AEFS.L Regulatory News (AEFS)

ALCENTRA EUROPEAN FLOATING RATE INCOME FUND LIMITED

3 JULY 2018

FOR IMMEDIATE RELEASE

THE BOARD OF DIRECTORS OF ALCENTRA EUROPEAN FLOATING RATE INCOME FUND LIMITED ANNOUNCES THE ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2018.

Strategic Report 

Financial Highlights and Performance Summary

Financial Highlights

Alcentra European Floating Rate Income Fund Limited (the "Company") repurchased and cancelled 11,277,425 Ordinary Shares during the year for a total cost of €12,739,819 (£11,272,921) (Year ended 31 March 2017: 6,365,065 Ordinary Shares were repurchased for a total cost of €7,564,758 (£6,345,793)).

Performance Summary

Ongoing Charges

The ongoing charge reflects those expenses of a type which are likely to recur in the foreseeable future and which relate to the operation of the Company, excluding the costs of acquisition or disposal of investments, finance charges, gains or losses arising on investments and Ordinary Shares.

The ongoing charge is a measure, expressed as a percentage of NAV, based on actual costs incurred in the year as being the best estimate of future costs excluding any non-recurring fees divided by the average NAV of the Company during the year, in accordance with the Association of Investment Companies (the "AIC") methodology. The ongoing charge for the year ended 31 March 2018 was 1.08% (31 March 2017: 1.03%).

Dividend History

Please refer to note 10 for details on dividends paid during the year.

1  Source: London Stock Exchange

Chairman's Statement

Dear Shareholder,

I'm pleased to present the Annual Report of the Company for the year ended 31 March 2018.

The Company showed modest growth for the Sterling NAV per Ordinary Share over the past year which increased from 104.14p as at 31 March 2017 to 104.55p as at 31 March 2018. In relation to the year, the Company declared dividends totalling 4.25p per Ordinary Share. As at the date of approval of the audited financial statements, total dividend paid since inception is 29.49p per Ordinary Share, giving an overall total return since inception of 41.43%. There was an annualised return of 5.88%.

The Board actively monitors the share price, working closely with the Company's brokers within an agreed framework. We have maintained the buyback programme with the aim of limiting the discount to NAV. During the year, 11,277,425 Ordinary Shares were repurchased and cancelled, bringing the issued share capital of the Company to 158,333,471 Ordinary Shares. The buyback transactions are so far proving successful in limiting the discount to less than 5% of NAV. The Board has now implemented a policy to hold some repurchased shares in treasury, which may be reissued. Additionally the Board has commenced a successful dialog with major shareholders in supporting the Company. During the year, I also visited with a number of the larger shareholders to understand their views and the Board wish to maintain this level of direct contact with shareholders going forward.

This year being reported on has seen higher turnover in the shareholder register than might more ordinarily be expected. In part this is a consequence of a shareholder representing original seed capital invested at IPO taking the opportunity to exit their position. As a consequence the Company's shareholders have become more diversified and a short term investor has been replaced with a broad spread of investors, which the Board views positively.

The Company invests predominantly in senior secured loans and senior secured bonds issued by European corporates and has additional capacity to invest in mezzanine loans and other debt securities. The highly diversified portfolio of well managed credits has yielded stable dividends over five years. The Company targets long term returns (net of fees and expenses) in excess of 5% per annum and continues with quarterly dividends. The spread compression experienced throughout global credit markets in 2016-2017 has halted and spreads have flattened out. Additionally market default rates remain very low. The Board is monitoring the situation and maintains confidence in the asset class owing to its floating rate nature and it having the ability to gain from future interest rate rises. 

The Board continues to closely monitor the markets in the current environment, including the consequences of the Brexit vote, within the risk management framework that has been established by the Risk Committee. Whilst the impact of Brexit remains unknown, loan markets have historically been far less volatile than bond or equity markets. Moreover, your Board remains confident in the Company's portfolio of well-selected, robust credits and with Alcentra Limited (the "Investment Manager") continues to seek opportunities in our markets to add further value.

The Investment Manager believes that the loan market performance over 2017 to date, given the level of financial markets volatility, demonstrates that the loan market continues to provide attractive risk adjusted returns compared to other asset classes. A strong pipeline of M&A activity into 2018 should provide an increase in loan issuance, which alongside demand for the asset class should result in new issue margins slightly increasing. Your Board continues to be satisfied with the portfolio's performance to date, the diversity of the portfolio and the strategy that is being applied by the Investment Manager. The Investment Manager will continue to update you on the Company's progress by way of the monthly performance updates.

On behalf of the Board, I would like to close by thanking shareholders for your continued commitment and I look forward to updating you on the Company's progress later on this year.

Ian Fitzgerald

Chairman

3 July 2018

Executive Summary

This report is designed to provide information about the business and results for the year ended 31 March 2018 for the Company. It should be read in conjunction with the Chairman's Statement and the Investment Manager's report which give a detailed review of investment activities for the year and an outlook for the future.

Corporate Summary

The Company is a non-cellular company limited by shares incorporated in Guernsey on 3 November 2011 under the Companies (Guernsey) Law, 2008, (as amended) (the "Companies Law"), with registration number 54200. The Company has been authorised by the Guernsey Financial Services Commission (the "GFSC") as an authorised closed-ended collective investment scheme.

