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 2022

 

 

NAV and share price total return**		Year to 30 June 2022	Year to 30 June 2021
Net asset value* (NAV)		2.04%	21.38%
Ordinary share price		1.21%	26.31%
Capital Values		30 June 2022	30 June 2021	% change
Total assets less current liabilities (with the exception of the bank loan facility)		£268.0m	£267.2m	0.30%
NAV per ordinary share*		49.30p	52.62p	(6.31%)
Share price (bid)1		51.20p	54.80p	(6.57%)
Revenue and Dividends		30 June 2022	30 June 2021	% change
Revenue earnings per ordinary share**		4.16p	4.18p	(0.48%)
Annual dividends per ordinary share**		4.48p	4.47p	0.22%
Dividend cover**		0.93x	0.94x	(1.06%)
Revenue reserve per ordinary share (after recognition of annual dividends)**		3.26p	3.78p
Dividend yield**		8.75%	8.16%
Premium**		3.86%	4.14%
Gearing**		12.35%	9.21%
Ongoing charges ratio**		1.19%	1.25%
Dividend History	Rate	xd date	Record date	Payment date
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
First interim 2021	1.00p	22 October 2020	23 October 2020	30 November 2020
Second interim 2021	1.00p	28 January 2021	29 January 2021	26 February 2021
Third interim 2021	1.00p	29 April 2021	30 April 2021	28 May 2021
Fourth interim 2021	1.47p	29 July 2021	30 July 2021	31 August 2021
Annual dividend per ordinary share	4.47p

 

¹ Source: Bloomberg

 

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

** A description of the Alternative Performance Measures used above and information on how they are calculated can be found below.

 

Statement from the Chair

Highlights

·      Net asset value total return of 2.04%

·      Ordinary share price total return of 1.21%

·      Dividend yield of 8.75%, based on dividends at an annualised rate of 4.48 pence and a share price of 51.20 pence as at 30 June 2022

·      Ordinary share price trading at a premium of 3.86% as at 30 June 2022

·      £17.2m of equity raised during the year to 30 June 2022

Investment and Share Price Performance

When I last wrote to Shareholders in February of this year, I reported on steady progress for the Company in terms of NAV and share price but noted there were worrying signs of increasing inflation and to mitigate this effect, central banks had begun to increase interest rates. The second half of the Company's financial year has indeed been much more difficult as the terrible invasion of Ukraine by Russia has unfolded. Markets have been rattled by this situation and the rising energy costs which followed. However, the full year performance numbers show that the net asset value of the Company managed a small positive total return of 2.04% and 1.21% from the total share price return. The premium stood at 3.86% as at 30 June 2022, close to the previous year-end figure of 4.14%.

The economic and geopolitical backdrop to your Company's financial year, particularly the second half, has been exceptionally difficult. The ongoing COVID-19 pandemic is still causing issues across the world, notably with supply chains, to which rising inflation and interest rates and the geopolitical events in the Ukraine have been added. In terms of direct impact, the Company experienced a 3.1% portfolio loss following the write-down of Raven Property Group Ltd and Raven Russia 12% 09-31/12/2059, investments connected to Russia. Your Investment Manager, Ian ("Franco") Francis, has many years of experience working in volatile markets utilising his underlying philosophy and stock selection to construct a diverse portfolio and this has been put to good use in the current environment. In my opinion, your Company's portfolio results this year against this backdrop of negative news are commendable and come on the back of the net asset value total return of over 21% last year. The Investment Manager's review below provides more details.

Earnings and Dividends

The Company's revenue earnings per ordinary share were 4.16 pence for the financial year, 0.5% lower than the 4.18 pence earned last year. Earnings were impacted by the passing of coupons from Raven Property, as detailed above. In my report last year, I noted that the Board was monitoring the potential reduction in investment opportunities available to the Company because of declining yields. This trend looks to be reversing because of recent rises in interest rates from central Governments which means that the Investment Manager is finding a greater range of suitable securities to invest in. This bodes well for future earnings.

The Company declared three interim dividends of 1.00 pence in respect of the period and one interim dividend of 1.48 pence since the year end. The aggregate payment of 4.48 pence per ordinary share represents a 0.22% increase on the 4.47 pence paid last year. The Board recognises the importance of the relatively high dividend to Shareholders and as flagged in previous reports, decided to utilise 0.32 pence per ordinary share of our 3.78 pence per ordinary share revenue reserves to cover the shortfall of earnings. The Board also decided to increase this year's dividend, albeit marginally, to maintain the Company's record of annual increases which has been unbroken since 2007.

Looking forward, the Board expects to pay similar dividends in the current financial year to last, possibly drawing modestly on our reserves but anticipating some increase in earnings per ordinary share. As I wrote in last year's report, the Board believes that this policy is supported by our Shareholders whom we consult regularly and we envisage continuing in this way in the near future, utilising one of the advantages of being a closed-ended fund.

Gearing

In December 2021, the Company replaced its existing loan facility with Scotiabank with a two year £45m facility at a current all-in rate of 1.45% plus a daily non-cumulative RFR rate with the same bank. Of this facility, £33m was drawn down at 30 June 2022 and the Company had an effective gearing rate of 12.35%. As I have shared in previous reports, the Board believes that a modest but meaningful amount of gearing (another notable advantage of closed-ended funds compared to open-ended) is desirable and expects to maintain approximately this level of gearing during the next financial year.

Share Issuance

For most of the year to 30 June 2022, the market attached a premium rating to your Company's shares, allowing us to issue new shares in a gradual manner and only when your Investment Manager was confident he could invest the additional funds favourably. £17.2m was raised from new and existing Shareholders during the review period, with 31.6m ordinary shares issued from the block listing facility. As well as a modest increase in net asset value 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.

Notice of Annual General Meeting

The notice of the Annual General Meeting to be held at 11.00 a.m. at IFC1, The Esplanade, St. Helier, Jersey, JE1 4BP on 1 December 2022, including the proposed resolutions, will be included in the Company's Annual Financial Report and Financial Statements. The Board considers that the passing of the resolutions to be proposed at the Annual General Meeting is in the best interests of the Company and its Shareholders as a whole and is most likely to promote the success of the Company for the benefit of the Shareholders as a whole. The Board unanimously recommends that all Shareholders vote in favour of these resolutions.

Outlook

The environment is particularly uncertain at present and unlikely to become less so in the immediate future. We can be pretty sure we will see further interest rate rises but how this translates into the inflation trajectory and impact on economic growth is not clear. However, I believe that your Company's portfolio has the attributes to weather the current storm. I have written before that the short remaining life of the majority of our fixed interest investments gives us some protection from rising yields and I expect that the rigorous credit analysis carried out by the team of your Investment Manager on the bond issuers reduces our default risk. Finally, the portfolio is well diversified including some exposure to currencies other than sterling and small but significant holdings in equities. All these factors add up to a robust portfolio and overall, I believe we are in good shape to continue delivering attractive returns to our shareholders.

