Axiom Euro Fin Debt - Annual Financial Report
22/03/2023 07:00
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RNS Number : 7754T Axiom European Financial Debt Fd Ld 22 March 2023
22 March 2023
Axiom European Financial Debt Fund Limited
("Axiom" or the "Company")
Annual Financial Report
For the year ended 31 December 2022
A robust performance in a challenging market - Reassuring outlook and positive
start to 2023
Axiom European Financial Debt Fund Limited, a closed-ended Guernsey fund,
listed on the Premium Segment of the London Stock Exchange, which offers
investors exposure to a diversified portfolio covering the European banking
and financials sector subordinated debt market, today announces its Annual
Financial Report for the year ended 31 December 2022.
Highlights ( 1 )
31 December 2022 31 December 2021
Published net assets £84,901,000 £96,585,000
Published NAV per Ordinary Share ( 1 ) 92.43p 105.15p
Share price 84.00p 95.50p
Discount to Published NAV (9.12)% (9.18)%
(Loss/)/profit for the year £(6,172,000) £14,746,000
Dividend per share declared in respect of the year 6.00p 6.00p
Total (loss)/return per Ordinary Share (based on the Published NAV) (6.39)% 16.88%
Total (loss)/return per Ordinary Share (based on share price) (5.76)% 15.34%
Ordinary Shares in issue at year end 91,852,904 91,852,904
1 These are Alternative Performance Measures. Please see note 22 for a
reconciliation of the NAV per Ordinary Share of 92.76p (2021: 105.48p) to the
Published NAV per Ordinary Share of 92.43p (2021: 105.15p).
Financial Highlights
· Total returns for the 12 months were -6.39% (FY21: 16.88%),
reflecting the challenging market conditions during 2022 with rising inflation
and interest rates
· Positive NAV return per share in the second half of 0.77%, partly
clawing back first half deficit
· Four quarterly dividend payments, each of 1.50p per share,
declared during the year bringing the total dividend declared for the period
to 6.00p
Outlook
· Our asset class and sector remains attractive in light of rising
interest rates which are in general good for the European banking and
financials sector
· Encouraging start for 2023 with positive returns in January and
February reflecting solid sector results season to date
Update on AEFD's Future
· The Board continues to believe that the sector and Company
present investors with attractive returns
· However, as stated at the half-year, the Board has concluded that
there is insufficient investor demand for the current closed-ended listed
structure
· The Company's advisers are currently working on proposals that will
be published shortly and put to shareholders at a general meeting in May 2023
in regards to the future of the of the Company
William Scott, Chairman, commented:
"The Company's portfolio generated a positive NAV return per share, including
dividends and net of all expenses, over the second half of the year, partly
clawing back the first half deficit. Given the volatile market conditions that
saw a period of sharply rising short-term rates and long-term yields, we
believe this is a creditable result.
"The outlook for our strategy is now more positive. Rising interest rates are
in general good for banks, enabling wider spreads between lending and deposit
rates and we have seen robust performances from banks as they have reported
their results. Returns on equity have been strong, interest margins widened,
and non-performing loans have remained at low levels.
"We look forward with renewed optimism for the market in regulatory capital
instruments issued by financial institutions in which we operate and where,
through the open-ended rollover option, continuing shareholders can benefit
from the application of our Investment Manager's specialist skills to a rich
opportunity set which is not easily accessible to more generalist managers."
Antonio Roman, Investment Manager, said:
"Last year will be remembered as being a particularly difficult period for the
bond market. The conjunction of global monetary tightening and the war in
Ukraine resulted in an exceptionally fast increase in interest rates combined
with a significant widening of credit spreads.
"Despite this, European banks' fundamentals remained strong throughout the
year and as the conditions improved, their performance improved, spreads
tightened and the fund was able to claw back some of the first half deficit
during the latter part of the year.
"Although the fallout from the collapse of Silicon Valley Bank and the
situation at Credit Suisse have caused a significant sell-off across global
bank stocks, we are reassured by rapid actions of regulators and governments
to limit the impact and by the robust solvency of the majority of European
banks."
"In 2023, bank credit investors will also have to navigate the cross-currents
induced by monetary tightening but we continue to view the Company as being
well positioned to capture the many opportunities arising from a higher
interest rates environment."
Enquiries to:
Axiom Alternative Investments SARL Elysium Fund Management Limited MHP Communications
David Benamou PO Box 650 Reg Hoare
Gildas Surry 1(st) Floor, Royal Chambers Charles Hirst
Antonio Roman St Julian's Avenue
Jerome Legras St Peter Port
Guernsey
GY1 3JX
www.axiom-ai.com (http://www.axiom-ai.com) axiom@elysiumfundman.com (mailto:axiom@elysiumfundman.com) axiom@mhpc.com (mailto:axiom@mhpc.com)
Tel: +44 20 3807 0670 Tel: +44 1481 810 100 Tel: +44 20 3128 8193
A copy of the Company's Annual Report and Financial Statements for the year
ended 31 December 2022 will shortly be available to view and download from the
Company's website,
http://axiom-ai.com/web/en/axiom-european-financial-debt-fund-limited-2/
(http://axiom-ai.com/web/en/axiom-european-financial-debt-fund-limited-2/) .
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on the Company's website (or any other website) is
incorporated into or forms part of this announcement.
About Axiom European Financial Debt Fund Limited
General information
The Company is an authorised closed-ended Guernsey investment company with
registered number 61003. Its Ordinary Shares were admitted to the premium
listing segment of the FCA's Official List and to trading on the Premium
Segment on 15 October 2018. Prior to this, the Ordinary Shares traded on the
SFS.
Proposals for the liquidation of the Company
The Board will shortly put forward proposals for the liquidation of the
Company, including the ability for Shareholders to receive shares, in respect
of their holdings of the Company's Ordinary Shares, in a new open-ended fund
managed by the same management team and with a similar investment mandate to
the Company. The Board believes that these proposals will provide continuity
for those Shareholders in terms of exposure to a strategy similar to the one
currently pursued by the Company and under the same management team. The New
Fund, AUFC, which will be a new Compartment of Axiom Lux SICAV, an established
Luxembourg SICAV that is registered as a UCITS with the Luxembourg financial
regulator, the Commission de Surveillance du Secteur Financier, will be
open-ended with daily liquidity. The proposals will also include a mechanism
for those Shareholders who do not wish to continue their investment to achieve
a cash exit.
Further details of the Proposals for the implementation of the Scheme will be
described in the Circular, which, when finalised, will be made available on
the Company's section of the Investment Manager's website
(https://axiom-ai.com/web/en/axiom-european-financial-debt-fund-limited-2/).
Investment objective
The investment objective of the Company is to provide Shareholders with an
attractive return, while limiting downside risk, through investment in the
following financial institution investment instruments:
· Regulatory capital instruments, being financial instruments
issued by a European financial institution which constitute regulatory capital
for the purposes of Basel I, Basel II or Basel III or Solvency I or Solvency
II;
· Other financial institution investment instruments, being
financial instruments issued by a European financial institution, including
without limitation senior debt, which do not constitute regulatory capital
instruments; and
· Derivative instruments, being CDOs, securitisations or
derivatives, whether funded or unfunded, linked or referenced to regulatory
capital instruments or other financial institution investment instruments.
Investment policy
The Company seeks to invest in a diversified portfolio of financial
institution investment instruments. The Company focuses primarily on investing
in the secondary market, although instruments have been subscribed in the
primary market where the Investment Manager, Axiom AI, identifies attractive
opportunities.
In February 2022, the Directors approved a minor change to the investment
policy in respect of hedging and derivatives. The words in brackets were added
to the following sentence: "The Company may implement other hedging and
derivative strategies designed to protect investment performance against
material movements in (but not limited to) exchange rates and to protect
against credit risk".
The Company invests its assets with the aim of spreading investment risk.
For a more detailed description of the investment policy, please see the
Company's Prospectus, which is available on the Company's section of the
Investment Manager's website
(http://www.axiom-ai.com/web/data/prospectus/ENG/AEFD-prospectus-UK.pdf
(http://www.axiom-ai.com/web/data/prospectus/ENG/AEFD-prospectus-UK.pdf) ).
The following text is extracted from the Annual Report and Financial
Statements of the Company for the year ended 31 December 2022:
Strategic Report
Chairman's Statement
The Company's portfolio generated a positive NAV return per share (based on
the Published NAV) including dividends and net of all expenses of 0.77% over
the second half of the year, partly clawing back the first half deficit to
give a net negative result of 6.39% for 2022 as a whole (2021: +16.88%).
When I wrote to you with our 2022 Half Year results in August, I noted that
the Company's returns in the first half of the year had been line with what
one would expect at that point in the interest cycle, that is when interest
rates begin to rise. The normalisation of interest rates after the decade-plus
long period of extremely low interest rates post the Global Financial Crisis
of 2008 has continued apace to the point where we and the wider markets can
now anticipate the imminent ending of that process even if we cannot be
definitive as to exactly when or at what level. Further, different countries
and blocs with their own currencies will reach their individual equilibrium
points at different times. The nature of markets is to anticipate the future
and the various markets in bonds are no exception and therefore, in general,
have now adjusted to the new normal levels of yield and the pattern of
positive returns largely from coupon payments is beginning to reassert itself.
For a strategy such as ours, the added value from active portfolio management
is also coming to the fore again as markets stabilised in the final quarter of
2022.
Further details on the development of key market events and activity in the
portfolio are given in the Investment Manager's Report.
Up to the end of 2021, our three-year NAV return was +39.09% or +11.63% p.a.
The negative result for 2022 has consequently brought the four-year figures to
+30.9% and +6.96% p.a. While this is behind our long-term target of +10% p.a.,
net of operating expenses, it is a creditable result in the context of
including a period of sharply rising short-term rates and long-term yields.
In aggregate, the Company reported a net loss for the year ended 31 December
2022 of £6.17 million (2021: profit of £14.75 million), representing a loss
per Ordinary Share of 6.72p (2021: earnings of 16.05p) and the Company's NAV
at 31 December 2022 was £85.20 million (92.76p per Ordinary Share) (2021:
£96.88 million, 105.48p per Ordinary Share). Over the full year, the share
price discount to NAV remained broadly steady at 9.12% at the end of 2022
(2021: 9.18%).
Dividends
As in prior years, the Company declared four dividends each of 1.50p per
Ordinary Share in relation to the year: one was declared after the balance
sheet date and was paid on 24 February 2023 to Shareholders on the register at
3 February 2023. During the period, actual payments of 6.00p were made, being
the May, August and November dividends of 1.50p each and the 1.50p dividend in
respect of the period ended 31 December 2021, which was paid on 25 February
2022.
Proposals for the future of the Company
When I wrote to you with our Half Year results in August 2022, I reported that
the conclusion of our consultation with Shareholders was that while many
larger Shareholders wished to remain invested in an evolved strategy
reflecting the changing opportunity set since the launch of the Company, they
would prefer to do so through an open-ended structure rather than a
closed-ended investment company. The Board's conclusion remains that there is
insufficient remaining investor demand for such a strategy expressed in the
form of a closed-ended listed vehicle such as the Company.
Our advisers are currently working on proposals anticipated to be published
shortly and put to Shareholders at a general meeting. In broad terms, these
are designed to give those who wish to continue in the evolved strategy the
opportunity to do so via an open-ended vehicle and those who do not, a cash
exit. The existing Company will consequently be liquidated.
Outlook
The outlook for our strategy is positive. Rising interest rates are in general
good for banks, enabling wider spreads between lending and deposit rates and
we have seen robust performances from banks as they have reported their
results. Returns on equity have been strong, interest margins widened, and
non-performing loans have remained at low levels.
The background to our principal industry sector as a whole therefore remains
positive.
Of course, what is true for the industry in general is not necessarily true
for all participants and sharply rising interest rates have exposed weaknesses
at some institutions while others have exhibited their own idiosyncrasies,
provoking a nervous depositor base to withdraw funds in classic bank runs and
we have seen several high-profile examples in recent weeks, including one in
our own universe of European banks, Credit Suisse. Although Credit Suisse
was one of our panel of prime brokers, we had no counterparty exposure
outstanding at the year-end nor any subsequently and in any event no customer
has suffered losses as a result of its near-collapse. The same cannot be said
for the AT1 bonds of Credit Suisse which have been wiped out by regulatory
fiat as part of the transaction which has reportedly placed a $3.25 billion
value on the Credit Suisse equity. This appears to a very strange decision
in that it reverses the established order of insolvency whereby ordinary
shareholders bear the first tranche of losses. This may yet have unintended
consequences and set a dangerous precedent. As at the time of writing, the
market is still digesting this news. Non-Swiss regulators, being the Single
Resolution Board, the European Banking Authority, ECB Banking Supervision and
the Bank of England have moved swiftly to give clarity to the markets that
they will continue to follow the established hierarchy of capital instruments
and the absorption of losses in a resolution or insolvency intervention.
We had a small exposure of approximately 1% of NAV at the year end to Credit
Suisse AT1 bonds. While we have suffered a loss of that capital, it is to be
expected from time to time that such things will happen even in
carefully-managed portfolios.
Inflation is still elevated but appears to have reached a steady level and may
soon fall back quite sharply as the pre-Ukrainian war price index levels drop
out of the trailing 12-month comparison. The immediate danger to that
trajectory is the extent to which this past consumer price inflation becomes
baked into future inflation through significant current wage settlements,
understandable as those are given the margin by which inflation has
outstripped wages over the past year and the consequent erosion of living
standards for workers. This may lead to interest rates remaining higher for
longer than would otherwise be the case.
We look forward with renewed optimism for opportunities in the market in
regulatory capital instruments issued by financial institutions in which we
operate and where, through the open-ended rollover option, continuing
shareholders can benefit from the application of our Investment Manager's
specialist skills to a rich opportunity set which is not easily accessible to
more generalist managers.
William Scott
Chairman
21 March 2023
Investment Manager's Report
1- Market developments
January
European banks started the year on a strong footing, with rates repricing
higher, economic data coming in better than expected and earnings beating
consensus. The SX7R returned 7.37% in January 2022 vs. -3.81% for the SXXR.
The yield on 5-year German bunds climbed from -45bps to -20bps while the
SubFin moved up 20bps to 125bps. US 10-year Treasuries sold-off with yields
reaching 1.80%.
Inflation was becoming increasingly uncomfortable for governments and central
banks globally. Commodity markets have not softened, lead times and backlogs
were increasing, and service inflation was starting to catch up with goods. On
26 January 2022, Jerome Powell prepared the market for a more hawkish turn.
Undeterred by the recent volatility in global markets, he refused to rule out
the possibility of raising rates by 50bps at once or hiking at consecutive
meetings. In Europe, January inflation readings came much higher than
expected, more than offsetting base effects. As interest rates of -50bps in
the Euro area were evidently not consistent with 5% inflation and unemployment
at record lows, we expected the ECB to revise its inflation projections
upwards and recognise at its March meeting that the conditions of the froward
guidance were met.
In Italy, the re-election of President Mattarella was taken positively by risk
assets. Mario Draghi would be able to continue his work on the allocation of
pandemic funds and structural reforms. Though non-establishment parties were
leading in the polls, political volatility was expected to be pushed back to
2023. In the meantime, the flexibility of PEPP reinvestments was expected to
provide a put for periphery spreads. In international news, the fluid
situation at the Ukrainian borders and raising concerns about Taiwan were
sources of spikes in volatility.
On the M&A front, Société Générale announced the acquisition of
LeasePlan for EUR5 billion. The deal would create a dominant player in the
auto leasing business in Europe. Though the price tag was slightly higher than
expected, the capital impact was relatively limited for Société Générale
and cost synergies could surprise positively.
The start of the earnings season was encouraging. Deutsche Bank reported
results 10% ahead of consensus and announced a buyback, which was not widely
expected and was interpreted as a sign of the ECB's satisfaction with
Deutsche's turn-around plan execution. UBS beat expectations by 13% and
unveiled a strategy plan focused on capital return commitments and operating
jaws. Sabadell and Bankinter also surprised positively.
February
The war in Ukraine drove risk assets lower in February 2022. The SubFin
widened by 35bps to 152bps over the month. As of 4 March 2022, the SX7R
suffered a 28% drawdown from its February 2022 peak. The loss was especially
acute for banks deemed to be more sensitive to Russia: RBI lost 55% of its
market value, while Société Générale, Erste Bank and UniCredit posted
losses close to 40%. This was quite a significant move: in a typical recession
(the Tech bubble, the 2011-12 Eurozone crisis or the Covid-19 crisis for
instance), bank equities' drawdowns tended to be around 40 to 45%.
Several elements were likely to have contributed to the price action:
i. Direct losses from Russian exposures;
ii. Possible losses stemming from legal uncertainty,
settlement risk and unusual price action on Russian markets;
iii. The macroeconomic impact of the war in Ukraine and
sanctions against Russia, from growth to inflation and rates; and
iv. Higher risk premia linked to a possible extension of the
conflict outside of Russia and Ukraine.
We believe that the fourth factor explained most of the movement while the
first and second factors were less significant.
a. Some early press reports have pointed to frightening possible
Russian losses for European banks (as high as EUR100 billion). They ignored
the fact that the exposure was largely sitting within local subsidiaries that
were bankruptcy remote in the context of banking groups. The maximum total
loss for the group would be the equity invested along with potential
intra-group debt (which was typically very small). As an example, though
Société Générale had a EUR18 billion exposure to Russia, the bulk of it
(EUR15 billion) was located in its Russian subsidiary Rosbank. If Rosbank
became insolvent or was seized by Russian authorities, Société Générale
group would only lose 50bps of CET1 capital. They would still be well above
regulatory requirements and their ability to distribute dividends would remain
intact. For the sector in general, we would price a total CET1 impact of less
than 30bps and a loss of future profits of not much more than 1%.
b. The speed and extent of the sanctions imposed on the Russian
financial system was unprecedented. Some banks were cut off from Swift,
correspondent relationships were banned, some assets were frozen, transactions
with the Central Bank were only authorised if related to energy payments, etc.
