Blackstone/GSO LnFin - Annual Financial Report - Part 4
25/04/2017 17:45
- Part 4: For the preceding part double click ID:nRSY3203Dc
conditions and more specifically credit events in the European corporate environment on the valuation of the CSWs,
PPNs and the BGCF portfolio.
The Investments
The investments are valued by the Administrator based on information from the Adviser and are reviewed and approved by the
Directors, taking into consideration a range of factors including the unaudited NAV of both the Lux Subsidiary and BGCF,
and other relevant available information. The other relevant information includes the review of available financial and
trading information of BGCF and its underlying portfolio, advice received from the Adviser and such other factors as the
Directors, in their sole discretion, deem relevant in considering a positive or negative adjustment to the valuation.
The estimated fair values may differ from the values that would have been realised had a ready market existed and the
difference could be material.
The fair value of the investment is assessed on an ongoing basis by the Board.
BGCF Portfolio
The Directors discuss BGCF's monthly valuation process to understand the methodology regarding valuation of
Level 3 assets. The majority of Level 3 assets in BGCF are comprised of collateralised loan obligations (CLOs). In
reviewing the fair value of these assets, the Directors look at the assumptions used and any significant fair value changes
during the period under analysis.
Loan asset fair value prices used in the valuation of the BGCF portfolio are based on prices provided by Markit Group
Limited ("Markit") which represent a consensus price based on an aggregation of broker quotes received. Where available,
the fair value of loan assets is based on their quoted market mid prices at the period end date without any deduction for
estimated future selling costs. Investments in loan assets for which Markit indicates limited broker quotes are available
and for which no other evidence of liquidity exists are classified as Level 3. If a quoted market price is not available on
a recognised stock exchange or from Markit for non-exchange traded financial instruments, the fair value of the instrument
is estimated using the valuation techniques of the Adviser, which are discussed, reviewed and accepted by the Board of BGCF
and independent service provider. These valuation techniques include use of recent arm's length market transactions,
reference to the current market fair value of another instrument that is substantially the same, discounted cash flow
techniques, option pricing models or any other valuation technique that provides a reliable estimate of prices obtained in
actual market transactions.
The CLO subordinated notes are valued by Thomson Reuters using a mark to model approach based on discounted cash flows. The
key model input assumptions are the loan prepayment rates, loan default rates, loan recovery given default rates and
reinvestment rates. For the avoidance of doubt, to the extent there are market clearing levels, broker quotations or bids
wanted in competition related to a CLO retention security, such data points may be considered in the selection of scenario
assumptions and/or discount rates by Thomson Reuters, however, the market colour will not replace the mark to model
approach outright. The CLO retention securities typically represent a controlling interest which entitles the holder to
certain rights and optionality which a non-controlling interest would not benefit from. There is significant judgement and
subjectivity related to the assumptions and inputs used to determine the fair values. Additionally, Thomson Reuters review
each CLO indenture and the latest underlying CLO loan portfolio forming various projections based on the quality of the
collateral and general macroeconomic conditions. CLOs are classified as Level 3 as certain inputs which have a substantial
impact on the fair value at period end are considered unobservable.
The following table summarises the inputs and assumptions used in determining the fair value of the CLO subordinated notes
held by BGCF as of 31 December 2016. The table is not meant to be all inclusive, but rather provide information on the
significant Level 3 inputs as they relate to the fair value measurement of the CLO subordinated notes held by BGCF as of 31
December 2016.
Asset Valuation Methodology Unobservable Input Weighted Average
CLO Subordinated Notes Discounted Cash Flows Constant Default Rate 2%
Conditional Prepayment Rate 20%
Reinvestment Spread (bp over LIBOR) 411.4
Recovery Rate 70%
Recovery Lag (Months) 12
Discount Rate 9.94%
Increases (decreases) in the constant default rate and discount rate in isolation would result in a lower (higher) fair
value measurement. Increases (decreases) in the reinvestment spread and recovery rate in isolation would result in a higher
(lower) fair value measurement. Changes in the constant prepayment rate may result in a higher or lower fair value,
depending on the circumstances. Generally, a change in the assumption used for the constant default rate may be accompanied
by a directionally opposite change in the assumption used for the constant prepayment rate and recovery rate.
Financial liabilities
(e) Classification
Financial liabilities include payables which are held at amortised cost using the effective interest rate method.
The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating
interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future
cash payments (including all fees and points paid or received that form an integral part of the effective interest rate,
transaction costs and other premiums or discounts) through the expected life of the financial liability, or where
appropriate a shorter period, to the net carrying amount on initial recognition.
(f) Recognition, measurement and derecognition
Financial liabilities are measured initially at their fair value plus any directly attributable incremental costs of
acquisition or issue.