Caroline Hitch

Chair

15 September 2022

 

Investment Manager's Review

 

Introduction

 

After a quiet six-month period to the end of December 2021, the second half of our financial year has seen major political and economic upheavals. As the restrictions from the latest COVID-19 Omicron variant began to recede, markets began to focus more on inflation concerns and what central Governments could do to rein in rampant inflation levels. Then came the dreadful Russian invasion of Ukraine in February 2022 which brought the spectre of an all-out war to Europe and caused commodities prices, particularly in energy, to increase substantially and exacerbate the worries over inflation. Equity and Bond markets in the first six months of 2022 have fallen sharply as investors have become concerned about inflation and the potential for economic recessions. The Company's portfolio has been affected by a Russia connected investment of which further details are provided below; nevertheless, the diverse nature of our portfolio holdings has meant that the overall net asset value total return for the 12 months to 30 June 2022 is a positive one at a modest 2.04%.

 

Market and economic review

 

The first half of our financial year saw economists and market commentators begin to realise that the spectre of inflation was more permanent than they had previously thought. At the end of June 2021, the UK CPI reading was an annual increase of 2.4%; by the end of December 2021 this had reached 5.4% and at our year-end in June 2022 consumer inflation was a massive 9.1%. A similar pattern emerged in the US and Europe. Up until the start of December 2021 equity stock markets seemed to shrug off worries over inflation and COVID-19 restrictions and were generally positive with major indices at near all-time highs in many markets. Markets started to come off their highs late in 2021 and fell sharply in January 2022 as economies stalled as supply chains were under pressure from rising inflation and ongoing COVID-19 restrictions.

 

As we started February, concerns were raised about the developing mobilisation of a considerable Russian force on the border of Ukraine. Despite warnings from western governments, on 24 February 2022 we saw the terrible full-on attack on various areas of Ukraine, from which point western sanctions have been massively increased. The continuing Russian invasion of Ukraine has increased the pressures on supply chains and inflated prices for oil, gas, and many hard and soft commodities. The net effect is the slowing of economic growth and post-pandemic recovery globally. Government largesse is constrained as the concerted stimulus to protect economies during the early COVID-19 era is largely at an end. Generally, the major tool available to central banks to curb inflation is interest rates and we have started to see a wave of interest rate rises around the world.

 

Markets have fallen sharply in 2022 as investors worry about inflation and slowing growth with the spectre of "stagflation" becoming apparent. In the UK, the FTSE All-Share Index fell by 6.6% over the six months to the end of June 2022 as the high weighting to commodity stocks help mitigate the fall whereas the Euro Stoxx 600 fell by 16% and the S&P 500 fell by 20.6% over the same period. High yield bond markets were also weak falling by around 14%.

 

Portfolio Review

 

We have continued to maintain a diversified portfolio across a range of sectors and during the year we have increased the proportion of the portfolio held in non-sterling currencies to help protect against sterling weakness.

 

The Company's portfolio was negatively affected by the Ukraine conflict as we held investments in a Guernsey domiciled company called Raven Property Group which has direct exposure to Russia. Its main business is operating warehouses for Western companies in St. Petersburg and Moscow. At the end of January, we had 2.9% of the Company's portfolio in the Raven Property 12% preference shares and 0.2% in its ordinary shares. Following the invasion, Raven suspended its shares and advised it was unlikely to be able to continue maintaining normal operations. It has since been delisted from the stock exchange, coupon payments on the preference shares have ceased and the price of both securities has been written down to zero in the Company's portfolio. We are monitoring the position and will wait to see what happens to Raven Property when hopefully the situation stabilises.

 

Three of the new holdings in the top ten over the year are positions that we have held for some time and have made their way into the top ten more recently, namely REA Finance, Stonegate Pub Group and Diversified Energy. There are two other new holdings in the top ten; Mangrove Luxco 7.775% 2025 which is a holding company for a German heat exchange manufacturer and Hawk Debtco 10.5% 2024 which is a financing company for an Aberdeen based energy services firm.

 

The revenue account has seen earnings per ordinary share of 4.16p come in below our total dividend of 4.48p for the year. In past years we have been able to put significant sums into the revenue reserves and we have again modestly utilised these this year to ensure that this dividend is paid to shareholders. In my 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 background for the short to medium term is hardly a positive one. There is the prospect of stagflation in the UK, increasing interest rates, double digit inflation, increasing unrest from major unions in the UK promising an autumn and winter of discontent. We have a new prime Minister in the UK and she has an onerous task ahead of her in trying to change existing policies in order to tackle the cost-of-living crisis. There are also a host of external factors out of the control of the UK government such as the ongoing war in Ukraine and continuing lockdowns in China.

 

For the Company, whilst all the above put stresses and strains on the markets, we have a diverse portfolio across sectors and currencies and imperfect markets should create opportunities for prudent investment. We have seen these types of market before and will continue to work hard for you.

 

Ian "Franco" Francis

New City Investment Managers

15 September 2022

 

Classification of Investment Portfolio

As at 30 June

 

By Currency	2022 Total investments %	2021 Total investments %
Sterling	62	68
US Dollar	23	22
Euro	12	9
Swedish Krona	2	-
Norwegian Krone	1	1
Total investments	100	100
By Asset Class	2022 Total investments %	2021 Total investments %
Bonds	81	84
Equity shares	19	15
Convertible Bonds	-	1
Total investments	100	100

 

Classification of Investment Portfolio by Sector

	2022 Total investments %	2021 Total investments %
Financials	36.9	45.0
Energy	21.8	16.5
Industrials	10.8	10.4
Consumer Discretionary	10.1	6.0
Consumer Staples	9.0	8.2
Information Technology	4.9	2.9
Real Estate	4.3	6.9
Materials	2.2	4.1
Total Investments	100.0	100.0

 

Investment Portfolio

As at 30 June 2022

 

