Source - PRN

DW Catalyst Fund Limited
Interim Report and Unaudited Financial Statements 2016

INTERIM REPORT AND UNAUDITED FINANCIAL STATEMENTS
30 JUNE 2016

CHAIR’S STATEMENT

Performance

The first half of 2016 continued in the volatile path of 2015, with a steep decline in most markets early in the year followed by a sharp rally which has largely continued into the second quarter. Although the end of the first half of 2016 was dominated by the macro event of Brexit and major market volatility globally, it ultimately was concluded with a surprisingly strong rebound in US equity and credit markets. Unlike the previous macro sell-offs of 2015 and 2016, global growth dominated concerns and led to sharp declines in yields in the US and Europe. This in turn caused continued flows into US credit markets as investors’ search for safe yield showed no sign of abating. Structured finance instruments have generally experienced less volatility than corporate bonds although there is some bifurcation based on the quality and visibility of cash flows. In particular, commercial mortgage backed securities issued since the end of the financial crisis struggled in the first half of 2016, with some contagion experienced by pre-crisis issued CMBS.

DW Catalyst Offshore Fund, Ltd. (the “Feeder Fund”) performance improved towards the end of the first half of 2016. This is particularly encouraging as it remains hedged to large fluctuations in the credit markets. The Feeder Fund’s longstanding approach is to isolate compelling credit opportunities while minimising general market risk. This is achieved by rigorous analysis of specific credits and credit-related assets. Given that the Fund hedges its portfolio with higher rated “safer” securities that have rallied significantly due to the “reach for yield” phenomenon described above, I am pleased that the Fund has nevertheless managed to generate better returns while sticking to its investment style and believe it is well positioned for the future.

Thus, as we look forward to the second half of 2016, I see a well-suited environment of ample opportunities for actively managed credit funds. In the face of this thirst for cheap yield, the credit markets that DW focuses on are quite compelling. In particular, credits that involve some complexity, such as including bankruptcies and restructurings, offer significantly more attractive prospective returns than at any time in the last couple of years. The Board believes that the investment team at DW Partners, LP (“DW” or the “Manager”) is ideally placed to take advantage of these opportunities.

In an environment in which beta has run up so much, I know that there is a place in both my portfolio, and those of many investors, for a hedged fund whose returns will not be strongly correlated with market direction. Moreover, the return to a winning quarter demonstrated the Fund’s solid foundations and strategy, and the team in NY is extremely focused and well-equipped to achieve further strong investments for the quarter ahead.

Discount management

During the period, the discount to NAV at which the Company’s Ordinary Shares traded ranged from 4.62% to 14.70% and ended the period at 10.91%. Nevertheless, the Board is committed to taking action to improve the discount, as exhibited through the share buyback programme. The Company bought back 458,715 Ordinary Shares in the period at an average discount to NAV of 9.25%. The buybacks enhanced the NAV per Ordinary Share by approximately 5.22 pence, equivalent to 0.43% of the NAV per Ordinary Share at the period end. Further, we recently closed the USD share class, folding all into the GBP share class, in order to improve secondary liquidity.

Of course, the key factor in reducing the discount is continuing to improve Net Asset Value (“NAV”) performance. The Board is hopeful that the Fund’s improved performance, twinned with an outlook of positive market opportunities, will lead to further improvements in performance in the latter half of 2016.

Finally, investor communication is always important, but especially so in periods of difficult markets, when discounts to NAV expand or when NAV performance is challenging. The Board remains committed to investor communication, and remains available to shareholders whenever they wish.

Discount Trigger Meeting

In accordance with the Articles of Incorporation of the Company, a Discount Trigger extraordinary general meeting (“Discount Trigger Meeting”) will be held should the average discount to NAV over a calendar year be beyond 5%. However, the Board strongly believes that DW Catalyst Offshore Fund offers an attractive opportunity for investors to obtain exposure to credit markets through a unique and sophisticated investment profile with strong risk controls and oversight. As always, the Board and the Manager remain committed to investor communication and continue to have ongoing conversations with shareholders.

DW Partners, LP appointed as Investment Manager

On the operational side, DW is now fully independent from Brevan Howard in all respects: Operations, Finance, Valuation, Risk Management, Client Relations, Cash Management and FX hedging, etc. DW had been fully independent in many of these areas for some time, but used the last 18 months to hire seasoned credit professionals, each of whom has verified domain expertise. DW also used that time to build technology and processes to allow their domain experts to work together to handle the underlying investments. The DW operations team has managed this transition in the background admirably, while David Warren and the investment teams have focused on difficult markets.

Due to the change, the Board visited DW twice in 2015 meeting with its key personnel. This included DW’s chief risk officer, chief operating officer, the investment team, and the board of the DW Catalyst Master Fund, Ltd (formerly known as Brevan Howard Credit Catalysts Master Fund Limited, the “Master Fund”). The Board is pleased to report that risk oversight and management has remained strong, and that existing investment policy and processes have been maintained since the change.

Board of Directors

The Board expresses its thanks for the continued support of the Company’s shareholders.

Charlotte Valeur
Chair

27 September 2016

BOARD MEMBERS

The Directors of the Company, all of whom are non-executive, are listed below:

Charlotte Valeur (Chair), age 52
Charlotte Valeur is the Managing Director of GFG Ltd, a Governance consultancy, which she founded in 2011. Ms Valeur has in excess of 30 years’ experience in the financial markets. Prior to GFG, Ms Valeur was the Managing Partner at Brook Street Partners Ltd from January 2003. Prior to Brook Street Partners, she worked in the City of London as a director in Capital Markets with various international banks. She began her career in Copenhagen in 1982 with Nordea A/S. In 1991, she moved to the London office of Nordea A/S. Ms Valeur currently serves as a non-executive director on boards and committees of listed and unlisted companies including NED of JPMorgan Global Convertibles Income Fund Limited, Renewable Energy Generation Limited and NTR Plc. She is the Chair of Kennedy Wilson Europe Real Estate Plc and of Blackstone/GSO Loan Financing Limited. Ms Valeur is a member of the Institute of Directors and is regulated by the Jersey Financial Services Commission in the conduct of Trust Company business. She is a resident of Jersey. Ms Valeur is the Chair of the Company’s Board of Directors. Ms Valeur was appointed to the Board in 2010.

Keith Dorrian (Senior Independent Director), age 70
Keith Dorrian has over 40 years’ experience in the offshore finance industry. Joining Manufacturers Hanover in 1973, he moved to First National Bank of Chicago in 1984. In 1989, he joined ANZ Bank (Guernsey) where as a director of the Bank and Fund Management company he was closely involved in the banking and fund management services of the ANZ group. He took up the position of “Investment Manager - Corporate Clients” at the Bank of Bermuda Guernsey in 1999 and was appointed local Head of Global Fund Services, CEO and managing director of their fund administration company in 2001, retiring on 31 December 2003. He is currently a Director of a number of fund and fund management companies. He is a Director of the following listed companies: AB Alternative Strategies PCC Limited, AB International Fund PCC Limited, IIAB PCC Limited, Master Capital Fund Limited, and Third Point Offshore Investors Limited. Mr Dorrian holds the Institute of Directors Diploma in Company Direction. Mr Dorrian has been elected a Fellow of the Institute of Directors. He is a resident of Guernsey. Mr Dorrian was appointed to the Board in 2010.

Patrick Firth (Chair of the Audit and Risk Committee), age 54
Patrick Firth qualified as a Chartered Accountant with KPMG in 1991 where he gained experience of the audit of a variety of financial services companies and investment funds. He joined Rothschild Asset Management (C.I.) Limited in 1992, where he assumed responsibility for the fund administration team. On the acquisition of the company by BISYS Fund Services in February 1999, Mr Firth became Head of Operations and subsequently Managing Director before moving to become Managing Director of Butterfield Fund Services (Guernsey) Limited (subsequently Butterfield Fulcrum Group (Guernsey) Limited), a company providing third party fund administration services, where he worked from April 2002 until June 2009. He is a member of the Institute of Chartered Accountants in England and Wales and the Chartered Institute for Securities and Investment. He is also a Director of a number of offshore funds and management companies, including JZ Capital Partners Limited, ICG-Longbow Senior Secured UK Property Debt Investments Limited, Riverstone Energy Limited and NextEnergy Solar Fund Limited. He is Chairman of GLI Finance Limited. He is a resident of Guernsey. Mr Firth was appointed to the Board in 2010.