Gains and losses are recognised in the Statement of Comprehensive Income when the liabilities are derecognised.
The Company derecognises a financial liability when the obligation specified in the contract is discharged, cancelled or
expires.
2.8 Foreign currency translations
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies at the Statement of Financial Position date are
translated to Euro at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation
are recognised in the Statement of Comprehensive Income.
Foreign currency gains and losses are included in profit or loss on the Statement of Comprehensive Income as part of the
"Realised gains on foreign exchange". There were no foreign currency gains or losses on financial assets classified at fair
value through profit or loss for the year ended 31 December 2016.
2.9 Taxation
Profit arising in the Company for the 2016 year of assessment will be subject to Jersey tax at the standard corporate
income tax rate of 0% (31 December 2015: 0%).
2.10 Dividends
Dividends to the Shareholders are recorded through the Statement of Changes in Equity when they are declared to
Shareholders.
2.11 Critical accounting judgements and estimates
The preparation of the financial statements in conformity with IFRS requires management to make judgements, estimates and
assumptions that affect items reported in the Statement of Financial Position and Statement of Comprehensive Income. It
also requires management to exercise its judgement in the process of applying the Company's accounting policies.
Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the
carrying amount of assets and liabilities affected in future periods.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised
prospectively.
(a) Fair value
For the fair value of all financial instruments held, the Company determines fair values using appropriate techniques.
Refer to Note 2.7 for further details on the significant estimates applied in the valuation of the underlying financial
instruments.
(b) Non-consolidation of the Lux Subsidiary undertaking
The Company meets the definition of an Investment Entity as defined by IFRS 10 and is required to account for its
investment at fair value through profit or loss.
The Company has multiple unrelated investors and holds multiple investments in the Lux Subsidiary. The Company has been
deemed to meet the definition of an Investment Entity per IFRS 10 as the following conditions exist:
i. The Company has obtained funds for the purpose of providing investors with investment management services;
ii. The Company's business purpose, which has been communicated directly to investors, is investing solely for returns
from capital appreciation, investment income, or both; and
iii. The performance of investments made through the Lux Subsidiary are measured and evaluated on a fair value basis.
The Company has also considered the typical characteristics of an investment entity per IFRS 10 in assessing whether it
meets the definition of an Investment Entity.
The Company controls the Lux Subsidiary through its 100% holding of the voting rights and ownership. The Lux Subsidiary is
incorporated in Luxembourg.
Refer to Note 11 for further disclosures relating to the Company's interest in the Lux Subsidiary.
(b) Non-consolidation of BGCF
To determine control, there has to be a linkage between power and the exposure to risks and rewards. The main link from
ownership would allow a company to control the payments of returns and operating policies and decisions of a subsidiary. To
meet the definition of a subsidiary under the single control model of IFRS 10, the investor has to control the investee.
Control involves power, exposure to variability of returns and a linkage between the two:
i. The investor has existing rights that give it the ability to direct the relevant activities that significantly
affect the investee's returns;
ii. The investor has exposure or rights to variable returns from its involvement with the investee; and
iii. The investor has the ability to use its power over the investee to affect the amount of the investor's returns.
In the case of BGCF, the relevant activities are the investment decisions made by it. However, in the Lux Subsidiary's
case, the power to influence or direct the relevant activities is not attributable to the Lux Subsidiary. The Lux
Subsidiary does not have the ability to direct or stop investments by BGCF; therefore, it does not have the ability to
control the variability of returns.
Accordingly, BGCF has been determined not to be a subsidiary undertaking as defined under IFRS 10 and the Lux Subsidiary's
investment in the PPNs issued by BGCF are accounted for at fair value through profit or loss.
(c) Presentation and functional currency
As outlined in Note 2, the Directors have used their judgement to determine that the Company's presentation and functional
currency is Euro.
2.12 New standards and interpretations applicable to future reporting periods
New standards, amendments and interpretations issued and effective for the financial year beginning 1 January 2016
There are no new standards, amendments or interpretations issued and effective for the financial year beginning 1 January
2016 that have a significant impact on the Company.
New standards, amendments and interpretations issued but not effective for the financial year beginning 1 January 2016 and
not early adopted
IFRS 9 "Financial Instruments" ("IFRS 9"), addresses the classification, measurement and recognition of financial assets
and financial liabilities and will become effective for the periods beginning on or after 1 January 2018. IFRS 9 requires
financial assets to be classified into two measurement categories: those measured at fair value and those measured at
amortised cost. The determination is made at initial recognition. The classification depends on the entity's business model
for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial
liabilities, IFRS 9 retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option
is taken for financial liabilities, the part of a fair value change due to an entity's own credit risk is recorded in other
comprehensive income rather than the profit or loss, unless this creates an accounting mismatch. The Company is yet to
assess IFRS 9's full impact.