Company	Sector	Valuation £'000	Total Investments %
Galaxy Finco Ltd 9.25% 31/07/2027	Financials	12,774	4.9
Shawbrook Group 31/12/2059 FRN	Financials	12,409	4.7
Virgin Money FRN PERP	Financials	12,188	4.6
Aggregated Micro 8% 17/10/2036	Energy	10,900	4.1
Co-Operative Fin 25/04/2029 FRN	Financials	8,616	3.3
REA Finance 8.75% 31/08/2025	Consumer Staples	8,592	3.3
Stonegate Pub 8.25% 31/07/2025	Consumer Discretionary	8,308	3.2
Mangrove Luxco Ltd 7.775% 19-09/10/2025	Financials	7,637	2.9
Hawk Debtco Ltd 10.5% 22/12/2024	Industrials	7,507	2.8
Diversified Energy Co Plc	Energy	7,490	2.8
Top ten investments		96,421	36.6
Albion Financing 8.75% 21-15/04/2027	Industrials	7,221	2.7
Boparan Finance 7.625% 30/11/2025	Consumer Staples	7,192	2.7
Arrow Bidco Llc 9.5% 15/03/2024	Consumer Discretionary	6,858	2.6
American Tanker 7.75% 02/07/2025	Energy	6,489	2.5
Euronav NV	Energy	6,026	2.3
Garfunkelux Hold 7.75% 20-01/11/2025	Financials	5,708	2.2
VPC Specialty Lending Invest	Financials	5,004	1.9
Just Group Plc 31/12/2059 FRN	Financials	4,583	1.7
Inspired Enterta 7.875% 21-01/06/2026	Information Technology	4,537	1.7
Azerion Holdings 7.25% 28/04/2024	Information Technology	4,344	1.7
Top twenty investments		154,383	58.6
M&G Plc	Financials	4,281	1.7
REA Holdings Plc PREF	Consumer Staples	4,215	1.6
Ithaca Energy N 9% 21-15/07/2026	Energy	4,208	1.6
Matalan Finance 9.5% 18-31/01/2024	Consumer Discretionary	3,845	1.5
Enquest Plc 7% 15/10/2023	Energy	3,689	1.4
Shamaran 12% 05/07/2023	Energy	3,550	1.3
Phoenix Group Holdings Plc	Financials	3,542	1.3
Euronav Lux 6.25% 21-14/09/2026	Energy	3,508	1.3
Barclays Plc 29/12/2049 FRN	Financials	3,481	1.3
Deutsche Bank AG 30/05/2049 FRN	Financials	3,370	1.3
Top thirty investments		192,072	72.9
Stonegrate Pub 8% 20-13/07/2025	Consumer Discretionary	3,311	1.2
TVL Finance 9% 20-15/01/2025	Consumer Discretionary	3,228	1.2
Welltec A/S 9.5% 01/12/2022	Energy	3,200	1.2
Bombardier Inc 7.5% 15/03/2025	Industrials	3,175	1.2
Channel Island Property Fund	Real Estate	3,060	1.2
Coburn Resources 12% 20/03/2026	Materials	3,041	1.2
RM Secured Direct Lending Plc	Financials	2,864	1.1
Siccar Point Energy 9% 04/03/2026	Energy	2,783	1.1
Petrotal Corp 12% 16/02/2024	Energy	2,774	1.0
First Quantum 7.5% 01/04/2025	Materials	2,640	1.0
Top forty investments		222,148	84.3
Summer BC Holdco 9.25% 19-31/10/2027	Industrials	2,377	0.9
HDL Debenture 10.375% 93-31/07/2023	Real Estate	2,270	0.9
Tufton Oceanic Assets Ltd	Financials	2,261	0.9
Doric Nimrod Air Three Ltd	Industrials	2,177	0.8
Oaknorth Bank 01/06/2028 FRN	Financials	2,020	0.8
Lloyds Banking 29/12/2049 FRN	Financials	1,948	0.7
AEW UK REIT Plc	Real Estate	1,929	0.7
Gaming Innovation 11/06/2024 FRN	Information Technology	1,893	0.7
Independent Oil 20/09/2024 FRN	Energy	1,752	0.7
Lloyds Banking 29/12/2049 FRN	Financials	1,746	0.7
Top fifty investments		242,521	92.1
NewRiver REIT plc	Real Estate	1,642	0.6
Greenfood AB 21-04/11/2025 FRN	Consumer Staples	1,639	0.6
Kent Global Plc 10% 28/06/2026	Energy	1,440	0.5
Palace Capital Plc	Real Estate	1,260	0.5
Navig Topco Holding 12% 03/05/2023	Industrials	1,254	0.5
Regional REIT Ltd	Real Estate	1,072	0.4
Nor5ke Viking 21-03/05/2024 FRN	Information Technology	1,037	0.4
House Of HR 7.5% 15/01/2027	Industrials	1,002	0.4
Harbour Energy Plc	Energy	868	0.3
Navigator Holdings 8% 10/09/2025	Energy	818	0.3
Top sixty investments		254,553	96.6
REA Holdings Plc 7.5% 30/06/2026	Consumer Staples	764	0.3
Casino Guichard 31/01/2049 FRN	Consumer Staples	757	0.3
REA Trading 9.5% 21-30/06/2024	Consumer Discretionary	650	0.3
Shamaran 12% 21-30/07/2025	Energy	631	0.3
Croma Security Solutions Group	Information Technology	625	0.2
Marex Group 22-30/12/2170 FRN	Financials	619	0.2
Hoist Finance AB 31/12/2060 FRN	Financials	573	0.2
West Bromwich BS 11% 18-12/04/2038	Financials	524	0.2
Cabonline GR 22-19/04/2026 FRN	Information Technology	482	0.2
R.E.A. Holdings Plc CW 15/07/2025	Consumer Staples	453	0.2
Top seventy investments		260,631	99.0
Other investments (36)		2,762	1.0
Total investments		263,393	100.0

 

Notes:
CV - Convertible Bond	PREF - Preference Shares
FRN - Floating Rate Note	REIT - Real Estate Investment Trust
PERP - Perpetual

 

Ten Largest Holdings

	Valuation 30 June 2021 £'000	Purchases £'000	Sales £'000	Revaluation gain/(loss) £'000	Valuation 30 June 2022 £'000
Galaxy Finco Ltd  9.25% 31/07/2027 A specialist provider of warranties for consumer electric products.	12,133	1,905	-	(1,264)	12,774
Shawbrook Group 7.875% FRN PERP A British multinational banking and financial services company.	10,793	2,074	-	(458)	12,409
Virgin Money FRN PERP A British banking company concentrating on UK Retail and SME regional banking services.	-	12,895	-	(707)	12,188
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.	8,838	2,281	-	(219)	10,900
Co-Operative Finance 25/04/2029 FRN A retail and commercial bank in the United Kingdom	8,466	1,058	-	(908)	8,616
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.	6,318	1,881	-	393	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 United Kingdom.	6,271	3,208	-	(1,171)	8,308
Mangrove Luxco 7.775% 19-09/10/2025 Holding company for a German heat exchange manufacturer.	-	8,142	-	(505)	7,637
Hawk Debtco Ltd 10.5% 20-22/12/2024 A financing company for an Aberdeen based energy services firm.	3,494	3,539	-	474	7,507
Diversified Energy Co Plc Energy Company focusing on US natural gas.	3,205	3,861	-	424	7,490
	59,518	40,844	-	(3,941)	96,421

 

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 2022. 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 Law").

 

The Company's ordinary shares are listed on the Official List of the UK Listing Authority and admitted to trading on the Main Market of the London Stock Exchange.

 

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 securities and accordingly the Company may invest up to 100% of total assets in any particular type of security.

 

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. 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 Company may not invest more than 7.5% of its total investments in the same investee company and that this be limited to no more than 3 investee companies with a maximum investment limit of 5% thereafter. In addition, there is a maximum investment limit whereby, at the time of investment, the Company may not invest more than 5% of its total investments in any one security.

 

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 key performance indicators are as follows:

 

·      Dividend Yield and Dividend Cover

It is intended that the Company will pay 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 2022, the Company's dividend yield was 8.75% (30 June 2021: 8.16%) based upon a share price of 51.20 pence (bid price) as at 30 June 2022 (30 June 2021: 54.80 pence) and its dividend cover was 0.93x (30 June 2021: 0.94x).

 

·      Revenue Earnings and Dividends per ordinary share

The Company has opted to follow the AIC's Statement of Recommended Practice: Financial Statements of Investment Trusts and Venture Capital Trusts (the "AIC 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 4.48 pence per ordinary share out of revenue earnings per ordinary share of 4.16 pence per ordinary share.

 

·      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 2022 was 1.19% (2021: 1.25%).

 

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 'Alternative Performance Measures' (APMs) under guidance issued by the European Securities and Markets Authority. Additional information explaining how these are calculated is set out in the Alternative Performance Measures 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 Annual General Meeting 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, the Board considers it likely that Shareholders will vote in favour of continuation at the forthcoming Annual General Meeting.