This created unprecedented price action on Russian markets and significant
operational and legal risks for banks. It was impossible to predict the size
of the losses that would arise from trapped collateral, settlement or gap
risk. As of March 2022, we could only assume that banks would have been
limiting leverage on Russian assets and using leading international
custodians. The Swift ban was only operational from 26 March 2022, leaving
banks time to adapt. Our base case was that we would not see any major impact
from this side.
c. The main macroeconomic impact of the war in Ukraine was expected to
materialise through commodities and supply chains. There were legitimate fears
that higher commodity prices would slow growth. In 2020 and 2021, the EU had
annual energy trade deficits of respectively EUR160 billion and EUR275
billion. In 2010-2014, when energy prices were around current levels (Brent at
USD120), the deficit was EUR400 billion. A return to these levels would
represent a GDP drag of 0.8%. It was worth noting that the majority of gas
imports were based on long-term contracts, and that the current gas curve was
very backward-dated (2025 gas futures were up less than 20% since the start of
2022). Exports to Russia would also be affected: in 2021, the EU exported
circa EUR80 billion of goods and circa EUR20 billion of services to Russia. If
those were halved, it would represent an additional 0.3% drag on GDP. Food
prices were also going up, but the EU was a net exporter. In total, the
annualised GDP impact for the EU was likely to be around 1% with an
uncertainty range of 0.7%-1.5%.
However, there were several mitigants: the conflict was likely to drag on for
months, but not years; consensus of real GDP growth for the EU was above 4%
for 2022 before the start of the war - growth was still highly likely to be
above 2% despite very high energy prices; higher energy prices would be partly
subsidised by governments, reducing the impact on purchasing powers for
consumers; Germany had fully abandoned its hawkish fiscal stance, reinforcing
the fiscal impulse and increasing flexibility for periphery governments; and
the EU was more united, paving the way for a closer banking union and more
fiscal integration.
The impact on rates was more subtle. In the immediate future, there would be
some delay to the normalisation agenda as central banks waited for clarity on
the economic impact of the crisis. But in the medium-term, the sheer pressure
of inflationary forces combined with lavish fiscal policies would make rate
hikes unavoidable.
d. The first three factors do not explain why bank equities suffered
close to two-thirds of their typical recession drawdown. We believed investors
feared that the conflict would extend beyond Ukraine and Russia. China could
have decided to attack Taiwan. Russia could have decided to go beyond Ukraine;
in a worst case scenario, a war between NATO and Russia could be inadvertently
triggered. There were also scenarios of possible widespread consequences from
damages to key nuclear infrastructure. The unexpected move of Putin pushed
"rational" investors to review their working assumption of a mostly stable
geopolitical environment. To be clear, we did not think that the conflict
would escalate outside of Ukraine. Signs from China were relatively
encouraging. However, we believed that the unthinkable would continue to be
priced until a resolution of the Ukrainian war was in sight or the
geopolitical stage had stabilised.
We were conscious that the higher risk premia would not dissipate quickly and
that the market would need signs of stabilisation. We expected the conflict to
drag on for weeks or months and would not be surprised to see Putin move
against Transnistria. However we had a strong core bullish bias in the
medium-term and could have progressively added risk in March 2022 on strong
headline moves.
March
Risk assets took respite in a fall of implied volatility towards the end of
the month as the Ukrainian conflict appeared to stay geographically contained.
Russian gas and oil exports were more resilient than expected, which limited
the increase in energy prices. High inflation readings fuelled fears that
hawkish central banks could trigger a recession in their attempt to slow
demand at a time when real incomes were already suffering from elevated
imported prices. The SubFin ended the month slightly better by 10bps. The VIX
settled 10 points lower at 20. The European bank indices SX7T and SX7R
returned respectively -3.01% and -2.11% vs. +1.00% for the SXXR.
The latest EBA risk dashboard highlighted the soundness of the European
banking sector. NPLs reached a new low of 2.0% while CET1 remained elevated at
an average of 15.4%. ROE stabilised at levels higher than in the pre-pandemic
period. Regulators were reassuring about the first-round impact of the
Ukrainian conflict, noting that a default of all Russian exposures would not
be a capital event for the sector and confirming that dividends and buybacks
could be continued. However, they also stressed that second-round effects,
such as reduced growth, increased compliance costs and higher risk premia
could negatively impact profitability.
Inferring from past recessions, we estimated that a 1-point reduction in the
real GDP growth outlook could lower earnings expectations for the banking
sector by about as much as 8%, with 5% coming from higher provisions for loan
losses, and the rest divided between lower fees and lower loan growth.
However, this would be more than compensated by higher interest rates, with
the sectors' results sensitivity to a 100bps parallel move being around 25%.
In addition, new guaranteed loan programs and increased fiscal spending
overall were likely to reduce provisioning needs and provide a boost to loan
growth. As such, we found the 13% underperformance of the SX7R versus the
broader European market since mid-February 2022 difficult to reconcile with
Bund yields climbing from 30bps to 55bps over the period. The consensus of
2022 earnings expectations of sell-side analysts were revised down by only 3%
since mid-February, with ROE expectations for the SX7E remaining above 8%,
while the sector was trading at only 55% of book value.
We understood the concerns regarding inflation and the future path of real
growth. There were downside risks ahead: high energy prices would hurt real
income; rich real estate valuations could be tested by rising mortgage rates,
resulting in lower perceived wealth and balance sheet quality; and central
banks could have been required to tighten aggressively into a recession if
inflation did not settle down. However, we believed the balance of risks was
to the upside: consumers had barely started to tap into their excess savings;
high government spending was still irrigating the European economy and
protecting vulnerable businesses; though manufacturing was operating above
potential, less energy-intensive services were still operating below
potential, offering significant real growth prospects as economies reopened;
the labour market was still reasonably elastic, with more people continuing to
join the workforce without unsustainable increases in wages; and inflation
expectations were not unanchored.
April
April 2022 was another down month for risk assets. Stocks were led lower by
the technology sector and cyclicals. The SXXP returned -0.57% while the SX7P
and SX7E respectively ended the month at -2.08% and -3.40%. The SubFin widened
to 195bps. Amid higher long-term inflation expectations, Germany and US
10-year yields respectively climbed above 0.9% and 2.9%.
In defiance of the prevailing pessimistic mood, European banks had an
excellent start to the reporting season. On aggregate, revenues were 7% higher
than expected - the strongest positive surprise in years - while earnings were
25% better. On a year-on-year basis, revenues grew by more than 8%. Net
interest income was supported by dynamic lending book growth and stable or
increasing margins. Costs were in line overall, which came as a relief in the
current environment. There was no evidence of deterioration in asset quality:
NPLs continued to decrease, and defaults remained significantly below average.
Banks nonetheless took precautionary provisions in light of geopolitical and
monetary policy risks. Capital ratios took a transitory hit from
mark-to-market losses in bonds not accounted at cost.
As analysts revised their expectations for the year upwards, the sector kept
trading at depressed levels. The SX7E was valued at 6.7x next year earnings
(and 5.9x 2023 earnings), which contrasted with a median level of 9.0x and a
maximum of 12x over the last decade. Only twice was the P/E lower: in the
middle of the 2011/2012 Eurozone crisis and at the onset of the pandemic. Why
the disconnect between fundamentals and valuations?
Two sets of developments were unsettling markets: on the one hand, higher
commodity and supply chain costs were eroding purchasing power and consumer
confidence (the Putin and Xi Jinping risk): on the other hand, the risk of a
wage-rent-inflation loop could have driven central bankers to slam the brakes
on growth by raising rates to contractionary levels (the Bullard and Knot
risk).
Though uncertainty was high (the prime example was the possibility of Russia
cutting gas supply), our central scenario remained more optimistic versus the
consensus: we saw a progressive improvement in commodity and supply conditions
as extraction and production capacities were rebuilt; we saw growth in
services sustaining employment and spending trends; and we saw central banks
not willing to risk a contractionary spiral to fight inflation.
May
Risk appetite was slightly better over the month as investors pondered record
inflation against a continued expansion in global demand and hints of easing
supply chain pressures. The SubFin index closed the month 5 bps tighter at
c.185 bps. Energy and bank stocks outperformed while retailers and media
companies underperformed. The SX7R returned +6.54% versus -0.61% for the SXXR.
Eurozone macroeconomic developments pointed to a strengthening in the core
inflation momentum:
· Core CPI increased by 0.5% MoM to an all-time high of 3.8% YoY.
· Fiscal packages aimed at protecting discretionary income against
energy and food prices are being broadly adopted, fueling demand-pull core
inflation.
· Negotiated wages climbed to a 10-year high of 2.8%.
· Growth in bank loans increased to 5.3% YoY (vs. a pre-pandemic 5Y
average of c. 2.5%).
Recession risk remained hotly debated amid unusually high demand and supply
shocks. Despite the current commodity squeeze, we see two consecutive quarters
of negative growth in the Eurozone as unlikely in 2022:
· Higher import prices are financed by fiscal deficits. The Euro
area is heading for deficits of 4.6% and 3.1% in 2022 and 2023. The bloc is
having a hard time departing from pandemic stimulus: in fact, between 2016 and
2019, the average deficit was below 1%. In contrast, a combined USD125 brent
and EUR90/Mwh gas shock represents an estimated 2.2% GDP shock versus
pre-pandemic levels (where they were trading closer to USD65 and EUR25/Mwh).
· The reopening effect has not fully played out. May Eurozone
activity surveys reported the highest increase in employment over the past
decade as well as strong investment trends. The supply side is ramping up
productive capacity, feeding a positive loop. Countries with tight labour
markets, such as the UK, are much less likely to enjoy the benefits of a
rising workforce and therefore the most likely to suffer from stagflation.
· The resolve of the ECB in its fight against inflation is
questionable. The shift in rate hikes expectations, though spectacular, has
lagged increases in forward inflation markets - and is very far off from
changes in realised core inflation. Presently, inflation is liquidating
aggregate debt at record pace and Bund 20y / 10y real rates are still below
-1%. As such, we believe talks of a recession induced by higher rates in the
Eurozone to be premature.
That said, headline GDP should matter less than usual for banks.
Traditionally, recessions are bad for banks because they are associated with:
a. deleveraging; and b. rising defaults due to a negative investment / final
demand loop. This is not the current set-up. Loan growth is actually
accelerating to a record pace and hiring is strong. In an economy where labour
markets are supported by the need to rebuild domestic energy, food and supply
chain security, though living standards are likely to fall, defaults may not
rise as much as suggested by headline growth.
The outlook for banks' earnings is encouraging:
· Consensus EPS expectations for 2022 and 2023 for the SX7P are now
back at their highest year-to- date, erasing the Ukraine-Russia war losses.
· NII expectations should continue to climb as analysts update
their models with the latest rate market levels - at this time, analysts are
still lagging the Eurozone rates market by c. 50-75bps.
· Analysts' assumptions for future loan losses are on the
conservative side. They are forecast to be above the 2017-2019 average in
spite of the Covid-19 precautionary provisions and default trends signalling
the opposite so far.
· Nominal cost trends are likely to be slightly worse than
expected, though C/I ratios should be better than expected.
On the regulatory front, the Basel Committee is allegedly considering treating
the Eurozone as one bloc for the calculation of the GSIB buffers. Though
practical implications are limited for now, it is a new step towards more
fungibility of capital and liquidity within the area. In other news, the
Italian government is working on the renewal of the state guarantees on NPL
transactions. The new scheme would provide for a state guarantee of 85-95%,
while the senior note minimum rating should be BBB+ (one notch higher).
June
Risk Markets sold-off in June as investors grew increasingly concerned over
the risk of central banks tightening in a recession. CDS indices in Europe and
the US are starting to price stressed economic conditions, with implied
high-yield default rates in the high single digits, well above current trends.
The Xover and SubFin indices respectively closed the month around 600 bps (+
c.155 bps) and 250 bps (+c.65 bps). M/m core inflation stabilized at high
levels in Europe and the US. The SX7R returned -9.11% vs. -7.09% for the SXXR.
Fundamentals remain solid. Bank lending accelerated to 5.8% in May, up from
5.3% in April and 4.8% in March, as credit demand followed strong nominal GDP.
High-yield and leveraged loans annualised default rates were around 75 bps in
June, well below their historical average of about 3%. The latest EBA data was
also comforting for the banking sector: non-performing and forborne loan
ratios reduced further on average to 1.9%.
Supervisors started to adopt a more prudent tone. The SSM asked banks to add a
Russian gas embargo stress test in their capital planning, and there is a risk
that the ECB may require buybacks to be more spread out over time, rather than
smaller. We note that Intesa received ECB approval to carry its share buyback
programme at the end of the month.
July
Risk assets rallied in July as company earnings and economic activity
surprised to the upside, especially in Europe. The Subfin index tightened by
45 bps to close the month at 204 bps. STOXX Europe companies reported revenues
and earnings respectively 4% and 5% higher than expected. Within the European
banking sector, revenues were 5% higher and earnings 30% higher. The SX7R
ended the month at 1.66% vs. 7.74% for the SXXR.
Bank earnings were boosted by solid growth in lending volumes and expanding
margins as higher interest rates started to flow through the P&L. Asset
quality was benign as defaults remained low. Costs were broadly in-line,
though were guided to creep higher. Commissions were more mixed: transaction
and lending commissions were boosted by the pick-up in activity while
investment commissions suffered from lower flows and customer engagement.
Trading was strong in macro products and equities. Capital markets remained
very weak. In aggregate, European banks posted very strong earnings, with a
number of banks printing their highest quarterly net income ever.
On the macro front, the ECB enacted the end of the negative interest rates era
while introducing a new policy tool designed to contain excessive widening in
sovereign spreads. The tool was approved unanimously, has infinite capacity
(no limit on the amount of securities purchased) and is only constrained by
indicative conditions, giving the ECB unprecedented market and therefore,
political power.
A new time-limited banking tax is being discussed in Spain. If voted, it
should take away close to 10% of Spanish banks' 2022 and 2023 earnings,
assuming extra costs are not passed on to customers. It is not clear yet what
the position of regulators will be on this tax, as banks are typically
required by the EBA to reflect the cost of taxes in their lending margins.
Similar measures are discussed in the Czech Republic.
August
August was a hectic month for markets as inflation and energy remained at the
forefront of investors' concerns. Hawkish central banks sent bonds lower with
Bund yields touching 1.54%, 10Y gilts at 2.80% and 10Y USTs at 3.19%. The
Subfin and Xover ended the month wider at 240 bps and 588 bps, respectively.
Banks outperformed the market, with the SX7R returning -1.1% vs. -5.1% for the
SXXR.
Newsflow was dominated by energy supply risks as Russia announced a full stop
to NS1. This brings total Russian gas cuts to 80% of pre-invasion flows.
Should Russia stop all exports, simulations show that further demand cuts
would be necessary in case of a cold winter. The size of household and
business support programs announced to date in the EU equals c. 2.5% of GDP
(3.5% in Greece, 3% in Italy and 2% in Germany).
Bank analysts continued to restrike their earnings expectations higher as
sensitivity to interest rates and strong lending outweighed salary inflation
and a more prudent credit losses outlook. Price / book ratios at 0.5x are
consistent with an average deflationary recession being priced in. While the
typical recession knocks out 40% of bank earnings, our pessimistic scenario
only sees a 15% impact with inflation and rates supporting revenues. As such,
we believe earnings resilience should provide support at these levels. Q3
results could be a catalyst for a rally should energy concerns not worsen.
On the primary front, August was one of the busiest months in recent memory,
with significant new issues volume across the cap structure. Banks are
adopting a more economic approach to redemptions. Volksbank Wien announced
that it will not exercise the call on its T2 note. This is the second T2
extension this year after Deutsche Pfandbriefbank.
September
September saw FX and interest rate volatility add to already elevated risk
premia across European assets. Gilts were especially erratic, with 10Y rates
moving by over 100 bps in a single day. The Subfin and the Xover closed the
month at 286 bps and 650 bps respectively. The SXXR returned -6.43% versus
-4.65% for the SX7R.
The market backdrop remains difficult to navigate as instability in key
benchmarks makes a fertile ground for fear mongering, speculative attacks and
negative feedback loops. During the UK mini-budget episode, a legitimate
initial move in sterling and rates was precipitated by pension funds having to
fire-sell their long duration holdings due to the inadequate liquidity of
their asset-liability management strategies. Elsewhere, unsubstantiated rumors
about Credit Suisse being insolvent triggered a short-lived panic that sent
their AT1s 15 points lower and revived fears of a "Lehman moment" in Europe.
Despite all the noise, fundamentals remain bullish for European banks. We
expect Q3 and Q4 results to reflect the continued expansion of volumes and
margins as well as low and stable default rates. Tighter monetary policy is
boosting net interest margins, and ample capital and funding buffers are
supporting lending volumes, while strong job markets and accommodative fiscal
policies are keeping defaults very low. Market volatility has remained a
source of profits for most trading floors.
October
Risk assets rallied in October as central banks were seen to favour smaller
interest rate hikes going forward. The Subfin tightened as of 31/1/0/2022 by
over 50 bps to close the month at 213 bps. The SX7R returned +8.39% vs. +6.35%
for the SXXR.
Economic data painted a picture of soft growth and entrenched inflation.
Annualized Q/Q GDP growth for the third quarter came at +2.6% in the US and
+0.9% in the EU. Despite poor consumer and business sentiment, job creations
remained robust on both sides of the Atlantic. EU October inflation numbers
surprised to the upside, due to energy, food and industrial goods. Prices of
services showed a notable deceleration.
European bank earnings have been strong with little signs of asset quality
deterioration. Future guidance was optimistic, with the exception of UK banks
which have pre-emptively built up larger reserves. On aggregate, revenues came
up 5% higher than analyst expectations, driven by strong net interest income
and trading, while earnings came 20% better. Compared to last year, revenues
and earnings were resp. 13% and 20% higher. Banks that showed inferior cost
control underperformed.
In other news, the ECB took actions on TLTRO, removing the arbitrage for banks
as expected. Remuneration of excess reserves was not mentioned, which is
encouraging. Asian markets have seen a plunge in the valuation of AT1s and
perpetual insurance securities after the Australian regulator warned against
non-economic calls and a South Korean insurer skipped a call.
November
Risk assets rallied in November as inflation showed signs of easing and the
Fed appeared more concerned about the risk of overtightening. The Subfin ended
the month 36 bps tighter at 184bps. The SX7R returned 9.14% versus 6.89% for
the SXXR.
The macroeconomic outlook remained hotly debated as leading indicators kept
sending confusing signals on the strength of nominal demand. On the one hand,
rate sensitive sectors are starting to show signs of weakness, with
manufacturing surveys, the housing market and layoffs in the technology sector
pointing to a recession. On the other hand, continuing wage pressures and
labour market strength, along with high cash buffers, allow consumer spending
to keep growing in real terms despite rock bottom saving rates. Banks' lending
capacity, boosted by public sector guarantees, continues to fuel high credit
creation, though at a declining pace. The need to reinvest in supply chains,
clean energy and sovereignty is also driving higher capital spending, a
feature that is usually not associated with recessions.