IFRS 15 "Revenue from contracts with customers" ("IFRS 15") establishes a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition
guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related interpretations when it becomes effective
for the periods beginning on or after 1 January 2018. The Company is yet to assess IFRS 15's full impact.
Amendments to IAS 7: Disclosure Initiative requires an entity to provide disclosures that enable users of financial
statements to evaluate changes in liabilities arising from financing activities. The amendments apply prospectively for
annual periods beginning on or after 1 January 2017 with earlier application permitted. Amendments to IAS 7: Disclosure
Initiative has not yet been endorsed by the EU.
3 Operating expenses
Year ended 31 December 2016 Year ended 31 December 2015
E E
Administration fees 290,871 336,477
Brokerage fees 404,647 358,386
Directors' fees (see Note 4) 251,901 252,500
Regulatory fees 34,351 75,039
Audit fees 116,730 100,742
Professional fees 1,079,102 288,479
Registrar fees 28,767 -
Sundry expenses 155,282 33,253
2,361,651 1,444,877
Administration fees
Under the administration agreement, the Administrator is entitled to receive variable fees based on the NAV of the Company
for the provision of administrative and compliance oversight services and a fixed fee for the provision of company
secretarial services. The overall charge for the above-mentioned fees for the Company for the year ended 31 December 2016
was E290,871 (31 December 2015: E336,477) and the amount due at 31 December 2016 was E21,996 (31 December 2015: E55,196).
Advisory fees
Under the Advisory Agreement, the Adviser is entitled to receive out of pocket expenses, all reasonable third-party costs,
and other expenses incurred in the performance of its obligations. The overall charge for the above-mentioned fees for the
Company for the year ended 31 December 2016 was ENil (31 December 2015: ENil) and the amount due at 31 December 2016 was
ENil (31 December 2015: ENil).
Professional fees
An amount of E643,850 of professional expenses related to the Luxembourg restructuring and legal advice regarding the
amended investment policy to include loan warehouses and additional risk retention companies.
Audit and non-audit fees
The Company incurred E116,730 (31 December 2015: E100,742) in audit fees during the year of which E76,148 (31 December
2015: E80,501) was outstanding at the year end.
Other Deloitte member firms Type of service provided Year ended31 December 2016 Year ended31 December 2015
E E
Deloitte LLP Guernsey(1) Advisory work on prospectus 138,136 -
Deloitte Ireland Tax advisory 80,200 -
Deloitte Luxembourg Tax advisory 105,272 30,000
Non audit fees 323,608 30,000
(1) These costs have been capitalised and are included in Other assets. Refer to Note 5 for further details.
4 Directors' fees and interests
During the year ended 31 December 2016, the Directors were each remunerated for their services at a fee of £35,000 per
annum (£50,000 for the Chair). The Chairs of the Audit Committee and Risk Committee received an additional £5,000 for their
services in these roles.
During the year ended 31 December 2016, the Directors received a one off payment fee of £10,000 each (31 December 2015:
£Nil) due to the additional work carried out during the year as a result of the Luxembourg restructuring and prospectus.
The Company has no employees. Directors' fees payable as at 31 December 2016 were E48,325 (31 December 2015: E51,048).
No Director, except Mr Clark, had any beneficial interest in the shares of the Company during the year ended 31 December
2016. Mr Clark purchased 25,000 Euro Shares in the Company pursuant to the placing in 2014. Mr Clark purchased an
additional 28,700 Euro Shares on 2 June 2016 and as at 31 December 2016 held 53,700 (31 December 2015: 25,000). Refer to
Note 20 for purchases made by the Directors after the end of the reporting period.
No pension contributions were payable in respect of any of the Directors.
Mr Austin is also a Director of Blackstone / GSO Debt Funds Europe Limited, an affiliate of DFME.
5 Other receivables
As at31 December 2016 As at31 December 2015
E E
Prepayments 33,298 32,365
Intercompany loan receivable from Lux Subsidiary - 30,000
Other assets 676,045
709,343 62,365
The intercompany loan receivable due from the Lux Subsidiary, which related to an interest free loan in respect to working
capital for setup and ongoing operating costs, was repaid in December 2016.
Other assets relate to costs incurred with respect to the prospectus. These costs will be offset against future placings.
6 Financial assets designated at fair value through profit or loss
As at31 December 2016 As at31 December 2015
E E
Financial assets designated at fair value through profit or loss 331,213,706 326,032,708
Financial assets designated at fair value through profit or loss consists of 295,083,703 CSWs, 2,000,000 Class A shares and
1 Class B share issued by the Lux Subsidiary (31 December 2015: 315,929,526 PPNs and 15 Class B2 shares issued by BGCF and
20,000 Class A shares issued by the Lux Subsidiary).