 

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 that the Russia-Ukraine conflict has 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 are incorporated into 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

15 September 2022

 

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 International Financial Reporting Standards as adopted by the European Union (EU) and applicable law.

 

Under company law 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 International Financial Reporting Standards (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

15 September 2022

 

Statement of Comprehensive Income

For the year ended 30 June 2022

 

		Year ended 30 June 2022			Year ended 30 June 2021
	Notes	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Net capital gains/(losses)
(Losses)/gains on financial assets designated at fair value	9	-	(14,459)	(14,459)	-	23,913	23,913
Foreign exchange gain/(loss)*		-	61	61	-	(36)	(36)
Revenue
Investment income	2	22,362	-	22,362	21,151	-	21,151
Total Income		22,362	(14,398)	7,964	21,151	23,877	45,028
Expenses
Investment management fee	3	(1,595)	(531)	(2,126)	(1,456)	(485)	(1,941)
Other expenses	4	(772)	(75)	(847)	(800)	(14)	(814)
Total expenses		(2,367)	(606)	(2,973)	(2,256)	(499)	(2,755)
Profit/(loss) before finance costs and taxation		19,995	(15,004)	4,991	18,895	23,378	42,273
Finance income/(costs)
Interest income		1	-	1	-	-	-
Interest expense	5	(456)	(152)	(608)	(326)	(107)	(433)
Profit/(loss) before taxation		19,540	(15,156)	4,384	18,569	23,271	41,840
Irrecoverable withholding tax	6	(377)	-	(377)	(267)	-	(267)
Profit/(loss) after taxation and total comprehensive income/(loss)		19,163	(15,156)	4,007	18,302	23,271	41,573
Basic and diluted earnings/(losses) per ordinary share (pence)	8	4.16	(3.29)	0.87	4.18	5.32	9.50

 

* Excludes foreign exchange gains and losses on financial assets designated through profit and loss which are presented within (losses)/gains on financial assets designated 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 Association of Investment Companies.

 

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 2022

 

	Notes	As at 30 June 2022 £'000	As at 30 June 2021 £'000
Non-current assets
Financial assets designated at fair value through profit or loss	9	263,393	257,467
Current assets
Debtors and other receivables	10	3,819	3,585
Cash and cash equivalents		3,985	11,427
		7,804	15,012
Total assets		271,197	272,479
Non-current liabilities
Bank loan	11	(33,000)	-
Current liabilities
Bank loan	11	-	(33,000)
Creditors and other payables	12	(3,211)	(5,301)
Total liabilities		(36,211)	(38,301)
Net asset value		234,986	234,178
Stated capital and reserves
Stated capital account	13	220,649	203,416
Special distributable reserve		50,385	50,385
Capital reserve		(51,610)	(36,454)
Revenue reserve		15,562	16,831
Equity Shareholders' funds		234,986	234,178
Net asset value per ordinary share (pence)	15	49.30p	52.62p

 

The Financial Statements were approved by the Board of Directors and authorised for issue on 15 September 2022 and were signed on its behalf by:

 

Caroline Hitch

Chair

15 September 2022

 

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

 

Statement of Changes in Equity

For the year ended 30 June 2022

 

	Notes	Stated capital account* £'000	Special distributable reserve‡ £'000	Capital reserve* £'000	Revenue reserve† £'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

 

For the year ended 30 June 2021

 

	Notes	Stated capital account* £'000	Special distributable reserve‡ £'000	Capital reserve* £'000	Revenue reserve† £'000	Total   £'000
At 1 July 2020		197,037	50,385	(59,725)	17,982	205,679
Total comprehensive  income for the year:
Profit for the year		-	-	23,271	18,302	41,573
Transactions with owners recognised directly in equity:
Dividends paid	7	-	-	-	(19,453)	(19,453)
Net proceeds from issue of shares	13	6,379	-	-	-	6,379
At 30 June 2021		203,416	50,385	(36,454)	16,831	234,178

 

 * 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. However, it is the Company's policy to account for revenue items and pay dividends, drawing where necessary from a separate revenue reserve.

 

‡ The balance on the special distributable reserve of £50,385,000 (2021: £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.

 

† The balance on the revenue reserve of £15,562,000 (2021: £16,831,000) 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 2022

 

	Notes	Year ended 30 June 2022 £'000	Year ended 30 June 2021 £'000
Operating activities
Profit before finance income/(cost) and taxation1		4,991	42,273
Adjustments to reconcile profit before tax to net cash flows:
Realised (gains)/losses on financial assets designated at fair value through profit or loss	9	(3,631)	11,575
Unrealised losses/(gains) on financial assets designated at fair value through profit or loss	9	18,090	(35,489)
Effective interest adjustment	9	(154)	(232)
Foreign exchange (gain)/loss		(61)	36
Purchase of financial assets designated at fair value through profit or loss2		(110,433)	(70,415)
Proceeds from sale of financial assets designated at fair value through profit or loss3		85,833	73,280
Changes in working capital
(Increase)/decrease in other receivables		(508)	51
Increase/(decrease) in other payables		2,266	(422)
Irrecoverable withholding tax paid		(377)	(267)
Net cash (used in)/generated from operating activities		(3,984)	20,390
Financing activities
Dividends paid	7	(20,432)	(19,453)
Drawdown of bank loan	11	-	2,000
Finance costs		(595)	(431)
Proceeds from issuance of ordinary shares4	13	17,508	6,104
Net cash used in financing activities		(3,519)	(11,780)
(Decrease)/increase in cash and cash equivalents		(7,503)	8,610
Cash and cash equivalents at the start of the year		11,427	2,853
Exchange gain/(loss)		61	(36)
Cash and cash equivalents at the end of the year		3,985	11,427

 

¹ Included within profit before finance income/(cost) and taxation is dividend income of £3,684,000 (30 June 2021: £2,934,000) and interest income of £18,678,000 (30 June 2021: £18,217,000).

² Amounts due to brokers as at 30 June 2022 relating to purchases of financial assets designated at fair value through profit amounted to £613,000 (30 June 2021: £4,980,000).

³ Amounts due from brokers as at 30 June 2022 relating to sales of financial assets designated at fair value through profit amounted to £nil (30 June 2021: £nil).

⁴ Amounts due on new share issuance not yet received as at 30 June 2022 amounted to £nil (30 June 2021: £275,000).

 

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 International Financial Reporting Standards ("IFRS") as adopted by the European Union and in accordance with the guidance set out in the Statement of Recommended Practice ("SORP"): Financial Statements of Investment Trust Companies and Venture Capital Trusts issued by the AIC in November 2014 and updated most recently in April 2021 with consequential amendments. Notwithstanding that CQS New City High Yield Fund Limited (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 notes and Financial Statements 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 Annual General Meeting 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, the Board considers it likely that Shareholders will vote in favour of continuation at the forthcoming Annual General Meeting.

 

The Company's existing loan facility as detailed below has been renewed for an amount of up to £45 million 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, impact of COVID-19 and the impact of the Russia-Ukraine conflict 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:

 

Interest Rate Benchmark Reform - Phase 2

These amendments address issues that might affect financial reporting as a result of the reform of an interest rate benchmark, including the effects of changes to contractual cash flows or hedging relationships arising from the replacement of an interest rate benchmark with an alternative benchmark rate. The amendments provide practical relief from certain requirements in IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 relating to changes in the basis for determining contractual cash flows of financial assets, financial liabilities and lease liabilities; and hedge accounting (no impact).