Christopher Waldron, age 52
Christopher Waldron has extensive experience in international asset management and is a Director of a number of listed and unlisted companies, including GBD Limited, Multi Investment Manager Investment Programmes PCC Limited, JZ Capital Partners Limited and Crystal Amber Fund Limited. He is also Chairman of UK Mortgages Limited and Ranger Direct Lending Fund Plc and a member of the States of Guernsey’s Policy and Resources Investment and Bond Management Sub-Committee. He began his career with James Capel as a graduate in 1986, working initially as an institutional equity broker and later specialising in equity derivatives. He subsequently held investment management positions with Bank of Bermuda, the Jardine Matheson Group and Fortis before joining the Edmond de Rothschild Group in Guernsey as Investment Director in 1999, overseeing a team of Investment Managers specialising in fixed income and alternative investment strategies. He was appointed Managing Director of the Edmond de Rothschild companies in Guernsey in 2008, a position he held until 2013, when he stepped down to devote more time to non-executive work and investment consultancy. He is a graduate of London and Cranfield Universities and a Fellow of the Chartered Institute for Securities and Investment. He is a Guernsey resident. Mr Waldron was appointed to the Board in 2010.

Andrew Rosenthal, age 57
Andrew Rosenthal was the Chief Operating Officer of DW Partners, LP from January 2010 until his departure in       May 2016. Before joining DW, Andrew spent 13 years at Morgan Stanley where most recently he was an Executive Director in the Securitised Products Group in charge of principal investments in distressed consumer credit (2005-2007). Prior, he served as the Securitised Products Group’s Operations Officer and was a member of the Global Large Loan Committee. From 1994 to 1999, Mr Rosenthal was co-head of Morgan Stanley’s mortgage-backed derivatives trading effort. Prior to joining Morgan Stanley, Mr Rosenthal spent six years at Credit Suisse First Boston as head of mortgage-backed derivatives trading (1988-1994) and four years at Bear Stearns trading collateralized mortgage obligation residuals. He began his career as an Analyst in Morgan Stanley’s Mergers and Acquisitions Department (1980-1982). Mr Rosenthal has a BS in Economics, cum laude, from the Wharton School of the University of Pennsylvania and an MBA from Harvard University. He is a resident of the United States of America. Mr Rosenthal was appointed to the Board in 2015.

DIRECTORS’ REPORT

The Directors submit their Interim Report together with the Company’s Unaudited Statement of Assets and Liabilities, Unaudited Statement of Operations and Performance Allocation, Unaudited Statement of Changes in Net Assets, Unaudited Statement of Cash Flows, and the related notes for the period ended 30 June 2016 (the “Unaudited Condensed Interim Financial Statements”). These Unaudited Condensed Interim Financial Statements have been prepared in conformity with United States Generally Accepted Accounting Principles (“U.S. GAAP”) and are in accordance with any relevant enactment for the time being in force and are in agreement with the accounting records.

The Company

The Company is a registered closed-ended collective investment scheme incorporated with limited liability in Guernsey on
19 October 2010, with registration number 52520.

The Company was admitted to a Premium Listing on the Official List of the London Stock Exchange (“LSE”) on 14 December 2010.

The Company offered multiple classes of ordinary shares, which differed in terms of currency of issue. On 29 March 2016, the Company announced that as at 29 February 2016, the net asset value of its US Dollar share class had declined below US$25 million. The Company determined with its Articles of Incorporation, to convert the outstanding US Dollar shares into Sterling shares by reference to the respective net asset values of each class of shares as at 31 March 2016. The compulsory conversion of the US Dollar shares into Sterling shares took place on 26 April 2016, following which the US Dollar share class was closed. The Company now has only Sterling shares in issue and the Company’s share class conversion facility was withdrawn.

At the Extraordinary General Meeting held on 19 December 2014, shareholders approved the Company’s new investment policy, new management agreement, name change of the Company and amendments to the Company’s Articles of Incorporation with effect from 1 January 2015.

The Company changed its name to DW Catalyst Fund Limited from BH Credit Catalysts Limited and changed its Manager to DW Partners, LP (“DW”) from Brevan Howard Capital Management LP (“BHCM”).

Full details were set out in the Circular dated 28 November 2014 which is available on the Company’s website, www.dwcatalystltd.com.

Investment Policy

The Company’s investment objective is to seek to generate high absolute returns through exposure to financial assets predominantly in the corporate credit, mortgage-backed securities and asset-backed securities markets.

Previously, the Company’s investment policy was to invest all of its assets in Brevan Howard Credit Catalysts Master Fund Limited (“BHCC”, now known as DW Catalyst Master Fund, Ltd. (the “Master Fund”)), an open-ended investment company with limited liability formed under the laws of the Cayman Islands.

The Company’s current investment policy is to invest its assets in the DW Catalyst Offshore Fund, Ltd. (the “Feeder Fund” and together with the Master Fund the “Catalyst Fund”). The Feeder Fund holds its investment in the Master Fund via an intermediate entity, DW Catalyst Investments Ltd (the “Cayman Corporation”), a Cayman corporation, which is wholly owned by the Feeder Fund. The Cayman Corporation acts as a corporate blocker for US federal income tax purposes and its only asset is its shareholding in the Master Fund.

The Cayman Corporation is consolidated in the Financial Statements of the Feeder Fund.

The Financial Statements of the Company should be read in conjunction with the Consolidated Financial Statements of the Master Fund and the Consolidated Financial Statements of the Feeder Fund, which can be found on the Company’s website, www.dwcatalystltd.com.

The Feeder Fund may also make one or more Specific Investments (as defined below). DW is the Manager of the Feeder Fund, Master Fund and the Cayman Corporation.

The Master Fund seeks to employ a multi-strategy approach to investing in order to generate attractive risk-adjusted returns via careful investment selection, portfolio construction, and risk management. The Master Fund makes fundamental research-based investments, opportunistically deploying capital across a broad range of asset types and strategies including, but not limited to the following: distressed; long/short credit and equity; event driven and special situations; securitized and structured product strategies involving a wide range of collateral including, but not limited to residential mortgages, commercial mortgages, student loans, corporate loans and derivatives, consumer loans, equipment leases and other collateral types. The Master Fund invests globally, taking positions in both developed and emerging markets. Positions may be in the form of securities, derivatives, claims, real assets or other asset types.

The Master Fund is permitted to acquire holdings in illiquid investments for which there may be no immediate readily assessable market value.

In instances in which the Investment Manager of the Feeder Fund determines, in its sole and absolute discretion, that it would be appropriate to do so for tax, regulatory, operational or other reasons, the Feeder Fund may invest a portion of its assets in investments that are held through specifically formed holding entities (“Specific Investments”), rather than through the Master Fund. Specific Investments are required to be consistent with the Master Fund’s investment objective, strategy and approach.

The Feeder Fund, the Master Fund and the Cayman Corporation, through their Investment Manager, DW, have agreed with the Company that for so long as the Company is invested in the Feeder Fund, (a) the Master Fund will hold at least 20 different investments and, at the time of investment, no investment will represent more than 20 per cent. of its gross assets and (b) at the time of investment, no more than 30 per cent. of the gross assets of the Feeder Fund will be invested in Specific Investments with no one Specific Investment (or, where a Specific Investment consists of a number of underlying investments, no one such underlying investment) representing more than 20 per cent. of the gross assets of the Feeder Fund. Neither the Master Fund nor the Feeder Fund will be required to liquidate any portion of its portfolio to remain within these diversification requirements. In addition, in determining whether an investment in an index complies with these diversification requirements, compliance will be determined by reference to the index constituents (by number and by weighting of the constituents) and not by treating the index as a single investment or security.

The Company may not incur borrowings other than for the purpose of financing share repurchases or redemptions or satisfying working capital requirements, and subject to outstanding borrowings being in compliance with the borrowing limit in its articles of incorporation of 20 per cent. of the net asset value of the Company, calculated as at the time of borrowing. The Master Fund and the Feeder Fund are not subject to any limitations on their ability to incur leverage.

The Manager

With effect from 1 January 2015, the Company entered into a new management agreement with DW (the “DW Management Agreement”) regarding the management of the Company and terminated the existing management agreement between the Company and BHCM (the “BH Management Agreement”).

Prior to 1 January 2015, BHCM was the manager of the Company. BHCM is a Jersey limited partnership, the sole general partner of which is Brevan Howard Capital Management Limited, a Jersey limited company. Brevan Howard Capital Management Limited is regulated in the conduct of fund services business by the Jersey Financial Services Commission pursuant to the Financial Services (Jersey) Law 1998 and the Orders made thereunder.

Following the implementation of the DW Management Agreement, the Company appointed DW as manager. Prior to 1 January 2015, DW served as investment manager for BHCC, responsible for the underlying investment of the Company’s funds since its inception. Since 1 January 2015, DW assumed management responsibilities for the Company, the Feeder Fund, the Master Fund and the Cayman Corporation.

DW is registered with the US Securities Exchange Commission as an investment adviser under the United States Investment Advisers Act of 1940, as amended. DW is also registered with the US Commodities and Futures Trading Commission (“CFTC”) as a commodity pool operator and is a member of the US National Futures Authority. DW is exempt from registration with the CFTC as a commodity trading advisor.