In bank specific news, Credit Suisse published another profit warning
outlining strong outflows in the Asian wealth management division in October.
However, the CEO later explained that outflows started to reverse in November.
HM Treasury released the response to its Solvency II consultation,
recommending a 65% decrease in the risk margin for life insurers and a 30%
reduction for non-life insurance companies, along with a broadening of the
eligible asset universe for the Matching Adjustment mechanism. AIB disclosed
improved medium-term targets for 2024 - RoTE >13%, CET1 >13.5% and a c.
50% cost income ratio.
In credit, BCP was the latest issuer to decide not to call its T2 notes;
however, the bank offered an exchange of the old bond into a new T2 (similar
transactions were proposed by Banca Ifis and Shawbrook recently). Nationwide
indicated its intention to carry CCDS buybacks.
December
Banks outperformed the market in December as economic data surprised to the
upside while central banks guided to more rate hikes than anticipated. The
SX7R returned +0.08% vs -3.38% for the SXXR. The Subfin closed 10 basis points
tighter at 174 bps. Rates sold off vigorously, with Bunds and 10Y Treasuries
ending the month at 2.55% and 3.87%, respectively.
The ECB raised rates 50 bps as expected and set initial parameters for QT with
reinvestments to fall by €15bn per month from March 2023. Mrs. Lagarde
shocked the market by explicitly committing to further 50 bps rate hikes. As a
result, the implied peak rate climbed from 3% to 3.5%. In his press
conference, Chairman Powell focused on the labour market, emphasizing the high
number of vacancies and strong wage pressures. The final surprise came from
the BoJ, which raised its Yield Curve Control cap on 10Y JGBs from +25bps to
+50bps.
Monetary data pointed to slowing but still dynamic bank lending in the Euro
area. Credit growth to non-financials corporations remained strong at 8.4%
YoY, slightly lower than the 8.9% in the previous two months. Among the major
countries, Ireland, Greece, Germany, Austria and Finland all saw double digit
growth rates. For households, the growth was little changed at 4.1% from 4.2%
in October. Month-on-month, total customer deposits were unchanged (higher
term deposits offsetting lower sight deposits) while loan volumes were
slightly up.
On the regulatory front, the UK is preparing a review of the ring fencing
rules as a post-Brexit plan to reduce the burden on smaller lenders. The EBA
published the results of its Risk Assessment Report: it noted elevated but
declining levels of capital and liquidity, improving profitability and low NPL
ratios. It warned against potential IT risks and highlighted the rising level
of Stage 2 assets.
In bank specific news, HSBC announced that it had agreed to sell its Canadian
business to RBC for a cash consideration of CAD 13.5bn (an impressive price of
2.5x P/B). The bank said it expected to distribute most of the surplus
generated through exceptional dividends or buybacks but would also consider
organic growth and investment opportunities. Moody's upgraded the Co-operative
Bank's ratings from B1 to Ba3. The upgrade reflects the improving
profitability and the higher capital buffers. UBS announced the redemption of
its $2bn 5% 23P AT1 on its first call date. NatWest announced the redemption
of legacy NWG 11.5 Perp at the make-whole level. There was £31mn left
outstanding and NatWest will take a P&L charge of c.£45mn on the
transaction. Standard Chartered consent solicitation for modifying the
reference rate from LIBOR to SOFR on its 7.014% and 6.409% preference shares
failed to reach the 75% approval threshold.
2- Investment Objective and Strategy
The Company is a closed-ended fund investing in liabilities issued by European
financial institutions, predominantly legacy T1s, T2s, and AT1s across five
sub-strategies:
· Liquid Relative Value: instruments issued by large and strong
quality institutions, with significant liquidity. These can be purchased on
either primary or secondary markets.
· Less Liquid Relative Value: instruments issued by large and strong
quality institutions, with limited liquidity due to past tenders or complex
features (secondary market).
· Restructuring: instruments issued by institutions in preparation or
implementation of a restructuring process (secondary market).
· Special Situations: instruments issued by entities in run-off,
under a merger process or split between several entities (secondary market).
· Midcap Origination: instruments issued by small institutions or
small subsidiaries of larger institutions (primary market).
3- Company activity
January
In Midcap Origination, the Company took part in the inaugural RT1 issuance
from offshore life insurance specialist Utmost. It also came back into eSure
RT1s. The Company took advantage of the sell-off in Metro Bank T2s post the
withdrawal of M&A rumours to build a small position. Finally, it increased
its exposure to My Money Bank T2s.
In Liquid Relative Value, the Company bought some Santander retail legacy
bonds, with the expectation that they would be redeemed at par at the next
call date.
February
In Liquid Relative Value, the Company closed its short position on Société
Générale long-dated T2s. It bought DPB CMS following the sell-off in discos.
In Midcap Origination, the Company participated in Chesnara's inaugural T2. It
also bought Quintet's AT1s. The Company took gains on Fidelidade T2s.
March
In Midcap Origination, the Company took part in the new Co-Operative Bank
senior HoldCo issue in GBP at a 6% coupon.
In Liquid Relative Value, it bought some RBI 2022 T2s in CHF.
In Restructuring, the Company opened a position in a Bank of Cyprus 2031 T2,
which offered a yield to call of around 9%.
April
In Liquid Relative Value, the Company took a position in La Banque Postale 3%
AT1s as a play on French spreads. It added to its position in BCP both in AT1s
and T2s.
In Midcap Origination, the Company divested from Leeds' PIBS to reduce its
overall exposure to fixed perpetual instruments.
May
In Liquid Relative Value, the Company slightly increased our exposure to BCP
and opened a position in La Banque Postale, while we closed our RBI holdings.
In Restructuring, the Company added to Piraeus and sold our GamaLife Tier 2s.
In MidCap Origination, we reduced our exposure to Coop Bank.
June
In Liquid Relative Value, the Company bought Intesa AT1s at a low cash price
and opened a position into Credit Suisse low-trigger AT1s. We participated in
the new Credito Emiliano Tier 2 issue. We added to Quintet Private Bank.
In MidCap Origination, the Company took part in an inaugural AT1 issue from
the commodity broker Marex at a 13.25% coupon.
July
In Liquid Relative Value, we added Athora and RBI to our AT1 positions.
In Midcap Origination, we slightly increased our investment in eSure.
August
In Liquid Relative Value, we reduced the Company's exposure to Intesa and
Credito Emiliano while we
opened a position in Virgin Money 8.25% AT1s.
In Midcap Origination, we sold some Banca di Asti AT1s.
September
In Midcap Origination, we bought Sainsbury Bank, Bank of Cyprus and Banco
Popolare di Adige Tier 2s.
In Restructuring, we sold Piraeus Bank Tier 2s and bought Cajamar senior
bonds.
In Liquid Relative Value, we opened a position in the National Bank of Greece
Tier 2s. We closed our Danske and BNP CDS contracts.
In Illiquid Relative Value, we reduced our holdings of RSA and Benefact prefs.
October
In Liquid Relative Value, we purchased low cash price AT1s from issuers such
as Sabadell, Unicredit, Deutsche Bank and Deutsche Pfandbriefbank.
In Midcap Origination, we took part in the new Permanent TSB 13.25% AT1 issue.
We added to Marex 13.25% AT1. We sold Jupiter T2s and Quintet AT1s.
In Illiquid Relative Value, we trimmed our holdings of Lloyds, Bank of
Ireland, RSA and Santander preference shares.
November
In Midcap origination and Restructuring, we trimmed our positions in a number
of names, such as Banca di Asti, International Personal Finance, Co-op bank
and Shawbrook.
In Illiquid Relative Value, we reduced preference share holdings.
In Liquid Relative Value, we bought Banco BPM, Pfandbrief Bank, Credit Suisse
and Provident.
December
In Liquid Relative Value, we bought Barclays, Virgin Money, Socgen, Intesa and
Volksbank Wien AT1s.
In Midcap Origination, we bought Permanent TSB Tier 2s. We reduced Shawbrook,
My Money Bank, Piraeus, the Co-Operative Bank, OneSavings, International
Personal Finance and NIBC.
In Illiquid Relative Value, we sold Lloyds, Bank of Ireland and Newcastle
Building Societies.
4- Portfolio (as at 31 December 2022)
chart
5- Company metrics (as at 31 December 2022)
Share price (mid) (GB pence) 84.00
Published NAV per share (daily) (GB pence) 92.43
Dividends paid over last 12 months (GB pence) 6.00
Shares in issue 91,852,904
Market capitalisation (GBP mn) 77.16
Total Published Net Assets (GBP mn) 84.90
Premium / (Discount) (9.12)%
Portfolio information (APM) 31 December 2022 31 December 2021
Modified duration 3.21 3.08
Sensitivity to credit 6.23 5.56
Positions 83 84
Average price at end of the month (1) 91.02 113.62
Running yield (GBP) 9.29% 5.95%
Yield to perpetuity (GBP) (2) 12.15% 6.23%
Yield to call (GBP) (3) 13.68% 6.70%
Gross assets 102.4% 112.7%
Net gearing 97.5% 108.4%
Investments / Published net assets 95.4% 95.7%
Cash 2.2% 7.3%
Collateral 4.9% 4.2%
Net Repo / Published net assets 0.0% 5.3%
CDS / Published net assets 28.7% 32.9%
Net Return(4, 7)
1 month 3 months(6) 6 months(6) 1 year(6) 3 years(5) Since launch(5)
0.60% 3.56% 1.03% -6.32% 3.97% 5.18%
chart
(1)Bonds only. (2)The yield to perpetuity is the yield of the portfolio
converted in GBP with the hypothesis that securities are not reimbursed and
kept to perpetuity. (3)The yield to call is the yield of the portfolio
converted in GBP at the anticipated reimbursement date of the bonds. (4)Past
performance does not guarantee future results. (5)Annualised performance,
dividends reinvested. (6)Performance with dividends reinvested. (7)Data is
from Bloomberg so may differ slightly to Company records.
6- NAV evolution(1)
chart
(1)Based on the Published NAV.
7- Outlook
2022 will be remembered as the year when the bond market crashed. The
conjunction of global monetary tightening and the war in Ukraine resulted in
an exceptionally fast increase in interest rates combined with a significant
widening of credit spreads. Bund yields increased from -0.18% to 2.56% while
the spread on the Xover index doubled. Axiom European Financial Debt returned
-6.32% vs. -12.89% for the Ice Bofa Coco AT1 Index and -12.46% for the Tier 2
Ice Bofa Index.
European banks' fundamentals remained strong throughout the year. The average
CET1 oscillated around 15% as higher capital generation compensated for the
increase in shareholder distributions. The stock of non-performing loans was
stable and the average NPL ratio reached a new low of 1.8%. Banks took
precautionary provisions and downgraded some assets in light of elevated macro
risks. The average LCR ratio stayed around its post-GFC highs i.e. 160%.
Banks' profits climbed. The increase in interest rates generally allowed banks
to boost commercial deposit margins while the high level of economic activity
supported commissions. The estimated next fiscal year ROE on the Stoxx Europe
600 Index jumped above 10% for the first time in more than a decade.
In 2023, bank credit investors will have to navigate the many cross-currents
induced by monetary tightening. On the one hand, elevated interest rates allow
banks to earn sizable margins on their retail and transactional funding;
continued fiscal spending and tight labour markets are supporting asset
quality. On the other hand, QT is slowly increasing funding costs and
pressuring global asset prices, resulting in lower collateral valuations. The
Company intends to take advantage of the higher carry available on the bank
fixed income market while keeping a prudent duration, credit and liquidity
profile.
Gildas Surry Antonio Roman
Axiom Alternative Investments SARL Axiom Alternative Investments SARL
21 March 2023 21 March 2023
Investment Portfolio as at 31 December 2022
£'000 % of NAV
Investments in capital instruments at fair value through profit or loss
Bonds
West Bromwich Building Society 4.500% Perp (Var) 3,266 3.83
Ulster Bank Ireland DAC 11.750% Perp 3,030 3.56
Co-Operative Bank Finance PLC 9.500% 04/25/29 (Var) 2,430 2.85
Intesa Sanpaolo SpA 7.75% Perp (Var) 2,147 2.52
eSure Group PLC 6.000% Perp (Var) 2,030 2.38
Volksbank Wien AG 7.750% Perp (Var) 2,026 2.38
Barclays PLC 6.375% Perp (VAR) 2,024 2.38
Promontia MMB SASu 8.000% Perp (Var) 1,839 2.16
Shawbrook Group 12.103% 12/08/27 Perp (Var) 1,757 2.06
Novo Banco SA 8.500% 07/06/28 (Var) 1,688 1.98
Nottingham Building Society 7.875% Perp 1,669 1.96
International Personal Finance PLC 9.750% 11/12/25 1,507 1.77
Promontia MMB SASU 5.250% 10/15/41 (Var) 1,479 1.74
AnaCap Financial Europe SA 5.000% 08/01/24 (Var) 1,389 1.63
Lifetri Groep BV 5.250% 06/01/32 (Var) 1,355 1.59
IKB Funding Trust I 1.087% Perp (Var) 1,317 1.55
Cassa di Risparmio di Asti SpA 9.250% Perp (Var) 1,299 1.52
OSB Group PLC 6.000% Perp (Var) 1,286 1.51
Saxo Bank A/S 8.125% Perp (Var) 1,279 1.50
Coventry Building Society 12.125% Perp 1,176 1.38
Bank of Cyprus Holdings PLC 6.625% 10/23/31 (Var) 1,131 1.33
Brit Insurance Holdings Ltd 3.661% Perp (Var) 1,060 1.24
Oldenburgische Landesbank AG 6.000% Perp (Var) 1,049 1.23
Chesnara PLC 4.750% 08/04/32 1,031 1.21
Bracken MidCo1 PLC 6.750% 11/01/27 1,013 1.19
DDM Debt AB 9.000% 04/19/26 989 1.16
NIBC Bank NV 6.000% Perp (Var) 981 1.15
UnipolSai Assicurazioni SpA 6.375% Perp (Var) 965 1.13
Banco Comercial Portugues SA 9.250% Perp (Var) 934 1.10
Marex Group PLC 13.25% Perp (Var) 927 1.09
Piraeus Financial Holdings SA 8.750% Perp (Var) 920 1.08
Credit Suisse Group AG 6.25% Perpetual Bond 916 1.07
Saxo Bank A/S 5.500% 07/03/29 916 1.07
Banca Pop Alto Adige 9.000% 09/09/2032 (Var) 908 1.07
Investec PLC 6.750% Perp (Var) 907 1.06
Virgin Money UK plc 8.25% Perp 06/17/27 906 1.06
Utmost Group PLC 6.125% Perp (Var) 897 1.05
La Banque Postale SA 3.000% Perp (Var) 891 1.05
Amissima Vita SpA 7.000% 08/16/31 (Var) 890 1.05
Buoni Poliennali del tes 1.600% 11/22/28 (Fixed) 876 1.03
Athora Netherlands NV 7.0% Perp 06/19/25 870 1.02
Piraeus Bank SA 3.875% 11/03/27 (Var) 862 1.01
Skipton Building Society 12.875% Perp 846 0.99
Banco Comercial Portugues SA 3.871% 03/27/30 842 0.99
Societe Generale 8.00% Perp (Var) 834 0.98
Deut Pfandbriefbank AG 5.75% 04/28/23 Perp (Var) 812 0.95
Metro Bank PLC 9.500% 10/08/25 (Var) 797 0.94
National Bank Greece SA 8.25% 07/18/29 (Fix to Var) 793 0.93
Banco BPM SPA 7.000% 04/12/27 (Var) 782 0.92
BNP Paribas SA Perp (Var) 743 0.87
Kommunalkredit Austria AG 6.500% Perp (Var) 739 0.87
Novo Banco SA 3.500% 07/23/24 (Var) 675 0.79
Deutsche Bank AG 4.625% 10/30/27 Perp (Var) 675 0.79
TSB Group Holdings PLC 7.875% Perp (Var) 647 0.76
Standard Chartered 4.315860% Perp 01/12/2049 641 0.75
Deutsche Postbank Funding Trust I 0.390% Perp (Var) 635 0.74
Aareal Bank AG 6.849% Perp (Var) 629 0.74
Banco de Credito Social Cooperativo SA 8.000% 09/22/26 (Var) 624 0.73
Banco De Sabadell SA 5.75% Perp (Var) 618 0.73
Raiffeisen Bank Intl 6.00% Perp 06/15/26 579 0.68
Banco Comercial Portugues SA 4.000% 05/17/32 (Var) 563 0.66
BNP Paribas SA 0.000% Perp (Var) 549 0.64
Caixa Economica Montepio Geral 5.000% Perp (Var) 534 0.63
GNB Cia de Securos de Vida SA 3.102% Perp (Var) 532 0.62
Abanca Corp Bancaire SA 7.500% Perp (Var) 524 0.62
Banco de Credito Social Cooperativo SA 5.250% 11/27/31 (Var) 522 0.61
Sainsburys Bank 10.500% 03/12/2033 (Var) 515 0.60
National Westminster Bank PLC 11.500% Perp Series BR 482 0.57
Louvre Bidco SAS 5.375% 09/30/24 (Var) 480 0.56
Provident Financial 8.875% 01/13/32 (Var) 447 0.52
BAWAG Group AG 5.125% Perp (Var) 440 0.52
Piraeus Bank SA 9.750% 06/26/24 (Var) 433 0.51
Unicaja Banco SA 4.875% Perp (Var) 386 0.45
Permanent TSB Group 13.25% (Var) 287 0.34
Ecology Building Society 9.625% Perp (Var) 258 0.30
Mitsubishi UFJ Investor Services & Banking Luxembourg SA 4.013% 12/15/50 171 0.20
(Var)
National Westminster Bank PLC 11.500% Perp Series RG 147 0.17
Banco Popular Espanol SA 8.000% 07/29/21 - -
Banco Popular Espanol SA 8.250% 10/19/21 - -
Popular Capital SA 6.000% Perp - -
------------ ------------
77,013 90.39
Other capital instruments
Bank of Ireland 12.625% Perp 722 0.85
------------ ------------
722 0.85
------------ ------------
Total investments in capital instruments at fair value through profit or loss 77,735 91.24
£'000 % of NAV
Derivative financial assets at fair value through profit or loss
GBP/USD foreign currency forward 260 0.30
------------ ------------
Derivative financial assets at fair value through profit or loss 260 0.30
Derivative financial liabilities at fair value through profit or loss
GBP/EUR foreign currency forward (461) (0.54)
Subfin CDSI S35 5Y SW CDS 12/20/22 (427) (0.50)
Subfin CDSI S38 5Y CDS 12/20/27 (426) (0.50)
------------ ------------
Derivative financial liabilities at fair value through profit or loss (1,314) (1.54)
Related party fund investments
Axiom Alternative Liquid Rates Z Cap Scv 1,836 2.16
------------ ------------
Related party fund investments 1,836 2.16
Other assets and liabilities
Collateral accounts for derivative financial instruments at fair value through 4,164 4.88
profit or loss
Cash and cash equivalents 3,941 4.62
Other receivables and prepayments 1,473 1.73
Bank overdrafts (2,234) (2.62)
Other payables and accruals (661) (0.78)
------------ ------------
Other assets and liabilities 6,683 7.84
------------ ------------
Net assets (as reported in these financial statements (see note 22)) 85,200 100.00
------------ ------------
Principal Risks and Uncertainties
Risk is inherent in the Company's activities, but it is managed through an
ongoing process of identifying and assessing risks and ensuring that
appropriate controls are in place. The Board evaluates the Company's principal
risks on an ongoing basis, and continuously assesses for future risks that
could have a potential impact. During the year, the Board and the Investment
Manager had ongoing discussions and reviews to consider the current, emerging,
and potential risks of the Company. The discussions generated insights into a
range of emerging and potential risks and has helped to focus attention on
additional areas for monitoring by the Board and the Investment Manager. The
Company's risk register is reviewed by the Board, including the assessment of
future risks that may arise.