 

Change in basis for determining cash flows

The amendments require an entity to account for a change in the basis for determining the contractual cash flows of a financial asset or financial liability that is required by interest rate benchmark reform by updating the effective interest rate of the financial asset or financial liability.

 

At the beginning of the period, the Company had an unsecured loan facility with Scotiabank Europe Plc that had a limit of £35 million of which £33 million was drawn down at an interest rate of 1.35% + LIBOR. Pursuant to a Seventh Amendment Agreement with effective date 17 December 2021, the loan facility was increased to a committed limit of £45 million (with an option to increase by a further £5 million) of which £33 million was still drawn down as at the year end. The interest rate was changed to 1.45% plus a compounded reference rate. As from 17 September 2021, the Company had replaced LIBOR by SONIA for the calculation of interest on the loan facility.

 

The Company held floating rate investments securities which were subject to the IBOR reform during the period given that their interest rates referenced LIBOR. All of those positions have replaced LIBOR by SONIA as from 1 July 2021, for the determination of the interest amounts due to the Company.

 

Standards and amendments becoming effective in future periods:

 

A number of amendments and interpretations to existing standards have been issued, but are not yet effective, that are not relevant to the Company's operations. The Directors believe that the application of these amendments and interpretations will not 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 is 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 (IPEV) 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.

 

In respect of two of the Company's investments in particular, Raven Property Group Ltd and Raven Russia 12% 09-31/12/2059, the Investment Manager marked the positions to a fair value of nil as at 30 June 2022, following the Russian/Ukraine conflict. Raven suspended its shares during the year and advised it was unlikely to be able to continue maintaining normal operations. It has since been delisted from the stock exchange, coupon payments on the preference shares have ceased and the price of both securities has been written down to zero in the Company's portfolio.

 

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

(a) 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.

 

(b) 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.

 

(c) 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 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 Income

	2022 £'000	2021 £'000
Income from investments*
Dividend income	3,684	2,934
Interest on fixed income securities†	18,678	18,217
Total income	22,362	21,151

 

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

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

 

3 Investment management fee

	2022 Revenue £'000	2022 Capital £'000	2022 Total £'000	2021 Revenue £'000	2021 Capital £'000	2021 Total £'000
Investment management fee	1,595	531	2,126	1,456	485	1,941

 

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

 

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 million, 0.70% per annum of total assets in excess of £200 million and up to and including £300 million and 0.60% per annum thereafter. The management fee is paid monthly in arrears.

                                                                                                           

The contract between the Company and CQS (UK) LLP may be terminated by either party giving not less than 12 months' notice of termination.    

 

During the year ended 30 June 2022, investment management fees of £2,126,000 were incurred (year ended 30 June 2021: £1,941,000), of which £173,000 was payable at the period end (year ended 30 June 2021: £168,000). Investment management fees have been allocated 75% to revenue and 25% to capital.    

 

4 Other Expenses

	2022 Revenue £'000	2022 Capital £'000	2022 Total £'000	2021 Revenue £'000	2021 Capital £'000	2021 Total £'000
Secretarial and administration fees	207	-	207	202	-	202
Directors' fees	169	-	169	157	-	157
Auditors' remuneration for:
- audit services	48	-	48	40	-	40
Broker fees	30	-	30	30	-	30
Printing	8	-	8	20	-	20
Bank and custody charges	110	-	110	84	-	84
Registrars' fees	37	-	37	34	-	34
Depositary fees	45	-	45	45	-	45
Legal and professional fees	40	-	40	43	-	43
Other	78	75	153	145	14	159
	772	75	847	800	14	814

 

Directors' fees

On 3 June 2021, the Board approved an increased level of remuneration for the Directors from £156,500 (Chair: £40,000; Audit Chair: £34,000 and other directors: £27,500) to £169,000 with annual effect from 1 July 2021 as follows:

 

Chair £42,500

Audit Chair £36,500

Other £30,000

 

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

 

Further details are provided in the Directors' Remuneration Report.                                                                                                                                 

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

 

Non-audit fees paid to the auditor                                                                                                       

There were no non-audit fees paid to the auditor during the year ended 30 June 2022 (year ended 30 June 2021: £nil).                                                                                                      

5 Interest expense

	2022 Revenue £'000	2022 Capital £'000	2022 Total £'000	2021 Revenue £'000	2021 Capital £'000	2021 Total £'000
Interest expense	456	152	608	326	107	433

 

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

 

6 Taxation

The taxation charge for the year is comprised of:

	2022 Revenue £'000	2022 Capital £'000	2022 Total £'000	2021 Revenue £'000	2021 Capital £'000	2021 Total £'000
Irrecoverable withholding tax suffered	377	-	377	267	-	267

 

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% (2021: 0%) as follows:

 

	2022 £'000	2021 £'000
Profit on ordinary activities before taxation	4,384	41,840
Theoretical tax expense at 0% (2021: 0%)	-	-
Effects of:
Foreign withholding tax	377	267
Current year revenue tax charge	377	267

 

7 Dividends

	2022 £'000	2021 £'000
Amounts recognised as distributions to equity holders in the year:
Dividends in respect of the year ended 30 June 2021
- Fourth interim dividend of 1.47p (2020: 1.46p) per ordinary share	6,557	6,319
Dividends in respect of the year ended 30 June 2022
- First interim dividend of 1.00p (2021: 1.00p) per ordinary share	4,552	4,359
- Second interim dividend of 1.00p (2021: 1.00p) per ordinary share	4,636	4,383
- Third interim dividend of 1.00p (2021: 1.00p) per ordinary share	4,687	4,392
	20,432	19,453

 

A fourth interim dividend in respect of the year ended 30 June 2022 of 1.48p per ordinary share was paid on 26 August 2022 to Shareholders on the register on 29 July 2022, having an ex-dividend date of 28 July 2022.

 

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 per Ordinary Share

	2022 Revenue pence	2022 Capital pence	2022 Total pence	2021 Revenue pence	2021 Capital pence	2021 Total pence
Basic and diluted earnings/(loss) per ordinary share	4.16p	(3.29p)	0.87p	4.18p	5.32p	9.50p

 

The revenue earnings per ordinary share is based on the net profit after taxation of £19,163,000 (year ended 30 June 2021: £18,302,000) and the capital return per ordinary share is based on a net capital loss of £15,156,000 (year ended 30 June 2021: net capital gain of £23,271,000). Both the revenue and capital earnings per ordinary share is based on a weighted average of 460,845,694 (year ended 30 June 2021: 437,519,666) 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 2022 and 15 September 2022 other than those disclosed in note 24, which were issued at a premium to the 30 June 2022 NAV.

