of these financial assets are thinly traded. Such financial assets are best valued by reference to current market price quotes provided by independent brokers. The Directors may overlay such prices with situation specific adjustments including (a) taking a second independent opinion on a specific investment, or (ii) reducing the value to a net present value, to reflect the likely time to be taken to realise a stock which the Company is actively looking to sell. The outturn is reflected in the valuations of investments as set out in note 22 to the Financial Statements.

 

Financial assets which are not listed or where trading in the securities of an investee company is suspended are valued at the Board's estimate of fair value in accordance with International Private Equity and Venture Capital valuation guidance. Unquoted financial assets are valued by the Directors on the basis of all the information available to them at the time of valuation. This includes a review of the financial and trading information of the investee company, covenant compliance, ability to pay the interest due and cash held. For convertible bonds this also includes consideration of their discounted cash flows and underlying equity value based on information provided by the Investment Manager.

 

There were no other significant accounting estimates or significant judgements in the current or previous year.

 

A summary of the principal accounting policies which have been applied to all periods presented in these Financial Statements is set out below.

 

(b) Financial assets

Financial assets which comprise equity shares, convertible bonds and fixed income securities, are classified as held at fair value through profit or loss as the Company's business model is not to hold these financial assets for the sole purposes of collecting contractual cash flows. In making this assessment, the Directors have given regard to the investment strategy of the Company, the fact that the performance of the portfolio is evaluated on a fair value basis and the fact that the Investment Manager is remunerated on a percentage of total assets.

 

Purchases or sales of financial assets are recognised/derecognised on the date the Company trades the investments. On initial recognition investments are measured at fair value and classified as fair value through profit or loss with any subsequent gain or loss, including any gain or loss arising from a change in exchange rates, recognised in the Statement of Comprehensive Income.

 

Financial assets held at fair value through profit or loss are valued in accordance with the policies described in the critical accounting estimates and judgements section above.

 

Financial assets also include the Company's cash and cash equivalents (comprising of cash held in current accounts and overdraft balances) and debtors and other receivables which are held at amortised cost using effective interest rate, less any impairment.

 

(c) Financial liabilities

Financial liabilities include amounts due to brokers, bank loan, interest on bank loan and other creditors which are held at amortised cost using the effective interest rate method. Financial liabilities are recognised initially at fair value, net of transaction costs incurred and are subsequently carried at amortised cost using the effective interest rate method. Financial liabilities are derecognised when the obligation specified in the contract is discharged, cancelled or expires.

 

(d) Income

Dividends receivable on equity shares (including preference shares) are recognised as income on the date that the related investments are marked ex-dividend. Dividends receivable on equity shares where no ex-dividend date is quoted are recognised as income when the Company's right to receive payment is established.

 

Dividends from overseas companies are shown gross of any non-recoverable withholding taxes which are disclosed separately in the Statement of Comprehensive Income.

 

Fixed returns on non-equity shares and debt securities (including preference shares) are recognised on a time apportioned basis so as to reflect the effective interest rate on those instruments. Other returns on non-equity shares are recognised when the right to the return is established.

 

Where the Company has elected to receive its dividends in the form of additional shares rather than cash, an amount equal to the cash dividend is recognised as income. Any excess in the value of the shares received over the amount of the cash dividend is recognised in the capital reserve.

 

(e) Expenses, including finance charges

All expenses are accounted for on an accruals basis. Expenses are charged through the revenue account except as follows:

-    expenses which are incidental to the acquisition of an investment are charged to the capital account;

-    expenses which are incidental to the disposal of an investment charged to the capital account;

-    the Company charges 25% of investment management fees and interest costs to capital, in line with the Board's expected long term return in the form of capital gains and income respectively from the investment portfolio of the Company. For further details refer to notes 3 and 5; and

-    expenses incurred in connection with the maintenance or enhancement of the value of the investments or for the long term benefit of the Company are charged to capital.

 

(f) Foreign currencies

Transactions denominated in foreign currencies are recorded in the functional currency at actual exchange rates at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the period end are reported in sterling at the rates of exchange prevailing at the period end. Exchange gains and losses on investments held at fair value through profit or loss are included in 'Gains or losses on investments held at fair value through profit or loss'. Exchange gains and losses on other balances are disclosed separately in the Statement of Comprehensive Income.

 

(g) Reserves

(i) Capital reserve. Following a change in Jersey Company law effective 27 June 2008, dividends can be paid out of any capital account of the Company subject to certain solvency restrictions. It is the Company's policy however to account for revenue items and pay dividends through a separate revenue reserve. The following are accounted for in the capital reserve:

·    gains and losses on the realisation of investments;

·    realised and unrealised exchange differences of a capital nature;

·    expenses and finance costs charged in accordance with the policies above; and

·    increases and decreases in the valuation of investments held at the period end.