The Initial Public Offering of the Company took place on 29 February 2012 and the Company commenced business on 6 March 2012, when its Ordinary Shares were admitted to the premium segment of the Financial Conduct Authority's (the "FCA") Official List and to trading on the Main Market of the London Stock Exchange (the "LSE").

The issued share capital of the Company as at 31 March 2018 was 158,333,471 (31 March 2017: 169,610,896) Ordinary Shares, which are denominated in Sterling. For details on the Company's share capital refer to note 9.

The Company has a wholly-owned subsidiary Alcentra European Floating Rate Income S.A., which is incorporated in Luxembourg (the "Subsidiary").

The Company is a member of the AIC.

Culture of the Company

The Board recognises the importance of a strong corporate governance culture that meets the requirements of the UK Governance framework, including the UK Listing Authority as well as other relevant bodies such as the GFSC and the AIC.

Significant Events During the Year Ended 31 March 2018

The Company repurchased and cancelled 11,277,425 Ordinary Shares during the year for a total cost of €12,739,819 (£11,272,921) (Year ended 31 March 2017: 6,365,065 Ordinary Shares were repurchased for a total cost of €7,564,758 (£6,345,793)).

Investment Manager

The Investment Manager was incorporated in England and Wales on 4 March 2003, with registration number 2958399. The Investment Manager is regulated by the UK's FCA and registered as an investment adviser with the US Securities and Exchange Commission.

Investment Objective

The investment objective of the Company is to provide its shareholders with regular quarterly dividends and the opportunity for capital growth by utilising the skills of the Investment Manager in selecting suitable investments.

The Company, together with the Subsidiary, as advised by the Investment Manager, invests either directly or, through sub-participation, indirectly in floating rate, secured loans or high-yield bonds issued by European and US corporate entities predominantly rated below investment grade or deemed by the Investment Manager to be of a corresponding credit quality.

The Company aims to satisfy the guideline in its investment policy that at least 80% of its investments are to be in debt obligations of corporate entities with significant operations, or which are domiciled, in Western Europe (including the UK). Investments are expected to be denominated in Euro, Sterling or US Dollars. 

Investment Policy

The Investment Manager will select, from the primary and secondary markets, investments for the Company in the following asset classes (which may be considered to be non-investment grade):

• secured loans, including senior loans, mezzanine loans and second lien loans;

• senior secured floating-rate notes; and

• senior secured and senior unsecured high-yield bonds.

The Investment Manager will seek to identify investment opportunities that combine an attractive current return with a strong probability of ultimate return of capital.

Diversification

The Company expects to maintain a diversified portfolio by asset class, issuer concentration, industry concentration and geographical exposure (the "Portfolio"). The Company does not include in its investment policy any exclusion of particular industry sectors. The Portfolio complies with the following restrictions (at each date an investment is made by the Company):

• at least 80% of the Company's NAV in senior loans, senior secured floating-rate notes and cash;

• no more than 20% of the Company's NAV in second lien loans and mezzanine loans; and

• no more than 5% exposure to any single obligor.

In addition, the Company will aim to satisfy the following guideline criteria for the Portfolio:

• no more than 15% of the Company's NAV in unsecured floating-rate notes, secured or unsecured fixed rate bonds or structured credit instruments;

• no more than 20% exposure to any single industry sector; and

• at least 80% exposure to corporate entities with significant operations, or which are domiciled, in Western Europe (including the UK).

Key Performance Indicators

In order to measure the success of the Company in meeting its objectives and to evaluate the performance of the Investment Manager, the Directors take into account the following performance indicators:

Returns and NAV

The Board reviews and compares, at each meeting, the NAV and Ordinary Share price of the Company. The Directors regard the Company's NAV total return as being the overall measure of value delivered to shareholders over the long term. Total return reflects both NAV growth of the Company and also dividends paid to shareholders. The Company targets a NAV total return in excess of 5% per annum over the longer term.

The NAV total return of the Company's Ordinary Shares is 37.88% since inception to 31 March 2018. Please refer to the Financial Highlights and Performance Summary for NAV and share price analysis.

Discount/Premium to NAV

At each Board meeting, the Board monitors the level of the Company's discount or premium to NAV and reviews the average discount/premium for the Company's peer company. The Company publishes its NAV per share on a daily basis via the Regulatory News Service (the "RNS") of the LSE. This figure is calculated in accordance with the AIC formula which includes current financial year revenue; the same basis as that calculated for the audited financial statements. Please refer to the Financial Highlights and Performance Summary for NAV and share price analysis.

Dividend Yield

The Board examine the revenue forecast quarterly and consider the yield on the Portfolio and the amount available for distribution. The dividend yield is detailed in the Financial Highlights and Performance Summary.

Benchmark Performance

The Board considers the peer company performance of other income funds at each quarterly Board meeting. Please refer to the Investment Manager's Report for performance summary, market review and outlook.

Key Risks and Uncertainties

The Board is responsible for the Company's system of internal controls and for reviewing its effectiveness. The Board also monitors the investment limits and restrictions set out in the Company's investment objective and policy.