The general partner of DW is DW Investment Partners, LLC. For the purposes of the third country marketing provisions of the Alternative Investment Fund Managers Directive, DW is the Alternative Investment Fund Manager (“AIFM”) of the Company for the purposes of the European Union Alternative Investment Fund Manager Directive (“AIFMD”).

Results and dividends

The results for the period are set out in the Unaudited Statement of Operations and Performance Allocation. The Directors do not recommend the payment of a dividend.

Share capital

The number of shares in issue at the period end is disclosed in note 4 to the Financial Statements.

Going concern

After making enquiries and given the nature of the Company and its investment, the Board is satisfied that it is appropriate to continue to adopt the going concern basis in preparing these Financial Statements and, after due consideration, the Board considers that the Company is able to continue for the foreseeable future. In reaching this conclusion the Board is mindful of the nature of the assets that underlie its investment in the Feeder Fund via the Master Fund, the Cayman Corporation and Specific Investments, including the Feeder Fund’s liquidity and has concluded that adverse investment performance will not have a material impact on the Company’s ability to meet its liabilities as they fall due on account of the liquidity of the investments in the Master Fund.

In accordance with the Articles of Incorporation of the Company, a Discount Trigger Meeting will be held should the average discount to NAV over a calendar year be beyond 5%. With the level of discount seen in the year to date, it is likely that the Company will hold a Discount Trigger Meeting following year end where a Discount Trigger Vote will take place. The Board has considered whether the results of such a vote could reduce the Company’s size to a level at which there would be no alternative to winding up the Company and has concluded that the probability of such an outcome is remote. Accordingly, the Board considers that the Company continue as a going concern.

International Tax Reporting

For purposes of the US Foreign Account Tax Compliance Act (“FATCA”), the Company registered with the US Internal Revenue Services (“IRS”) as a Guernsey reporting Foreign Financial Institution (“FFI”), received a Global Intermediary Identification Number (KT2S8Y.9999.SL.831), and can be found on the IRS FFI list.

The Common Reporting Standard (“CRS”) is a standard developed by the Organisation for Economic Co-operation and Development (“OECD”) and is a global approach to the automatic exchange of tax information. Guernsey has now adopted the CRS which came into effect on 1 January 2016. The CRS has replaced the UK Inter-Governmental Agreement (“IGA”) from 1 January 2016. The first report for CRS will be made to the Director of Income Tax by 30 June 2017.

The Company is subject to Guernsey regulations and guidance based on reciprocal information sharing inter-governmental agreements which Guernsey has entered into with the United Kingdom and the United States of America. The Board will take the necessary actions to ensure that the Company is compliant with Guernsey regulations and guidance in this regard.

Discount management programme

The Directors review the share price in relation to NAV on a regular basis. For additional information, refer to note 7 of the Financial Statements.

Shareholders with any queries in relation to the above should contact the Administrator, whose contact details can be found on the Company’s website, www.dwcatalystltd.com/contacts.

Significant shareholders

Shareholders with holdings of more than 3.0% of the Shares of the Company at 30 June 2016 were as follows:

Significant Shareholders Total shares held % holdings in class
Sterling shares
 Nortrust Nominees Limited 1,539,864 15.49%
 Vidacos Nominees Limited 1,509,828 15.19%
 The Bank Of New York (Nominees) Limited 994,446 10.00%
 Roy Nominees Limited 903,950 9.09%
 State Street Nominees Limited 550,910 5.54%
 HSBC Global Custody Nominee (UK) Limited 479,166 4.82%
 CGWL Nominees Limited 396,410 3.99%
 Harewood Nominees Limited 383,301 3.86%
 Luna Nominees Limited 309,302 3.11%

Statement of Directors’ Responsibility in Respect of the Unaudited Condensed Interim Report and Financial Statements

We confirm to the best of our knowledge that:

  • these Unaudited Condensed Interim Financial Statements have been prepared in conformity with United States Generally Accepted Accounting Principles and have been properly prepared in all material respects.
  • these Unaudited Condensed Interim Financial Statements include information detailed in the Chair’s Statement, and the Directors’ Report, which provides a fair view of the information required by:

a)     DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on these Unaudited Condensed Interim Financial Statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

b)     DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Company during that period; and any changes in the related party transactions described in the last Annual Audited Financial Statements that could materially affect the financial position or performance of the Company.

Signed on behalf of the Board by:

Patrick Firth
Director

27 September 2016

INVESTMENT MANAGER’S REPORT

DW (hereinafter “we” or “us”) is the Manager of the Company, DW Catalyst Master Fund, Ltd. (the “Master Fund”) (formerly Brevan Howard Credit Catalysts Master Fund Limited), DW Catalyst Investment, Ltd. (the “Cayman Corporation”) and DW Catalyst Offshore Fund, Ltd. (the “Feeder Fund”, a feeder fund to the Cayman Corporation, which is a feeder to the Master Fund).

DW has been responsible for the underlying investment decisions of the Company’s funds since its inception, and following a vote of shareholders on 19 December 2014, DW assumed the corresponding management responsibilities for the Company, the Master Fund, the Cayman Corporation and the Feeder Fund effective from 1 January 2015.

Net asset value summary

The NAV per share of the Company’s USD and GBP currency classes depreciated by 4.34% and 2.21%, respectively, in the first half of 2016. The month-by-month performance of each currency class is stated below:

USD Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD
2012* 0.64 1.15 2.36 1.51 1.17 (0.10) 1.38 1.39 1.65 0.8 0.73 1.26 14.83
2013 1.73 0.24 1.19 1.07 1.74 (0.52) 0.16 1.07 1.18 1.68 1.7 1.52 13.5
2014 1.07 1.43 0.49 1.51 0.85 1.47 0.58 (1.00) (0.76) (0.72) 0.04 0.35 5.39
2015 (0.04) 0.48 0.31 1.23 (0.10) (0.76) (2.60) (0.97) (1.42) (2.08) (2.92) (1.00) (9.52)
2016** (2.07) (0.89) (1.45) - - - - - - - - - (4.34)

   

GBP Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD
2012 0.64 1.15 2.40 1.5 1.22 (0.06) 1.40 1.36 1.62 0.81 0.75 1.26 14.95
2013 1.76 0.27 1.20 1.05 1.81 (0.52) 0.18 1.06 1.13 1.71 1.68 1.54 13.62
2014 1.08 1.43 0.53 1.51 0.88 1.48 0.63 (1.01) (0.77) (0.71) 0.03 0.38 5.55
2015 (0.02) 0.48 0.34 1.23 (0.11) (0.74) (2.58) (0.96) (1.41) (2.05) (2.94) (1.08) (9.48)
2016 (2.23) (0.89) (1.40) 1.73 0.33 0.28 - - - - - -    (2.21)

Source: The Company’s NAV data is provided by the Administrator. Monthly NAV data is unaudited and net of all fees and expenses payable by the Company. Shares in the Company do not necessarily trade at a price equal to the prevailing NAV per Share.

Past performance is not indicative of future results.

* December 2011 is 1% lower than these figures due to the deduction of the expenses of the initial public offering borne by the Company in December 2010. See financial highlights in note 8.

** On 26 April 2016, all of the Company’s US Dollar shares were converted into Sterling shares, based on 31 March 2016 NAV, following which the US Dollar share class was closed.

Investment profile

The evolution of the strategy profile* of the Feeder Fund, as measured as a percentage of total Market Value**, is summarised below:

Strategy 30 June 2016 31 December 2015
Long (%) Short (%) Long (%) Short (%)
Corporate Performing 30 (68) 44 (71)
Corporate Distressed 23 (7) 14 (12)
Corporate Structured 7 (12) 8 (4)
Residential Real Estate 24 (37) 38 (65)
Commercial Real Estate 42 (42) 32 (45)
Agency MBS*** 1 - 22 (8)
Other Structured Finance 17 (18) 10 (13)
Total 144 (184) 168 (218)

* Strategy profile is subject to change.

** Market Values are shown as a percentage of Feeder Fund NAV, excluding positions in US Treasuries. Market Value for derivatives is calculated in bond-equivalent terms, as underlying notional less current replacement cost. For example, a $100m notional credit default swap trading at 5 points upfront creates $95m of Market Value.

*** The “Agency MBS” strategy includes 5% long market value in Agency Tranche positions. 

Performance Review

The NAV of the Company declined by approximately 2.21% over the first half 2016. Gains in Corporate Distressed, Corporate Structured and Residential Real Estate were offset by weakness in the Catalyst Fund’s Corporate Performing Strategy.  

Portfolio Overview

The Catalyst Fund’s performance for the first half of 2016 was marked by a difficult first quarter, where idiosyncratic bonds traded off as more “beta-oriented” assets rallied, followed by a much better second quarter for the Catalyst Fund where Corporate strategies outperformed. Despite the difficult start to the year, it has been rewarding to see the Catalyst Fund’s Corporate Distressed positions, which had a difficult 2015, recover and perform more in line with expectations. The Catalyst Fund’s structured finance portfolio has been modestly positive, with gains in our Residential Mortgage-Backed Security (“RMBS”) outpacing losses in our Commercial Mortgage-Backed Security (“CMBS”) portfolio.