 

(ii) Special distributable reserve. This reserve is treated as distributable profits available to be used for all purposes permitted by Jersey company law including the buying back of ordinary shares, the payment of dividends (see note 7) and the payment of preliminary expenses.

 

(iii) Revenue reserve. The net profit/(loss) and total comprehensive income/(loss) arising in the revenue column of the Statement of Comprehensive Income is added to or deducted from this reserve and is available for paying dividends.

 

(h) Share capital

Ordinary shares

The Company's ordinary shares are classified as equity based on the substance of the contractual arrangements and in accordance with the definition of equity instruments under International Accounting Standard ("IAS") 32. The proceeds from the issue of ordinary shares are recognised in the Statement of Changes in Equity, net of issue costs.

Treasury shares

When the Company purchases its ordinary shares to be held in treasury, the amount of the consideration paid, which includes directly attributable costs is recognised as a deduction from the stated capital account. When these shares are sold subsequently, the amount received is recognised as an increase in equity and the resulting surplus or deficit on the transaction is transferred to or from the stated capital account.

 

(i) Segmental information

The Company, holds a wide variety of different investments in a wide range of issues locating in different geographies and operating in different sectors. However, resources are allocated and the business is managed by the chief operating decision-makers, the Directors, on an aggregated basis. Strategic and financial management decisions are determined centrally by the Directors and, on this basis, the Company operates as a single investment management business and no segmental reporting is provided.

 

2 Investment income

	2023 £'000	2022 £'000
Income from financial assets at fair value through profit or loss1
Dividend income	4,964	3,684
Interest on fixed income securities2	21,265	18,678
Total income	26,229	22,362

¹ All investment income arises on financial assets valued at fair value through profit or loss.

² Fixed income securities include fixed and floating rate securities, convertible securities and preference shares.

 

3 Investment management fee

	2023 Revenue £'000	2023 Capital £'000	2023 Total £'000	2022 Revenue £'000	2022 Capital £'000	2022 Total £'000
Investment management fee	1,591	530	2,121	1,595	531	2,126

 

The Company's investment manager is CQS (UK) LLP.

 

As per the Investment Management Agreement dated 18 September 2019, the management fee is charged at a rate of 0.80% per annum on the Company's total assets (being total assets less current liabilities (other than bank borrowings and ignoring any taxation which is or may be payable by the Company)) up to £200,000,000, 0.70% per annum of total assets in excess of £200,000,000 and up to and including £300,000,000 and 0.60% per annum thereafter. The management fee is paid monthly in arrears.

                                                                                                           

The contract between the Company and the Investment Manager may be terminated by either party giving not less than 12 months' notice of termination.   

 

During the year ended 30 June 2023, investment management fees of £2,121,000 were incurred (2022: £2,126,000), of which £176,000 was payable at the year-end (2022: £173,000). Investment management fees have been allocated 75% to revenue and 25% to capital.      

 

4 Other expenses

	2023 Revenue £'000	2023 Capital £'000	2023 Total £'000	2022 Revenue £'000	2022 Capital £'000	2022 Total £'000
Secretarial and administration fees	206	-	206	207	-	207
Directors' fees	169	-	169	169	-	169
Auditors' remuneration for audit services1	51	-	51	48	-	48
Broker fees	30	-	30	30	-	30
Printing	18	-	18	8	-	8
Bank and custody (rebate)/charges	(53)	-	(53)	110	-	110
Registrars' fees	33	-	33	37	-	37
Depositary fees	45	-	45	45	-	45
Legal and professional fees	44	-	44	40	-	40
Other	104	89	193	78	75	153
	647	89	736	772	75	847

 

Directors' fees

For the year ended 30 June 2023, Directors' remuneration were as follows:

Chair £42,500

Audit Chair £36,500

Other £30,000

 

Directors' fees of £7,500 were accrued as at 30 June 2023 (2022: £7,500).

 

No pension contributions were payable in respect of any of the Directors and the Company does not have any employees.

 

¹Non-audit fees paid to the auditor                                                                                                      

There were no non-audit fees paid to the auditor during the year ended 30 June 2023 (2022: £nil).                                                                                                

5 Interest expense

	2023 Revenue £'000	2023 Capital £'000	2023 Total £'000	2022 Revenue £'000	2022 Capital £'000	2022 Total £'000
Interest expense	1,167	389	1,556	456	152	608

 

Interest expense and similar charges have been allocated 75% to revenue and 25% to capital as explained in note 1(e).