The key risks that have been identified and the steps taken by the Board to mitigate these are as follows:

Investment Activity and Performance

An inappropriate investment strategy may result in under-performance against the Company's objectives. The Board manages these risks by ensuring a diversification of investments. The Investment Manager operates in accordance with the investment limits and restrictions policy determined by the Board. The Board review the limits and restrictions on a regular basis and BNP Paribas Securities Services S.C.A., Guernsey Branch (the "Administrator" and the "Custodian") monitors adherence to the limits and restrictions every month and will notify any breaches to the Board.

The Investment Manager provides the Board with management information including performance data and reports. The Directors monitor the implementation and results of the investment process with the Investment Manager at each Board meeting and monitor risk factors in respect of the portfolio. Investment strategy is reviewed at each meeting. Please refer to the Investment Manager's Report for performance summary, market review and outlook.

Level of discount or premium

A discount or premium to NAV can occur for a variety of reasons, including market conditions or to the extent investors undervalue the management activities of the Investment Manager or discount their valuation methodology and judgement. While the Board may seek to mitigate any discount to NAV per Ordinary Share through the discount management mechanisms set out in the Prospectus, there can be no guarantee that they will do so or that such mechanisms will be successful and the Directors accept no responsibility for any failure of any such strategy to effect a reduction in any discount or premium.

Market price risk

The market value of the Portfolio may vary because of a number of factors, including, but not limited to, the financial condition of the underlying borrowers, the industry in which a borrower operates, general economic or political conditions, interest rates, the condition of the debt trading markets and certain other financial markets, developments or trends in any particular industry and changes in prevailing interest rates. The Investment Manager carries out extensive due diligence on each borrower which is subsequently assessed by its credit committee to mitigate this risk.

Accounting, legal and regulatory

The Company must comply with the provisions of the Companies Law and, since its shares are admitted to listing on the FCA's Official List and to trading on the Main Market of the LSE, the Company is subject to the Listing Rules of the FCA (the "Listing Rules") and the Disclosure Guidance and Transparency Rules of the FCA (the "DTR"). A breach of the legislation could result in the Company and/or the Directors being fined or subject to criminal proceedings. A breach of the Listing Rules could result in the suspension of the Company's shares. The Board relies on its Company Secretary and advisers to ensure adherence to the Guernsey legislation and the FCA's rules.

The Investment Manager is contracted to provide investment services and the Administrator, company secretarial, administration and accounting services through qualified professionals. The Board receives regular internal control reports from the Administrator that confirm compliance. The Subsidiary, must comply with the regulatory and statutory rules and requirements in Luxembourg. The Board relies on the Investment Manager and advisers to the Subsidiary to ensure the Subsidiary adheres to Luxembourg legislation.

Operational

Disruption to, or the failure of, either the Investment Manager's or the Administrator's accounting, dealings or payment systems, or the custodian's records could prevent the accurate reporting or monitoring of the Company's financial position.

Details of how the Board monitors the services provided by the Investment Manager and the Administrator, and the key elements designed to provide effective internal control are explained further in the Internal Controls and Risk Management section in the Directors' Report.

Viability Statement

Under the AIC Code, the Directors are required to make a viability statement which explains how they have assessed the prospects of the Company, over what period they have done so and why they consider that period to be appropriate, taking into account the Company's current position and principal risks. The key risks faced by the Company are described in the Executive Summary.

The Directors have conducted a robust assessment of the viability of the Company over a five year period, taking account of the Company's current position and the potential impact of the principal risks outlined above. This statement is made on the assumption that continuation votes will be passed throughout the period under assessment.

In making this statement, the Directors have considered the resilience of the Company, taking into account its current position, the principal risks facing the Company in severe but reasonable scenarios and the effectiveness of any mitigating actions. This assessment has considered the potential impacts of these risks on the business model, future performance, solvency and liquidity over the period.

The Directors have determined that a five year period is an appropriate period over which to provide its viability statement as this best suits the average weighted life of the portfolio.

In making their assessment, factors taken into consideration by the Directors included the Company's NAV, net income, resulting cash flows and dividend cover over the period. These factors were subjected to stress tests which involved sensitivity analysis of the key assumptions underlying the forecast. Where appropriate, this analysis was carried out to evaluate the potential impact of the Company's principal risks actually occurring, primarily, severe changes to macro-economic conditions, increased defaults and counterparty risks.

Based on this assessment, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period to 3 July 2023.

Discount Control Mechanism

As per the Articles of Incorporation, under the discount control mechanism, if, as at 31 March, 30 June, 30 September or 31 December in any calendar year, the Ordinary Shares of any class in issue have, on average over the last twelve calendar months preceding such date (a ''Discount Calculation Period''), traded at an average discount in excess of 5% of the NAV per share of that class1, the Directors will, subject to any legal or regulatory requirements, implement a redemption offer (a ''Redemption Offer'') pursuant to which each shareholder of the relevant class shall be permitted to redeem up to 50% of their Ordinary Shares of that class. No more than one Redemption Offer shall be made in respect of any class of Ordinary Share in a twelve month period.

The Company's Ordinary Shares traded at an average discount of 3.9% of the NAV per Ordinary Share during the year ended 31 March 2018.

1 Calculated by reference to the middle market quotations of the shares of that class on the Daily Official List of the LSE on each trading day in the relevant Discount Calculation Period and the most recently published NAV per share of the relevant class for each such trading day.