Please refer to Note 1 for further details of the Luxembourg restructuring that took place on 3 February 2016 and the
redemption of the 15 Class B2 shares that took place on 20 December 2016.
CSWs
The Company has the right, at any time during the exercise period (being the period from the date of issuance, 3 February
2016, and ending on earlier of the 3 February 2046 or the date on which the liquidation of the Lux Subsidiary is closed),
to request that the Lux Subsidiary redeems all or part of the CSWs at the redemption price (see below), by delivering a
redemption notice, provided that the redemption price will be due and payable only if and to the extent that (a) the Lux
Subsidiary will have sufficient funds available to settle its liabilities to all other ordinary or subordinated creditors,
whether privileged, secured or unsecured, prior in ranking to the CSWs, after any such payment, and (b) the Lux Subsidiary
will not be insolvent after payment of the redemption price.
The redemption price is the amount payable by the Lux Company on the redemption of CSWs outstanding, which shall be at any
time equal to the fair market value of the ordinary shares, (that would have been issued in case of exercise of all CSWs),
as determined by the Board on a fully diluted basis on the date of redemption, less a 13.5bps margin (determined by the
Board on the basis of a transfer pricing report prepared by an independent advisor), and the redemption price for each CSW
shall be obtained by dividing the amount determined in accordance with the preceding sentence by the actual number of CSWs
outstanding.
If at the end of any financial year there is excess cash, as determined in good faith by the Lux Subsidiary board (but for
this purpose only), the Lux Subsidiary will automatically redeem, to the extent of such excess cash, all or part of the
CSWs at the redemption price provided the requirements in the previous paragraph are met, unless the Company notifies the
Lux Subsidiary otherwise. For the avoidance of doubt, to the extent the subscription price for the CSWs to be redeemed has
not been paid at the time the CSWs were issued, the subscription price for such CSWs to be redeemed shall be deducted from
the Redemption Price.
CSWs listed in an exercise notice may not be redeemed.
Class A and Class B shares held in the Lux Subsidiary
Class A and Class B shares are redeemable and have a par value of one Euro per share. Class A and Class B Shareholders have
equal voting rights commensurate with their shareholding.
Class A and Class B Shareholders are entitled to dividend distributions from the net profits of the Lux Subsidiary (net of
an amount equal to five per cent of the net profits of the Lux Subsidiary which is allocated to the general reserve, until
this reserve amounts to ten per cent of the Lux Subsidiary nominal share capital).
Dividend distributions are paid in the following order of priority:
i. Each Class A share is entitled to the Class A dividend, being a cumulative dividend in an amount of not less than
0.10% per annum of the face value of the Class A shares.
ii. Each Class B share is entitled to the Class B dividend (if any), being any income such as but not limited to
interest or revenue deriving from the receivable from the PPN's held by the Lux Subsidiary, less any non-recurring costs
attributable to the Class B shares.
Any remaining dividend amount for allocation of the Class A dividend and Class B dividend shall be allocated pro rata among
the Class A shares.
The Board does not expect income from the Lux Subsidiary to significantly exceed the anticipated annual running costs of
the Lux Subsidiary and therefore does not expect that the Lux Subsidiary will pay significant, or any, dividends although
it reserves the right to do so.
Class B2 shares held in BGCF
Class B2 shares are redeemable and have a par value of one Euro per share (and share premium of E999,999 per share). The
Class B2 shares do not carry any right to receive a dividend nor have any voting rights attached. All Class B2 shares held
in BGCF were redeemed on 20 December 2016. Refer to Note 1 for more details.
Fair value hierarchy
IFRS 13 'Fair Value Measurement' ("IFRS 13") requires an analysis of investments valued at fair value based on the
reliability and significance of information used to measure their fair value.
The Company categorises its financial assets according to the following fair value hierarchy detailed in IFRS 13, that
reflects the significance of the inputs used in determining their fair values:
· Level 1: Quoted market price (unadjusted) in an active market for an identical instrument.
· Level 2: Valuation techniques based on observable inputs, either directly (i.e., as prices) or indirectly (i.e.,
derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar
instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other
valuation techniques where all significant inputs are directly or indirectly observable from market data.
· Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where
the valuation technique includes inputs not based on observable data and the unobservable variable inputs have a
significant effect on the instrument's valuation. This category includes instruments that are valued based on quoted prices
for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences
between the instruments.