 

9 Financial assets designated 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.

	2022 £'000	2021 £'000
Equity shares	49,687	39,090
Fixed income securities*	213,706	218,377
	263,393	257,467

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

 

	2022 £'000	2021 £'000
Opening valuation	257,467	230,741
Purchases at cost	106,064	80,009
Sales proceeds	(85,833)	(77,428)
Realised gains/(losses) on sales	3,631	(11,575)
Effective interest adjustment	154	232
Unrealised (losses)/gains	(18,090)	35,488
Closing valuation	263,393	257,467

 

Losses on investments	2022 £'000	2021 £'000
Realised gains/(losses)1	3,631	(11,575)
Unrealised (losses)/gains2	(18,090)	35,488
Gains/(losses) on investments	(14,459)	23,913

 

¹ Realised gains/(losses) on financial assets designated at fair value through profit or loss is made up of gains of £5,680,000 (2021: 2,755,000) and losses of £2,049,000 (2021: 14,330,000).

² Unrealised (losses)/gains on financial assets designated at fair value through profit or loss is made up of gains of £14,225,000 (2021: 47,622,000) and losses of £32,315,000 (2021: 12,133,000).              

                                                                                                                                                                               

10 Debtors and Other Receivables

	2022 £'000	2021 £'000
Amounts due on new share issuance	-	275
Accrued income	3,807	3,302
Prepayments and other debtors	12	8
	3,819	3,585

 

11 Bank Loan

	2022 £'000	2021 £'000
Bank loan facility- opening balance	33,000	31,000
Drawdowns	-	2,000
Bank loan facility - closing balance	33,000	33,000

 

The Company had a short term unsecured loan facility of £35 million with Scotiabank Europe Plc ("Scotiabank") at the start of the year. On 17 December 2021, the Company entered into a Seventh Amendment Agreement with Scotiabank on the following terms:

 

•    the committed loan facility has been increased to £45 million;

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

•    the tenor of the facility would be 2 years from the renewal date;

•    the interest on the loan would be a margin of 1.45% p.a plus a daily non-cumulative compounded RFR rate.

•    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.

 

As at 30 June 2022, an amount of £33 million (30 June 2021: £33 million) was drawn down from the facility.

 

The following are the covenants for the facility held as at 30 June 2022:

 

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

·   the borrower shall not permit the net asset value 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 2022 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

	2022 £'000	2021 £'000
Amounts due to brokers	613	4,980
Interest on bank loan facility	28	16
Other creditors*	2,570	305
	3,211	5,301

 

*Included in other creditors is an amount of £2,196,000 which relates to an overpayment of dividend by one of the Company's equity investments, Aggregated Micro 8PCT 16-171036. The excess dividend was paid back to Aggregated Micro 8PCT 16-171036 on 5 July 2022.

 

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 2021	445,051,858			203,416
1,000,000 ordinary shares of no par value allotted on 1 July 2021 at 55.30p	1,000,000	553	(4)	549
2,100,000 ordinary shares of no par value allotted on 4 August 2021 at 54.80p	2,100,000	1,151	(9)	1,142
500,000 ordinary shares of no par value allotted on 10 August 2021 at 54.80p	500,000	274	(2)	272
500,000 ordinary shares of no par value allotted on 13 August 2021 at 54.40p	500,000	272	(2)	270
500,000 ordinary shares of no par value allotted on 19 August 2021 at 54.40p	500,000	272	(2)	270
5,500,000 ordinary shares of no par value allotted on 9 September 2021 at 54.90p	5,500,000	3,020	(23)	2,997
1,000,000 ordinary shares of no par value allotted on 1 November 2021 at 55.50p	1,000,000	555	(4)	551
500,000 ordinary shares of no par value allotted on 2 November 2021 at 55.50p	500,000	278	(3)	275
500,000 ordinary shares of no par value allotted on 6 December 2021 at 55.50p	500,000	278	(2)	276
600,000 ordinary shares of no par value allotted on 15 December 2021 at 56.00p	600,000	336	(3)	333
1,750,000 ordinary shares of no par value allotted on 23 December 2021 at 55.90p	1,750,000	978	(7)	971
1,400,000 ordinary shares of no par value allotted on 24 December 2021 at 55.90p	1,400,000	783	(6)	777
2,750,000 ordinary shares of no par value allotted on 29 December 2021 at 55.90p	2,750,000	1,537	(11)	1,526
1,100,000 ordinary shares of no par value allotted on 1 February 2022 at 55.50p	1,100,000	611	(6)	605
900,000 ordinary shares of no par value allotted on 11 February 2022 at 55.30p	900,000	498	(4)	494
850,000 ordinary shares of no par value allotted on 21 February 2022 at 55.60p	850,000	473	(3)	470
650,000 ordinary shares of no par value allotted on 22 February 2022 at 55.40p	650,000	360	(3)	357
650,000 ordinary shares of no par value allotted on 23 February 2022 at 55.40p	650,000	360	(3)	357
500,000 ordinary shares of no par value allotted on 15 March 2022 at 53.40p	500,000	267	(2)	265
400,000 ordinary shares of no par value allotted on 24 March 2022 at 53.60p	400,000	214	(2)	212
2,250,000 ordinary shares of no par value allotted on 4 May 2022 at 54.70p	2,250,000	1,231	(8)	1,223
500,000 ordinary shares of no par value allotted on 16 May 2022 at 53.80p	500,000	269	(2)	267
500,000 ordinary shares of no par value allotted on 27 May 2022 at 53.90p	500,000	267	(2)	265
1,000,000 ordinary shares of no par value allotted on 31 May 2022 at 53.80p	1,000,000	538	(4)	534
600,000 ordinary shares of no par value allotted on 6 June 2022 at 53.80p	600,000	323	(2)	321
600,000 ordinary shares of no par value allotted on 15 June 2022 at 54.00p	600,000	324	(2)	322
1,500,000 ordinary shares of no par value allotted on 21 June 2022 at 53.60p	1,500,000	804	(5)	799
1,000,000 ordinary shares of no par value allotted on 22 June 2022 at 53.80p	1,000,000	537	(4)	533
Total as at 30 June 2022	476,651,858	17,363	(130)	220,649

 

The balance of shares left in Treasury at the year-end was nil (2021: nil shares).

 

On 13 July 2022, a block listing facility for 45,600,000 new shares was approved by the UK Listing Authority. This facility is used for the purposes of satisfying market demand.

 

Since 30 June 2022, a further 4,350,000 ordinary shares have been issued for consideration of £2,273,000.

 

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 2022 comprises its stated capital, special distributable reserve, capital reserve and revenue reserve at a total of £234,986,000 (2021: £234,178,000).

 

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 any given time. 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 net asset value per ordinary share and the net asset value attributable to the ordinary shares at the year-end calculated in accordance with their entitlements in the Articles of Association were as follows:

 

	2022	2021
Net Asset Value (£'000)	234,986	234,178
Net Asset per ordinary share (pence)	49.30p	52.62p

 

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 2022 comprised of 476,651,858 ordinary shares (30 June 2021: 445,051,858).

 

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 designated 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 2022 all of which are held at amortised cost, other than financial assets designated 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.

 

	2022 £'000	2021 £'000
Financial assets
Financial assets designated at fair value through profit or loss	263,393	257,467
Cash and cash equivalents	3,985	11,427
Amounts due on new share issuance	-	275
Accrued income	3,807	3,302
Financial liabilities
Amount due to brokers	613	4,980
Bank loan	33,000	33,000
Interest on bank loan facility	28	16
Other creditors	2,570	305

 

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 Board's investment strategy is to select investments for their fundamental value. Stock selection is therefore based on disciplined accounting, market and sector analysis, with the emphasis on long term investments. An appropriate spread of investments is held in the portfolio in order to reduce both the statistical risk and the risk arising from factors specific to a country or sector. The Investment Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to consider investment strategy.