Share Buybacks

The Directors operate an active discount management policy through the use of share buybacks. At the AGM held on 20 September 2017 the Directors were granted authority to repurchase 24,937,951 Ordinary Shares for cancellation or to be held as treasury shares. This authority will expire at the next Annual General Meeting of the Company (the "AGM") which will be held on 27 September 2018. The Directors intend to seek annual renewal of this authority from the shareholders.

Pursuant to this authority, and subject to the Companies Law and the discretion of the Directors, the Company may purchase Ordinary Shares in the market on an on-going basis with a view to addressing any imbalance between the supply of and demand for Ordinary Shares, thereby increasing the NAV per Ordinary Share and assisting in controlling the discount to NAV per Ordinary Share in relation to the price at which the Ordinary Shares may be trading.

Please refer to note 9 for details of Ordinary Share buybacks during the year ended 31 March 2018.

Environmental and Social Issues

The Company is a closed-ended investment company which has no employees and therefore its own direct environmental impact is minimal. The Board notes that the companies in which the Company invests in will have a social and environmental impact over which it has no control. The Board, the majority of whom are based in Guernsey, have held all their meetings in Guernsey and therefore the Company's greenhouse gas emissions and environmental footprint are negligible.

Gender Metrics

The Board consists of one woman and two men. More information on the Board's consideration of diversity is given in the Corporate Governance Report.

Life of the Company

The Company does not have a fixed life. In accordance with the Articles of Incorporation, a continuation resolution to propose that the Company continues its business as a closed-ended investment company was passed at the AGM on 20 September 2017.

The Directors will convene a general meeting to propose a further continuation resolution annually. The next continuation resolution will be considered at the AGM on 27 September 2018.

If a continuation resolution is not passed, the Directors shall put proposals to shareholders for the reconstruction or reorganisation of the Company.

Future Strategy

While the future performance of the Company is dependent, to a large degree, on the performance of international financial markets which, in turn, are subject to many external factors, the Board's intention is that the Company will continue to pursue its stated investment objective as outlined in the Executive Summary. Further comments on the outlook for the Company for the next twelve months are set out in both the Chairman's Statement and the Investment Manager's Report.

Going Concern

Under the AIC Code of Corporate Governance issued in July 2016 and applicable regulations, the Directors are required to satisfy themselves that it is reasonable to assume that the Company is a going concern from the date of approval of the audited financial statements.

After analysing the following, the Directors believe that it is appropriate to adopt the going concern basis in preparing these audited financial statements:

1. Working capital - As at 31 March 2018, the working capital surplus in the Company was approximately €2.03 million. The Company has the ability to sell bonds in the Subsidiary and/or request repayment of accrued interest. The Subsidiary has a working capital surplus of approximately €1.75 million. The Directors noted that as at 31 March 2018, the Company had no borrowings. As such it has sufficient capital in hand to cover all expenses (which mainly consist of Investment Manager's fees, administration fees and professional fees) and to meet all of its obligations as they fall due.

2. Closed-ended company - The Company has been registered with the GFSC as a registered closed-ended collective investment scheme, as such shareholders have no right to have their Ordinary Shares redeemed, and therefore no cash flows out of the Company in this respect.

3. In accordance with the Articles of Incorporation a continuation resolution was passed at the AGM on 20 September 2017. The next continuation resolution will be considered at the AGM on 27 September 2018 and the Directors' going concern assessment assumes that the continuation vote will be passed. If a continuation resolution is not passed, the Directors shall put proposals to the shareholders for the reconstruction and reorganisation of the Company.

4. Discount Control Mechanism - the Company's Ordinary Shares did not trade at an average discount in excess of 5% of the NAV per share over the Discount Calculation Period ended 31 March 2018 and as a result the Discount Control Mechanism has not been triggered. The Company has repurchased Ordinary Shares in the market for cancellation to assist in controlling the discount in the Ordinary Share price to NAV per Ordinary Share. Although the Board operates an active discount management policy to mitigate any discount to NAV per share, there can be no guarantee that they will do so or that such mechanisms will be successful. Please refer to the Executive Summary for details regarding the Discount Control Mechanism and Redemption Offer and note 9 for details of Ordinary Share buybacks.

Taking into consideration the analysis detailed above, the Company's ability to meet its liabilities as they fall due and reasonably manage any uncertainties as they arise, and after making enquiries of the Company's Investment Manager and Corporate Brokers, the Directors who are also in regular contact with a range of investors, are satisfied that it is appropriate to continue to prepare the financial statements on a going concern basis.

This Strategic Report was approved by the Board of Directors on 3 July 2018 and signed on its behalf by:

Ian Fitzgerald Jonathan Bridel

Chairman Audit Committee Chairman

Investment Manager's Report

Summary

The Sterling NAV per Ordinary Share has again remained relatively stable posting a modest gain for the 12 months to 31 March 2018. The only negative period was Q1 2018, when the secondary bid was weaker following a spike in new primary supply, and some of the bonds in the portfolio trading lower as a result of outflows in the High Yield market.

The dividend has remained stable over the past year. This is still an attractive feature of the investment and we believe should compare well with the sterling yield available from a currency hedged US loan fund.