 

6 Irrecoverable withholding tax

The taxation charge for the year is comprised of:

	2023 Revenue £'000	2023 Capital £'000	2023 Total £'000	2022 Revenue £'000	2022 Capital £'000	2022 Total £'000
Irrecoverable withholding tax suffered	505	-	505	377	-	377

 

The taxation on profit differs from the theoretical expense that would apply on the Company's profit before taxation using the applicable tax rate in Jersey of 0% for the year ended 30 June 2023 (2022: 0%) as follows:

	2023 £'000	2022 £'000
Profit on ordinary activities before taxation	3,700	4,384
Theoretical tax expense at 0% (2022: 0%)	-	-
Effects of:
Foreign withholding tax	505	377
Current year revenue tax charge	505	377

 

7 Dividends

	2023 £'000	2022 £'000
Amounts recognised as distributions to equity holders in the year:
Dividends in respect of the year ended 30 June 2022
- Fourth interim dividend of 1.48p (2021: 1.47p) per ordinary share	7,054	6,557
Dividends in respect of the year ended 30 June 2023
- First interim dividend of 1.00p (2022: 1.00p) per ordinary share	4,815	4,552
- Second interim dividend of 1.00p (2022: 1.00p) per ordinary share	4,963	4,636
- Third interim dividend of 1.00p (2022: 1.00p) per ordinary share	5,153	4,687
	21,985	20,432

A fourth interim dividend in respect of the year ended 30 June 2023 of 1.49p per ordinary share was paid on 31 August 2023 to Shareholders on the register on 28 July 2023, having an ex-dividend date of 27 July 2023.

 

In accordance with IFRS, dividends paid to the Company's Shareholders are recognised when they become payable on the ex-dividend date, consequently the fourth interim dividend has not been included as a liability in these Financial Statements and will be recognised in the period in which it becomes payable.

 

8 Basic and diluted earnings/(losses) per ordinary share

	2023 Revenue pence	2023 Capital pence	2023 Total pence	2022 Revenue pence	2022 Capital pence	2022 Total pence
Basic and diluted earnings/(losses) per ordinary share	4.51p	(3.87p)	0.64p	4.16p	(3.29)p	0.87p

 

The revenue earnings per ordinary share is based on the net profit after taxation of £22,443,000 (2022: £19,163,000) and the capital return per ordinary share is based on a net capital loss of £19,248,000 (2022: £15,156,000). Both the revenue and capital earnings per ordinary share is based on a weighted average of 497,695,146 (2022: 460,845,694) ordinary shares in issue throughout the year.                                                                                                                                                                                 

Total earnings per ordinary share reflects both revenue earnings and capital returns per ordinary share. The Company has not issued any instruments that could potentially dilute basic earnings per ordinary share in the future. Therefore, the Company's basic earnings per ordinary share is equivalent to its diluted earnings per ordinary share.

 

There have been no transactions involving the Company's ordinary shares between 1 July 2023 and 14 September 2023 other than those disclosed in note 24, which were issued at a premium to the 30 June 2023 NAV.

 

9 Financial assets at fair value through profit or loss

All financial assets are valued at fair value through profit or loss. Gains or losses arising from changes in the fair value of investments are included in the Statement of Comprehensive Income.

	2023 £'000	2022 £'000
Equity shares1	45,763	49,687
Fixed income securities2	220,248	213,706
	266,011	263,393

¹ Equity shares include investment funds.

² Fixed income securities include fixed and floating rate securities, convertible securities and preference shares.

 

	2023 £'000	2022 £'000
Opening valuation	263,393	257,467
Purchases at cost	77,533	106,064
Sales proceeds	(57,170)	(85,833)
Realised (losses)/gains on sales	(1,273)	3,631
Effective interest adjustment	243	154
Unrealised losses	(16,715)	(18,090)
Closing valuation	266,011	263,393

 

Losses on investments	2023 £'000	2022 £'000
Realised (losses)/gains1	(1,273)	3,631
Unrealised losses2	(16,715)	(18,090)
	(17,988)	(14,459)

¹ Realised (losses)/gains on financial assets at fair value through profit or loss is made up of gains of £6,030,000 (2022: 5,680,000) and losses of £7,303,000 (2022: 2,049,000).

² Unrealised losses on financial assets at fair value through profit or loss is made up of gains of £8,225,000 (2022: 14,225,000) and losses of £24,940,000 (2022: 32,315,000).          

 

10 Debtors and other receivables

	2023 £'000	2022 £'000
Accrued income	7,000	3,807
Prepayments and other debtors	10	12
	7,010	3,819

 

11 Bank loan

	2023 £'000	2022 £'000
Bank loan facility- opening balance	33,000	33,000
Drawdowns	2,000	-
Bank loan facility - closing balance	35,000	33,000

 

The Company has a short-term unsecured loan facility with Scotiabank up to a limit of £45,000,000 which is due to expire on 17 December 2023. At the start of the year, the Company had drawn down £33,000,000 from the facility and on 20 June 2023, it drew down a further £2,000,000. As at 30 June 2023, the drawn down amount of the facility was £35,000,000 (2022: £33,000,000).