31 December 2016 Level 1 Level 2 Level 3 Total
E E E E
Financial assets designated at fair value through profit or loss - - 331,213,706 331,213,706
31 December 2015 Level 1 Level 2 Level 3 Total
E E E E
Financial assets designated at fair value through profit or loss - - 326,032,708 326,032,708
Financial assets designated at fair value through profit or loss reconciliation
The following table shows a reconciliation of all movements in the fair value of financial assets categorised within Level
3 between the start and the end of the reporting period:
31 December 2016 Total
E
Balance as at 1 January 2016 326,032,708
Movements:
Lux restructuring
Issuance - CSWs, Class A and B shares 311,013,368
Transfer - PPNs (311,013,368)
Purchases - CSWs 18,000,000
Sale proceeds - CSWs and Class B2 Shares (48,272,545)
Realised gain on financial assets designated at fair value through profit or loss 1,322,881
Unrealised gain on financial assets designated at fair value through profit or loss 34,130,662
Balance as at 31 December 2016 331,213,706
Total change in unrealised gains on financial assets for the year 34,130,662
Realised gain on financial assets designated at fair value through profit or loss 1,322,881
Investment income(1) 7,426,394
Net gains on investments designated at fair value through profit or loss 42,879,937
(1) Investment income relates to PPN interest received from the Company's holding of PPNs in BGCF prior to the Luxembourg
restructuring. Please refer to Note 1 for further details of the Luxembourg restructuring that took place on the 3 February
2016.
During the year ended 31 December 2016, there were no reclassifications between levels of the fair value hierarchy.
The following table shows a reconciliation of all movements in the fair value of financial assets categorised within Level
3 between the start and the end of the reporting period:
31 December 2015 Total
E
Balance as at 1 January 2015 299,277,149
Movements:
Purchases 29,999,526
Unrealised gain on financial assets designated at fair value through profit or loss (3,243,967)
Balance as at 31 December 2015 326,032,708
Total change in unrealised gains on financial assets for the year (3,243,967)
During the year ended 31 December 2015, there were no reclassifications between levels of the fair value hierarchy.
Please refer to Note 2.7 for valuation methodology of financial assets designated at fair value through profit and loss.
The Company's investments, through the Lux Subsidiary, in BGCF are untraded and illiquid. The Board has considered these
factors and concluded that there is no further need to apply a discount for illiquidity as at the end of the reporting
period.
The following tables detail the investment holding of the Lux Subsidiary at the BGCF level, categorising these assets
according to the fair value hierarchy in accordance with IFRS 13 and detailing the quantitative information of significant
unobservable inputs of the Level 3 investments held. The disclosures have been included to provide an insight to
Shareholders, of the asset class mix held by BGCF portfolio.
It is important to note that as at 31 December 2016, the Lux Subsidiary held a 73.1% (2015: 100%) interest in the PPNs
issued by BGCF. The disclosures have not been apportioned according to the Lux Subsidiary's PPN holding, as the Board
believes to do so would be misleading and not an accurate representation of the Company's investment in BGCF.
Financial assets and liabilities at fair value through profit or loss - for BGCF
31 December 2016 Level 1 Level 2 Level 3 Total
E E E E
Financial assets at fair value through profit or loss:
Designated at fair value through profit or loss:
- Investments - 330,505,793 289,954,556 620,460,349
Held for trading
- Derivative financial assets - - - -
Total financial assets - 330,505,793 289,954,556 620,460,349
Financial liabilities at fair value through profit or loss:
Designated at fair value through profit or loss:
- PPNs - - (451,337,094) (451,337,094)
Held for trading
- Derivative financial liabilities - (1,481,665) - (1,481,665)
Total financial liabilities - (1,481,665) (451,337,094) (452,818,759)
There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the financial year.
31 December 2015 Level 1 Level 2 Level 3 Total
E E E E
Financial assets at fair value through profit or loss:
Designated at fair value through profit or loss:
- Investments - 137,816,910 185,090,584 322,907,494
Held for trading
- Derivative financial assets - - - -
Total financial assets - 137,816,910 185,090,584 322,907,494
Financial liabilities at fair value through profit or loss:
Designated at fair value through profit or loss:
- PPNs - - (311,012,708) (311,012,708)
Held for trading
- Derivative financial liabilities - (939,403) - (939,403)
Total financial liabilities - (939,403) (311,012,708) (311,952,111)
The following table shows the movement in Level 3 of BGCF's fair value hierarchy for the year ended 31 December 2016:
BGCF Financial assets at fair value through profit or loss Financial liabilities at fair value through profit or loss
E E
Opening balance 185,090,584 (311,012,708)
Movement out of Level 3 (1,628,098) -
Net gains or losses in comprehensive income (14,972,436) (16,527,988)
Purchases / Issuances 217,623,612 (134,000,000)
Sales / Redemptions (96,159,106) 10,000,000
Closing Balance 289,954,556 (451,337,094)
The following table shows the movement in Level 3 of BGCF's fair value hierarchy for the year ended 31 December 2015:
BGCF Financial assets at fair value through profit or loss Financial liabilities at fair value through profit or loss
E E
Opening balance 135,541,185 (284,277,149)
Movement out of Level 3 (25,441,206) -
Net gains or losses in comprehensive income (13,891,197) 3,243,967
Purchases / Issuances 161,640,730 (29,979,526)
Sales / Redemptions (72,758,928) -
Closing Balance 185,090,584 (311,012,708)
The movement out of Level 3 represents holdings that were priced by Markit Group Limited ("Markit") as at 31 December 2015
with only one price input resulting in a fair value hierarchy classification of Level 3. However, these same holdings were
priced by Markit as at 31 December 2016 with more than one price input resulting in a fair value hierarchy classification
of Level 2.