The share price did fall over this period, resulting in a discount of 5.442% as of the 31 March 2018 year end. We believe the share price will be partly linked to investors' views on the prospects for UK interest rate rises. At present, UK interest rates of 0.5% do not make a significant contribution to floating rate returns, or indeed have a significant negative impact on fixed rate returns in other credit portfolios. But there is increasing speculation that the potential for increased UK inflation will see further rate rises to come over the next year. The most immediate boost to the share price is likely to come from the development of this rate rise scenario.

Defaults have remained low in Europe, with the latest reading at 1.18% for March 20182.

As at 31 March 2018 the NAV was 104.55 pence per Ordinary Share.

Note on Foreign Exchange Hedging in period

The Company maintains its account in EUR and with the outstanding Ordinary Shares in issue solely denominated in GBP the Company actively hedges foreign exchange risk by utilising fx forward contracts. The EUR:GBP exchange rate was more stable in the period than it had been in the prior year, with EUR:GBP showing a modest decline. The Company therefore generated small hedging losses which offset the currency appreciation of the non-GBP assets.

Portfolio

As at 31 March 2018, the portfolio was invested in line with the Company's investment policy and was diversified by obligor and industry with 109 issuers/borrowers across 27 different industry sectors and no individual borrower representing an exposure of more than 5 percent of the portfolio. Against a volatile financial markets backdrop over the past few years, the Company's performance has been strong, outperforming both US and European loan indices.

Portfolio Statistics

The Weighted Average Yield on the portfolio remains healthy at 4.87%. Clearly spreads are lower across most credit markets over the past year, but the relative value in European loans still looks attractive to us versus the US loan market (Q1 2018 new issue spreads were 3.87% for European single B rated loans versus 3.58% for the US) and the High Yield bond market. As a result, we are lightly positioned in both US loans and High Yield at present.

Portfolio Statistics as at 31 March 2018

The tables below highlight key aspects of the portfolio as at 31 March 2018 (based on mid-price).

Performance

Since inception the portfolio has evolved as follows:

· Increased the number of issuers from 47 to 109 improving further diversity within the portfolio.

· Reduced high UK exposure, but still maintain UK as largest geography, to take advantage of the better margins available for Sterling loans.

· Reduced exposure to France, in light of the weaker economic outlook.

· Not significantly increased US exposure, given better total return on non-US Dollar tranches on cross-border deals.

Geographical Region (31 March 2018)

Geographical Region (as at completion of initial investment - 30 April 2012)

Key attractions of Floating Rate Secured Loans and Bonds:

· In Q1 2018 the average new issue spread was Euribor + 3.65% (3.87% for single B loans)3.

· Senior secured, so lower risk of loss in the event of default than unsecured asset classes.

· Low market default rates (1.18%)4.

· Active new issue market with €120.4 billion of leveraged loans issued in 20175 and a liquid secondary market with over €12.1 billion traded in Q4 2017.

· Low secondary market price volatility compared to other asset classes.

· Floating rate income benefiting from an interest rate rise.

Geography Focus - Europe versus the United States

The European Loan market provides price stability and discipline versus the US:

§ Reduced leverage and increased equity commitments

- Leverage multiples are down from their pre-crisis peak and are typically lower in Europe than in the US6

- Average amount of equity has risen from 33% in 2007 to 52% in Q1 2018 in Europe versus 31% to 39% over the same period in the US7

§ More stable supply/demand dynamics in Europe

- Less affected by volatile retail investor capital flows which have impacted US issue spreads

- Strong institutional and retail demand has led to more banks continuing to pull back from lending

§ Availability of private information

- Private nature of European deals allows greater transparency of borrower performance

§  Returns8

§ Diversity

- The US offers greater diversity than the European market, as the market is significantly larger.

§ Yields

- Spreads in the two markets have become closely aligned. Average new issue spreads in Europe are Euribor+365bps over the past quarter, with an average interest rate floor of 18bps. In the US they are Libor+332bps over an average floor of 98bps. Given the higher US rate, the interest rate floors are actually more beneficial to returns in Europe than the US, despite the floors being higher9.

Outlook:

§ Defaults stayed low during the period with S&P's default rate at 1.18% in March 2018, versus 1.73% in March 201710. The Fund has had no impairments from defaults since inception.

§ S&P's Distress Ratio (which measures the percentage of the S&P ELLI trading below 80) had fallen to 0.76% in March 2018, versus 2.50% in March 201711. This is normally a good indicator of future defaults but will also be influenced by secondary loan price improvements from increased investor demand10.

§ Average leverage multiples are at 5.2x, so the increased loan demand has, to date, had more impact on weaker loan documentation (weaker covenants) than it has on aggressive leverage12. Although this is the highest figure since the financial crisis, it remains well below the 2007 figure of 6.1x. As a result we continue to expect low default rates to continue in 2018 and we would anticipate default rates to be 1.5% to 2.0% for the next 12 months13.

§ We would forecast another year of steady returns with income of 3.25% to 3.75% for the CS WELLI and limited scope for meaningful capital gain (but higher for a GBP investor given the currency hedging).

§ Clearly, there remains some scope for volatility with Brexit, more European elections (including Russia and Sweden), Quantitative Easing and Trump all likely to feature in the headlines. Although financial markets were remarkably immune from volatility last year, there is no guarantee that continues, however, we would still expect European loan markets to be far more robust than bonds and equities.