 

As per the Seventh Amendment Agreement dated 17 December 2021, the terms of the loan facility are as follows:

·    the Agreement contains an option to increase the facility by a further £5,000,000 - no commitment fees are payable on the £5,000,000 until this option is exercised.

·    the interest on the loan would be a margin of 1.45% p.a plus a daily non-cumulative compounded Reference Rate (RFR).

·    the commitment fees would be 0.375% p.a on the daily Available Commitment if the utilised Commitment exceeds 50 per cent of the Commitment and 0.425% on the daily Available Commitment if the utilised Commitment is less than or equal to 50 per cent of the Commitment.

 

The following are the covenants for the facility held as at 30 June 2023:

·    the borrower shall not permit the adjusted asset coverage to be less than 4 to 1

·    the borrower shall not permit the NAV to be less than £95,000,000 at any time

·    the borrower shall maintain an additional adjusted asset coverage of at least 1.5 to 1 at all times

 

For the year ended 30 June 2023 and up until the date of this report, the Company has complied with all covenants of the loan facility.

 

The bank loan facility is a financial liability held at amortised cost.

 

12 Creditors and other payables

	2023 £'000	2022 £'000
Amounts due to brokers	904	613
Interest on bank loan facility	56	28
Other creditors	3,227	2,570
	4,187	3,211

 

13 Stated capital account

 

Authorised

The authorised share capital of the Company is represented by an unlimited number of ordinary shares of no par value.

 

Allotted, called up and fully-paid

	Number of ordinary shares	Amount received £'000	Share Issue Costs £'000	Share capital £'000
Total as at 1 July 2022	476,651,858			220,649
750,000 ordinary shares of no par value allotted on 4 August 2022 at 51.80p	750,000	388	(3)	385
500,000 ordinary shares of no par value allotted on 9 August 2022 at 52.00p	500,000	260	(2)	258
750,000 ordinary shares of no par value allotted on 16 August 2022 at 52.50p	750,000	394	(3)	391
500,000 ordinary shares of no par value allotted on 26 August 2022 at 53.00p	500,000	265	(2)	263
850,000 ordinary shares of no par value allotted on 31 August 2022 at 53.00p	850,000	450	(3)	447
500,000 ordinary shares of no par value allotted on 2 September 2022 at 53.16p	500,000	266	(2)	264
500,000 ordinary shares of no par value allotted on 15 September 2022 at 53.25p	500,000	266	(2)	264
500,000 ordinary shares of no par value allotted on 22 September 2022 at 53.30p	500,000	267	(2)	265
3,500,000 ordinary shares of no par value allotted on 1 November 2022 at 51.25p	3,500,000	1,794	(14)	1,780
500,000 ordinary shares of no par value allotted on 4 November 2022 at 51.50p	500,000	258	(3)	255
2,600,000 ordinary shares of no par value allotted on 8 November 2022 at 51.20p	2,600,000	1,331	(13)	1,318
500,000 ordinary shares of no par value allotted on 11 November 2022 at 51.30p	500,000	257	(3)	254
600,000 ordinary shares of no par value allotted on 15 November 2022 at 51.50p	600,000	309	(3)	306
750,000 ordinary shares of no par value allotted on 17 November 2022 at 51.60p	750,000	387	(4)	383
500,000 ordinary shares of no par value allotted on 24 November 2022 at 51.60p	500,000	258	(3)	255
950,000 ordinary shares of no par value allotted on 28 November 2022 at 51.60p	950,000	490	(5)	485
750,000 ordinary shares of no par value allotted on 1 December 2022 at 51.50p	750,000	386	(4)	382
500,000 ordinary shares of no par value allotted on 2 December 2022 at 51.40p	500,000	257	(3)	254
1,000,000 ordinary shares of no par value allotted on 5 December 2022 at 51.30p	1,000,000	513	(5)	508
1,350,000 ordinary shares of no par value allotted on 11 January 2023 at 53.40p	1,350,000	721	(5)	716
1,250,000 ordinary shares of no par value allotted on 16 January 2023 at 52.50p	1,250,000	656	(5)	651
4,700,000 ordinary shares of no par value allotted on 31 January 2023 at 51.00p	4,700,000	2,397	(18)	2,379
1,300,000 ordinary shares of no par value allotted on 3 February 2023 at 51.00p	1,300,000	663	(5)	658
2,750,000 ordinary shares of no par value allotted on 8 February 2023 at 51.00p	2,750,000	1,403	(11)	1,392
4,000,000 ordinary shares of no par value allotted on 15 February 2023 at 51.25p	4,000,000	2,050	(15)	2,035
2,500,000 ordinary shares of no par value allotted on 17 February 2023 at 51.20p	2,500,000	1,280	(10)	1,270
2,000,000 ordinary shares of no par value allotted on 13 March 2023 at 51.40p	2,000,000	1,028	(8)	1,020
750,000 ordinary shares of no par value allotted on 16 March 2023 at 51.20p	750,000	384	(4)	380
500,000 ordinary shares of no par value allotted on 28 March 2023 at 49.60p	500,000	248	(2)	246
500,000 ordinary shares of no par value allotted on 12 April 2023 at 49.80p	500,000	249	(2)	247
2,600,000 ordinary shares of no par value allotted on 3 May 2023 at 48.85p	2,600,000	1,270	(13)	1,257
500,000 ordinary shares of no par value allotted on 10 May 2023 at 48.85p	500,000	244	(2)	242
500,000 ordinary shares of no par value allotted on 12 May 2023 at 48.85p	500,000	244	(2)	242
750,000 ordinary shares of no par value allotted on 18 May 2023 at 48.70p	750,000	365	(4)	361
500,000 ordinary shares of no par value allotted on 23 May 2023 at 48.70p	500,000	243	(2)	241
500,000 ordinary shares of no par value allotted on 24 May 2023 at 48.80p	500,000	244	(2)	242
500,000 ordinary shares of no par value allotted on 25 May 2023 at 49.00p	500,000	245	(2)	243
2,500,000 ordinary shares of no par value allotted on 1 June 2023 at 48.90p	2,500,000	1,223	(12)	1,211
1,000,000 ordinary shares of no par value allotted on 6 June 2023 at 49.00p	1,000,000	490	(5)	485
Total as at 30 June 2023	524,601,858	24,443	(208)	244,884