 

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

 

If the investment portfolio valuation fell 7.5% at 30 June 2022, the impact on the profit or loss and the net asset value would have been negative £19.8 million (2021: a fall of 7.5% would have impacted the profit or loss and the net asset value by negative £19.4 million). Due to the effect of gearing, the impact on the net asset value per ordinary share would have been a decrease of 8.4% (2021: decrease of 8.3%). 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.

 

	2022	2022	2022	2021	2021	2021
	£'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	158,941	7.12	4.31	130,814	7.10	4.31
Floating rate notes	54,531	4.08	n/a	78,591	5.97	n/a
Preference shares	234	11.90	n/a	8,972	11.89	n/a
Financial liabilities:
Bank Loan	33,000	2.64	n/a	33,000	1.43	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 2022, cash and cash equivalents included cash amount of £4,088,000 held in sterling (2021: £10,335,000) and an immaterial amount of cash overdraft of £103,000 in a range of other currencies (2021: positive cash balance of £1,092,000). The benchmark rate which determines the interest payments received on sterling interest bearing cash balances is the UK bank base rate, which was 1.25% at 30 June 2022 (2021: 0.10%).

 

Financial liabilities

The Company has borrowed in sterling at a variable rate of interest based on the UK bank base rate. If the bank base rate increased by 1.00%, the impact on the net assets would have been a loss of £330,000 (2021: £330,000). If the bank base rate had decreased by 1.00%, the impact on the profit or loss would have been equal and opposite. 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.

 

The Directors believe 1.00% is relevant based on observed interest rate adjustments in recent years.

 

At year end, the Company held bank loans of £33 million 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 2022 was as follows:

	2022 Investments £'000	2022 Cash £'000	2022 Accrued Income £'000	2022 Total £'000	2021 Investments £'000	2021 Cash £'000	2021 Accrued Income £'000	2021 Total £'000
Euro	31,977	(22)	237	32,192	22,083	817	202	23,102
Australian dollar	191	-	-	191	587	2	-	589
US dollar	61,126	(315)	1,418	63,229	56,403	238	1,310	57,951
Norwegian krone	1,064	-	15	1,079	1,454	16	34	1,504
Canadian dollar	314	191	-	505	686	18	4	708
Swedish Krona	4,015	43	38	4,096	1,110	0	5	1,115
	99,687	(103)	1,708	101,292	82,323	1,091	1,555	84,969

 

If the value of sterling had weakened against each of the currencies in the portfolio by 5% (2021: 5%), the impact on the profit or loss and the net asset value would have been positive £5.3 million (2021: positive £4.4 million).                                                                                                                                   

If the value of sterling had strengthened by the same amount the impact on the profit or loss and the net asset value would have been negative £4.8 million (2021: negative £3.9 million).

 

The calculations are based on the portfolio valuation and accrued income balances at the balance sheet date and 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:

	2022 £'000	2021 £'000
Fixed income securities*	213,706	218,377
Cash and cash equivalents	3,985	11,427
Amounts due on new share issuance	-	275
Accrued income	3,807	3,302
	221,498	233,381

* 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	2022 %	2021 %
BB-	5.3	4.0
B+	4.0	2.7
B	4.0	6.7
B-	1.3	2.7
CC	1.3	-
CCC	2.7	4.0
CCC+	6.7	4.0
CCC-	1.3	1.3
Not rated	73.4	74.6
	100.0	100.0

Source: 2022: S&P, 2021: S&P

 

The percentage above represents the value of fixed income securities of £213,706,000 (2021: £218,377,000) 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 BNP Paribas Securities Services S.C.A. The Company holds a residual cash balance with HSBC of £11,000 (2021: £11,000). The rating agency Moody's assigns a rating of A1 to HSBC and A2 to BNPP.

                                                                                                                       

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

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 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	(6,388)	(36,177)

 

30 June 2021		Contractual cash flows
	Carrying amount £000	0-1 year £000	1-2 years £000
Bank loan	33,000	(33,172)
Creditors and other payables	5,301	(5,301)	-
	38,501	(38,473)	-

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 million with Scotiabank, out of which, £33 million has been drawn-down and is outstanding as at 30 June 2022. 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

International Financial Reporting Standard ("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 securities*	234	209,627	3,845	213,706
Equity shares	45,195	4,038	454	49,687
As at 30 June 2022	45,429	213,665	4,299	263,393

 

Financial assets at fair value	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Fixed income securities*	8,972	208,783	622	218,377
Equity shares	33,578	5,498	14	39,090
As at 30 June 2021	42,550	214,281	636	257,467

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

 

Transfers between level 1 and level 2:

SQN Secured Income Fund Plc £353,000 (2021: £1,283,000) and Croma Security Solutions Gro £625,000 (2021: £700,000) were transferred out of level 1 to level 2 because they were not traded on active markets.

 

If the market value of the Level 3 investments fell by 5% (2021: 5%), the impact on the profit or loss and the net asset value would have been negative £0.21 million (2021: negative £0.03 million). 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	2022 £'000	2021 £'000
Opening valuation	636	8,864
Additions	374	-
Sales	(88)	(942)
Unrealised (losses)/gains	(9,954)	9,973
Realised gains/(losses)	198	(10,436)
Transfers out of Level 3	(623)	(7,775)
Transfers into Level 3	13,756	952
Closing valuation	4,299	636

 

Transfers in and out of level 3:

Raven Russia 12% 09-31/12/2059 £nil (2021: £8,757,000) and Raven Property Group Ltd £nil (2021: £455,000) were transferred out of level 1 to level 3 because they were delisted during the year.

 

Matalan Finance 9.5% 18-31/01/2024 £3,845,000 (2021: £4,543,000) was transferred out of level 2 to level 3 because of the significant impact of unobservable inputs in determining its fair value as at the year end.

 

Brighthouse Fin 9% 18-15/05/2023 £nil (2021: £nil) was transferred out of level 2 to level 3 because it has been categorized as default/zero value PIK.

 

REA Holdings plc 7.5% 30/06/2022 £764,000 (2021: £622,000) and Oro Negro Drilli 7.5% 24/01/2023 £41,000 (2021: £nil) were transferred out of level 3 to level 2 since they have been priced through broker quotes.

 

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 2022 and 30 June 2021:

 

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

 

30 June 2021

Description	Fair value as at 30 June 2021 £000	Valuation technique	Significant Unobservable inputs	Range/input	Weighted Average
REA Holdings Plc 7.5% 30/06/2022	622	Vendor Pricing	Unadjusted Broker Quote	1	N/A
R.E.A Holdings Plc CW 15/07/2025	14	Black Scholes model	Volatility	57.1	N/A
Total	636

 

The remaining 22 investments (2021: 20) classified as Level 3 have not been included in the above analysis as they have fair value of nil as at 30 June 2022 and 30 June 2021.

 

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 the Directors' Remuneration Report and as set out in note 4 to the Financial Statements. The beneficial interests of the Directors in the shares of the Company are disclosed in the 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 15 September 2022, 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.