§ Until we do see some meaningful volatility we expect demand for European loans to remain strong. New CLOs, unlevered loan funds and even banks, will all continue to drive demand.

§ The supply/demand dynamic should however remain well balanced as we see a good pipeline of M&A and believe Private Equity firms have been deploying more capital and are open to looking at larger target companies. Whilst we do not see much scope for widening spreads, we would also hope that the refinancing trend is not as aggressive as saw in 2017.

Alcentra Limited

3 July 2018

2S&P Global Leveraged Commentary and Data Global View dated 4 April 2018

3Standard & Poor's Global Leveraged Lending Review Q1 2018.

4Standard & Poor's LCD Global View, 31 March 2018.

5Standard & Poor's LCD European Playbook, 2 January 2018.

6Standard & Poor's LCD Global Leveraged Lending Review Q4 2017, based on EBITDA of Euro/$50 million or more.

7Standard & Poor's LCD Global Leveraged Lending Review Q1 2018.

8Credit Suisse Western European Leveraged Loan Index (hedged to EUR), & Credit Suisse (US) Leveraged Loan Index Excel Data, 31 March 2018.

9Standard & Poor's Index Data, 31 March 2018.

10Standard & Poor's LCD Global View, 31 March 2018.

11Standard & Poor's Index Data, 31 March 2018. 

12Alcentra, 4 January 2018, S&P Market Intelligence, Default Survey: Rates to Stay Low in 2018, but Focus on Docs, 21 December 2017.

13Defaults as a % principal value.

Standard & Poor's LCD Global Leveraged Lending Review Q1 2018, EBITDA of Euro/$50million or more.

Past performance is not indicative of future results

Director's Report

The Directors present the Annual Report and audited financial statements of the Company for the year ended 31 March 2018.

Board of Directors

The Directors of the Company who served during the year and their biographies are detailed below.

Directors' Interests

None of the Directors had a material interest in any contract, which is significant to the Company's business. The Directors held a minor interest in the Company's share capital during the year ended 31 March 2018 as follows:

There have been no changes in the interests of the Directors since the year-end.

Statement of Disclosure of Information to the Auditor

The Directors who held office at the date of approval of this Directors' Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's auditor is unaware and that they have taken the steps that they ought to have taken as Directors to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

Internal Controls and Risk Management

The Risk Committee has established a process for identifying, evaluating and managing any major risks faced by the Company. The process is subject to regular review by the Board and accords with the AIC Code.

The Risk Committee is responsible in ensuring that all risks affecting the Company are identified through a robust assessment and that a policy is implemented to mitigate, monitor and manage these risks which should include:

· Market risk;

· Liquidity risk;

· Counterparty risk;

· Operational risk; and

· Conflicts of interest.

The Board is responsible for the Company's system of internal control and for reviewing its effectiveness. However, such a system is designed to manage rather than eliminate risks of failure to achieve the Company's business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.

The Board receives reports from the Investment Manager on the Company's risk evaluation process and reviews changes to key risks identified. The Board has undertaken a full review of the Company's business risks, which have been analysed and recorded in a risk report, which is reviewed and updated regularly. Each quarter the Board receives a formal report from the Investment Manager which details the steps taken to monitor the areas of risk including those that are not directly the responsibility of the Investment Manager and which reports the details of any known internal control failures. The Administrator provides the Board with an annual report on its internal controls which includes a report from the Administrator's auditor on the control policies and procedures in operation.

The Investment Manager has established an internal control framework to provide reasonable but not absolute assurance on the effectiveness of the internal controls operated on behalf of its clients. The effectiveness of the internal controls is assessed by the Investment Manager's compliance and risk department on an on-going basis. The Investment Manager's controls processes have also been outlined to the Board.

The Management Engagement Committee conducted a review of the Investment Manager, the Administrator and the Custodian during the year ended 31 March 2018 and had concluded that the performance of all had been satisfactory and no internal control issues were noted.

The Board's assessment of the Company's key risks and uncertainties is set out in the Executive Summary.

By means of the procedures set out above, the Board confirms that it has reviewed the effectiveness of the Company's system of internal controls for the year ended 31 March 2018 and to the date of approval of this Annual Report and that no issues have been noted.

Share Capital

The share capital of the Company consists of an unlimited number of shares which the Directors may classify as Ordinary Shares, B Shares, or C Shares of such classes denominated in such currencies as the Directors may determine. Since inception of the Company, no B or C Shares have been issued.

Notifications of Shareholdings

The Company had been notified in accordance with Chapter 5 of the DTR (which covers the acquisition and disposal of major shareholdings and voting rights), of the following shareholders that had an interest of greater than 5% in the Company's issued share capital.

There were no new notifications received between 1 April 2018 and 2 July 2018.

Borrowing Limits

The Company does not and will not utilise leverage to achieve its investment objective, save that it is anticipated that the Company may seek access to a revolving credit facility to allow it to take advantage of opportunities to purchase whole portfolios of assets should these become available. Any such borrowing would be intended to be short term until such time as it could be repaid through the issuance by the Company of new shares and will at all times be subject to a maximum leverage level equal to 20% of the Company's NAV at the time of drawdown of any such borrowing.

There were no borrowings as at 31 March 2018 (31 March 2017: £nil).