 

The balance of shares left in Treasury at the year-end was nil (2022: nil shares).

 

On 22 May 2023, a block listing facility for 21,690,000 new shares was approved by the UK Listing Authority. This facility is used for the purposes of satisfying market demand.

 

Because the criteria in paragraphs 16c and 16d of IAS 32 Financial Instruments: Presentation have been met, the stated capital of the Company is classified as equity even though there is an annual continuation vote.

 

Ordinary shares issued are accounted for based on the associated trade date.

 

14 Reserves

The capital of the Company is managed in accordance with its investment policy, in pursuit of its investment objective, which is detailed above.

 

On 24 May 2007, the Royal Court of the Island of Jersey confirmed that the amount standing to the credit of the Company's stated capital account be reduced by 75% and was used to create the special distributable reserve in the Company's accounts. This reserve is treated as distributable profits available to be used for all purposes permitted by Jersey company law including the buying back of ordinary shares, the payment of dividends and the payment of preliminary expenses.

 

Capital management policies and procedures

The Board defines capital as financial resources available to the Company. The Company's capital as at 30 June 2023 comprises its stated capital, special distributable reserve, capital reserve and revenue reserve at a total of £240,431,000 (2022: £234,986,000).

 

The Company's capital management objectives are:

 

·    to ensure that the Company will be able to continue as a going concern; and

·    to maximise the capital return to its equity Shareholders through an appropriate balance of equity capital and debt.

 

The Board normally seeks to limit gearing to 25% of Shareholders' funds at the time of borrowing. The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes the nature and planned level of gearing, which takes account of the Investment Manager's views on the market and the extent to which revenue in excess of that which is required to be distributed should be retained. The Company has no externally imposed capital requirements.

 

The capital of the Company is managed in accordance with its investment policy detailed in the Strategic Review of the Company's Annual Financial Report and Financial Statements.

 

15 Net asset value per ordinary share

The NAV per ordinary share and the NAV attributable to the ordinary shares at the year-end calculated in accordance with their entitlements in the Articles of Association were as follows:

 

	2023	2022
NAV (£'000)	240,431	234,986
NAV per ordinary share (pence)	45.83p	49.30p

 

NAV per ordinary share has been calculated based on the share capital in issue as at year end. The issued share capital as at 30 June 2023 comprised of 524,601,858 ordinary shares (2022: 476,651,858).

 

16 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 and financial liabilities in pursuit of its investment objective. The Company uses flexible borrowings for short term purposes and to seek to enhance the returns to Shareholders, when considered appropriate by the Investment Manager.

 

Financial assets at fair value through profit or loss (see note 9) are held at fair value. For listed securities trading actively, fair value is considered to be equivalent to the most available recent bid price. Where listed securities are not trading actively, independent broker quotes are referenced to estimate fair value. For unlisted securities, fair value is determined by the Board using valuation techniques based on unobservable inputs, mainly using broker quotes. The fair value of other receivables, cash and cash equivalents and other payables is represented by their carrying value in the Statement of Financial Position shown above. These are short term financial assets and liabilities whose carrying value approximate fair value.    

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

 

(i)   market price risk, being the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices and comprises currency risk, interest rate risk and other price risk;

(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 bank may demand repayment of the loan and/or that the Company may not be able to liquidate quickly its investments.