The Catalyst Fund’s Corporate portfolio had a mixed start to the year – distressed debt positions in Energy companies have done well, even as single-name Energy short positions have rallied with the rise in commodity prices. We remain focused on managing our exposure to commodity prices, and the volatility in the sector this year has provided opportunities to trade around positions both long and short. The Catalyst Fund also had positive performance on some of the higher-in-the-capital-structure securities in several industrial companies, which we added to the portfolio at substantial discounts to par in Q4 2015. Similar to what we have seen in some of our distressed names, these previously oversold bonds are once again trading on fundamentals, and as the market wakes up to these stories, we are taking profits and moving on to other misunderstood capital structures. Our largest detractors for the Catalyst Fund in the first half of the year came from our Corporate Performing strategies, which had a difficult first quarter and did not see as strong of a rebound as our Distressed Corporate positions.

Within our Structured Finance portfolio, we continued to sell RMBS, often with gains as other managers bid up these now-safer bonds to lower and lower yield levels. In addition, we received a long-expected payout in June from the Bank of America / Countrywide settlement. While it was long expected, the market traded these bonds at some risk premium to that payment coming through, so the realisation of the cash flow did lead to gains in June. In aggregate, we have experienced small losses in CMBS positions this year. 

We have seen strong event-driven gains from a number of our CMBS positions, either where realised cash flows have been strong or where there has been positive news on underlying loans, but these gains have been offset by markdowns on other CMBS where the catalysts are still in the near future. Other investors have been selling legacy CMBS positions, and prices have fallen even in the face of improving fundamentals. We believe we have a good amount of “embedded” profits in our CMBS portfolio that should be realised over the next year or so.

Opportunity Set

We think that this is one of the most fascinating moments that I have observed in the past 30 years of Wall Street. We are calling it a critical moment because the actions we take as investors, the choices we make, can now have a dramatic impact on our portfolio values looking ahead over the next two, five and ten years. We have seen very significant market fragmentation and bifurcation on the back of unprecedented central bank stimulus. There is an insatiable demand for securities that are regarded as ‘safe’ – not just government bonds but investment grade and BB high yield corporates as well as defensive large cap stocks. At the same time, there is often insufficient capital for complex or distressed situations where banks are not willing or able to provide capital and the investment cannot be structured as public equity or rated credit.

What is DW’s reaction to this new normal? We are focusing on what we have always done: investing in stressed securities, long and short, some with a fair amount of complexity, and definitely not the type of investing that I would call ever-richer safe yield. We have run the Catalyst Fund for seven years and for seven years we’ve been saying there are better returns, even better risk-adjusted returns investing in the “not-so-safe” securities vs. plowing all the capital into safe, modest yielding instruments that have greater downside than upside if the world really goes wrong.

So this moment that has been painful, that we are calling critical, is also the moment of greatest opportunity, as those who stay the course, who find off-the-beaten-path sources of alpha, are going to outperform the most, and do it without much outright market risk. That’s what we did in the second quarter in the Catalyst Fund, generating gross returns of 3%, even while we were selling securities and reducing gross exposures to produce all the cash and risk reduction we need to meet upcoming redemptions. As we’ve said for years, one of the advantages of Catalyst Fund is that from quarter to quarter, year to year, credit returns will come from different sources. Last year’s giant winner may be this year’s laggard, and last year’s problem can be this year’s opportunity. So, after a very difficult period for Corporate Distressed, it was fulfilling to see our strongest returns driven by Corporate Distressed positions, with plenty of upside to come. We have a substantial amount of capital invested in legacy CMBS, and we have made strong returns over the years in structured finance securities. We will find out in the next 12-24 months how these securities actually cash flow, and we are optimistic.

David Warren
Chief Investment Officer
DW Partners, LP

INDEPENDENT REVIEW REPORT TO DW CATALYST FUND LIMITED

Introduction

We have been engaged by the Company to review the Unaudited Condensed Interim Financial Statements in the Unaudited Condensed Interim Report for the six months ended 30 June 2016 which comprise the Unaudited Statement of Assets and Liabilities, Unaudited Statement of Operations and Performance Allocation, Unaudited Statement of Changes in Net Assets, Unaudited Statement of Cash Flows and the related notes 1 to 10. We have read the other information in the Unaudited Condensed Interim Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the Unaudited Condensed Interim Financial Statements.

This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements (UK and Ireland) 2410, “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.

Directors’ responsibilities

The interim financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Unaudited Condensed Interim Report, in accordance with the Disclosure and Transparency Rules of the United Kingdom’s Financial Conduct Authority. As disclosed in note 2, the Unaudited Condensed Interim Financial Statements of the Company are prepared in accordance with accounting principles generally accepted in the United States.

Our responsibility

Our responsibility is to express to the Company a conclusion on the Unaudited Condensed Interim Financial Statements in the Unaudited Condensed Interim Report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” issued by the Auditing Practices Board for use in the United Kingdom. A review on the interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Audited (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the Unaudited Condensed Interim Financial Statements in the Unaudited Condensed Interim Report for the six months ended 30 June 2016 are not prepared, in all material respects, in accordance with accounting principles generally accepted in the United States and the Disclosure and Transparency Rules of the United Kingdom’s Financial Conduct Authority.

Ernst & Young LLP
Guernsey, Channel Islands
27 September 2016

1.  The maintenance and integrity of the DW Catalyst Fund Limited website is the responsibility of the Directors; the work carried out by the auditor does not involve consideration of these matters and, accordingly, the auditor accepts no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

2.  Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

UNAUDITED STATEMENT OF ASSETS AND LIABILITIES
As at 30 June 2016
(Expressed in ‘000 US Dollars)

30.06.16 31.12.15 30.06.15
(Unaudited) (Audited) (Unaudited)
Assets
Investment in the Feeder Fund (Cost in '000s: US$208,777;
31 December 2015: US$218,792; 30 June 2015: US$219,311) 160,199 190,317 224,653
Prepaid expenses - 19 -
Cash and bank balances denominated in Sterling 2,635 164 182
Cash and bank balances denominated in US Dollars - 43 26
Total assets 162,834 190,543 224,861
Liabilities
Redemptions in respect of buybacks payable 104 - -
Directors' fees and expenses payable 58 65 68
Accrued expenses and other liabilities 42 42 123
Administration fees payable (note 3) 32 33 34
Registrar fees payable (note 3) 10 5 1
Total liabilities 246 145 226
Net assets 162,588 190,398 224,635
Number of shares in issue (note 4)
US Dollar shares - 2,211,203 2,779,230
Sterling shares 9,935,317 8,856,566 8,492,733
Net asset value per share (notes 6 and 8)
US Dollar shares - US$12.40 US$13.86
Sterling shares £12.19 £12.47 £13.93

The financial statements were approved by the Board of Directors on 27 September 2016 and signed on its behalf by:

Patrick Firth
Director

See accompanying notes to the Unaudited Condensed Interim Financial Statements.

UNAUDITED STATEMENT OF OPERATIONS AND PERFORMANCE ALLOCATION
For the period from 1 January 2016 to 30 June 2016
(Expressed in ‘000 US Dollars)

01.01.16 01.01.15 01.01.15
to 30.06.16 to 31.12.15 to 30.06.15
(Unaudited) (Audited) (Unaudited)
Investment gain allocated from the Feeder Fund
Interest 13,441 35,041 12,351
Dividend income  (net of withholding tax of: US$126,866) 269 100 31
Other income 155 - -
Expenses (2,641) (4,576) (5,079)
Management fees (note 3) (1,721) (4,254) -
Investment gain allocated from the Feeder Fund 9,503 26,311 7,303
Company income
Foreign exchange gains (note 2) - 2 3
Total Company income - 2 3
Company expenses
Other expenses 288 663 503
Directors' fees and expenses 121 264 132
Administration fees (note 3) 100 200 99
Registrar fees (note 3) 20 32 15
Foreign exchange losses (note 2) 19 - -
Total Company expenses 548 1,159 749
Net investment gain 8,955 25,154 6,557
Net realised loss and change in unrealised depreciation on investments allocated from the Feeder Fund
Net realised loss on investments (11,562) (10,909) (3,792)
Net unrealised depreciation on investments (1,939) (35,117) (424)
Net (loss)/gain on foreign currency hedges (note 2) (15,917) (8,746) 2,278
Net realised loss and unrealised depreciation
 on investments allocated from the Feeder Fund (29,418) (54,772) (1,938)
Net (decrease)/increase in net assets resulting from operations after performance allocation (20,463) (29,618) 4,619

See accompanying notes to the Unaudited Condensed Interim Financial Statements.