The Board has carried out a robust assessment of the Company's emerging and
principal risks and the key risks faced by the Company, along with controls
employed to mitigate those risks. These have not substantially changed in the
last year and are set out below.
Proposals for the liquidation of the Company
The Board is putting forward proposals for the liquidation of the Company. If
Shareholders vote in favour of the Proposals, the Company will be liquidated.
Further details of the Proposals for the implementation of the Scheme will be
described in the Circular, which, when finalised, will be made available on
the Company's section of the Investment Manager's website
(https://axiom-ai.com/web/en/axiom-european-financial-debt-fund-limited-2/).
Macroeconomic risk
Adverse changes affecting the global financial markets and economy as a whole,
and in particular European financial debt markets, may have a material
negative impact on the performance of the Company's investments. In addition,
the Company's non-Pounds Sterling investments may be affected by fluctuations
in currency exchange rates. Prices of financial and derivative instruments in
which the Company invests are subject to significant volatility due to market
risk.
The Company may use derivatives, including options, short market indices, CDS,
and others, to mitigate market-related downside risk, but the Company is not
committed to maintaining market hedges at any time.
The Company has a systematic hedging policy with respect to currency risk.
Subject only to the availability of suitable arrangements, the assets
denominated in currencies other than Pounds Sterling are hedged by the Company
(to a certain extent) by using currency forward agreements to buy or sell a
specified amount of Pounds Sterling on a particular date in the future.
Historically, FX hedging has undermined many closed-ended investment funds, as a result of sharp movements in the FX rates leaving large hedging losses which could not be met as assets were illiquid and banks were under severe balance sheet strain and could not offer forbearance on facilities in breach.
The Company is exposed to FX hedging risks (see note 24) but this risk is mitigated by the following:
- Based on the worst case scenario observed in monthly spot movements in the past 10 years, our worst case expected hedging loss on expiry would be 4.00% of NAV;
- Our portfolio trading liquidity is such that it would take one day, in normal circumstances, to liquidate sufficient assets to meet such an anticipated worst case loss; and
- In "stressed" markets, we estimate it would take one day to raise such liquidity.
Russian Invasion of Ukraine
Russia's invasion of Ukraine and resulting international sanctions on Russia
are believed to have already caused substantial economic damage to that
country, which is likely to worsen the longer the sanctions are in place, and
has had a wider global effect on the supply and prices of certain commodities
and consequently on inflation and general economic growth of the global
economy. The effects will vary from country to country, depending, for
example, on their dependence on Russian energy supplies, particularly gas,
which cannot be so easily transported and substituted as oil. European and
global banks in general were very strongly capitalised as at the end of 2021
and they have limited direct exposure to Russian credit risk and there is no
evidence of meaningful stress in the financial markets. The military and
political situation will no doubt continue to develop and as a consequence
there may well be further price volatility in some instruments, but absent
unexpected catastrophic tail risk events, the effects on the Company's
portfolio are not expected to be significant.
Investment risk
There are certain risks associated with the Company's investment activities
that are largely a result of the Company's investment policy (e.g. a portfolio
concentrated on European financial debt) and certain investment techniques
which are inherently risky (e.g. short selling).
There are numerous risks associated with having a concentrated portfolio and
the primary risk management tool used by the Company is the extensive research
performed by the Investment Manager prior to investment, along with the
ongoing monitoring of a position once held in the Company's portfolio. The
Board reviews portfolio concentration and receives a detailed overview of the
portfolio positions quarterly, and more frequently if necessary.
Counterparty risk
The Company has credit and operational risk exposure to its counterparties
which will require it to post collateral to support its obligations in
connection with forwards and other derivative instruments. Cash pending
investment or held on deposit will also be held with counterparties. The
insolvency of a counterparty would result in a loss to the Company which could
be material.
In order to mitigate this risk the Company seeks to trade only with reputable
counterparties that the Investment Manager believes to be creditworthy. The
Investment Manager negotiates its ISDA agreements to include bilateral
collateral agreements. In addition, cash held is only with financial
institutions with short term credit ratings of A-1 (Standard & Poor's) or
P-1 (Moody's) or better.
Exposure to counterparties is monitored by the Investment Manager and reported
to the Board each quarter.
Credit risk
The Company may use leverage to meet its investment objectives. The Company will also use forward contracts to hedge its non-Pounds Sterling assets. In order to do this, it will need to have in place credit lines with one or more financial institutions.
Due to market conditions or other factors, credit lines may be withdrawn and it might not be possible to put in place alternative arrangements. As such, the ability to meet the Company's investment objective and/or hedging strategy may not be met.
The Investment Manager monitors the use of credit lines and reports to the Board each quarter.
Share price risk
The Company is exposed to the risk that its shares may trade at a significant
discount to NAV or that the market in the shares will be illiquid. To mitigate
this risk the Company increased the frequency of the publication of its NAV to
daily and has retained the Broker to maintain regular contact with existing
and potential shareholders. The Board monitors the trading activity of the
shares on a regular basis and addresses the premium/discount to NAV at its
regular quarterly meetings.
From 1 January 2022 to 31 December 2022, the Company's shares traded at an
average discount to NAV of 9.19% (2021: 9.14% discount to NAV). At the year
end, the shares traded at a 9.12% discount to Published NAV (2021: 9.18%
discount). The level of discount had not improved over the year, which is part
of the reason for putting forward the Proposals to liquidate the Company - as
detailed in the Circular, which, when finalised, will be made available on the
Company's section of the Investment Manager's website
(https://axiom-ai.com/web/en/axiom-european-financial-debt-fund-limited-2/).
Regulatory risk
Changes in laws or regulations, or a failure to comply with these, could have
a detrimental impact on the Company's operations. Prior to initiating a
position, the Investment Manager considers any possible legal and regulatory
issues that could impact the investment and the Company. The Company's
advisers and service providers monitor regulatory changes on an ongoing basis,
and the Board is apprised of any regulatory inquiries and material regulatory
developments on a quarterly basis.
Reputational risk
Reputational damage to the Company or the Investment Manager as a result of
negative publicity could adversely affect the Company. To address this risk,
the Company has engaged a public relations firm to monitor media coverage and
actively engage with media sources as necessary. The Board also receives
updates from the Broker and the Investment Manager on a quarterly basis and
considers measures to address concerns as they arise.
Environmental, Employee, Social and Community Issues
As an investment company, the Company does not have any employees or physical
property, and most of its activities are performed by other organisations.
Therefore, the Company does not combust fuel and does not have any greenhouse
gas emissions to report from its operations, nor does it have direct
responsibility for any other emission producing sources.
ESG Policy
The Board believes that all companies have a duty to consider their impact on
the community and the environment. As an investment company, the Company does
not have any employees and all of its day-today activities are delegated to
third party service providers. The Directors, together with the Company's key
service providers, the Administrator, Company Secretary and external auditor
are all based in Guernsey and Board meetings are held in Guernsey, thus
negating the need for long commutes or flights to/from Board meetings, and
thereby minimising the negative environmental impact of travel to/from Board
meetings.
When making investment decisions, the Investment Manager uses three main
mechanisms to integrate ESG criteria:
· Its in-house database and tools dedicated to ESG, as
described in its ESG policy which is available on their website
https://axiom-ai.com/web/en/responsible-investing/
(https://axiom-ai.com/web/en/responsible-investing/) );
· Engagement with management or investor relations teams to get
additional information; and
· Information published in annual reports or other regulatory
filings (such as TCFD or sustainability reports).
Axiom AI's Investment Committee is ultimately responsible for the progress of
ESG integration by the investment teams, under the supervision of Axiom AI's
Executive Committee.
In addition to the ESG policy, Axiom AI maintains an exclusion list.
Investments in securities issued by a firm on that exclusion list are
prohibited. If a name is added to the exclusion list and the securities are
already in the portfolios, the portfolio manager must divest the securities,
in a way that is not harmful to holders (no fire sale). The list is mainly
based on the lists established by recognised key players, such as the
Norwegian government pension fund. The list was introduced in order to
formalise the Investment Manager's desire not to invest in any company engaged
in activities that do not correspond to our values and our requirements in
terms of sustainable development. Companies can be excluded, for example
because they produce controversial weapons, such as the ones covered by the
Ottawa and Oslo Conventions (anti-personnel mines, cluster munitions). This
list is regularly reviewed and amended.
Gender Diversity
The Board of Directors of the Company currently comprises three male
Directors. Further information in relation to the Board's policy on diversity
can be found in the Directors' Remuneration Report.
Key Performance Indicators
The Board uses the following KPIs to help assess the Company's performance
against its objectives. Further information regarding the Company's
performance is provided in the Chairman's Statement and the Investment
Manager's Report.
Dividends per Ordinary Share
As set out in the Prospectus, the Company intends to distribute all of its
income from investments, net of expenses, by way of dividends on a quarterly
basis. The Company may retain income for distribution in a subsequent quarter
to that in which it arises in order to smooth dividend amounts or for the
purposes of efficient cash management.
The Company announced dividends of £5,511,000 (6.00p per Ordinary Share) for
the year ended 31 December 2022 (2021: £5,511,000, 6.00p per Ordinary Share)
(see note 6 for further details). The Company has met the 6.00p dividend per
share target each year since inception and expects to continue to be able to
pay out dividends of this level in the future, until the Liquidation of the
Company.
NAV and total return
In line with the Prospectus, the Company has been targeting a net total return
on invested capital of approximately 10% p.a. over a seven year period.
The Company incurred a total loss of -6.39% in the year ended 31 December 2022
(2021: achieved a total return of +16.88%). The total return from inception to
31 December 2022 was 4.35% p.a., which is below the long-term target return of
10% p.a. net of operating expenses. The future rate of return and dividends
cannot be guaranteed, especially in light of the impending vote on the
liquidation of the Company.
The Board regularly monitors the premium/discount of the price of the Ordinary
Shares to the NAV per share. Should the discount of share price to NAV become
unacceptable to the Board, the Company may buy back some of its shares.
However, this is unlikely to occur in the immediate future, given the
Proposals for the liquidation of the Company.
At 31 December 2022 the share price was 84.00p (2021: 95.50p), a 9.12%
discount to the Published NAV (2021: 9.18% discount).
Promoting the Success of the Company
The following disclosure outlines how the Directors have had regard to the
matters set out in Section 172(1)(a) to (f) of the Companies Act 2006.
Although, as a Guernsey company, the Company is not required to directly
comply with the Companies Act 2006, Section 172 is considered as a requirement
of the AIC Code with which the Company complies (see the Corporate Governance
Report (in the Annual Report and Financial Statements) for further details).
The Board considers the needs of a number of stakeholders when considering the
long-term future of the Company. The key stakeholders with which the Board
liaised during the year ended 31 December 2022 were Shareholders and key
service providers.
Shareholders
The Company's significant Shareholders at the year end can be found in the
Directors' Report (in the Annual Report and Financial Statements).
When making principal decisions it is considered imperative to analyse the
views of the Company's investors, to ensure that there may continue to be a
supply of capital enabling the Company to continue to expand its shareholder
base, realise its potential for growth and achieve its long-term investment
objective. Indeed, it was engagement with investors that led the Board to
put forward the Proposals for the implementation of the Scheme.
The KPIs, detailed above, have been considered on an ongoing basis as part of
the Board's decision making process.
Details of how the Directors communicate with Shareholders can be found in the
Corporate Governance Report (in the Annual Report and Financial Statements).
During the year, the Board and its advisers engaged with the investors with
respect to determining proposals for the future of the Company, as disclosed
in the Chairman's Statement.
The only other engagement with investors in the year was routine regarding
strategy and performance.
Key service providers
Details of the Company's key service providers can be found in the material
contracts section of the Directors' Report (in the Annual Report and Financial
Statements).
The key service providers, including the Investment Manager, are fundamental
to the Company's ability to continue in the same state as any changes could
disrupt the expected timeliness of information provided to the markets. In
turn this would be likely to have a detrimental impact on the Company's
reputation. Reputational risk is discussed further in the Principal Risks and
Uncertainties.
The Board considers the performance of the Investment Manager to be imperative
to the success of the Company and therefore reviews the performance of the
Investment Manager at each Board meeting and conducts a more formal review of
all service providers on an annual basis. The Investment Manager and
Administrator provide the Board with documentation for consideration at the
meetings to assist with their review of performance and the Investment Manager
also provides a verbal report to the Board. The Directors raise any queries
they have at these meetings with the Investment Manager to help to ensure the
successful implementation of the investment objective and success of the
Company.
The Board has continuous access to all of the Company's key service providers
and has open two-way communication with them. Key aspects of discussion with
these service providers, other than those regarding Company performance and
strategy, were in respect of fees payable to these providers.
Following these discussions, no fee arrangements were amended in the year
ended 31 December 2022. However, protective notice was served on all key
service providers due to the Proposals for the implementation of the Scheme.
CACEIS refused to accept the protective notice but the Board noted CACEIS's
three month notice period and that the fee was immaterial.
William Scott
Chairman
21 March 2023
Statement of Comprehensive Income
for the year ended 31 December 2022
Note Year ended Year ended 31 December 2021
31 December 2022
£'000 £'000
Income
Capital instrument income 6,084 5,180
Credit default swap income 713 1,107
Bank interest receivable 73 5
------------ ------------
Total income 6,870 6,292
------------ ------------
Investment gains and losses on investments held at fair value through profit
or loss
Realised (losses)/gains on disposal of capital instruments and other 15 (2,716) 8,269
investments
Movement in unrealised losses on capital instruments and other investments 15 (9,358) (986)
Realised gains on derivative financial instruments 18 971 5,223
Movement in unrealised losses on derivative financial instruments 18 (579) (1,294)
------------ ------------
Total investment gains and losses (11,682) 11,212
------------ ------------
Expenses
Gains/(losses) on foreign currency 552 (721)
Other expenses 12 (784) (296)
Investment management fee 8a (744) (866)
Interest payable and similar charges 11 (150) (52)
Administration fee 8b (139) (132)
Directors' fees 8f (95) (95)
Performance fee 8a - (596)
------------ ------------
Total expenses (1,360) (2,758)
------------ ------------
(Loss)/profit for the year attributable to the Owners of the Company (6,172) 14,746
------------ ------------
(Loss)/earnings per Ordinary Share: basic and diluted 14 (6.72)p 16.05p
------------ ------------
The Company does not have any income or expenses that are not included in
profit for the year. Therefore, the loss for the year is also the total
comprehensive loss for the year.
The accompanying notes form an integral part of these financial statements.
Statement of Changes in Equity
for the year ended 31 December 2022
Note Distributable reserves Performance fee reserve Total
£'000 £'000 £'000
Opening balance at 1 January 2021 87,350 - 87,350
Profit for the year ended 31 December 2021 14,746 - 14,746
50% Performance fee payable in Shares 8a - 298 298
Contributions by and distributions to Owners
Dividends paid 6 (5,511) - (5,511)
------------ ------------ ------------
At 31 December 2021 96,585 298 96,883
Loss for the year ended 31 December 2022 (6,172) (6,172)
Contributions by and distributions to Owners
Dividends paid 6 (5,511) - (5,511)
------------ ------------ ------------
At 31 December 2022 84,902 298 85,200
------------ ------------ ------------
The share capital has not been presented separately in the above Statement of
Changes in Equity as the Ordinary Shares have no par value, and hence the
share capital is £nil.
The Performance fee reserve is also distributable.
The accompanying notes form an integral part of these financial statements.
Statement of Financial Position
as at 31 December 2022
As at As at
Note 31 December 2022 31 December 2021
£'000 £'000
Current assets
Investments in capital instruments at fair value through profit or loss 15, 19 77,735 85,449
Cash and cash equivalents 3,356 7,713
Other investments at fair value through profit or loss 15, 19 1,836 4,874
Derivative financial assets at fair value through profit or loss 18 260 4,506
Collateral accounts for derivative financial instruments at fair value through 16,18 4,164 4,119
profit or loss
Other receivables and prepayments 17 2,058 2,143
------------ ------------
Total assets 89,409 108,804
------------ ------------
Current liabilities
Derivative financial liabilities at fair value through profit or loss 18 (1,314) (6,555)
Bank overdrafts (2,234) (693)
Other payables and accruals 20 (661) (649)
Short position(s) covered by reverse sale and repurchase agreements 15, 19 - (3,932)
Collateral accounts for derivative financial instruments at fair value through 16,18 - (92)
profit or loss
------------ ------------
Total liabilities (4,209) (11,921)
------------ ------------
Net assets 85,200 96,883
------------ ------------
Share capital and reserves
Share capital 21 - -
Distributable reserves 84,902 96,585
Performance fee reserve 298 298
------------ ------------
Total equity holders' funds 85,200 96,883
------------ ------------
Net asset value per Ordinary Share: basic and diluted 22 92.76p 105.48p
These financial statements were approved by the Board of Directors on 21 March
2023 and were signed on its behalf by:
William Scott John Renouf
Chairman Director
21 March 2023 21 March 2023
The accompanying notes form an integral part of these financial statements.