BGCF's policy is to recognise transfers into and transfers out of fair value hierarchy levels as of the last day of the
accounting period.
Sensitivity of Level 3 holdings to unobservable inputs
Sensitivity analysis of Level 3 assets is performed at BGCF's level since that has a direct impact on the valuation of the
Company's Level 3 holdings.
A number of holdings in BGCF's portfolio as at 31 December 2016 were priced using Markit where the input into the Markit
price was only one price so they were classified as Level 3. These loan assets are not modelled on analysts' prices but are
from dealers' runs; therefore, there are no unobservable inputs into the prices. The CLO Income Notes were priced by
Thomson Reuters and were classified as Level 3 as this is a single pricing source. The CLO prices are determined
independently by consideration of several factors including the following: loan prepayment rates, discount rates, loan
default rates, loan recovery given default rates, recovery lag and reinvestment rates. These factors are highly sensitive,
and variations may materially affect the fair value of BGCF's asset.
The assets classified as Level 3 represented 46.7% (31 December 2015: 57.3%) of BGCF's total financial assets. If the price
of the holdings classified as Level 3 increased or decreased by 5% it would result in an increase or decrease in the value
of BGCF's financial assets of E14,497,728 (2.34% of BGCF's total financial assets) (31 December 2015: E9,254,529 (2.87% of
BGCF's total financial assets)). There also would be an equal and opposite effect on the valuation of the PPNs (3.21%) (31
December 2015: (2.98%)).
The CLO Income Notes are valued by Thomson Reuters. The key model input assumptions are the loan prepayment rates, discount
rates, loan default rates, loan recovery given default rates, recovery lag and reinvestment rates. These metrics are
accumulated from various market sources independent of DFME. Additionally, Thomson Reuters review each CLO indenture and
the latest underlying CLO loan portfolio forming various projections based on the quality of the collateral, the collateral
manager capabilities and general macroeconomic conditions.
The financial liabilities of BGCF at fair value through profit or loss consist of the PPNs. The PPNs are valued using a
model based on the fair value of the underlying assets and liabilities. The amortised cost of the variable funding notes
and cash and cash equivalents and receivables and payables included in the underlying assets and liabilities equate to
their fair value due to the floating interest rates and short term nature of the balances. If the value of the underlying
assets or liabilities changes then there would be an equal and opposite effect on the valuation of the PPNs - as discussed
in the previous paragraph.
The elements of debt (CLO Income Notes) issued by BGCF's subsidiaries and purchased by BGCF are valued by Thomson Reuters.
If the valuation had increased or decreased by 5% the value of the CLO Income Notes would move by E13,583,883 (31 December
2015: E8,555,110).
7 Cash and cash equivalents
Cash and cash equivalents are held with the Custodian.
8 Payables
Year ended 31 December 2016 Year ended 31 December 2015
E E
Administration fees 21,996 55,196
Directors' fees 48,325 51,048
Audit fees 76,148 80,501
Placement costs 202,646 -
Brokerage fees - 89,807
Other payables 48,733 100,771
Total payables 397,848 377,323
9 Stated capital
Authorised
The authorised share capital of the Company is represented by an unlimited number of shares at no par value.
Allotted, called up and fully-paid
Euro shares Number of shares Stated capital
E
As at 1 January 2016 331,319,700 331,307,652
Euro shares issued during the year - -
Euro shares repurchased during the year and held in treasury (6,719,000) (6,284,476)
Total issued share capital as at 31 December 2016 324,600,700 325,023,176
Euro shares Number of shares Stated capital
E
As at 1 January 2015 301,200,000 301,200,000
Euro shares issued during the year 30,119,700 30,107,652
Total issued share capital as at 31 December 2015 331,319,700 331,307,652
Euro shares
260,500,000 Euro shares were issued and admitted to trading on the SFS on 23 July 2014. A further 40,700,000 Euro shares
were issued and admitted to trading on the SFS of the LSE on 28 August 2014. These shares were issued at a price of E1 per
Euro share.
On 29 April 2015, the Company issued a further 30,119,700 Euro shares at a price of E1.02 per Euro share, raising gross
proceeds of E30,722,094 (net proceeds of E30,107,652).