UNAUDITED STATEMENT OF CHANGES IN NET ASSETS
For the period from 1 January 2016 to 30 June 2016
(Expressed in ‘000 US Dollars)

01.01.16 01.01.15 01.01.15
to 30.06.16 to 31.12.15 to 30.06.15
(Unaudited) (Audited) (Unaudited)
Net (decrease)/increase in net assets resulting from operations
Net investment gain 8,955 25,154 6,557
Net realised loss on investments allocated from
 the Feeder Fund (11,562) (10,909) (3,792)
Net change in unrealised depreciation on investments
allocated from the Feeder Fund (1,939) (35,117) (424)
Net (loss)/gain on foreign currency hedges allocated from the Feeder Fund (15,917) (8,746) 2,278
(20,463) (29,618) 4,619
Share capital transactions
Purchase of own shares into treasury (note 4) (7,347) - -
(7,347) - -
Net (decrease)/increase in net assets (27,810) (29,618) 4,619
Net assets at the beginning of the period/year 190,398 220,016 220,016
Net assets at the end of the period/year 162,588 190,398 224,635

See accompanying notes to the Unaudited Condensed Interim Financial Statements.

UNAUDITED STATEMENT OF CASH FLOWS
For the period from 1 January 2016 to 30 June 2016
(Expressed in ‘000 US Dollars)

01.01.16 01.01.15 01.01.15
to 30.06.16 to 31.12.15 to 30.06.15
(Unaudited) (Audited) (Unaudited)
Cash flows from operating activities
Net (decrease)/increase in net assets resulting from operations (20,463) (29,618) 4,619
Adjustments to reconcile net increase in net assets
 resulting from operations to net cash generated from operating activities
Net investment gain allocated from the Feeder Fund (9,503) (26,311) (7,303)
Net realised loss on investments allocated from the Feeder Fund 11,562 10,909 3,792
Net change in unrealised depreciation on investments
 allocated from the Feeder Fund 1,939 35,117 424
Net proceeds from sale of investment in the Feeder Fund 10,203 4,545 4,035
Net loss/(gain) on foreign currency hedges allocated
 from the Feeder Fund 15,917 8,746 (2,278)
Decrease/(increase) in prepaid expenses 19 (19) -
Decrease in performance fees payable - (2,856) (2,856)
Decrease in management fees payable - (379) (379)
(Decrease)/increase in Directors' fees and expenses payable (7) (2) 1
Increase in accrued expenses and other liabilities - 11 92
(Decrease)/increase in administration fees payable (1) - 1
Increase/(decrease) in registrar fees payable 5 (6) (10)
Net cash generated from operating activities 9,671 137 138
Cash flows from financing activities
Purchase of own shares (7,243) - -
Net cash used in financing activities (7,243) - -
Change in cash 2,428 137 138
Cash, beginning of the period/year 207 70 70
Cash, end of the period/year 2,635 207 208
Cash, end of the period/year
Cash and bank balances denominated in Sterling 2,635 164 182
Cash and bank balances denominated in US Dollars - 43 26
2,635 207 208

   

Supplemental disclosure of non-cash financing activities:
In specie divestment from the Master Fund (note 9) - 220,828 -
In specie investment in the Feeder Fund (note 9) - (220,828) -

See accompanying notes to the Unaudited Condensed Interim Financial Statements.

NOTES TO THE UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS
For the period from 1 January 2016 to 30 June 2016

1. The Company and Organisation

Details of the Company and its organisation are set out in the Directors’ Report.

2. Significant accounting policies

Basis of Presentation

The Annual Report and Audited Financial Statements, which give a true and fair view, are prepared in conformity with United States Generally Accepted Accounting Principles and comply with the Companies (Guernsey) Law, 2008. The accompanying Unaudited Condensed Interim Financial Statements have been prepared following the same accounting policies and methods of computation as the most recent Annual Audited Financial Statements. Prior to the US Dollar share class closure on 26 April 2016, the functional and reporting currency of the Company was US Dollar. With effect from 26 April 2016, the Company’s functional currency changed to Sterling (see page 19). The presentation currency of the Company is United States Dollar.

The Company is an Investment Entity which has applied the provisions of ASC 946. U.S. GAAP requires investments of an investment company to be recorded at their estimated fair value. The unrealised gains and/or losses in the investment's fair value need to be recognised on a current basis in the Unaudited Statement of Operations and Performance Allocation. The carrying value of all other assets and liabilities approximates fair value.

Going Concern

Having reassessed the principal risks; the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the Unaudited Condensed Interim Report and Financial Statements.

In accordance with the Articles of Incorporation of the Company, a Discount Trigger Meeting will be held should the average discount to NAV over a calendar year be beyond 5%. With the level of discount seen in the year to date, it is likely that the Company will hold a Discount Trigger Meeting following year end where a Discount Trigger Vote will take place. The Board has considered whether the results of such a vote could reduce the Company’s size to a level at which there would be no alternative to winding up the Company and has concluded that the probability of such an outcome is remote. Accordingly, the Board considers that the Company continue as a going concern.

The following are significant accounting policies adopted by the Company:

Valuation of investments

The Company records its investment in Class A shares of the Feeder Fund at fair value. Fair value is determined as the Company’s proportionate share of the Feeder Fund’s net assets. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820 “Fair Value Measurement”, fair value is defined as the price the Company would receive upon selling a security in a timely transaction to an independent buyer in the principal or most advantageous market of the security. At 30 June 2016 the Company’s US Dollar and Sterling capital accounts represented 0.00% and 9.67% (31 December 2015: 1.29% and 7.69%; 30 June 2015: 1.39% and 6.74%) respectively of the Feeder Fund’s capital.

The Company’s investment in the Master Fund via the Feeder Fund and the Cayman Corporation is determined as the Company’s proportionate share of the Master Fund’s net assets. At 30 June 2016 the Company’s US Dollar and Sterling capital account represented 0.00% and 6.11% (31 December 2015: 0.82% and 4.85%; 30 June 2015: 1.39% and 6.74%) respectively of the Master Fund’s capital.

The valuation and classification of securities held by the Master Fund, Feeder Fund and Cayman Corporation are discussed in the notes to the Unaudited Condensed Financial Statements of the Master and Feeder Funds which are available on the Company’s website, www.dwcatalystltd.com.

Fair value measurement

ASC 820 establishes a three-level hierarchy to maximise the use of observable market data and minimise the use of unobservable inputs and to establish classification of fair value measurements for disclosure purposes. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value including such a pricing model and/or the risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable.

As a result of the changes in ASC 820 “Fair Value Measurements”, the Company is using the practical expedient and therefore is not using fair value hierarchy.

Income and expenses

The Company records monthly its proportionate share of the Feeder Fund’s income, expenses and realised and unrealised gains and losses, which in turn records its proportionate share of the Master Fund’s income, expenses and realised and unrealised gains and losses. In addition, the Company accrues its own income and expenses. Prior to the closure of USD share class, the Company expenses were allocated proportionately to the US Dollar and Sterling share classes based on their respective Net Asset Values (“NAVs”).

Use of estimates

The preparation of Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of those Financial Statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.

Change in functional currency

As a consequence of the closure of the US dollar share class, a decision was made by the Directors to change the functional currency from US Dollar to Sterling. It is acknowledged that the Company’s price quotation on the LSE is now only Sterling and performance is reported in Sterling. The Company invests in a single investment through a Sterling Share class, and substantially all of the Company’s cash flows are now in Sterling. The presentation currency remains unchanged as US Dollar.

Foreign exchange

Purchases and sales of investments and income and expense items denominated in foreign currencies are translated into Sterling, the Company's functional currency, at the date of such transactions. Exchange differences arising on translation are included in the Unaudited Statement of Operations and Performance Allocation.

Investment securities and other assets and liabilities are translated into US Dollars, the Company's reporting currency, using exchange rates at the reporting date.  Transactions reported in the Unaudited Statement of Operations and Performance Allocation are translated into US Dollar amounts at the average exchange rate for the period. The share capital and other capital reserve accounts are translated at the historic rate ruling at the date of the transaction.  Exchange differences arising on translation into the reporting currency are offset against exchange differences arising on translation into the functional currency. Certain comparative figures have been reclassified in the Unaudited Statement of Operations and Performance Allocation to conform with the current year presentation.

Cash and bank balances

Cash and cash equivalents comprise of cash in bank and demand deposits with original maturities of less than 90 days.

Treasury shares

Where the Company may purchase its own share capital, the consideration paid, which includes any directly attributable costs, is recognised as a deduction from equity shareholders’ funds through the share capital account. When such shares are subsequently sold or reissued to the market, any consideration received, net of any directly attributable incremental transaction costs, is recognised as an increase in equity shareholders’ funds through the share capital account. Where the Company cancels treasury shares, no further adjustment is required to the share capital account of the Company at the time of cancellation. Shares held in treasury are excluded from calculations when determining NAV per share as detailed in note 6 or in the Financial Highlights in note 8.