Statement of Cash Flows
for the year ended 31 December 2022
Note Year ended 31 December 2022 Year ended 31 December 2021
£'000 £'000
Cash flows from operating activities
Net (loss)/profit (6,172) 14,746
Adjustments for:
Foreign exchange movements (552) 721
Total investment losses/(gains) at fair value through profit or loss 11,682 (11,212)
Capital instrument income (6,084) (5,180)
CDS income (713) (1,107)
Interest on sale and repurchase agreements 90 (2)
Performance fee reserve - 298
Cash flows relating to financial instruments:
Payment (to)/from collateral accounts for derivative financial instruments 16 (137) 1,538
Purchase of investments at fair value through profit or loss (38,911) (87,768)
Sale of investments at fair value through profit or loss 37,537 90,710
Premiums received from selling credit default swap agreements 18 1,584 274
Premiums paid on buying credit default swap agreements 18 - (83)
Purchase of foreign currency derivatives 18 (197,420) (185,824)
Close-out of foreign currency derivatives 18 195,378 189,680
Purchase of bond futures 18 (929) (4,234)
Sale of bond futures 18 2,805 4,977
Proceeds from sale and repurchase agreements 18 18,156 20,821
Payments to open reverse sale and repurchase agreements 18 - (4,166)
Payments for closure of sale and repurchase agreements 18 (24,350) (26,437)
Proceeds from closure of reverse sale and repurchase agreements 18 4,175 3,898
Opening of short position(s) - 3,844
Closure of short position(s) (3,418) (1,932)
Cash paid during the year for interest (1,937) (1,404)
Cash received during the year for interest 7,897 7,751
Cash received during the year for dividends 346 363
------------ ------------
Net cash (outflow)/inflow from operating activities before working capital (388) 10,272
changes
Decrease/(increase) in other receivables and prepayments 6 (3)
Increase in other payables and accruals 28 336
------------ ------------
Net cash (outflow)/inflow from operating activities (354) 10,605
Cash flows from financing activities
Dividends paid 6 (5,511) (5,511)
------------ ------------
Net cash outflow from financing activities (5,511) (5,511)
------------ ------------
(Decrease)/increase in cash and cash equivalents (6,450) 5,094
Cash and cash equivalents brought forward 7,020 2,647
Effect of foreign exchange on cash and cash equivalents 552 (721)
------------ ------------
Cash and cash equivalents carried forward * 1,122 7,020
------------ ------------
* Cash and cash equivalents, represented by:
Cash and cash equivalents 3,356 7,713
Bank overdrafts (2,234) (693)
------------ ------------
1,122 7,020
------------ ------------
The accompanying notes form an integral part of these financial statements.
Notes to the Financial Statements
for the year ended 31 December 2022
1. General information
The Company is domiciled in Guernsey and was incorporated in Guernsey on 7
October 2015 as an authorised closed-ended investment Company, under the
Companies (Guernsey) Law, 2008 with registered number 61003. Its Ordinary
Shares were admitted to trading on the Premium Segment and to the premium
listing segment of the FCA's Official List on 15 October 2018 (prior to this,
the Ordinary Shares traded on the SFS).
Proposals for the liquidation of the Company
The Board will shortly put forward proposals for the liquidation of the
Company, including the ability for Shareholders to receive shares, in respect
of their holdings of the Company's Ordinary Shares, in a new open-ended fund
managed by the same management team and with a similar investment mandate to
the Company. The Board believes that these proposals will provide continuity
for those Shareholders in terms of exposure to a strategy similar to the one
currently pursued by the Company and under the same management team. The New
Fund, AUFC, which will be a new Compartment of Axiom Lux SICAV, an established
Luxembourg SICAV that is registered as a UCITS with the Luxembourg financial
regulator, the Commission de Surveillance du Secteur Financier, will be
open-ended with daily liquidity. The proposals will also include a mechanism
for those Shareholders who do not wish to continue their investment to achieve
a cash exit.
Further details of the Proposals for the implementation of the Scheme will be
described in the Circular, which, when finalised, will be made available on
the Company's section of the Investment Manager's website
(https://axiom-ai.com/web/en/axiom-european-financial-debt-fund-limited-2/).
Investment objective
The investment objective of the Company is detailed in the Annual Report and
Financial Statements.
Investment policy
The investment policy of the Company is detailed in the Annual Report and
Financial Statements.
2. Statement of compliance
a) Basis of preparation
These financial statements present the results of the Company for the year
ended 31 December 2022. The comparative figures stated were for the year ended
31 December 2021. These financial statements have been prepared in accordance
with UK-adopted international accounting standards.
These financial statements are presented in Sterling, which is also the
Company's functional currency (please see notes 3b and 4 for further details).
All amounts are rounded to the nearest thousand.
b) Non-going concern
After undertaking prudent and robust enquiries, and assessing all data
relating to the Company's liquidity, the Directors have a reasonable
expectation that the Company would have adequate resources to continue in
operational existence for the foreseeable future if Shareholders were to vote
not to liquidate the Company. However, it is expected that Shareholders will
vote in favour of the Proposals and that the Company will be liquidated. For
this reason, they have not adopted the going concern basis in preparing the
financial statements. The effect of this is explained in note 4 to the
financial statements.
c) Basis of measurement
The financial statements have been prepared on a historical cost basis, except
for certain financial instruments, which are measured at fair value through
profit or loss.
d) Use of estimates and judgements
The preparation of financial statements in conformity with IFRS requires
management to make judgements, estimates and assumptions that affect the
application of policies and the reported amounts of assets and liabilities,
income and expenses.
Judgements made by management in the application of IFRS that have a
significant effect on the financial statements and estimates with a
significant risk of material adjustment are discussed in note 4.
3. Significant accounting policies
a) Income and expenses
Bank interest, capital instrument income and credit default swap income is
recognised on an accruals basis.
Dividend income is recognised when the right to receive payment is
established. Capital instrument income comprises bond interest and dividend
income. Revenue from fixed interest securities is recognised on an effective
interest rate basis. Accrued interest purchased and sold on interest bearing
securities is excluded from the capital cost of these securities and dealt
with as part of the revenue of the Company.
All expenses are recognised on an accruals basis. All of the Company's
expenses (with the exception of share issue costs, which are charged directly
to the distributable reserve and the portion of performance fees that are
deemed to be a share-based payment) are charged through the Statement of
Comprehensive Income in the period in which they are incurred.
b) Foreign currency
Foreign currency transactions are translated into Sterling using the exchange
rates prevailing at the dates of the transactions. Foreign exchange gains and
losses resulting from the settlement of such transactions and from the
translation at period-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the Statement of
Comprehensive Income.
The exchange rates used by the Company as at 31 December 2022 were
£1/€1.1287, £1/US$1.2083, £1/DKK8.3945, £1/CA$1.6377 and £1/SGD1.6185
(2021: £1/€1.1895, £1/US$1.3528, £1/DKK8.8479, £1/CA$1.7096 and
£1/SGD1.8249).
c) Taxation
Investment income is recorded gross of applicable taxes and any tax expenses
are recognised through the Statement of Comprehensive Income as incurred.
d) Financial assets and liabilities
The financial assets and liabilities of the Company are investments in capital
instruments at fair value through profit or loss, other investments at fair
value through profit or loss, collateral accounts for derivative financial
instruments, cash and cash equivalents, other receivables, derivative
financial instruments and other payables.
In accordance with IFRS 9, the Company classifies its financial assets and
financial liabilities at initial recognition into the categories of financial
assets and financial liabilities as discussed below.
In applying that classification, a financial asset or financial liability is
considered to be held for trading if:
· It is acquired or incurred principally for the purpose of selling
or repurchasing it in the near term; or
· On initial recognition, it is part of a portfolio of identified
financial instruments that are managed together and for which, there is
evidence of a recent actual pattern of short-term profit-taking; or
· It is a derivative (except for a derivative that is a financial
guarantee contract or a designated and effective hedging instrument).
Financial assets
The Company classifies its financial assets as subsequently measured at
amortised cost or measured at fair value through profit or loss on the basis
of both:
· The business model for managing the financial assets; and
· The contractual cash flow characteristics of the financial asset.
A financial asset is measured at fair value through profit or loss if:
· Its contractual terms do not give rise to cash flows on specified
dates that are solely payments of principal interest ("SPPI") on the principal
amount outstanding; or
· It is not held within a business model whose objective is either
to collect contractual cash flows, or to both collect contractual cash flows
and sell; or
· At initial recognition, it is irrevocably designated as measured
at fair value through profit or loss when doing so eliminates or significantly
reduces a measurement or recognition inconsistency that would otherwise arise
from measuring assets or liabilities or recognising the gains and losses on
them on different bases.
The Company includes in this category:
· Instruments held for trading. This category includes equity
instruments and debt instruments which are acquired principally for the
purpose of generating a profit from short-term fluctuations in price. This
category also includes derivative financial assets at fair value through
profit or loss.
· Debt instruments. These include investments that are held under a
business model to manage them on a fair value basis for investment income and
fair value gains.
Financial liabilities
A financial liability is measured at fair value through profit or loss if it
meets the definition of held for trading.
The Company includes in this category, other payables, derivative contracts in
a liability position and equity and debt instruments sold short since they are
classified as held for trading.
Derivative financial instruments, including credit default swap agreements,
foreign currency forward contracts, bond future contracts and sale and
repurchase agreements are recognised initially, and are subsequently measured
at, fair value. Sale and repurchase agreements are recognised at fair value
through profit or loss as they are generally not held to maturity but incurred
principally for the purpose of repurchasing in the near term and on initial
recognition are part of a portfolio of identified financial instruments that
are managed together and for which there is evidence of a recent actual
pattern of short-term profit taking. Derivative financial instruments are
classified as assets when their fair value is positive or as liabilities when
their fair value is negative. Derivative assets and liabilities arising from
different transactions are offset only if the transactions are with the same
counterparty, a legal right of offset exists, and the parties intend to settle
the cash flows on a net basis.
These financial instruments are classified at fair value through profit or
loss upon initial recognition on the basis that they are part of a group of
financial assets which are managed and have their performance evaluated on a
fair value basis, in accordance with investment strategies and risk management
of the Company.
Recognition
The Company recognises a financial asset or a financial liability when, and
only when, it becomes a party to the contractual provisions of the instrument.
Purchases and sales of financial assets that require delivery of assets within
the time frame generally established by regulation or convention in the
marketplace are recognised on the trade date, i.e. the date that the Company
commits to purchase or sell the asset.
Derecognition
A financial asset (or, where applicable, a part of a financial asset or part
of a group of similar assets) is derecognised where:
· The rights to receive cash flows from the asset have expired; or
· The Company has transferred its rights to receive cash flows from the
asset or has assumed an obligation to pay the received cash flows in full
without material delay to a third party under a "pass-through" arrangement;
and
· Either: (a) the Company has transferred substantially all the risks
and rewards of the asset; or (b) the Company has neither transferred nor
retained substantially all the risks and rewards of the asset, but has
transferred control of the asset.
When the Company has transferred its rights to receive cash flows from an
asset (or has entered into a pass-through arrangement) and has neither
transferred nor retained substantially all the risks and rewards of the asset
nor transferred control of the asset, the asset is recognised to the extent of
the Company's continuing involvement in the asset.
The Company derecognises a financial liability when the obligation under the
liability is discharged, cancelled or expires.
Initial measurement
Financial assets and financial liabilities at fair value through profit or
loss are recorded in the Statement of Financial Position at fair value. All
transaction costs for such instruments are recognised directly in the
Statement of Comprehensive Income.
Subsequent measurement
After initial measurement, the Company measures financial assets which are
classified at fair value through profit or loss, at fair value. Subsequent
changes in the fair value of those financial instruments are recorded in net
gain or loss on financial assets and liabilities at fair value through profit
or loss. Interest and dividends earned or paid on these instruments are
recorded separately in interest income or expense and dividend income or
expense.
Net gain or loss on financial assets and financial liabilities at fair value
through profit or loss
The Company records its transactions in investments and the related revenue
and expenses on a trade date basis. Unrealised gains and losses comprise
changes in the fair value of financial instruments at the period end. These
gains and losses represent the difference between an instrument's initial
carrying amount and disposal amount, or cash payment on, or receipts from
derivative contracts.
Offsetting of financial instruments
Financial assets and financial liabilities are reported net by counterparty in
the Statement of Financial Position, provided that a legal right of offset
exists, and is not offset by collateral pledged to or received from
counterparties.
Other receivables
Receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. The Company includes in this
category other short-term receivables. The Company makes use of a simplified
approach in accounting for trade and other receivables as well as contract
assets and records the loss allowance as lifetime expected credit losses.
These are the expected shortfalls in contractual cash flows, considering the
potential for default at any point during the life of the financial
instrument. In calculating, the Company uses its historical experience to
determine the expected credit losses.
e) Collateral accounts for derivative financial instruments at
fair value through profit or loss
Collateral accounts for derivative financial instruments at fair value through
profit or loss comprise cash balances held at the Company's depositary and the
Company's clearing brokers and cash collateral pledged to counterparties
related to derivative contracts. Cash that is related to securities sold, not
yet purchased, is restricted until the securities are purchased. Financial
instruments held within the margin account consist of cash received from
brokers to collateralise the Company's derivative contracts and amounts
transferred from the Company's bank account.
f) Cash and cash equivalents
Cash in hand and in banks and short-term deposits which are held to maturity
are carried at cost. Cash and cash equivalents are defined as cash in hand,
demand deposits and short-term, highly liquid investments readily convertible
to known amounts of cash and subject to insignificant risk of changes in
value.
g) Share capital
Ordinary Shares are classified as equity. Incremental costs directly
attributable to the issue of Ordinary Shares are recognised as a deduction
from equity.
When share capital recognised as equity is repurchased, the amount of the
consideration paid, which includes directly attributable costs, is recognised
as a deduction from equity. Repurchased shares that are classified as Treasury
Shares are presented as a deduction from equity. When Treasury Shares are sold
or subsequently reissued, the amount received is recognised as an increase in
equity and the resulting surplus or deficit is transferred to/from
distributable reserves.
Funds received from the issue of Ordinary Shares are allocated to share
capital, to the extent that they relate to the nominal value of the Ordinary
Shares, with any excess being allocated to distributable reserves.
h) Distributable reserves
All income and expenses, foreign exchange gains and losses and investment
gains and losses of the Company are allocated to the distributable reserve.
i) Performance fee reserve
In accordance with IFRS 2, Share-based payments, the portion of the
performance fee that is due to be settled in shares is deemed to be an
equity-settled share-based payment when the fee is settled. As such, 50% of
the performance fee accrual at 31 December 2021 (£298,000) has been allocated
to the performance fee reserve until the payment, which will be utilised to
purchase the shares, has been made. This accrual remained outstanding for
payment at 31 December 2022 and was settled in full on 6 March 2023. There is
no vesting period (see note 8 a) for further details).
j) NAV per share and earnings per share
The NAV per share disclosed on the face of the Statement of Financial Position
is calculated by dividing the net assets by the number of Ordinary Shares in
issue at the year end.
Earnings per share is calculated by dividing the earnings for the year by the
weighted average number of Ordinary Shares in issue during the year.
k) Changes in accounting policy and disclosures
The accounting policies adopted are consistent with those of the previous
financial period. The Company adopted the following new and amended relevant
IFRS in the period:
IFRS 9 Financial Instruments (amendments resulting from Annual Improvements to IFRS
Standards 2018-2020)
IAS 37 Provisions, Contingent Liabilities and Contingent Assets (amendments regarding
the costs to include when assessing whether a contract is onerous)
The adoption of these accounting standards did not have any effect on the
Company's Statement of Financial Position or equity.
l) Accounting standards issued but not yet effective
The IASB has issued/revised a number of relevant standards with an effective
date after the date of these financial statements. Any standards that are not
deemed relevant to the operations of the Company have been excluded. The
Directors have chosen not to early adopt these standards and interpretations
and they do not anticipate that they would have a material impact on the
Company's financial statements in the period of initial application.
Effective date
IAS 1 Presentation of Financial Statements (amendments regarding the classification 1 January 2023
of liabilities and the disclosure of accounting policies)
IAS 1 Presentation of Financial Statements (amendments regarding the classification 1 January 2024
of debt with covenants)
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (amendments 1 January 2023
regarding the definition of accounting estimates)
IAS 12 Income Taxes (amendments regarding deferred tax on leases and decommissioning 1 January 2023
obligations)
4. Use of judgements and estimates
The preparation of the Company's financial statements requires the Directors
to make judgements, estimates and assumptions that affect the reported amounts
recognised in the financial statements and disclosure of contingent
liabilities. The estimates and associated assumptions are based on historical
experience and various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis of making judgements
about carrying values of assets and liabilities that are not readily apparent
from other sources. However, uncertainty about these assumptions and estimates
could result in outcomes that could require a material adjustment to the
carrying amount of the asset or liability in future periods.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised, if the revision affects only that period, or in the
period of the revision and future periods, if the revision affects both
current and future periods.
Judgements
In the process of applying the Company's accounting policies, management has
made the following judgement which had a significant effect on the amounts
recognised in the financial statements:
i) Determination of functional currency
The performance of the Company is measured and reported to investors in
Sterling. Although a significant proportion of the Company's underlying assets
are held in currencies other than Sterling, because the Company's capital is
raised in Sterling, expenses are paid in Sterling and the Company hedges
substantially all of its foreign currency risk back to Sterling, the Directors
consider Sterling to be the Company's functional currency.
The Directors do not consider there to be any other judgements that have had a
significant impact on the financial statements.
Estimates and assumptions
The Company based its reporting date assumptions and estimates on parameters
available when the financial statements were approved. However, existing
circumstances and assumptions about future developments may change due to
market changes or circumstances arising beyond the control of the Company.
Such changes are reflected in the assumptions when they occur.
i) Valuation of financial assets and liabilities
The Company uses the expertise of the Investment Manager to assess the prices
of investments at the valuation date. The majority of the prices can be
independently verified with reference to external data sources, however a
minority of investments cannot be verified by reference to an external source
and the Investment Manager secures an independent valuation with reference to
the latest prices traded within the market place. These independent valuations
take the form of quotes from brokers.
Credit default swap assets and liabilities are valued by the Investment
Manager using market observable inputs. Refer to note 19 for further details.
ii) Going concern
The provision for the liquidation costs comprises the costs of the liquidation
itself. These estimated expenses of £10,000 are based on an estimate of what
future costs will be, in accordance with the expected timeline to wind up, and
are included in the restructuring/liquidation fees of £379,000 in note 12.