 

Share Issues

Following the year end the Company undertook further issues of shares issuing, in total, an additional 4,350,000 ordinary shares of no par value for total consideration of £2,273,000. As at the date of this report, the total number of ordinary shares by the Company was 481,001,858.

 

Dividend declaration

The fourth interim dividend of 1.48 pence per ordinary share was announced on 21 July 2022 and paid on 26 August 2022 to Shareholders on the register on 29 July 2022, having an ex-dividend date of 28 July 2022.

 

Block listing facility

On 13 July 2022, a block listing facility for 45,600,000 new shares was approved by the UK Listing Authority. This facility is used for the purposes of satisfying market demand.

 

Glossary of Terms and Definitions 

 

AIC Code	Association of Investment Companies Code of Corporate Governance published in February 2019.
Alternative Performance Measures ("APMs")	Alternative performance measures are numerical measures of the Company's current, historical or future performance, financial position or cash flows, other than financial measures defined or specified in the applicable financial framework. The Company's applicable financial framework includes IFRS and the AIC SORP.
Company	CQS New City High Yield Fund Limited
ESG	Environmental, Social and Governance.
FCA	Financial Conduct Authority.
FRN	Floating Rate Note.
ISAE	International Standard for Assurance Engagements.
Net Asset Value or NAV and NAV per ordinary share	The value of total assets less total liabilities. Liabilities for this purpose include current and long-term liabilities. To calculate the net asset value per ordinary share, the net asset value divided by the number of shares in issue.
PIK	Payment in kind.
Reference rate (RFR)	The SONIA (Sterling Overnight Index Average) reference rate displayed in the relevant screen of any authorised distributor of that reference rate.
SME	Small and medium-sized enterprises.
United Nations PRI	United Nations Principles for Responsible Investment

 

Alternative Performance Measures

In accordance with European Securities and Markets Authority ("ESMA") Guidelines on APMs the Board has considered what APMs are included in the Annual Financial Report and Financial Statements which require further clarification.

 

The Company uses the following APMs (as described below) to present a measure of profitability which is aligned with the requirements of our investors and potential investors, to draw out meaningful data around revenues and earnings, and to provide additional information not required for disclosure under accounting standards:

 

·       Net Asset Value total return

·       Ordinary share price total return

·       Revenue earnings per ordinary share

·       Annual dividends per ordinary share

·       Dividend cover

·       Revenue reserve per ordinary share

·       Dividend yield

·       Premium

·       Gearing

·       Ongoing charges ratio

 

All APMs relate to past performance. The following tables detail the methodology of the Company's APMs.

 

NAV and ordinary share price total return

The return to Shareholders is calculated on a per ordinary share basis by adding dividends paid and declared in the period to the increase or decrease in the share price (bid) or net asset value. The dividends are assumed to have been reinvested in the form of ordinary shares or net assets.

 

2022	Annual dividend per ordinary share	NAV	Share price (bid)
30 June 2021	4.47p	52.62	54.80
30 June 2022	4.48p	49.30	51.20
Capital return		(6.31%)	(6.57%)
Effect of dividend reinvestment		8.35%	7.78%
Total return		2.04%	1.21%

 

2021	Annual dividend per ordinary share	NAV	Share price (bid)
30 June 2020	4.46p	47.52	47.40
30 June 2021	4.47p	52.62	54.80
Capital return		10.73%	15.61%
Effect of dividend reinvestment		10.65%	10.70%
Total return		21.38%	26.31%

 

Revenue earnings per ordinary share

Revenue earnings (which includes dividends paid out during the year) divided by the weighted average number of ordinary shares in issue during the financial year.

 

		2022	2021
Revenue earnings	a	£19,164,000	£18,302,000
Weighted average number of ordinary shares in issue	b	460,845,694	437,519,666
Revenue earnings per ordinary share	(a/b)*100	4.16p	4.18p

 

Annual dividend per ordinary share

The total amount of dividends declared for every issued ordinary share over the Company's financial year.

 

Dividend History	Rate	xd date	Record date	Payment date
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
First interim 2021	1.00p	22 October 2020	23 October 2020	30 November 2020
Second interim 2021	1.00p	28 January 2021	29 January 2021	26 February 2021
Third interim 2021	1.00p	29 April 2021	30 April 2021	28 May 2021
Fourth interim 2021	1.47p	29 July 2021	30 July 2021	31 August 2021
Annual dividend per ordinary share	4.47p

 

Dividend cover

Earnings per ordinary share divided by the annual dividend per ordinary share expressed as a ratio.

 

		2022	2021
Earnings per ordinary share	a	4.16p	4.18p
Annual dividend per ordinary share	b	4.48p	4.47p
Dividend cover	a/b	0.93x	0.94x

 

Revenue reserves per ordinary share

Revenue reserve (which includes dividends paid out during the year) divided by the number of ordinary shares at the balance sheet date.

 

		2022	2021
Revenue reserve	a	£15,562,000	£16,830,543
Ordinary shares in issue	b	476,651,858	445,051,858
Revenue reserves per ordinary share	(a/b)*100	3.26p	3.78p

 

Dividend yield

The annual dividend per ordinary share expressed as a percentage of the share price (bid price).

 

		2022	2021
Annual dividend per ordinary share	a	4.48p	4.47p
Share price (bid price)	b	51.20p	54.80p
Dividend yield	a/b	8.75%	8.16%

 

Premium

The amount by which the market price per ordinary share of an investment company is higher or lower than the net asset value per ordinary share. The discount or premium is expressed as a percentage of the net asset value per ordinary share.

 

		2022	2021
Share price (bid price)	a	51.20p	54.80p
NAV per ordinary share	b	49.30p	52.62p
Premium	(a-b)/b	3.86%	4.14%

 

Gearing

The level of borrowing that the Company has undertaken. Represented by total assets (being total assets less current liabilities (excluding borrowings)) less all cash, expressed as a percentage of Shareholders' funds (being the Net Asset Value of the Company) minus 100.

		2022 £'000	2021 £'000
Total assets		271,197	272,479
Current liabilities (excluding borrowings)		(3,211)	(5,301)
Cash and cash equivalents		(3,985)	(11,427)
Total	a	264,001	255,751
Net Asset Value	b	234,980	234,178
Gearing	((a/b)-1)*100	12.35%	9.21%

 

Ongoing charges ratio

A measure of all operating costs incurred in the reporting period, calculated as a percentage of average net assets in that year. Operating costs exclude costs suffered within underlying investee funds, costs of buying and selling investments, interest costs, taxation and the costs of buying back or issuing ordinary shares.

 

		2022	2021
Average NAV	a	239,974,073	214,507,033
Operating expenses per Statement of Comprehensive Income		2,972,763	2,754,644
Ineligible expenses		(124,839)	(64,535)
Operating expenses	b	2,847,924	2,690,109
Ongoing charges figure (calculated using the AIC methodology)	b/a	1.19%	1.25%

 

A copy of the Company's Annual Report will be available shortly from the Company Secretary, (BNP Paribas Securities Services S.C.A., Jersey Branch, IFC 1, The Esplanade, St Helier, Jersey, JE1 4BP), or will be circulated on the Company's website (https://ncim.co.uk/cqs-new-city-high-yield-fund-ltd).