Allocation of results of the Feeder and Master Funds

Net realised and unrealised gains/losses of the Feeder Fund and Master Fund are allocated to the Company’s share classes based upon the percentage ownership of the equivalent Feeder Fund and Master Fund class.

Leverage

The Company, subject to Board approval, may not incur leverage other than for the purpose of financing share repurchases or satisfying working capital requirements, and subject to outstanding borrowings being in compliance with the borrowing limit in the Articles of 20% of the NAV of the Company, calculated as at the time of borrowing.

Recent Standards and Pronouncements

In January 2016, the FASB issued Accounting Standards Update No. 2016-01 (ASU 2016-01) "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01 amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. ASU 2016-01 is effective for annual reporting periods, and interim periods within those years beginning after 15 December 2017. The Board does not expect that this standard will have a material effect on the Company’s financial statements.

In August 2014, the FASB issued ASU 2014-15 – Presentation of Financial Statements – Going Concern (Subtopic 205-40)(“ASU 2014-15”). The pronouncement defined management’s responsibility regarding the assessment of the Company’s ability to continue as a going concern, even if the Company’s liquidation is not imminent. Currently, no similar guidance exists for management representation of going concern. Under this guidance, during each period on which financial statements are prepared, management needs to evaluate whether there are conditions or events that, in the aggregate, raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. Substantial doubt exists if these conditions or events indicate that the Company will be unable to meet its obligations as they become due. If such conditions or events exist, management should develop a plan to mitigate or alleviate these conditions or events. Regardless of management’s plan to mitigate, certain disclosures must be made in the financial statements. ASU 2014-15 is effective for annual periods ending after 15 December 2016, however early adoption is permitted. The Board is currently evaluating the impact the update will have on the Company’s financial statements.

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2015-07”), in which certain investments measured at fair value using the net asset value per share method (or its equivalent) as a practical expedient are not required to be categorized in the fair value hierarchy. This guidance is effective for annual reporting periods, including interim periods, beginning after 15 December 2015. The Company has adopted ASU 2015-07 and accordingly has not leveled applicable positions.

3. Management, Performance, Administration and Registrar fees

Management and Performance fees

Per the DW Management Agreement, the Manager is entitled to a management fee and performance allocation at the level of the Master Fund and the holding entities of Specific Investments but not payment of management and performance fees by the Company. Instead, the Company will indirectly bear a portion of the management fee and performance allocation charged by the Manager to the Master Fund and to any holding entity of a Specific Investment.

The DW Management Agreement may be terminated by either party giving the other party not less than 24 months written notice. In certain circumstances the Company will be obliged to pay compensation to the Investment Manager of the aggregate management fees which would otherwise have been payable on the Company’s indirect interests in the Master Fund and the Specified Investments during the 24 months following the date of such notice and the Company will be obliged to pay any other related costs. Compensation is not payable if more than 24 months notice of termination is given. In certain circumstances, the management agreement may be terminated by the Company giving the Investment Manager not less than 30 days’ or 90 days’ notice.

Administration fee

The Company has appointed Northern Trust International Fund Administration Services (Guernsey) Limited as Administrator and Corporate Secretary. The Administrator is paid fees based on the NAV of the Company, payable quarterly in arrears. The fee is at a rate of 0.025% per annum of the first US$750 million of net assets of the Company and then 0.015% per annum thereafter, subject to a minimum fee of US$200,000 per annum.

The Administrator is entitled to be reimbursed out-of-pocket expenses incurred in the course of carrying out its duties. The fee will be reviewed on an annual basis.

During the period ended 30 June 2016, US$100,000 (31 December 2015: US$200,000, 30 June 2015: US$99,195) was earned by the Administrator as administration fees. At 30 June 2016, US$32,103 (31 December 2015, US$33,155,
30 June 2015: US$33,844) of the fee remained outstanding.

Registrar fee

The Company appointed Computershare Investor Services (Guernsey) Limited as Registrar, with effect from
19 November 2010. The Registrar is paid fees according to the agreement, subject to a minimum fee of £6,000 per annum, payable quarterly in arrears. During the period ended 30 June 2016, US$19,996 (31 December 2015: US$32,344,
30 June 2015: US$15,029) were charged by the Registrar. At 30 June 2016: US$9,525 (31 December 2015: US$5,184,
30 June 2015: US$746) of the fee remained outstanding.

4. Share capital

Issued and authorised share capital

The Company was incorporated with the authority to issue up to one billion shares of no par value in each class, which authority expired on 19 October 2015. As approved by the shareholders at the AGM held on 22 June 2016, the Directors have the power to issue 3,464,332 Sterling shares. Such power expires fifteen months after the passing of the resolution or on the conclusion of the next AGM of the Company, whichever is earlier. The Articles require any further issues of shares for cash to be made on a pre-emptive basis to holders of shares of the same class, except to the extent that such pre-emption rights have been disapplied by shareholders in general meeting. The shares may be issued in differing currency classes of ordinary redeemable shares including C shares (described in the Company’s Prospectus) at the discretion of the Board. At 30 June 2016, 31 December 2015 and 30 June 2015, no C shares were in issue.

For the period from 1 January 2016 to 30 June 2016

US Dollar shares Sterling shares
Number of ordinary shares
In issue at 1 January 2016 2,211,203 8,856,566
Share conversions from US Dollar shares to Sterling shares (2,211,203) 1,537,466
Purchase of own shares into treasury - (458,715)
In issue at 30 June 2016 - 9,935,317
Number of treasury shares
In issue at 1 January 2016 - -
Shares purchased and held in treasury during the period:
  - On market purchases - 458,715
In issue at 30 June 2016 - 458,715
Percentage of class - 4.41%
Company Total
US$'000 £'000 US$'000
Share capital account
At 1 January 2016 12,346 93,762 157,615
Share conversions from US Dollar shares to Sterling shares (12,346) 18,345 * -
Purchase of own shares into treasury - (5,098) (7,347)
At 30 June 2016 - 107,009 150,268

*including cumulative gains on US Dollar shares converted to Sterling shares.


For the year ended 31 December 2015

US Dollar shares Sterling shares
Number of ordinary shares
In issue at 1 January 2015 3,024,729 8,332,877
Share conversions from US Dollar shares to Sterling shares (910,568) 586,303
Share conversions from Sterling shares to US Dollar shares 97,042 (62,614)
In issue at 31 December 2015 2,211,203 8,856,566
Company Total
US$'000 £'000 US$'000
Share capital account
At 1 January 2015 23,360 86,635 157,615
Share conversions from US Dollar shares to Sterling shares (12,335) 7,984 -
Share conversions from Sterling shares to US Dollar shares 1,321 (857) -
At 31 December 2015 12,346 93,762 157,615

For the period from 1 January 2015 to 30 June 2015

US Dollar shares Sterling shares
Number of ordinary shares
In issue 1 January 2015 3,024,729 8,332,877
Share conversions from US Dollar shares to Sterling shares (304,159) 197,669
Share conversions from Sterling shares to US Dollar shares 58,660 (37,813)
In issue at 30 June 2015 2,779,230 8,492,733
Company Total
US$'000 £'000 US$'000
Share capital account
At 1 January 2015 23,360 86,635 157,615
Share conversions from US Dollar shares to Sterling shares (4,238) 2,767
Share conversions from Sterling shares to US Dollar shares 808 (523) -
In issue at 30 June 2015 19,930 88,879 157,615

Share classes

On 26 April 2016, all of the Company’s US Dollar shares were converted into Sterling shares, based on 31 March 2016 NAV, following which the US Dollar share class was closed. The Company now has only Sterling shares in issue. Any increase or decrease in the NAV of the Feeder Fund is allocated in full to the Sterling Share class.

Prior to the compulsory US Dollar share conversion, a separate class account was established in the books of the Company in respect of each class of shares. An amount equal to the aggregate proceeds of issue of each share class was credited to the relevant class account. Any increase or decrease in the NAV of the Feeder Fund’s US Dollars shares and the Feeder Fund’s Sterling shares as calculated by the Feeder Fund was allocated to the relevant class account in the Company.

Share issue expenses

Share issue expenses of US$1,592,065 were borne by the Company and were charged against the share capital account at launch (the “Offer”). In accordance with the Placing Agreement dated 19 November 2010, BHCM paid the costs and expenses of, and incidental to, the Offer (including all costs related to the establishment of the Company) (the “Offer Costs”) which were in excess of 1% of the gross proceeds of the Offer. The Offer Costs paid by BHCM amounted to US$3,261,054. The DW Management Agreement replicates the provisions in the BH Management Agreement regarding repayment of BHCM’s outstanding costs incurred in connection with the Company’s IPO.

Pursuant to the terms of the DW Management Agreement, the Company must repay to DW a fraction of these Offer Costs for every US Dollar by which repurchases, redemptions or cancellations of the Company’s shares reduce the current US Dollar NAV of the Company below its NAV at the time of the Company’s listing, being US$157,614,394. The current US Dollar NAV is calculated using the exchange rates ruling at the time of the Company’s listing and at 30 June 2016 stood at US$191,036,311.