The preparation of the financial statements on a non-going concern basis,
instead of a going concern basis, has reduced the net assets at 31 December
2022 by £10,000 (31 December 2021: £nil).
For further information on the assumptions and inputs used to fair value the
financial instruments, please see note 19.
5. Segmental reporting
In accordance with IFRS 8, Operating Segments, it is mandatory for the Company
to present and disclose segmental information based on the internal reports
that are regularly reviewed by the Board in order to assess each segment's
performance.
Management information for the Company as a whole is provided internally for
decision making purposes. The Company does compartmentalise different
investments in order to monitor compliance with investment restrictions,
however the performance of these allocations does not drive the investment
decision process. The Directors' decisions are based on a single integrated
investment strategy and the Company's performance is evaluated on an overall
basis. Therefore, the Directors are of the opinion that the Company is engaged
in a single economic segment of business for all decision-making purposes and
no segmental reporting is required. The financial results of this segment are
equivalent to the results of the Company as a whole.
6. Dividends
As set out in the Prospectus, the Company intends to distribute all of its
income from investments, net of expenses, by way of dividends on a quarterly
basis. The Company may retain income for distribution in a subsequent quarter
to that in which it arises in order to smooth dividend amounts or for the
purposes of efficient cash management.
The Company has declared the following dividends during the year ended 31
December 2022:
Total dividend declared in respect of earnings Amount per Ordinary Share
£'000
Dividends declared and paid in the year 5,511 6.00p
Less, dividend declared in respect of the prior year that was paid in 2022 (1,378) (1.50)p
Add, dividend declared out of the profits of the year but paid after the year 1,378 1.50p
end:
------------ ------------
Dividends declared in respect of the year 5,511 6.00p
------------ ------------
The Company declared the following dividends during the year ended 31 December
2021:
Total dividend declared in respect of earnings Amount per Ordinary Share
£'000
Dividends declared and paid in the year 5,511 6.00p
Less, dividend declared in respect of the prior year that was paid in 2021 (1,378) (1.50)p
Add, dividend declared out of the profits of the year but paid after the year 1,378 1.50p
end:
------------ ------------
Dividends declared in respect of the year 5,511 6.00p
------------ ------------
In accordance with IFRS, dividends are only provided for when they become a
present obligation of the Company. Therefore, during the year a total of
£5,511,000 (2021: £5,511,000) was incurred in respect of dividends, none of
which was outstanding at the reporting date. The fourth dividend declared out
of the profits for the year of £1,378,000 had not been provided for at 31
December 2022 (2021: £1,378,000) as, in accordance with IFRS, it was not a
liability of the Company at that date.
7. Related parties
Details of the relationships between the Company and its related parties,
being the Investment Manager and the Directors, are disclosed in notes 8a and
8f.
Details of the relationships between the Company and its other advisors and
service providers (the Administrator, the Broker, the Registrar and the
Depositary) are also disclosed in note 8.
As at 31 December 2022, the Company had holdings in the following investments,
which were managed by the Investment Manager:
31 December 2022 31 December 2021
Units held Cost Value Units held Cost Value
£'000 £'000 £'000 £'000
Axiom Alternative Liquid Rates Z Cap Scv 2,000 1,705 1,836 2,000 1,705 1,691
Axiom Global CoCo UCIT ETF USD-hedged - - - 35 2,984 3,183
During the year, the Company:
· purchased 1,900 units in Axiom Sustainable Financial Bonds Class
Z for £2,130,000;
· sold 1,900 units in Axiom Sustainable Financial Bonds Class Z for
£2,131,000, realising a gain of £1,000; and
· sold 35 units in Axiom Global CoCo UCIT ETF USD-hedged for
£3,120,000, realising a gain of £136,000.
During the year ended 31 December 2021, the Company:
· sold 10 units in Axiom Global CoCo UCIT ETF GBP-hedged for
£1,106,000, realising a gain of £106,000;
· sold 500 units in Axiom Equity Class Z for £1,035,000, realising
a gain of £568,000; and
· purchased 2,000 units in Axiom Alternative Liquid rates Z Cap Scv
for £1,705,000.
The Directors are not aware of any ultimate controlling party.
8. Key contracts
a) Investment Manager
The Company has entered into an Investment Management Agreement with Axiom AI
under which the Company receives investment advice and management services. As
part of the Proposal process, the Company served protective notice on the
Investment Manager on 12 August 2022.
Management fee
Under the terms of the Investment Management Agreement, a management fee is
paid to the Investment Manager quarterly in arrears. The quarterly fee is
calculated by reference to the following sliding scale:
i. where NAV is less than or equal to £250 million, 1% per annum of
NAV;
ii. where NAV is greater than £250 million but less than or equal to
£500 million, 1% per annum of NAV on the first £250 million and 0.8% per
annum of NAV on the balance; and
iii. where NAV is greater than £500 million, 0.8% per annum of NAV, in each
case, plus applicable VAT.
In respect of the management fee calculation above, any related party holdings
are deducted from the NAV.
If in any quarter (other than the final quarter) of any accounting period the
aggregate expenses of the Company (excluding performance fees, interest
charged on sale and repurchase agreements, bank charges and withholding tax)
during such quarter exceed an amount equal to one-quarter of 1.5% of the
average NAV of the Company during such quarter (such amount being a "Quarterly
Expenses Excess"), then the management fee payable in respect of that quarter
shall be reduced by the amount of the Quarterly Expenses Excess, provided that
the management fee shall not be reduced to an amount that is less than zero
and no sum will be payable by the Investment Manager to the Company in respect
of the Quarterly Expenses Excess.
If in the final quarter of any accounting period the aggregate expenses of the
Company during such accounting period exceed an amount equal to 1.5% of the
average NAV of the Company during such accounting period (such amount being an
"Annual Expenses Excess"), then the management fee payable in respect of that
quarter shall be reduced by the amount of the Annual Expenses Excess. If such
reduction would not fully eliminate the Annual Expenses Excess (the amount of
any such shortfall being a "Management Fee Deduction Shortfall"), the
Investment Manager shall pay to the Company an amount equal to the Management
Fee Deduction Shortfall (a "Management Fee Deduction Shortfall Payment") as
soon as is reasonably practicable.
During the year, a total of £744,000 (2021: £866,000) was incurred in
respect of Investment Management fees, of which £182,000 was payable at the
reporting date (2021: £213,000).
Under the terms of the Investment Management Agreement, if at any time there
has been any deduction from the management fee as a result of the Quarterly
Expenses Excess or Annual Expenses Excess (a "Management Fee Deduction"), and
during any subsequent quarter:
i. all or part of the Management Fee Deduction can be paid; and/or
ii. all or part of the Management Fee Deduction Shortfall payment can be
repaid,
by the Company to the Investment Manager without:
iii. in any quarter (other than the final quarter) of any accounting period
the aggregate expenses of the Company during such quarter exceeding an amount
equal to one-quarter of 1.5% of the average NAV of the Company during such
quarter; or
iv. in the final quarter of any accounting period the aggregate expenses of
the Company during such accounting period exceeding an amount equal to 1.5% of
the average NAV of the Company during such accounting period,
then such payment and/or repayment shall be made by the Company to the
Investment Manager as soon as is reasonably practicable.
The Quarterly Expenses Excess and Annual Expenses Excess for the year was
£103,000 (2021: £40,000), and at 31 December 2022 the Quarterly Expenses
Excess and Annual Expenses Excess, which could be payable to the Investment
Manager in future periods, was £880,000 (2021: £777,000) (see note 27).
Performance fee
The Investment Manager is entitled to receive from the Company a performance
fee subject to certain performance benchmarks.
The fee is payable as a share of the Total Shareholder Return ("TSR") where
TSR for this purpose is defined as:
i. the NAV (on a per share basis) at the end of the relevant accounting
period; plus
ii. the total of all dividends and other distributions made to
Shareholders since 5 November 2015 (being the date of the Company's original
admission to the SFS) divided by the average number of shares in issue during
the period from 5 November 2015 to the end of the relevant accounting period.
The performance fee, if any, is equal to 15% of the TSR in excess of a
weighted average hurdle equal to a 7% per annum return. The performance fee is
subject to a high water mark. The fee, if any, is payable annually and
calculated on the basis of audited accounts of the Company.
50% of the performance fee will be settled in cash. The balance will be
satisfied in shares, subject to certain exceptions where settlement in shares
would be prohibited by law or would result in the Investment Manager or any
person acting in concert with it incurring an obligation to make an offer
under Rule 9 of the City Code, in which case the balance will be settled in
cash.
Assuming no such requirement, the balance of the performance fee will be
settled either by the allotment to the Investment Manager of such number of
new shares credited as fully paid as is equal to 50% of the performance fee
(net of VAT) divided by the most recent practicable NAV per share (rounded
down to the nearest whole share) or by the acquisition of shares in the
market, as required under the terms of the Investment Management Agreement.
All shares allotted to (or acquired for) the Investment Manager in part
satisfaction of the performance fee will be subject to a lock-up until the
date that is 12 months from the end of the accounting period to which the
award of such shares related. A lock-up termination event is a disposal of
shares pursuant to a takeover or sale of the Company or where the Investment
Manager is required by law to dispose of such shares, or a termination of the
Investment Management agreement by the Company.
At 31 December 2022, a performance fee of £298,000 (2021: £596,000) was
payable by the Company in respect of the year ended 31 December 2021, of which
£nil was payable in cash (2021: £298,000). During the year, the Company paid
the Investment Manager £298,000, relating to the cash settlement element of
the 2021 performance fee.
The remaining performance fee payable by the Company as at 31 December 2022
(£298,000) was settled through the purchase of Ordinary Shares in the market
by the Investment Manager and the Company reimbursed the Investment Manager in
cash on 6 March 2023. As such, the performance fee was allocated to the
performance fee reserve until the payment, which was utilised to purchase the
shares, was made. This treatment has resulted in an increase to the NAV
originally announced to the market on 4 January 2023 of 0.33p per Ordinary
Share (see note 22).
b) Administrator and Company Secretary
Elysium has been appointed by the Company to provide day to day administration
services to the Company, to calculate the NAV per share as at the end of each
calendar month and to provide company secretarial functions required under the
Law.
Under the terms of the Administration Agreement, the Administrator is entitled
to receive an annual fee of £126,794 (2021: £121,450), which is subject to
an annual increase in line with Guernsey RPI. In addition, the Company pays
the Administrator a fee for work undertaken in connection with the daily NAV,
subject to a maximum aggregate amount of £10,000 per annum.
During the year, a total of £139,000 (2021: £132,000) was incurred in
respect of Administration fees of which £34,000 (2021: £33,000) was payable
at the reporting date.
As part of the Proposal process, the Company served protective notice on the
Administrator on 22 August 2022.
c) Broker
Winterflood has been appointed to act as Broker for the Company, in
consideration for which the Company pays Winterflood an annual retainer fee of
£35,000 per annum.
For the year to 31 December 2022, the Company incurred Broker fees of £40,000
(2021: £37,000) of which £7,000 was payable at 31 December 2022 (2021:
£6,000).
As part of the Proposal process, the Company served protective notice on the
Broker on 10 February 2023.
d) Registrar
Link Market Services (Guernsey) Limited is Registrar of the Company. Under the
terms of the Registrar Agreement, the Registrar is entitled to receive from
the Company certain annual maintenance and activity fees, subject to a minimum
fee of £5,500 per annum.
During the year, a total of £22,000 (2021: £18,000) was incurred in respect
of Registrar fees, of which £1,000 was payable at 31 December 2022 (2021:
£1,000).
As part of the Proposal process, the Company served protective notice on the
Registrar on 23 August 2022.
e) Depositary
CACEIS Bank France has been appointed by the Company to provide depositary,
settlement and other associated services to the Company.
Under the terms of the Depositary Agreement, the Depositary is entitled to
receive from the Company:
i. an annual depositary fee of 0.03% of NAV, subject to a minimum annual
fee of €25,000;
ii. a safekeeping fee calculated using a basis point fee charge based on
the country of settlement and the value of the assets; and
iii. an administration fee on each transaction, together with various other
payment/wire charges on outgoing payments.
As part of the Proposal process, the Company has served protective notice on
the Depositary, however, CACEIS refused to accept the protective notice but
the Board noted CACEIS's three month notice period and that the fee was
immaterial.
During the year, a total of £47,000 (2021: £37,000) was incurred in respect
of depositary fees, of which £26,000 was payable at the reporting date (2021:
£22,000).
CACEIS Bank Luxembourg is entitled to receive a monthly valuation agent fee
from the Company in respect of the provision of certain accounting services
which will, subject to a minimum monthly fee of €2,500, be calculated by
reference to the following tiered sliding scale:
i. where NAV is less than or equal to €50 million, 0.05% per annum of
NAV;
ii. where NAV is greater than €50 million but less than or equal to
€100 million, 0.04% per annum of NAV; and
iii. where NAV is greater than €100 million, 0.03% per annum of NAV, in
each case, plus applicable VAT.
During the period, a total of £38,000 (2021: £43,000) was incurred in
respect of valuation agent fees paid to CACEIS Bank Luxembourg, of which
£7,000 was payable at 31 December 2022 (2021: £11,000).
f) Directors' remuneration
William Scott (Chairman) is paid £35,000 per annum (2021: £35,000), John
Renouf (Chairman of the Audit Committee) is paid £32,500 per annum (2021:
£32,500), and Max Hilton is paid £27,500 per annum (2021: £27,500).
The Directors are also entitled to reimbursement of all reasonable travelling
and other expenses properly incurred in the performance of their duties.
During the year, a total of £95,000 (2021: £95,000) was incurred in respect
of Directors' fees, none of which was payable at the reporting date (2021:
£nil). No bonus or pension contributions were paid or payable on behalf of
the Directors.
9. Key management and employees
Other than the Non-Executive Directors, the Company has had no employees since
its incorporation.
10. Auditor's remuneration
Grant Thornton was appointed to act as the Company's external auditor with
effect from 19 August 2020.
For the year ended 31 December 2022, total fees charged by Grant Thornton,
together with amounts accrued at 31 December 2022, amounted to £48,000 (2021:
£40,850), all of which related to audit services. As at 31 December 2022,
£36,000 was due to Grant Thornton (2021: £21,000).
11. Interest payable and similar charges
Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
Bank interest 56 42
Commission 4 11
Interest payable on sale and repurchase agreements 90 (1)
------------ ------------
150 52
------------ ------------
12. Other expenses
Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
Restructuring/liquidation fees 379 -
PR expenses 68 61
Audit fees (note 10) 48 41
Legal fees 48 13
Withholding tax on bond interest 48 -
Depositary fees (note 8e) 47 37
Other expenses 46 46
Broker fees (note 8c) 40 37
Valuation agent fees (note 8e) 38 43
Registrar fees (note 8d) 22 18
------------ ------------
784 296
------------ ------------
13. Taxation
The Company is exempt from taxation in Guernsey, and it is the intention to
conduct the affairs of the Company to ensure that it continues to qualify for
exempt company status for the purposes of Guernsey taxation. The Company pays
a fixed fee of £1,200 per annum to maintain exempt company status.
14. (Loss)/earnings per Ordinary Share
The loss per Ordinary Share of 6.72p (2021: earnings of 16.05p) is based on a
loss attributable to owners of the Company of £6,172,000 (2021: profit of
£14,746,000) and on a weighted average number of 91,852,904 (2021:
91,852,904) Ordinary Shares in issue since 1 January 2022. There are no
dilutive shares and there is no difference between the basic and diluted
earnings per share.
15. Investments at fair value through profit or loss
Movements in (losses)/gains in the year
31 December 2022 31 December 2021
Unrealised Realised Total Unrealised Realised Total
£'000 £'000 £'000 £'000 £'000 £'000
Investments in capital instruments (9,392) (3,279) (12,671) (781) 7,659 6,878
Other investments (53) 137 84 (130) 674 544
Short position covered by reverse sale and repurchase agreements 87 426 513 (75) (64) (139)
------------ ------------ ------------ ------------ ------------ ------------
(9,358) (2,716) (12,074) (986) 8,269 7,283
------------ ------------ ------------ ------------ ------------ ------------
Closing valuations
31 December 2022 31 December 2021
£'000 £'000
Investments in capital instruments 77,735 85,449
Other investments 1,836 4,874
Short position(s) covered by reverse sale and repurchase agreements - (3,932)
------------ ------------
Investments at fair value through profit or loss 79,571 86,391
------------ ------------
Investments in capital instruments at fair value through profit or loss
comprise mainly of investments in bonds, and also preference shares,
structured notes and other securities that have a similar income profile to
that of bonds. The other investments at fair value through profit or loss
consist of investments in open ended funds managed by the Investment Manager
(see note 7) to obtain diversified exposure on bank equities.
As at 31 December 2022, the Company had no open sale and repurchase agreements
(2021: eight open sale and repurchase agreements, one of which was a reverse
sale and repurchase agreement) (see note 18). In 2021, the reverse sale and
repurchase agreement was open ended and was used to cover the sale of capital
instruments (the short position noted above).
The fair value of the capital instruments subject to sale and repurchase
agreements (excluding any short positions) at 31 December 2022 was nil (2021:
£9,349,000). There were no short positions at 31 December 2022. The fair
value net of the short position at 31 December 2021 was £5,417,000.
16. Collateral accounts for derivative financial instruments at fair
value through profit or loss
31 December 2022 31 December 2021
£'000 £'000
JP Morgan 2,689 3,495
Goldman Sachs International 1,200 207
CACEIS Bank France 275 305
Credit Suisse - 112
------------ ------------
4,164 4,119
CACEIS Bank France - negative balance - (92)
------------ ------------
Net balance on collateral accounts held by brokers 4,164 4,027
------------ ------------
With respect to derivatives, the Company pledges cash and/or other liquid
securities ("Collateral") to third parties as initial margin and as variation
margin. Collateral may be transferred either to the third party or to an
unaffiliated custodian for the benefit of the third party. In the case where
Collateral is transferred to the third party, the third party pursuant to
these derivatives arrangements will be permitted to use, reuse, lend, borrow,
hypothecate or re-hypothecate such Collateral. The third parties will have no
obligation to retain an equivalent amount of similar property in their
possession and control, until such time as the Company's obligations to the
third party are satisfied. The Company has no right to this Collateral but has
the right to receive fungible, equivalent Collateral upon the Company's
satisfaction of the Company's obligation under the derivatives.