 

The Company held the following categories of financial instruments as at 30 June 2023, all of which are held at amortised cost, other than financial assets at fair value through profit or loss, which are held at fair value. The Directors are of the opinion that for the financial instruments held at amortised cost, the carrying value approximates their fair value.

 

	2023 £'000	2022 £'000
Financial assets
Financial assets at fair value through profit or loss	266,011	263,393
Cash and cash equivalents	6,597	3,985
Accrued income	7,000	3,807
Financial liabilities
Amount due to brokers	(904)	(613)
Bank loan	(35,000)	(33,000)
Interest on bank loan facility	(56)	(28)
Other creditors	(3,227)	(2,570)

 

17 Market price risk

Market price risk (including other 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 Investment Manager's investment strategy is:

·      to select investments for their fundamental value. Stock selection is based on disciplined accounting, thorough market and sector analysis, with the emphasis on investments that will redeem in full at the end of their maturity date.

·      to ensure that 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.

·      to monitor market prices throughout the year and report to the Board, which meets regularly in order to consider investment strategy.

 

Investment and portfolio performance are discussed in the Investment Manager's Review and further information on the investment portfolio is set out above. These pages do not form part of the audited Financial Statements.

 

If the investment portfolio valuation fell 7.5% at 30 June 2023 (2022: fall of 7.5%), the impact on the profit or loss and the NAV would have been negative £19,951,000 (2022: negative £19,754,000). Due to the effect of gearing, the impact on the NAV per ordinary share would have been a decrease of 8.3% (2022: decrease of 8.4%). If the investment portfolio valuation rose by the same amount, the effect would have been equal and opposite. The calculations are based on the portfolio valuation at the Statement of Financial Position date and is not representative of the period as a whole and may not be reflective of future market conditions.

 

The Directors believe 7.5% is a relevant percentage based on average market volatility in recent years.                

 

18 Interest rate risk

The Company's financial assets and liabilities, with the exception of cash and cash equivalents (see below), that are subject to interest rate risk are detailed below.

 

	2023	2023	2023	2022	2022	2022
	£'000	Weighted average interest rate (%)	Weighted average period for which the rate is fixed (years)	£'000	Weighted average interest rate (%)	Weighted average period for which the rate is fixed (years)
Financial assets:
Fixed rate instruments & convertible securities	144,383	7.35	4.09	158,941	7.12	4.31
Floating rate notes	75,637	5.08	n/a	54,531	4.08	n/a
Preference shares	228	0.00	n/a	234	11.90	n/a
Financial liabilities:
Bank Loan	35,000	6.38	n/a	33,000	2.64	n/a

 

Financial assets

Fixed, floating rate 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.

 

Interest rates on fixed income instruments are fixed at the time of purchase, as the fixed coupon payments are known, as are the final redemption proceeds. Consequentially, if a fixed income instrument is held until its redemption date, the total return achieved is unaltered from its purchase date. However, over the life of a fixed income instrument the market price at any given time will depend on the market environment at that time. Therefore, a fixed income instrument sold before its redemption date is likely to have a different price to its purchase level and a profit or loss may be incurred.

 

Interest rates on floating rate instruments vary throughout the life of the instrument based on movements in the applicable underlying base rate. Consequentially, the total return achieved on these positions changes throughout the life of position. In addition, over the life of the financial instrument, the market price of such instruments will depend on the market environment at that time. Therefore, a floating rate instrument sold before its redemption date is likely to have a different price to its purchase level and a profit or loss may be incurred.

 

Cash and cash equivalents

When the Company retains cash balances they are held in floating rate deposit accounts. As at 30 June 2023, cash and cash equivalents included cash amount of £2,987,000 held in sterling (2022: £4,088,000) and £3,610,000 in a range of other currencies (2022: cash overdraft of £103,000). The benchmark rate which determines the interest payments received on sterling interest bearing cash balances is the UK bank base rate, which was 5.00% at 30 June 2023 (2022: 1.25%).

 

Financial liabilities

The Company has borrowed in sterling at a variable rate of interest based on the UK bank base rate. The impact of a 1% increase (or decrease) in the bank base rate would be a NAV loss (or gain) of £350,000 (2022: £330,000). The impact is linear - in other words, a 2% increase (or decrease) in the bank base rate would result in twice the NAV loss (or gain) as 1%. The calculations are based on borrowings as at the respective Statement of Financial Position dates and are not representative of the year as a whole.

 

At year-end, the Company held a bank loan of £35,000,000 from Scotiabank, details of which are contained in note 11 above.

 

19 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.