At the 2015 AGM, held on 18 June 2015, the Directors were generally and unconditionally authorised for the purposes of
Article 57 of the Companies (Jersey) Law 1991, as amended, to make one or more on-market purchases of shares in the Company
for cancellation or to be held as Treasury shares.
Pursuant to this authority, a total of 6,719,000 Euro shares were purchased during the year and held as Treasury shares as
detailed below:
Date Number of shares Price per Euro shareE
1 June 2016 1,300,000 0.9150
10 June 2016 1,000,000 0.9369
15 June 2016 2,200,000 0.9400
22 June 2016 2,219,000 0.9419
This authority was renewed at the 2015 AGM, held on 29 June 2016, when Shareholders gave the Directors authority to make
one or more on-market purchases, up to a maximum of 48,657,645 shares. This authority will expire at the 2017 AGM. Please
refer below for further details regarding share buybacks.
As at 31 December 2016, the Company had 324,600,700 Euro shares (31 December 2015: 331,319,700) in issue, excluding
6,719,000 Treasury shares (31 December 2015: Nil).
Voting rights
Holders of Euro shares participate in the profits of the Company. Shareholders have the right to attend, speak and vote at
any general meetings of the Company in accordance with the provisions of the Articles of Association and have one vote in
respect of each whole share held.
Dividends
The Company may, by ordinary resolution, declare dividends in accordance with the respective rights of the Shareholders,
but no such dividend shall exceed the amount recommended by the Directors. The Directors may pay fixed rate and interim
dividends.
A general meeting declaring a dividend may, upon the recommendation of the Directors, direct that payment of a dividend
shall be satisfied wholly or partly by the issue of shares or the distribution of assets and the Directors shall give
effect to such resolution.
Except as otherwise provided by the rights attaching to or terms of issue of any shares, all dividends shall be apportioned
and paid pro rata according to the amounts paid on the shares during any portion or portions of the period in respect of
which the dividend is paid. No dividend or other monies payable in respect of a share shall bear interest against the
Company.
The Directors may deduct from any dividend or other moneys payable to a Shareholder all sums of money (if any) presently
payable by the holder to the Company on account of calls or otherwise in relation to such shares.
Any dividend unclaimed after a period of 10 years from the date on which it became payable shall, if the Directors so
resolve, be forfeited and cease to remain owing by the Company.
The dividends declared by the Board during the year are detailed above.
Please refer to Note 20 for dividends made after the year end.
Share buybacks
The Board intends to seek annual renewal of this authority from the Shareholders at the Company's AGM, to make one or more
on-market purchases of shares in the Company for cancellation or to be held as Treasury shares.
The Board may, at its absolute discretion, use available cash to purchase Euro shares in issue in the secondary market at
any time.
Rights as to Capital
On a winding up, the Company may, with the sanction of a special resolution and any other sanction required by the
Companies Law, divide the whole or any part of the assets of the Company among the Shareholders in specie provided that no
holder shall be compelled to accept any assets upon which there is a liability. On return of assets on liquidation or
capital reduction or otherwise, the assets of the Company remaining after payments of its liabilities shall subject to the
rights of the holders of other classes of shares, be applied to the Shareholders equally pro rata to their holdings of
shares.
Capital management
The Company is closed-ended and has no externally imposed capital requirements.
The Company's objectives for managing capital are:
i. To invest the capital in investments meeting the description, risk exposure and expected return indicated in its
prospectus;
ii. To achieve consistent returns while safeguarding capital by investing via the Lux Subsidiary in BGCF;
iii. To maintain sufficient liquidity to meet the expenses of the Company and to meet dividend commitments; and
iv. To maintain sufficient size to make the operation of the Company cost efficient.
Please refer to Note 10C Liquidity Risk for further discussion on capital management, particularly on how the distribution
policy is managed.
10 Financial risk management
The Company is exposed to market risk (including interest rate risk, currency risk and price risk), credit risk and
liquidity risk arising from the financial instruments it holds.
10A Market risk
Market risk is the risk that the Company's performance will be adversely affected by changes in the markets in which it
invests. The Company holds three investments in the Lux Subsidiary in the form of CSWs, Class A and Class B shares. The
CSWs are the main driver of the Company's performance. The Lux Subsidiary holds one investment in BGCF in the form of PPNs.
The PPNs are the main driver of the Lux Subsidiary's performance. The performance of the PPNs is driven solely by the
underlying portfolio of BGCF and therefore consideration of the risks to which BGCF is exposed to have also been made.
BGCF invests predominantly in below investment grade senior secured loans domiciled in Western Europe and/or North America.
As such, the Company through its holding in the Lux Subsidiary and BGCF could be particularly exposed to any deterioration
in the current European and/or American economic climates.