17. Other receivables and prepayments
31 December 2022 31 December 2021
£'000 £'000
Accrued capital instrument income receivable 1,432 1,064
Due from sale of capital instruments 585 1,034
Interest due on credit default swaps 23 21
Prepayments 9 24
Bank interest receivable 9 -
------------ ------------
2,058 2,143
------------ ------------
18. Derivative financial instruments
Credit default swap agreements
A credit default swap agreement represents an agreement that one party, the
protection buyer, pays a fixed fee, the premium, in return for a payment by
the other party, the protection seller, contingent upon a specified credit
event relating to an underlying reference asset. If a specified credit event
occurs, there is an exchange of cash flows and/or securities designed so the
net payment to the protection buyer reflects the loss incurred by holders of
the referenced obligation in the event of its default. The ISDA establishes
the nature of the credit event and such events include bankruptcy and failure
to meet payment obligations when due.
Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
Opening balance (128) 448
Premiums received from selling credit default swap agreements (1,584) (274)
Premiums paid on buying credit default swap agreements - 83
Movement in unrealised losses in the year (143) (782)
Realised gains in the year 1,001 397
------------ ------------
Outstanding liability due on credit default swaps (854) (128)
------------ ------------
Credit default swap assets at fair value through profit or loss - 180
Credit default swap liabilities at fair value through profit or loss (854) (308)
------------ ------------
Outstanding liability due on credit default swaps (854) (128)
------------ ------------
Interest paid or received on the credit default swap agreements has been
accounted for in the Statement of Comprehensive Income as it has been incurred
or received. At the year end, £23,000 (2021: £21,000) of interest on credit
default swap agreements was due to the Company.
Collateral totalling £3,890,000 (2021: £3,328,000) was held in respect of
the credit default swap agreements.
Foreign currency forwards
Foreign currency forward contracts are used for trading purposes and are used
to hedge the Company's exposure to changes in foreign currency exchange rates
on its foreign portfolio holdings. A foreign currency forward contract is a
commitment to purchase or sell a foreign currency on a future date and at a
negotiated forward exchange rate.
Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
Opening balance 7 775
Purchase of foreign currency derivatives 197,420 185,824
Closing-out of foreign currency derivatives (195,378) (189,680)
Movement in unrealised losses in the year (209) (768)
Realised (losses)/gains in the year (2,042) 3,856
------------ ------------
Fair value of net (liabilities)/assets on foreign currency forwards (202) 7
------------ ------------
Foreign currency forward assets at fair value through profit or loss 259 132
Foreign currency forward liabilities at fair value through profit or loss (461) (125)
------------ ------------
Fair value of net (liabilities)/assets on foreign currency forwards (202) 7
------------ ------------
Bond futures
A bond future contract involves a commitment by the Company to purchase or
sell bond futures for a predetermined price, with payment and delivery of the
bond future at a predetermined future date.
Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
Opening balance (12) -
Purchase of bond futures 929 4,234
Sale of bond futures (2,805) (4,977)
Movement in unrealised gains/(losses) in the year - (66)
Realised gains in the year 1,888 797
------------ ------------
Balance payable on bond futures - (12)
------------ ------------
Bond future assets at fair value through profit or loss - -
Bond future liabilities at fair value through profit or loss - (12)
------------ ------------
Balance payable on bond futures - (12)
------------ ------------
Sale and repurchase agreements
Under the terms of a sale and repurchase agreement one party in the agreement
acts as a borrower of cash, using a security held as collateral, and the other
party in the agreement acts as a lender of cash. Almost any security may be
employed in the sale and repurchase agreement. Interest is paid by the
borrower for the benefit of having funds to use until a specified date on
which the effective loan needs to be repaid.
When a transfer of assets that are not derecognised in their entirety does not
result in derecognition, it is viewed as a secured financing transaction, with
any consideration received resulting in a corresponding liability. The Company
is not entitled to use these financial assets for any other purposes.
Under the sale and repurchase agreements, the Company may sell securities
subject to a commitment to repurchase them. The securities are retained on the
balance sheet as the Company retains substantially all the risks and rewards
of ownership. The consideration received is accounted for as a financial
liability at fair value through profit or loss.
Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
Opening balance (1,916) (8,304)
Opening of sale and repurchase agreements (18,156) (20,821)
Opening of reverse sale and repurchase agreements - 4,166
Closing-out of sale and repurchase agreements 24,350 26,437
Closing-out of reverse sale and repurchase agreements (4,175) (3,898)
Movement in unrealised (losses)/gains in the year (227) 301
Realised gains in the year 124 203
------------ ------------
Total liabilities on sale and repurchase agreements - (1,916)
------------ ------------
Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
Sale and repurchase assets at fair value through profit or loss - 4,194
Sale and repurchase liabilities at fair value through profit or loss - (6,110)
------------ ------------
Total liabilities on sale and repurchase agreements - (1,916)
------------ ------------
Interest paid on sale and repurchase agreements has been accounted for in the
Statement of Comprehensive Income as it has been incurred. At 31 December 2022
£nil (2021: £nil) interest on sale and repurchase agreements was payable by
the Company.
Options
An option offers the buyer the opportunity to buy or sell an underlying asset
at a stated price within a specified timeframe.
Year ended Year ended
31 December 2022 31 December 2021
£'000 £'000
Opening balance - 7
Movement in unrealised gains in the year - 22
Realised losses in the year - (29)
------------ ------------
Balance receivable on options -
------------ ------------
Option assets at fair value through profit or loss - -
Option liabilities at fair value through profit or loss - -
------------ ------------
Balance receivable on options - -
------------ ------------
Offsetting of derivative financial instruments
The Company presents the fair value of its derivative assets and liabilities
on a gross basis, no such assets or liabilities have been offset in the
Statement of Financial Position. Certain derivative financial instruments are
subject to enforceable master netting arrangements, such as ISDA master
netting agreements, or similar agreements that cover similar financial
instruments.
The similar agreements include derivative clearing agreements, global master
repurchase agreements, global master securities lending agreements, and any
related rights to financial collateral. The similar financial instruments and
transactions include derivatives, sale and repurchase agreements, reverse sale
and repurchase agreements, securities borrowing, and securities lending
agreements.
The Company's agreements allow for offsetting following an event of default,
but not in the ordinary course of business, and the Company does not intend to
settle these transactions on a net basis or settle the assets and liabilities
on a simultaneous basis.
The table below sets out the carrying amounts of recognised capital
instruments and short position(s) which could be offset under the applicable
derivative agreements (as described above) as at 31 December 2022:
Gross carrying amount before offsetting Amounts offset in accordance with offsetting criteria Net amount presented in Statement of Financial Position Effect of remaining rights of offset that do not meet the criteria for Net exposure
offsetting in the Statement of Financial Position - Cash held as collateral
£'000 £'000 £'000 £'000 £'000
Financial assets
Derivatives 260 - 260 - 260
Collateral accounts for derivative financial instruments (note 16) 4,164 - 4,164 (1,128) 3,036
------------ ------------ ------------ ------------ ------------
Total assets 4,424 - 4,424 (1,128) 3,296
------------ ------------ ------------ ------------ ------------
Financial liabilities
Derivatives (1,315) - (1,315) - (1,315)
Collateral accounts for derivative financial instruments (note 16) (1) - (1) - (1)
------------ ------------ ------------ ------------ ------------
Total liabilities (1,316) - (1,316) - (1,316)
------------ ------------ ------------ ------------ ------------
The table below sets out the carrying amounts of recognised capital
instruments and short position(s) which could be offset under the applicable
derivative agreements (as described above) as at 31 December 2021:
Gross carrying amount before offsetting Amounts offset in accordance with offsetting criteria Net amount presented in Statement of Financial Position Effect of remaining rights of offset that do not meet the criteria for Net exposure
offsetting in the Statement of Financial Position - Cash held as collateral
£'000 £'000 £'000 £'000 £'000
Financial assets
Derivatives 4,506 - 4,506 (3,932) 574
Collateral accounts for derivative financial instruments (note 16) 4,119 - 4,119 (320) 3,799
------------ ------------ ------------ ------------ ------------
Total assets 8,625 - 8,625 (4,252) 4,373
------------ ------------ ------------ ------------ ------------
Financial liabilities
Derivatives (6,555) - (6,555) 5,727 (828)
Collateral accounts for derivative financial instruments (note 16) (92) - (92) - (92)
------------ ------------ ------------ ------------ ------------
Total liabilities (6,647) - (6,647) 5,727 (920)
------------ ------------ ------------ ------------ ------------
19. Fair value of financial instruments at fair value through profit or
loss
The following table shows financial instruments recognised at fair value,
analysed between those whose fair value is based on:
· Quoted prices in active markets for identical assets or
liabilities (Level 1);
· Those involving inputs other than quoted prices included in Level
1 that are observable for the asset or liability, either directly (as prices)
or indirectly (derived from prices) (Level 2); and
· Those with inputs for the asset or liability that are not based
on observable market data (unobservable inputs) (Level 3).
At 31 December 2022, the financial assets and liabilities designated at fair
value through profit or loss were as follows:
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Traded/listed capital instruments at fair value through profit or loss 77,735 - - 77,735
Other investments at fair value through profit or loss (note 7) 1,836 - - 1,836
Credit default swap liabilities (note 18) - (853) - (853)
Other derivative financial assets - 260 - 260
Other derivative financial liabilities - (461) - (461)
------------ ------------ ------------ ------------
79,571 (1,054) - 78,517
------------ ------------ ------------ ------------
At 31 December 2021, the financial assets and liabilities designated at fair
value through profit or loss were as follows:
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Traded/listed capital instruments at fair value through profit or loss 85,208 241 - 85,449
Other investments at fair value through profit or loss (note 7) 4,874 - - 4,874
Credit default swap assets (note 18) - 180 - 180
Credit default swap liabilities (note 18) - (308) - (308)
Other derivative financial assets - 4,326 - 4,326
Other derivative financial liabilities (12) (6,223) - (6,235)
Short position covered by sale and repurchase agreements - (3,932) - (3,932)
------------ ------------ ------------ ------------
90,070 (5,716) - 84,354
------------ ------------ ------------ ------------
Level 1 financial instruments include listed capital instruments at fair value
through profit or loss, unlisted open-ended funds and bond future contracts,
which have been valued at fair value by reference to quoted prices in active
markets. No unobservable inputs were included in determining the fair value of
these investments and, as such, alternative carrying values for ranges of
unobservable inputs have not been provided.
Level 2 financial instruments include broker quoted bonds, credit default swap
agreements, foreign currency forward contracts, sale and repurchase agreements
and options. Each of these financial investments are valued by the Investment
Manager using market observable inputs. The fair value of the other
investments are based on the market price of the underlying securities.
The model used by the Company to fair value credit default swap agreements
prices a credit default swap as a function of its schedule, deal spread,
notional value, credit default swap curve and yield curve. The key assumptions
employed in the model include: constant recovery as a fraction of par,
piecewise constant risk neutral hazard rates and default events being
statistically independent of changes in the default-free yield curve.
The Company used a 20% correlation parameter when valuing the credit default
swap agreements at 31 December 2022. The Investment Manager believes this to
be conservative as the underlying basket on the instrument is made up of only
financial companies which would have a higher correlation as they are of the
same sector. It is estimated that a 10% increase in the correlation factor for
the credit default swap agreement subject to valuation by reference to the
underlying basket would increase the Company's valuation by approximately
£35,000 to £62,000.
The fair values of other derivative financial assets and liabilities are based
on the forward foreign exchange rate curve.
The sale and repurchase agreements have been valued by reference to the
notional amount, expiration dates and rates prevailing at the valuation date.
The options were valued using the relevant options prices curve.
Transfers between levels
Transfers between levels during the year are determined and deemed to have
occurred at each financial reporting date. There were no investments
classified as Level 3 during the year, and no transfers between levels in the
year. See notes 15, 16 and 18 for movements in instruments held at fair value
through profit or loss.
20. Other payables and accruals
31 December 2022 31 December 2021
£'000 £'000
Restructuring related fees 356 -
Investment management fee (note 8a) 182 213
Audit fees (note 10) 36 21
Administration fee (note 8b) 34 33
Depositary fees (note 8e) 26 22
Other accruals 12 13
Valuation agent fees (note 8e) 7 11
Broker fee (note 8c) 7 6
Registrar fees (note 8d) 1 1
Performance fee (note 8a) - 298
Accrued interest payable on capital instrument short position(s) - 17
Share issue costs - 14
------------ ------------
661 649
------------ ------------
21. Share capital
31 December 2022 31 December 2021
Number £'000 Number £'000
Authorised:
Ordinary Shares of no par value Unlimited - Unlimited -
------------ ------------ ------------ ------------
Allotted, called up and fully paid:
Ordinary Shares of no par value 91,852,904 - 91,852,904 -
------------ ------------ ------------ ------------
The Ordinary Shares carry the right to receive all dividends declared by the
Company. Shareholders are entitled to all dividends paid by the Company and,
on a winding up, provided the Company has satisfied all of its liabilities,
the Shareholders are entitled to all of the surplus assets of the Company.
Shareholders will be entitled to attend and vote at all general meetings of
the Company and, on a poll, will be entitled to one vote for each Ordinary
Share held.
22. NAV per Ordinary Share
The NAV per Ordinary Share is based on the net assets attributable to owners
of the Company of £85,200,000 (2021: £96,883,000), and on 91,852,904 (2021:
91,852,904) Ordinary Shares in issue at the year end.
The NAV of 92.76p (2021: 105.48p) per Ordinary Share disclosed in these
financial statements is 0.33p (2021: 0.33p) higher than the NAV of 92.43p
(2021: 105.15p) per Ordinary Share announced on 4 January 2023 (2021: 5
January 2022) as a result of 50% of the accrued performance fee, which is due
to be settled through the purchase of shares in the Company, being allocated
to the performance fee reserve (see note 8a for further details of the
performance fee).
23. Changes in liabilities arising from financing activities
The Company did not raise any capital from the placing of new shares in the
year ended 31 December 2022 or 31 December 2021. Therefore, there were no cash
flows in relation to share issue costs in 2022 or 2021.
24. Financial instruments and risk management
The Company invests its assets with the aim of spreading investment risk.
Risk is inherent in the Company's activities, but it is managed through a
process of ongoing identification, measurement and monitoring. The Company is
exposed to market risk (which includes currency risk, interest rate risk and
price risk), credit risk and liquidity risk from the financial instruments it
holds. Risk management procedures are in place to minimise the Company's
exposure to these financial risks, in order to create and protect Shareholder
value.
Risk management structure
The Investment Manager is responsible for identifying and controlling risks.
The Board of Directors supervises the Investment Manager and is ultimately
responsible for the overall risk management approach within the Company.
The Company has no employees and is reliant on the performance of third party
service providers. Failure by the Investment Manager, Administrator,
Depositary, Registrar or any other third party service provider to perform in
accordance with the terms of its appointment could have a significant
detrimental impact on the operation of the Company.
Risk concentration
Concentration indicates the relative sensitivity of the Company's performance
to developments affecting a particular industry or geographical location.
Concentrations of risk arise when a number of financial instruments or
contracts are entered into with the same counterparty, or where a number of
counterparties are engaged in similar business activities, or activities in
the same geographic region, or have similar economic features that would cause
their ability to meet contractual obligations to be similarly affected by
changes in economic, political or other conditions. Concentrations of
liquidity risk may arise from the repayment terms of financial liabilities,
sources of borrowing facilities or reliance on a particular market in which to
realise liquid assets. Concentrations of foreign exchange risk may arise if
the Company has a significant net open position in a single foreign currency,
or aggregate net open positions in several currencies that tend to move
together.
Within the aim of maintaining a diversified investment portfolio, and thus
mitigating concentration risks, the Company has established the following
investment restriction in respect of the general deployment of assets:
Concentration
No more than 15% of NAV, calculated at the time of investment, will be exposed
to any one financial counterparty. This limit will increase to 20% where, in
the Investment Manager's opinion (having informed the Board in writing of such
increase) the relevant financial institution investment instrument is expected
to amortise such that, within 12 months of the date of the investment, the
expected exposure (net of any hedging costs and expenses) will be equal to or
less than 15% of NAV, calculated at the time of the investment.
Market risk
i) Price risk
Price risk exposure arises from the uncertainty about future prices of
financial instruments held. It represents the potential loss that the Company
may suffer through holding positions in the face of price movements. The
investments in capital instruments, unlisted open-ended funds, and bond
futures at fair value through profit or loss (notes 15, 18 and 19) are exposed
to price risk and it is not the intention to mitigate the price risk.
At 31 December 2022, if the valuation of these investments at fair value
through profit or loss had moved by 5% with all other variables remaining
constant, the change in net assets would amount to approximately +/-
£3,979,000 (2021: +/- £4,319,000). The fair value of financial instruments
exposed to price risk at 31 December 2022 was £79,571,000 (2021:
£86,384,000).
ii) Foreign currency risk
Foreign currency risk is the risk that the value of a financial instrument
will fluctuate because of changes in foreign currency exchange rates. Currency
risk arises when future commercial transactions and recognised assets and
liabilities are denominated in a currency that is not the Company's functional
currency. The Company invests in securities and other investments that are
denominated in currencies other than Sterling. Accordingly, the value of the
Company's assets may be affected favourably or unfavourably by fluctuations in
currency rates and therefore the Company will necessarily be subject to
foreign exchange risks.
In order to limit the exposure to foreign currency risk, the Company entered
into hedging contracts during the year. At the year end, the Company held the
following foreign currency forward contracts:
31 December 2022
Maturity date Amount to be sold Amount to be purchased
9 February 2023 €51,534,000 £45,610,000
9 February 2023 US$6,469,000 £5,366,000
31 December 2021
Maturity date Amount to be sold Amount to be purchased
27 January 2022 €47,498,000 £40,124,000
27 January 2022 US$7,887,000 £5,711,000
At the year end a proportion of the net financial assets of the Company were
denominated in currencies other than Sterling as follows:
Investments at fair value through profit or loss Receivables Cash and cash equivalents Exposure Foreign currency forward contract Net exposure
£'000 £'000 £'000 £'000 £'000 £'000
31 December 2022
Euro 46,979 - (2,234) 44,745 (45,610) (865)
US Dollars 4,518 2 931 5,451 (5,366) 85
Swiss Francs - - 43 43 - 43
------------ ------------ ------------ ------------ ------------ ------------
51,497 2 (1,260) 50,239 (50,976) (737)
------------ ------------ ------------ ------------ ------------ ------------
31 December 2021
Euro 40,361 1,593 (693) 41,261 (39,991) 1,270
US Dollars 4,952 11 371 5,334 (5,835) (501)
------------ ------------ ------------ ------------ ------------ ------------
45,313 1,604 (322) 46,595 (45,826) 769
------------ ------------ ------------ ------------ ------------ ------------
Other future foreign exchange hedging contracts may be employed, such as
currency swap agreements, futures contracts and options. There can be no
certainty as to the efficacy of any hedging transactions.