 

Foreign currency exposure at 30 June 2023 and 30 June 2022 was as follows:

	2023 Investments £'000	2023 Cash £'000	2023 Accrued Income £'000	2023 Total £'000	2022 Investments £'000	2022 Cash £'000	2022 Accrued Income £'000	2022 Total £'000
Euro	30,838	1,168	331	32,337	31,977	(22)	237	32,192
Australian dollar	193	5	-	198	191	-	-	191
US dollar	50,770	2,298	1,011	54,079	62,126	(315)	1,418	63,229
Norwegian krone	929	51	17	997	1,064	-	15	1,079
Canadian dollar	228	4	-	232	314	191	-	505
Swedish krona	4,507	84	72	4,663	4,015	43	38	4,096
	87,465	3,610	1,431	92,506	99,687	(103)	1,708	101,292

 

If the value of sterling had weakened against each of the currencies in the portfolio by 5% (2022: 5%), the impact on the profit or loss and the NAV would have been positive £4,679,000 (2022: positive £5,337,000).                                                                                                                            

If the value of sterling had strengthened by the same amount the impact on the profit or loss and the NAV would have been negative £4,233,000 (2022: negative £4,828,000).

 

The calculations are based on the portfolio valuation and accrued income balances at the balance sheet date are not representative of the period as a whole and may not be reflective of future market conditions.    

 

The Directors believe 5% is relevant based on the average market volatility in exchange rates in recent years.

 

20 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.

 

At the reporting date, the Company's financial assets exposed to credit risk amounted to the following:

	2023 £'000	2022 £'000
Fixed income securities1	220,248	213,706
Cash and cash equivalents	6,597	3,985
Accrued income	7,000	3,807
	233,845	221,498

¹ Fixed income securities include fixed and floating rate securities, convertible securities and preference shares.

 

Credit risk on fixed income securities and convertible bonds instruments is considered to be part of market price. The credit ratings for the fixed income securities held by the Company as at 30 June have been listed below:

Rating of fixed income securities	2023 %	2022 %
BB-	9.1	5.3
B+	3.9	4.0
B	3.9	4.0
B-	2.6	1.3
BBB	1.3	-
CC	-	1.3
CCC	2.6	2.7
CCC+	3.9	6.7
CCC-	-	1.3
C-	1.3	-
Not rated	71.4	73.4
	100.0	100.0

Source: 2023: S&P, 2022: S&P

 

The percentage above represents the value of fixed income securities of £220,248,000 (2022: £213,706,000) included in the Statement of Financial Position which are exposed to credit and counterparty risk by credit rating.

 

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 used. The Board monitors the quality of service provided by the brokers used to further mitigate this risk.

 

The Company's cash and most of the assets are held by the Administrator. The Company holds a residual cash balance with The Hong Kong and Shanghai Banking Corporation ("HSBC") of £11,000 (2022: £11,000). The rating agency Moody's assigns a rating of A1 to HSBC and Aa3 to BNP Paribas.

                                                                                                           

There were no contingencies or guarantees outstanding at the balance sheet date.

 

21 Liquidity risk

Market liquidity risk

The Company's financial instruments include 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 within a short time frame.

 

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

 

Funding liquidity risk

The following are the remaining contractual maturities of financial liabilities at the reporting date. The amounts are gross and undiscounted and include contractual interest payments.

 

30 June 2023		Contractual cash flows
	Carrying amount £000	0-1 year £000	1-2 years £000
Bank loan	35,000	(37,232)	-
Creditors and other payables	4,187	(4,187)	-
	39,187	(41,419)	-

 

30 June 2022		Contractual cash flows
	Carrying amount £000	0-1 year £000	1-2 years £000
Bank loan	33,000	(318)	(33,318)
Creditors and other payables	3,211	(3,211)	-
	36,211	(3,529)	(33,318)

The table above illustrates the contractual undiscounted cash flows relating to the financial liabilities of the Company.

 

As disclosed in note 11, the Company has availed of a secured bank loan facility of £45,000,000 with Scotiabank, out of which, £35,000,000 has been drawn-down and is outstanding as at 30 June 2023. In addition to this, the Company maintains sufficient cash and readily realisable securities to pay accounts payable, accrued expenses and any repayment on its bank facility.

 

The interest payments on the bank loan in the table above reflect market forward interest rates available at the reporting date and these amounts may change as market interest rates change.

 

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.

 

22 Fair value hierarchy

IFRS 13 Fair Value Measurement requires an analysis of investments valued at fair value based on the reliability and significance of information used to measure their fair value. The level is determined by the lowest (that is the least reliable or independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:

·    Level 1 - investments quoted in an active market;

·    Level 2 - investments whose fair value is based directly on observable current market prices or indirectly being derived from market prices;

·    Level 3 - investments whose fair value is determined using a valuation technique based on assumptions that are not supported by observable current market prices or based on observable market data.

 

Transfers in and out of the levels are deemed to have occurred at the start of the reporting period.

 

Investments valued using stock market active prices are disclosed as Level 1 and this is the case for the quoted equity investments that the Company holds.