The amount of these Offer Costs to be repaid for every US Dollar by which the Company’s NAV is reduced will be up to 2.07 cents (or such lower amount as may result from any reduction in the Offer Costs actually paid by the Investment Manager), being the figure obtained by dividing the Offer Costs by the NAV of the Company at the time of its listing.

In addition, if the DW Management Agreement were to be terminated for certain reasons before the seventh anniversary of admission to the London Stock Exchange, being 14 December 2017, the Company will be required to reimburse the Investment Manager in respect of the offer costs borne by the Investment Manager. The Directors consider the likelihood of the DW Management Agreement terminating and as a consequence the contingent liability described above arising as remote and therefore no provision has been made within these Financial Statements.

The Directors confirm that there are no other contingent liabilities that require disclosure or provision.

Voting rights

Ordinary redeemable shares carry the right to vote at general meetings of the Company and to receive any dividends, attributable to the ordinary shares as a class, declared by the Company and, in a winding-up will be entitled to receive, by way of capital, any surplus assets of the Company attributable to the ordinary shares as a class in proportion to their holdings after settlement of any outstanding liabilities of the Company.

Each shareholder shall have one vote for each share denominated in the base class held by them. As prescribed in the Company’s Articles, the different classes of ordinary shares have different values attributable to their votes. The attributed values have been calculated on the basis of the Weighted Voting Calculation (as described in the Articles) which takes into account the prevailing exchange rates on the date of initial issue of ordinary shares. Currently, a single Sterling ordinary share has 1.5774 votes. A single US Dollar share had 1 vote until the US Dollar share class was closed.

Treasury shares do not have any voting rights.

Repurchase of shares

The Directors have been granted authority to purchase in the market up to 1,558,066 of Sterling shares and they intend to seek annual renewal of this authority from shareholders which was last granted on 22 June 2016. The Directors may, at their discretion, utilise this share repurchase authority to address any imbalance between the supply of and demand for shares.

Distributions

The Directors may from time to time authorise dividends and distributions to be paid to Shareholders on a class by class basis.

The amount of such dividends or distributions paid in respect of one class may be different from that of another class.

The Feeder Fund does not expect to pay dividends to its investors. Therefore, the Directors of the Company do not expect to declare any dividends. This does not prevent the Directors of the Company from declaring a dividend at any time in the future if the Directors consider payment of a dividend to be appropriate in the circumstances.

As announced on 15 January 2014, the Company intends to be operated in such a manner to ensure that its shares are not categorised as non-mainstream pooled investments. This may mean that the Company may pay dividends in support of any income that it receives or is deemed to receive for UK tax purposes so that it would qualify as an investment trust if it were UK tax-resident.

Treasury shares are not entitled to distributions.

Deferred share

The Company has issued one, non-participating, non voting, non redeemable deferred share having the right to the payment of £1 on liquidation of the Company. The deferred share was issued on 19 October 2010 and has a right to vote only if there are no other classes of voting share in issue.

Annual partial capital return offer

Commencing on or after 1 January 2012, for each calendar year the Directors may, in their absolute discretion, determine that the Company should make an offer to redeem such number or value of shares as they may determine provided that the minimum amount distributed shall not be less than 33% and not more than 100% of the increase in the NAV of the Company in the prior calendar year.

The Directors shall, in their absolute discretion, determine the particular class or classes of shares in respect of which an Annual Partial Capital Return Offer will be made, the timetable for that Annual Partial Capital Return Offer and the price at which the shares of each relevant class will be redeemed.

Whether a return of capital is made in any particular year and, if so, the amount of the return, may depend, among other things, on prevailing market conditions, the ability of the Company to liquidate its investment to fund the capital return, the success of prior capital returns and applicable legal, regulatory and tax considerations.

The Directors determined that the Company would not offer an annual partial capital return during 2016.

Share conversion scheme

Previously, the Company implemented a Share Conversion Scheme. The scheme provided shareholders with the ability to convert some or all of their shares in the Company of one class into shares of another class. Shareholders, at the discretion of the Board, were able to convert ordinary shares on the last business day of every month. Each conversion was based on NAV (note 6) of the share classes converted. Following the closure of the US Dollar share class, on 26 April 2016, the share conversion scheme was withdrawn.

5. Taxation

Overview

The Company is exempt from taxation in Guernsey under the provisions of the Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 and pays an annual fee of £1,200 (2015: £1,200). Accordingly, no provision for Guernsey income tax is included in these Unaudited Financial Statements.

Uncertain tax positions

The Company recognises the tax benefits of uncertain tax positions only where the position is more likely than not (i.e. the likelihood is greater than 50 per cent) to be sustained assuming examination by a tax authority based on the technical merits of the position. In evaluating whether a tax position has met the recognition threshold, the Company must presume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognise in the Company’s Audited Financial Statements. Income tax and related interest and penalties would be recognised by the Company as tax expense in the Consolidated Statement of Operations and Performance Allocation if the tax positions were deemed not to meet the 50% likelihood threshold.

The Company analyses all open tax years for all major taxing jurisdictions. Open tax years are those that are open for examination by taxing authorities, as defined by the Statute of Limitations in each jurisdiction. The Company identifies its major tax jurisdictions as the Cayman Islands and foreign jurisdictions where the Company makes significant investments. The Company has no examinations by tax authorities in progress.

The Directors have analysed the Company’s tax positions, and has concluded that no liability for unrecognised tax benefits should be recorded related to uncertain tax positions. Further, the Directors are not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognised tax benefits will significantly change in the next twelve months.

6. Publication and calculation of net asset value

The NAV of the Company is equal to the value of its total assets less its total liabilities. The NAV per share of each class is calculated by dividing the NAV of the relevant share class by the number of shares of the relevant class in issue on that day.

The Company publishes the NAV per share for each class of shares as calculated by the Administrator based in part on information provided by the Feeder Fund, monthly in arrears, as at each month end.

The Company also publishes an estimate of the NAV per share for each class of shares as calculated by the Administrator based in part on information provided by the Feeder Fund, weekly in arrears.

7. Discount management programme

The Company has a discount management programme which includes the ability to make market purchases of shares and the obligation to convene an Extraordinary General Meeting of the Company (a “Discount Trigger EGM”) if, in any fixed discount management period (1 January to 31 December each year), the average daily closing market price of the relevant class of shares during such period is less than 95% of the average NAV per share of the relevant class taken over the 12 monthly NAV Determination Dates in that fixed discount management period, as described more fully in the Company’s Articles.

The discount management measures will be funded by and subject to the Company’s ability to make partial redemptions of the Company’s investment in the Feeder Fund.

In the event of the relevant conditions being met, the Board will hold a Discount Trigger EGM and propose an ordinary resolution, which, if approved, will require the Company to compulsorily redeem the shares which voted in favour of the resolution.

The price at which the shares will be redeemed will be based on the NAV per share of the relevant class, less:

  1. any costs and expenses (including redemption fees) incurred in relation to the Discount Trigger EGM; and
  2. a fractional share of any Offer Costs paid by the Investment Manager (note 4).

Shareholders voting in favour of the resolution will have their shares redeemed in four quarterly instalments.

The Annual Partial Capital Return Offer described in note 4 which enables a partial return of capital also forms part of the discount management programme.

During the period ended 30 June 2016, the Company recorded an average discount to NAV of 11.95% and 10.85% for US Dollar shares and Sterling shares respectively (year to 31 December 2015: 4.70% and 4.73%, six month period ended 30 June 2015: 2.96% and 2.95%).The Company utilised its ability to buy back shares during the period, buying back 458,715 Sterling shares at a cost of £5,098,300 with an average discount to NAV of 9.25%.

At the date of this report, the discount on the Sterling shares had moved to 10.91%. The estimated NAV per share stood at £12.19 for the Sterling shares.

8. Financial highlights

The following tables include selected data for a single ordinary share of each of the ordinary share classes in issue at the period end and other performance information derived from the Unaudited Condensed Interim Financial Statements.

The per share amounts and ratios which are shown reflect the income and expenses of the Company for each class of ordinary share.

01.01.16 to 01.01.16 to
30.06.16 30.06.16
US Dollar shares ^ Sterling shares
US$ £
Per share operating performance
Net asset value at beginning of the period 12.40 12.47
Income from investment operations
Net investment gain 1 0.25 0.63
Net realised loss and unrealised depreciation on investment* (0.79) (0.88)
Other capital items 2 - (0.02)
Total loss (0.54) (0.27)
Conversion of US Dollar shares to Sterling shares (11.86) -
Net asset value, end of the period - 12.19
Total loss (4.34%) (2.21%)

^ Returns of the US Dollar share class have been calculated up to 31 March 2016.