At 31 December 2022, if the exchange rates had strengthened/weakened by 5%
against Sterling with all other variables remaining constant, net assets at 31
December 2022 would have decreased/increased by £37,000 (2021: £38,000).
iii) Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates
will affect future cash flows or the fair values of financial instruments. The
Company is exposed to risks associated with the effects of fluctuations in the
prevailing levels of market interest rates on its financial instruments and
cash flow. A large number of the capital instruments bear interest at a fixed
rate, but capital instruments to the value of £62,650,000 (2021:
£54,572,000), cash and cash equivalents, net of overdrafts, of £1,122,000
(2021: £7,020,000) and collateral account balances of £4,164,000 (2021:
£4,027,000) were the only interest-bearing financial instruments subject to
variable interest rates at 31 December 2022. Therefore, if interest rates had
increased/decreased by 50 basis points, with all other variables remaining
constant, the change in the value of interest cash flows of these assets in
the year would have been +/-£351,000 (2021: +/-£344,000).
Fixed interest Variable interest Non-interest bearing Total
31 December 2022 £'000 £'000 £'000 £'000
Financial assets
Investments at fair value through profit or loss 11,754 62,650 5,167 79,571
Cash and cash equivalents - 3,356 - 3,356
Collateral accounts for derivative financial instruments at fair value through - 4,164 - 4,164
profit or loss
Derivative financial assets at fair value through profit or loss - - 260 260
Other receivables - - 2,058 2,058
------------ ------------ ------------ ------------
Total financial assets 11,754 70,170 7,485 89,409
------------ ------------ ------------ ------------
Financial liabilities
Bank overdrafts - (2,234) - (2,234)
Derivative financial liabilities at fair value through profit or loss (853) - (461) (1,314)
Other payables and accruals - - (661) (661)
------------ ------------ ------------ ------------
Total financial liabilities (853) (2,234) (1,122) (4,209)
------------ ------------ ------------ ------------
Total interest sensitivity gap 10,901 67,936 6,363 85,200
------------ ------------ ------------ ------------
Fixed interest Variable interest Non-interest bearing Total
31 December 2021 £'000 £'000 £'000 £'000
Financial assets
Investments at fair value through profit or loss 18,363 54,572 17,388 90,323
Cash and cash equivalents - 7,713 - 7,713
Collateral accounts for derivative financial instruments at fair value through - 4,119 - 4,119
profit or loss
Derivative financial assets at fair value through profit or loss 4,374 - 132 4,506
Other receivables - - 2,143 2,143
------------ ------------ ------------ ------------
Total financial assets 22,737 66,404 19,663 108,804
------------ ------------ ------------ ------------
Financial liabilities
Bank overdrafts - (693) - (693)
Collateral accounts for derivative financial instruments at fair value through - (92) - (92)
profit or loss
Derivative financial liabilities at fair value through profit or loss (6,418) - (137) (6,555)
Short position covered by sale and repurchase agreements - (3,932) - (3,932)
Other payables and accruals - - (649) (649)
------------ ------------ ------------ ------------
Total financial liabilities (6,418) (4,717) (786) (11,921)
------------ ------------ ------------ ------------
Total interest sensitivity gap 16,319 61,687 18,877 96,883
------------ ------------ ------------ ------------
It is estimated that the fair value of the fixed interest and non-interest
bearing capital instruments of £16,921,000 (2021: £35,751,000) at 31
December 2022 would increase/decrease by +/-£272,000 (0.34%) (2021:
+/-£551,000 (0.61%)) if interest rates were to change by 50 basis points.
The Investment Manager manages the Company's exposure to interest rate risk,
paying heed to prevailing interest rates and economic conditions, market
expectations and its own views as to likely movements in interest rates.
Although it has not done so to date, the Company may implement hedging and
derivative strategies designed to protect investment performance against
material movements in interest rates. Such strategies may include (but are not
limited to) interest rate swaps and will only be entered into when they are
available, in a timely manner, and on terms acceptable to the Company. The
Company may also bear risks that could otherwise be hedged where it is
considered appropriate. There can be no certainty as to the efficacy of any
hedging transactions.
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, resulting in a financial loss to the Company.
At 31 December 2022, credit risk arose principally from investment in capital
instruments of £77,735,000 (2021: £85,449,000), cash and cash equivalents of
£3,356,000 (2021: £7,713,000), balances held as collateral for derivative
financial instruments at fair value through profit or loss of £4,164,000
(2021: £4,119,000), foreign currency forward assets of £260,000 (2021:
assets of £132,000) and investments in sale and repurchase assets of £nil
(2021: £4,194,000). The Company seeks to trade only with reputable
counterparties that the Investment Manager believes to be creditworthy. The
credit rating of cash and collateral counterparties is sufficient that no
expected credit loss or provision for impairment is considered necessary.
The Investment Manager manages the Company's credit risk by investing in a
diverse portfolio of capital instruments, in line with the Prospectus. At 31
December 2022, the capital instrument rating profile of the portfolio was as
follows:
31 December 2022 31 December 2021
Percentage Percentage
BBB 2.80 7.93
BB 34.54 19.34
B 23.60 16.90
Below B 3.20 9.89
No rating 35.86 45.94
------------ ------------
100.00 100.00
------------ ------------
The investments without a credit rating correspond to issuers that are not
rated by an external rating agency. Although no external rating is available,
the Investment Manager considers and internally rates the credit risk of these
investments, along with all other investments. The internal risk score is
based on the Investment Manager's fundamental view (stress test, macro
outlook, solvency, liquidity risk, business mix, and other relevant factors)
and is determined by the Investment Manager's risk committee. The risk grades
are mapped to an external Baseline Credit Assessment, and any discrepancy of
more than two notches is monitored closely.
The cash pending investment may be held without limit with a financial
institution with a credit rating of A-1 (Standard & Poor's) or P-1
(Moody's) or better to protect against counterparty failure.
The Company may implement hedging and derivative strategies designed to
protect against credit risk. Such strategies may include (but are not limited
to) credit default swaps and will only be entered into when they are available
in a timely manner and on terms acceptable to the Company. The Company may
also bear risks that could otherwise be hedged where it is considered
appropriate. There can be no certainty as to the efficacy of hedging
transactions.
Due to the Company's investment in credit default swap agreements, the Company
is exposed to additional credit risk as a result of possible counterparty
failure. The Company has entered into ISDA contracts with Credit Suisse (A-),
JP Morgan (A+) and Goldman Sachs (A+) (2021: all rated A+ with Standard &
Poor's). At 31 December 2022, the overall net exposure to these counterparties
was 4.56% (2021: 3.62%) of NAV. The collateral held at each counterparty is
disclosed in note 16.
Liquidity risk
Liquidity risk is defined as the risk that the Company will encounter
difficulties in realising assets or otherwise raising funds to meet financial
commitments. The principal liquidity risk is contained in unmatched
liabilities. The liquidity risk at 31 December 2022 was low since the ratio of
cash and cash equivalents (net of overdrafts) to unmatched liabilities was 3:1
(2021: 11:1).
In addition, the Company diversifies the liquidity risk through investment in
capital instruments with a variety of maturity dates, as follows:
31 December 2022 31 December 2021
Percentage Percentage
Less than 1 year 1.48 15.99
1 to 3 years 33.28 26.88
3 to 5 years 30.82 24.75
5 to 7 years 7.91 1.59
7 to 10 years 9.53 2.92
More than 10 years 16.98 27.87
------------ ------------
100.00 100.00
------------ ------------
As at 31 December 2022, the Company's liquidity profile was such that 74.5% of
capital instruments were realisable within one day (2021: 63.6%), 20.1% was
realisable between two days and one week (2021: 32.3%) and 5.4% was realisable
between eight days and one month (2021: 4.1%).
As at the year end, the Company's liabilities fell due as follows:
31 December 2022 31 December 2021
Percentage Percentage
1 to 3 months 60.40 71.52
3 to 6 months 18.04 -
6 to 12 months - -
1 to 3 years ( 1 ) - 28.48
3 to 5 years 21.56 -
------------ ------------
100.00 100.00
------------ ------------
( 1 ) This classification assumes that derivative liabilities are held to maturity.
However, they have been included as current liabilities in the Statement of
Financial Position as they are not always held to maturity but are incurred
principally for the purpose of repurchasing in the near term and, on initial
recognition, are part of a portfolio of identified financial instruments that
are managed together and for which there is evidence of a recent actual
pattern of short-term profit taking.
25. Capital management policy and procedures
The Company's capital management objectives are:
· to ensure that it will be able to meet its liabilities as they fall
due; and
· to maximise its total return primarily through the capital
appreciation of its investments.
Pursuant to the Company's Articles of Incorporation, the Company may borrow
money in any manner. However, the Board has determined that the Company should
borrow no more than 20% of direct investments.
The Company uses sale and repurchase agreements to increase the gearing of the
Company. As at 31 December 2022 the Company had no open sale and repurchase
agreements (2021: eight open sale and repurchase agreements, one of which was
a reverse sale and repurchase agreement, committing the Company to make a
total repayment of £6,110,000 post the year end). As a result of the reverse
sale and repurchase agreement(s) held by the Company as at 31 December 2021,
the Company was due to receive £4,194,000 after the year end.
The raising of capital through the placing of shares forms part of the capital
management policy. See note 21 for details of the Ordinary Shares issued since
incorporation.
As disclosed in the Statement of Financial Position, at 31 December 2022 the
total equity holders' funds were £85,200,000 (2021: £96,883,000).
25. Capital commitments
The Company holds a number of derivative financial instruments, which, by
their very nature, give rise to capital commitments post 31 December 2022.
These are as follows:
· At 31 December 2022, the Company had sold two (2021: six) credit
default swap agreements for a total of £316,000 (2021: £457,000), each
receiving quarterly interest. The exposure of the Company in relation to these
agreements at the year end date was £853,000 (2021: £86,000). Collateral of
£3,890,000 for these agreements was held at 31 December 2022 (2021:
£3,328,000).
· At 31 December 2022, the Company had committed to two foreign
currency forward contracts dated 9 February 2023 to buy £50,774,000 (2021:
two foreign currency forward contracts dated 27 January 2022 to buy
£45,834,000). At 31 December 2022, the Company could have effected the same
trades and purchased £50,976,000 (2021: £45,827,000), giving rise to a loss
of £202,000 (2021: gain of £7,000).
· At 31 December 2022, the Company held no (2021: six (this excludes
the one open reverse sale and repurchase agreement)) open sale and repurchase
agreements (2021: committing the Company to make a total repayment of
£6,310,000).
26. Contingent assets and contingent liabilities
In line with the terms of the Investment Management Agreement, as detailed in
note 8a, should the Company's NAV reach a level at which the TER reduced to
less than 1.5% of the average NAV in a future accounting period then the
Quarterly Expenses Excess and Annual Expenses Excess totalling £880,000 at 31
December 2022 (2021: £777,000) would become payable to the Investment
Manager, to the extent that the total expenses including any repayment did not
exceed 1.5% of the average NAV for that period.
For a significant amount of the £880,000 (2021: £777,000) Expenses Excess to
become payable within the foreseeable future, the Company's NAV would have to
increase considerably from the 31 December 2022 NAV. The Directors consider
that it is possible, but not probable, that an increase in the NAV leading to
a significant payment of the Expenses Excess will be achieved in the
foreseeable future. Accordingly, the possible payment to the Investment
Manager has been treated as a contingent liability in the financial
statements.
There were no other contingent assets or contingent liabilities in existence
at the year end.
27. Events after the financial reporting date
On 25 January 2023, the Company declared a dividend of 1.50p per Ordinary
Share relating to the period from 1 January 2022 to 31 December 2022, which
(in accordance with IFRS) was not provided for at 31 December 2022, out of the
retained profits as at 31 December 2022 (note 6). This dividend was paid on 24
February 2023.
The Board will shortly put forward proposals for the liquidation of the
Company, including the ability for Shareholders to receive shares, in respect
of their holdings of the Company's Ordinary Shares, in a new open-ended fund
managed by the same management team and with a similar investment mandate to
the Company. The Board believes that these proposals will provide continuity
for those Shareholders in terms of exposure to a strategy similar to the one
currently pursued by the Company and under the same management team. The New
Fund, AUFC, which will be a new Compartment of Axiom Lux SICAV, an established
Luxembourg SICAV that is registered as a UCITS with the Luxembourg financial
regulator, the Commission de Surveillance du Secteur Financier, will be
open-ended with daily liquidity. The proposals will also include a mechanism
for those Shareholders who do not wish to continue their investment to achieve
a cash exit.
Further details of the Proposals for the implementation of the Scheme will be
described in the Circular, which, when finalised, will be made available on
the Company's section of the Investment Manager's website
(https://axiom-ai.com/web/en/axiom-european-financial-debt-fund-limited-2/).
Glossary
Defined terms
Administrator Elysium
AGM Annual General Meeting
AIB Allied Irish Bank
AIC Association of Investment Companies
AIC Code AIC Code of Corporate Governance
AIF Alternative Investment Fund
AIFM Alternative Investment Fund Manager
AIFMD Alternative Investment Fund Managers Directive
APM Alternative Performance Measures
AT1 Additional T1
Axiom AI Axiom Alternative Investments Sarl
BACA Bank Austria UniCredit
BBVA Banco Bilbao Vizcaya Argentaria
Broker Corporate Broker
BRRD II Bank Recovery and Resolution Directive II
CDS Credit Default Swap
CET1 Common Equity T1
CFO Chief Financial Officer
CIB Cash In Bank
CMS Constant Maturity Swap
Committees The Company's Audit Committee, Management Engagement Committee and Nomination
and Remuneration Committee
Company Axiom European Financial Debt Fund Limited
COO Chief Operating Officer
CPI Consumer Price Index
CRR Capital Requirements Regulation
CSAM Credit Suisse Asset Management
CVA Credit Valuation Adjustment
EBA European Banking Authority
EC European Commission
ECB European Central Bank
Elysium Elysium Fund Management Limited
ESG Environmental, Social and Governance
FCA The Financial Conduct Authority
Fed Federal Reserve System
FICC Fixed Income Clearing Corporation
FX Foreign exchange
GDP Gross Domestic Product
GFSC Guernsey Financial Services Commission
Grant Thornton Grant Thornton Limited
IASB International Accounting Standards Board
IFRS UK-adopted international accounting standards
IG Investment Grade
Investment Manager Axiom AI
IPO Initial Public Offering
ISDA International Swaps and Derivatives Association
KID Key Information Document
KPIs Key Performance Indicators
Law Companies (Guernsey) Law, 2008
LSE London Stock Exchange
M&A Mergers and Acquisitions
MIFIR Markets in Financial Instruments Regulation
MREL Minimum Requirement for own funds and Eligible Liabilities
NAV Net asset value
New Fund or AUFC Axiom Unconstrained Financial Credit, a newly established Compartment of Axiom
Lux SICAV
NPL Non-Performing Loan
P&C Property and Casualty
PIBS Permanent Interest Bearing Shares
POI Law The Protection of Investors (Bailiwick of Guernsey) Law, 2020
PRA Prudential Regulatory Authority
Premium Segment The Premium Segment of the Main Market of the LSE
Proposals Proposals for the implementation of the Scheme as described in the Circular
Published NAV The NAV published on the LSE on 4 January 2023, prior to the adjustments
required for these financial statements under IAS 2 (see note 22)
Published net assets The net assets used to calculate the Published NAV, prior to the adjustments
required for these financial statements under IAS 2 (see note 22)
RT1 Restricted T1
Scheme The proposed scheme of reconstruction pursuant to which the Company will be
placed into voluntary liquidation and the Transfer will be effected
SFDR Sustainability-related disclosures in the financial services sector
SFS The Specialist Fund Segment of the LSE
SME Small and Medium-sized Entities
SPAC Special Purpose Acquisition Company
SPPI Solely payments of principal interest
SPV Special Purpose Vehicle
SREP Supervisory Review and Evaluation Process
SubFin Markit iTraxx Europe Subordinated Financial Index
SX7R STOXX Europe 600 Banks Index
SXXR STOXX Europe 600 Index
T1 Tier 1
T2 Tier 2
TBV Total Book Value
TCFD Task Force on Climate-Related Financial Disclosures
TISE The International Stock Exchange
TLTRO Targeted Longer-Term Refinancing Operations
TMO Taux Moyen des Obligations
Transfer The proposed transfer of substantially all of the assets of the Company to the
New Fund in exchange for the issue by the New Fund of the Issue Shares to
Shareholders pursuant to the Transfer Agreement, as further described in the
Circular
TRIM Targeted Review of Internal Models
UK-adopted international accounting standards International Accounting Standards, International Financial Reporting
Standards and interpretations issued by the International Financial Reporting
Standards Interpretations Committee, as adopted by the UK
UK Code UK Corporate Governance Code 2018
Winterflood Winterflood Securities Limited
Alternative Performance Measures
Cash (%) Total cash held, including overdrafts, expressed as a percentage of Published
net assets.
Collateral (%) Total collateral held, including negative balances, expressed as a percentage
of Published net assets.
Gross assets (%) Total assets, expressed as a percentage of Published net assets.
Modified duration The percentage impact on the fair value of investments of a 100bps increase in
risk free rates.
Net gearing Total assets, less collateral, expressed as a percentage of Published net
assets.
Published NAV / Published net assets Please see the Glossary.
Running yield Expected annualised coupons, expressed as a percentage of the fair value of
investments.
Sensitivity to credit The percentage impact on the fair value of investments of a 100bps increase in
credit spreads.
Share price premium/discount The amount by which the Ordinary Share price is higher/lower than the
Published NAV per Ordinary Share, expressed as a percentage of the Published
NAV per Ordinary Share.
Total return per Ordinary Share Total return per Ordinary Share has been calculated by comparing the NAV or
share price, as applicable, at the start of the year with the NAV or share
price, as applicable, plus dividends paid, at the year end, assuming that
dividends are reinvested.
Yield to call The yield of the portfolio, converted into GBP at the anticipated
reimbursement date of the bonds.
Yield to perpetuity The yield of the portfolio, converted into GBP, with the hypothesis that
securities are not reimbursed and kept to perpetuity.
-- ENDS --
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