 

Securities in Level 2 are priced using evaluated prices from a third party vendor, together with a price comparison made to evaluated secondary and tertiary third party sources, including broker quotes and benchmarks. As a result, these investments are disclosed as Level 2 - recognising that the fair values of these investments are not as visible as quoted investments and their higher inherent pricing risk.

 

Investments included as Level 3 are priced by the investment manager using a valuation technique reviewed by the Board taking into account, where appropriate, latest dealing prices, broker statements, valuation information and other relevant factors.

Financial assets at fair value	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Fixed income securities1	228	219,970	50	220,248
Equity shares2	42,088	3,621	54	45,763
As at 30 June 2023	42,316	223,591	104	266,011

 

Financial assets at fair value	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Fixed income securities1	234	209,627	3,845	213,706
Equity shares2	45,195	4,038	454	49,687
As at 30 June 2022	45,429	213,665	4,299	263,393

¹ Fixed income securities include fixed and floating rate securities, convertible securities and preference shares.

² Equity shares include investment funds.

 

If the market value of the Level 3 investments fell by 5% (2022: 5%), the impact on the profit or loss and the NAV would have been negative £5,000 (2022: negative £215,000). If the value of the Level 3 investments rose by the same amount, the effect would have been equal and opposite.

 

IFRS 13 requires disclosure, by class of financial instrument, if the effect of changing one or more input to reasonably possible alternative assumptions would result in a significant change to the fair value measurement. The information used in determination of the fair value of Level 3 investments is chosen with reference to the specific underlying circumstances and position of the investee company. On that basis the Board believes that the impact of changing one or more of the inputs to reasonably possible alternative assumptions would not change the fair value significantly. The following shows a reconciliation from the beginning to the end of the year for fair value measurements in Level 3 of the fair value hierarchy.

 

Level 3 Financial Assets	2023 £'000	2022 £'000
Opening valuation	4,299	636
Additions	1,231	374
Sales	(204)	(88)
Unrealised (losses)/gains	1,949	(9,954)
Realised gains/(losses)	(7,292)	198
Transfers out of Level 3	-	(623)
Transfers into Level 3	121	13,756
Closing valuation	104	4,299

 

Transfers into Level 3:

Trevali Mining Corp £nil (30 June 2022: £80,000) was transferred out of Level 1 to Level 3 because it was delisted during the year ended 30 June 2023.

 

Oro Negro Dril 7.5% 14-24/01/2019 £8,000 (30 June 2022: £41,000) was transferred out of Level 2 to Level 3 because it has been categorized as being in default.

 

Quantitative information of significant unobservable inputs - Level 3

The following tables summarise the significant unobservable inputs the Company used to value its significant investments categorised within Level 3 as at 30 June 2023 and 30 June 2022:

 

30 June 2023

Description	Fair value as at 30 June 2023 £000	Valuation technique	Significant Unobservable inputs	Range/input	Weighted Average
R.E.A Holdings Plc CW 15/07/2025	54	Black Scholes model	Volatility	50.1	N/A
ORO SG 12% 19-20/12/2025 DFLT	42	Vendor Pricing	Unadjusted Broker Quote	1	N/A
ORO NEGRO DRIL 7.5% 14-24/01/2019 DFLT	8	Vendor Pricing	Unadjusted Broker Quote	1	N/A
Total	104

 

30 June 2022

Description	Fair value as at 30 June 2022 £000	Valuation technique	Significant Unobservable inputs	Range/input	Weighted Average
Matalan Finance 9.5% 18-31/01/2024	3,845	Vendor Pricing	Unadjusted Broker Quote	1	N/A
R.E.A Holdings Plc CW 15/07/2025	454	Black Scholes model	Volatility	57.1	N/A
Total	4,299

 

The remaining 22 investments (2022: 22) classified as Level 3 have not been included in the above analysis as they have fair value of £nil as at 30 June 2023 and 30 June 2022.

 

23 Transaction with the Investment Manager and related parties

All transactions with related parties are carried out at an arm's length basis.

 

There are no transactions with the Board other than aggregated remuneration for services as Directors as disclosed in note 4 to the Financial Statements. The beneficial interests of the Directors in the shares of the Company are disclosed in the Company's Annual Financial Report and Financial Statements. There are no outstanding balances to the Directors at the year end.

 

Details of the fee arrangement with the Investment Manager are disclosed in note 3.

 

24 Subsequent events

The Board has evaluated subsequent events for the Company through to 14 September 2023, the date the Financial Statements were available to be issued and has concluded that the material events listed below do not require adjustment of the Financial Statements.

 

Dividend declaration

The fourth interim dividend of 1.49 pence per ordinary share was announced on 21 July 2023 and paid on 31 August 2023 to Shareholders on the register on 28 July 2023, having an ex-dividend date of 27 July 2023.