Global Greenhouse Gas Emissions

The Company has no greenhouse gas emissions to report from its operations for the year to 31 March 2018, nor does it have responsibility for any other emission-producing sources. 

Independent Auditor

KPMG Channel Islands Limited ("KPMG"), has indicated its willingness to continue in office as auditor and a resolution proposing its re-appointment and to authorise the Directors to determine its remuneration will be proposed at the forthcoming AGM.

Events After the Reporting Date

The Directors are not aware of any developments that might have a significant effect on the operations of the Company in subsequent financial periods that are not already disclosed in this report or the attached audited financial statements. Note 15 details the events after the reporting date.

For and on behalf of the Board

Ian Fitzgerald

Chairman

3 July 2018

Directors' Biographies

Ian Fitzgerald (Non-Executive Chairman, Chairman of the Management Engagement Committee and Chairman of the Risk Committee)

Ian is currently a Director and Chief Executive Officer of Loans Specialist Advisory Services Limited, a company established to provide specialist loan product business services. Ian held senior management positions within Lloyds Bank Capital Markets from 1997 to 2011. From 2004 he was Managing Director and Head of Loan Markets, responsible for the bank's primary and secondary loan market businesses globally, including all corporate, acquisition, leveraged, project, infrastructure and property-related loan finance.

Ian joined Lloyds from Hill Samuel as Head of Loan Syndication and Distribution, upon Lloyds' merger with Hill Samuel TSB Bank plc in 1997. Prior to joining Hill Samuel in 1992, Ian held senior lending and syndicate roles at Chemical Bank, Manufacturers Hanover Limited, Bankers Trust International Limited, and other financial institutions. Ian commenced his banking career with Barclays Bank International in 1975. Ian was chairman of the Loan Market Association (''LMA'') from 2009 to 2011, having been appointed as a non-executive Director of the LMA in 2006.

Jonathan Bridel (Non-Executive Director and Chairman of the Audit Committee)

Jonathan is a Guernsey resident and is currently a non-Executive Director of the Renewables Infrastructure Group Limited (FTSE 250), Starwood European Real Estate Finance Limited, Funding Circle SME Income Fund Limited and Sequoia Economic Infrastructure Income Fund Limited (FTSE 250) which are listed on the Main Market of the London Stock Exchange. Other companies for which Jonathan acts as a Director include DP Aircraft I Limited, Fair Oaks Income Fund Limited and Phaunos Timber Fund Limited which is in the process of asset realisation and wind down. Jonathan was previously Managing Director of Royal Bank of Canada's investment businesses in the Channel Islands and served as a Director on other RBC companies including RBC Regent Fund Managers Limited. Prior to joining RBC, Jonathan served in a number of senior management positions in banking, specialising in credit and corporate finance and private businesses as Chief Financial Officer in London, Australia and Guernsey having previously worked at Price Waterhouse Corporate Finance in London.

Jonathan graduated from the University of Durham with a degree of Master of Business Administration, holds qualifications from the Institute of Chartered Accountants in England and Wales (1987) where he is a Fellow, the Chartered Institute of Marketing and the Australian Institute of Company Directors. Jonathan is a Chartered Marketer and a member of the Chartered Institute of Marketing, a Chartered Director and Fellow of the Institute of Directors, and a Chartered Fellow of the Chartered Institute for Securities and Investment.

Anne Ewing (Non-Executive Senior Independent Director, Chairman of the Remuneration and Nomination Committee)

Anne serves as Chairman of Global Mena Financial Assets Limited, CDC Holdings Limited, Altair Guernsey Limited and is a Non-Executive Director of Kleinwort Hambros Bank (CI) Limited and, Kleinwort Hambros Trust Company (Channel Islands) Limited, Silverfleet Capital (Guernsey) Limited, Silverfleet Capital II (Guernsey) Limited and Clareant Structured Credit Opportunities Fund III. Anne was previously an Executive Director and Licensee of Imperium Trust Company Limited and has held senior positions with Dexion Capital (Guernsey) Limited, Dominion Fund Management Limited, KPMG Channel Islands Limited, Rothschild Bank CI Limited and Asset Management, Old Mutual and Citibank NA.

Anne graduated from Bournemouth University with Masters of Science Degree in Corporate Governance & Administration/Grad ICSA and holds an ACCA Certified Diploma in Accounting & Finance. Anne is a Chartered Fellow of the Chartered Institute of Securities & Investment, a Fellow of the Institute of Chartered Secretaries and Administrators, an Associate Member of the Association of Corporate Treasurers, and past Guernsey Branch Chairman of the Institute of Directors. Anne is a member of the Guernsey Investment Fund Association.

Corporate Governance Report

Introduction

The Board is committed to high standards of corporate governance and has put in place a framework for corporate governance which it believes is appropriate for the Company.

Applicable Corporate Governance Codes

The AIC Code requires listed companies to disclose how they have applied the principles and complied with the provisions of the UK Corporate Governance Code (the "UK Code") as issued by the Financial Reporting Council ("FRC"). It provides specific corporate governance guidelines to investment companies.

The Board considers that reporting against the principles and recommendations of the AIC Code and by reference to the AIC Guide (which incorporates the UK Code), will enable shareholders to make a comprehensive assessment of the Company's governance principles.