BGCF is subject to investment limits when it holds senior secured loans directly in its portfolio. BGCF also invests in
CLOs with each CLO being subject to investment limits. These investment limits amongst others relate to the number of
positions held by obligor, industry sector, credit rating and weighted average life and rating of the portfolio.
Financial market disruptions may have a negative effect on the valuations of BGCF's investments and, by extension, on the
NAV of the Lux Subsidiary and the Company and/or the market price of the Company's Euro shares, and on liquidity events
involving BGCF's investments. Any non-performing assets in BGCF's portfolio may cause the value of BGCF's portfolio to
decrease and, by extension, the NAV of the Lux Subsidiary and the Company. Adverse economic conditions may also decrease
the value of any security obtained in relation to any of BGCF's investments.
A sensitivity analysis is shown below disclosing the impact on the NAV of the Company, if the fair value of the Company's
investment in the Lux Subsidiary at the year-end increased or decreased by 5%:
Current value Year ended 31 December 2016 Increase by Decrease by
Total 5% 5%
E E E
Financial assets held at fair value through
profit or loss:
CSWs 329,213,705 345,674,390 312,753,020
Investment in the Lux Subsidiary - Class A and Class B shares 2,000,001 2,100,001 1,900,001
Current value Year ended 31 December 2015 Increase by Decrease by
Total 5% 5%
E E E
Financial assets held at fair value through
profit or loss:
PPNs 311,012,708 326,563,343 295,462,073
Investment in BGCF 15,000,000 15,750,000 14,250,000
Investment in the Lux Subsidiary 20,000 21,000 19,000
The calculations are based on the investment valuation at the Statement of Financial Position date and are not
representative of the period as a whole, and may not be reflective of future market conditions.
i. Interest rate risk
Interest rate movements affect the fair value of investments in fixed interest rate securities and floating rate loans and
on the level of income receivable on cash deposits.
The following tables detail the Company's interest rate risk as at 31 December 2016 and 31 December 2015:
31 December 2016 Interest bearing Non-interest bearing Total
E E E
Assets
Cash and cash equivalents 813,119 - 813,119
Other receivables - 709,343 709,343
Financial assets designated at fair value through profit or loss - 331,213,706 331,213,706
Total assets 813,119 331,923,049 332,736,168
Liabilities
Payables - (397,848) (397,848)
Total liabilities - (397,848) (397,848)
Total interest sensitivity gap 813,119
31 December 2015 Interest bearing Non-interest bearing Total
E E E
Assets
Cash and cash equivalents 252,610 - 252,610
Other receivables - 62,365 62,365
Financial assets designated at fair value through profit or loss 311,012,708 15,020,000 326,032,708
Total assets 311,265,318 15,082,365 326,347,683
Liabilities
Payables - (377,323) (377,323)
Total liabilities - (377,323) (377,323)
Total interest sensitivity gap 311,265,318
As at 31 December 2016, the Company no longer held PPNs. The CSWs held in the Lux Subsidiary are not interest bearing.
As at 31 December 2015, the majority of the Company's interest rate exposure arose in the fair value of the underlying BGCF
portfolio which is largely invested in below investment grade senior secured loans of companies predominantly in Western
Europe or North America. Most of the investments in senior secured loans carry variable interest rates and various maturity
dates.
The following tables detail BGCF's exposure to interest rate risk. They include BGCF's assets and trading liabilities at
fair values, categorised by whether the asset or liability has a floating rate or is non-interest bearing, measured by the
carrying value of the assets and liabilities as at 31 December 2016 and as at 31 December 2015:
BGCF - 31 December 2016 Floating rate Non-interest bearing Total
E E E
Financial assets at fair value through profit or loss:
Designated at fair value through profit or loss:
- Investments 620,460,349 - 620,460,349
Receivable for investments sold - 184,379,820 184,379,820
Other receivables - 11,171,514 11,171,514
Cash and cash equivalents 30,013,469 - 30,013,469
Total assets 650,473,818 195,551,334 846,025,152
Financial liabilities at fair value through profit or loss:
Designated at fair value through profit or loss:
- Notes and credit facilities (748,725,328) - (748,725,328)
Held for trading
- Derivative financial liability - (1,481,665) (1,481,665)
Payable for investments purchased - (94,478,627) (94,478,627)
Other payables and accrued expenses - (1,336,872) (1,336,872)
Total liabilities (748,725,328) (97,297,164) (846,022,492)
Total interest sensitivity gap (98,251,510)
BGCF - 31 December 2015 Floating rate Non-interest bearing Total
E E E
Financial assets at fair value through profit or loss:
Designated at fair value through profit or loss:
- Investments
- More to follow, for following part double click ID:nRSY3203De
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