*Foreign exchange hedge gain allocated from the Feeder Fund and currency translation loss arising due to translation of USD allocations to GBP functional currency each amounted to £1.19 per share.

Total return reflects the net return for an investment made at the beginning of the year and is calculated as the change in the NAV per ordinary share during the period from 1 January 2016 to 30 June 2016 and is not annualised. An individual shareholder’s return may vary from these returns based on the timing and entry price of their purchase or sale of shares.

01.01.16 to 01.01.16 to
30.06.16 30.06.16
US Dollar shares ^^ Sterling shares
US$ £
Supplemental data
Net asset value, beginning of the period 27,425 110,397
Net asset value, prior to final share conversion 23,238 107,621
Net asset value, end of the period - 121,108
Average net asset value for the period 25,884 115,040

^^ The US Dollar share class NAV at the end of the period is the NAV as at the 31 March 2016.The average US Dollar share class NAV for the period is calculated based on published NAVs from the start of the period to 31 March 2016.

01.01.16 to 01.01.16 to
30.06.16 30.06.16
US Dollar shares ^^^ Sterling shares
US$ £
Ratio to average net assets
Operating expense
Company expenses 3 0.10% 0.31%
Feeder Fund expenses 4 0.57% 1.25%
Feeder Fund interest expenses 5 0.64% 1.23%
1.31% 2.79%
Net investment gain 1
2.10% 5.16%

^^^Ratio to average net assets for the US Dollar share class is calculated from the start of the period to 31 March 2016.

01.01.15 to 01.01.15 to
31.12.15 31.12.15
US Dollar shares Sterling shares
US$ £
Per share operating performance
Net asset value at beginning of the year 13.71 13.77
Income from investment operations
Net investment gain 1 1.47 1.63
Net realised loss and unrealised depreciation on investment* (2.83) (2.92)
Other capital items 2 0.05 (0.01)
Total loss (1.31) (1.30)
Net asset value, end of the year 12.40 12.47
Total loss (9.52%) (9.48%)

* Foreign exchange hedge loss allocated from the Feeder Fund and currency translation gain arising due to translation of USD allocations to GBP functional currency each amounted to £0.67 per share.

01.01.15 to 01.01.15 to
31.12.15 31.12.15
US Dollar shares Sterling shares
US$ £
Supplemental data
Net asset value, beginning of the year 41,462 114,748
Net asset value, end of the year 27,425 110,397
Average net asset value for the year 36,688 115,109

   

01.01.15 to 01.01.15 to
31.12.15 31.12.15
US Dollar shares Sterling shares
US$ £
Ratio to average net assets
Operating expense
Company expenses 3 0.55% 0.54%
Feeder Fund expenses 4 2.33% 2.36%
Feeder Fund interest expenses 5 1.75% 1.82%
4.63% 4.72%
Net investment gain 1 10.91% 12.05%

   

01.01.15 to 01.01.15 to
30.06.15 30.06.15
US Dollar shares Sterling shares
US$ £
Per share operating performance
Net asset value at beginning of the period 13.71 13.77
Income from investment operations
Net investment gain 1 0.41 0.42
Net realised loss and unrealised depreciation on investment* (0.24) (0.27)
Other capital items 2 (0.02) 0.01
Total return 0.15 0.16
Net asset value, end of the period 13.86 13.93
Total return 1.11% 1.18%

* Foreign exchange hedge gain allocated from the Feeder Fund and currency translation gain arising due to translation of USD allocations to GBP functional currency each amounted to £0.18 per share.

Total return reflects the net return for an investment made at the beginning of the year and is calculated as the change in the NAV per ordinary share during the period from 1 January 2015 to 30 June 2015 and is not annualised. An individual shareholder’s return may vary from these returns based on the timing and entry price of their purchase or sale of shares.

01.01.15 to 01.01.15 to
30.06.15 30.06.15
US Dollar shares Sterling shares
US$ £
Supplemental data
Net asset value, beginning of the period 41,462 114,748
Net asset value, end of the period 38,520 118,333
Average net asset value for the period 41,293 116,114

   

01.01.15 to 01.01.15 to
30.06.15 30.06.15
US Dollar shares Sterling shares
US$ £
Ratio to average net assets
Operating expense
Company expenses 3 0.34% 0.34%
Feeder Fund expenses 4 1.56% 1.56%
Feeder Fund interest expenses 5 0.76% 0.76%
2.66% 2.66%
Net investment gain 1 2.97% 3.01%

1)   The net investment gain figures disclosed above do not include net realised and unrealised gains/losses on investments allocated from the Feeder Fund and Master Fund.

2)   Included in other capital items are share issue costs and the discounts and premiums on conversions between share classes during the period as compared to the NAV per share at the beginning of the year.

3)   Company expenses are as disclosed in the Statement of Operations, excluding the performance fees.

4)   The Feeder and Master Fund’s expenses are the operating expenses of the Feeder and Master Fund respectively.

5)   Feeder and Master Fund interest expense includes interest and dividend expenses on investments sold short.

9. Related party transactions

Parties are considered to be related if one party has the ability to control the other party in making financial or operational decisions.

On 1 January 2015, the Company redeemed, in specie, $41,646,556 of the US Dollar shares and £115,151,649 of the Sterling shares it held in BHCC, amounting to an equivalent amount of US$220,828,279, and in return received Class A shares of the Feeder Fund (a company managed by the Investment Manager) in US Dollar and Sterling classes in proportions matching the relative number of US Dollar and Sterling shares of the Company in issue at the time.

Management fees are disclosed in note 3.

Directors’ fees charged during the period/year were as follows:

01.01.16 to 01.01.15 to 01.01.15 to
30.06.16 31.12.15 30.06.15
£ £ £
Charlotte Valeur 33,000 66,000 33,000
Keith Dorrian 16,500 33,000 16,500
Partick Firth 20,000 40,000 20,000
Christopher Waldron  16,500 33,000 16,500
Andrew Rosenthal* - - -
86,000 172,000 86,000

*Andrew Rosenthal has waived his right to receive a Director fee.

The Company shares held by the Directors at period/year end were as follows:

Sterling shares
30.06.16 31.12.15 30.06.15
Charlotte Valeur 4,236 4,236 4,236
Keith Dorrian Nil Nil Nil
Partick Firth 500 500 500
Christopher Waldron 500 500 500
Andrew Rosenthal Nil Nil Nil

At 30 June 2016, David Warren - the Chief Investment Officer of DW – held 173,257 Sterling shares (31 December 2015: 52,270 US Dollar shares and 135,512 Sterling shares) in the Company.

10. Subsequent events

The Financial Statements were approved for issuance by the Directors on 27 September 2016. Subsequent events have been evaluated up to this date.

Subsequent to the period end and up to the date of this report, the Company purchased the following shares of the Company to be held as treasury shares:

Number of shares Cost Cost
Treasury shares  purchased £ US$
Sterling shares 252,500 2,770,237 3,636,678

Following the purchase of shares, the Company has 9,682,817 Sterling shares in issue.

No further subsequent events have occurred.


COMPANY INFORMATION

Directors
Charlotte Valeur* (Chair)
(appointed 31 October 2010)

Keith Dorrian* (Senior Independent Director)
(appointed 31 October 2010)

Patrick Firth* (Chair of Audit and Risk Committee)
(appointed 31 October 2010)

Christopher Waldron*
(appointed 31 October 2010)

Andrew Rosenthal
(appointed 8 April 2015)

(All Directors are non-executive)
* These Directors are independent for the purpose of LR15.2.12-A.

Registered Office
PO Box 255
Trafalgar Court
Les Banques
St. Peter Port
Guernsey
GY1 3QL

Investment Manager
DW Partners, LP
590 Madison Avenue
13th Floor
New York
NT 10022

Administrator and Corporate Secretary
Northern Trust International Fund
Administration Services (Guernsey) Limited
PO Box 255
Trafalgar Court
Les Banques
St. Peter Port
Guernsey
GY1 3QL

Independent Auditor
Ernst & Young LLP
PO Box 9, Royal Chambers
St Julian’s Avenue
St Peter Port
Guernsey
GY1 4AF

Registrar and CREST Service Provider
Computershare Investor Services (Guernsey) Limited
rd Floor, Natwest House
Le Truchot
St. Peter Port
Guernsey
GY1 1WD

Legal Advisors (Guernsey Law)
Carey Olsen
Carey House
Les Banques
St. Peter Port
Guernsey
GY1 4BZ

Legal Advisors (UK Law)
Freshfields Bruckhaus Deringer LLP
65 Fleet Street
London
EC4Y 1HS

Corporate Brokers
JPMorgan Cazenove
25 Bank Street
London
E14 5JP

Fidante Capital(formerly Dexion Capital Plc)
1 Tudor Street
London
EC4Y 0AH

For the latest informationwww.dwcatalystltd.com
 

Related Charts

DW Catalyst Fund (DWCG)

+4.50p (+0.40%)
delayed 12:37PM