The FRC has confirmed that AIC member companies who report against the AIC Code and who follow the AIC Guide will be meeting obligations in relation to the UK Code, paragraph 9.8.6 of the Listing Rules and associated disclosure requirements of the DTR.

Copies of the AIC Code, the AIC Guide and the UK Code can be found on the respective organisations' websites www.theaic.co.uk and www.frc.org.uk.

Corporate Governance Statement

The AIC Code comprises 21 principles and the Directors believe that during the year under review they have complied with all the recommendations of the AIC Code and the relevant provisions of the UK Code insofar as they apply to the Company's business except as set out below:

· the role of the chief executive;

· executive Directors' remuneration; and

· internal audit function.

For the reasons set out in the AIC Guide, and as explained in the UK Code, the Board considers these provisions are not relevant to the position of the Company, being an externally managed investment company. In particular, all of the Company's day-to-day management and administrative functions are outsourced to third parties. As a result, the Company has no executive Directors, employees or internal operations. The Company has therefore not reported further in respect of these provisions.

The Company complies with the corporate governance statement requirements pursuant to the DTR by virtue of the information included in the Corporate Governance section of the Annual Report together with information contained in the Strategic Report and Directors' Report.

The Board, Independence and Composition

The Board consists of three Directors, all of whom are independent of the Investment Manager and demonstrate a breadth of investment, accounting, professional knowledge and experience. Jonathan Bridel and Anne Ewing are resident in Guernsey, Ian Fitzgerald is resident in the UK.

The Board considers that all the Directors have different qualities and areas of expertise on which they may lead where issues arise and to whom concerns can be conveyed. The balance and independence of the Board is kept under review by the Remuneration and Nomination Committee, details of which can be found below.

The Directors consider that there are no factors, as set out in principle 1 or 2 of the AIC Code, which compromise the Chairman's or other Directors' independence and that they all contribute to the affairs of the Company in an adequate manner. The Board reviews the independence of all Directors annually.

Anne Ewing is a Senior Independent Director and acts as chairman if the Chairman is unable to attend a Board meeting.

Anne Ewing is also a director of an investment company which is also managed by the Investment Manager. The Board have discussed Anne Ewing's independence with regard to the AIC's guidance on this matter and concluded that Anne Ewing is independent.

The Board believe that Anne Ewing's relationship with the Investment Manager does not affect her judgement in respect of her duties, however in order to promote the efficient and effective distribution of workloads amongst the Directors, and taking into account the Management Engagement Committee's function to review the performance of the Investment Manager, the Board appointed Ian Fitzgerald chairman of the Management Engagement Committee with effect from 27 June 2017. Anne Ewing remains a member of the Management Engagement Committee.

The Board is actively looking at its composition and succession planning.

Directors' Duties and Responsibilities

The Chairman's responsibilities include the leadership, operation and governance of the Board, ensuring effectiveness, and setting the agenda for the Board.

The Board meets at least four times each year and deals with the important aspects of the Company's affairs, including the setting and monitoring of investment strategy and the review of investment performance. The Investment Manager takes decisions as to the purchase and sale of individual investments, in line with the investment policy and strategy set by the Board. The Investment Manager, together with the Company Secretary, also ensures that all Directors receive all relevant management, regulatory and financial information relating to the Company and its Portfolio of investments in a timely manner. Representatives of the Investment Manager attend each Board meeting, enabling Directors to question any matters of concern or seek clarification on certain issues. Matters specifically reserved for decision by the full Board have been defined and a procedure adopted for Directors in the furtherance of their duties to take independent professional advice at the expense of the Company.

The Company Secretary acts as secretary to the Board and committees and in doing so it:

· assists the Chairman in ensuring that all Directors have full and timely access to all relevant documentation;

· organises induction of new Directors; and

· is responsible for ensuring that the correct Board procedures are followed and advises the Board on corporate governance matters.

Board and Committees

The Board has established four committees: the Audit Committee, the Management Engagement Committee, the Remuneration and Nomination Committee and the Risk Committee. Each committee membership comprises all Directors and operate within clearly defined terms of reference and duties. The terms of reference for each committee are available on the Company's website: www.aefrif.com.

Audit Committee

The Audit Committee is responsible for the provision of effective governance over the appropriateness of the Company's financial reporting including the adequacy of related disclosures, the performance of the external auditor and the management of the Company's systems of internal controls and business risks. Meetings of the Audit Committee are to be held at least three times a year at appropriate times in the reporting and audit cycle and otherwise as required.

The report on the role and activities of the Audit Committee and its relationship with the external auditor is set out in the Audit Committee Report.

Remuneration and Nomination Committee

The Remuneration and Nomination Committee is responsible for ensuring that the Board comprises individuals with the necessary skills, knowledge and experience to ensure that it is effective in discharging its responsibilities and oversight of all matters relating to corporate governance and to review the on-going appropriateness and relevance of the remuneration policy.

Performance Evaluation

The Remuneration and Nomination Committee undertakes an evaluation of the Board on an annual basis. The performance of each Director is considered as part of a formal review by the Remuneration and Nomination Committee. The Directors also meet without the Chairman present in order to review his performance.

The Committee reviewed the performance of the Chairman in his role and agreed that Mr Fitzgerald is very experienced and his performance and leadership are an asset to the Company. The Chairman also reviews each individual Director's contribution.

As a result of the recommendations made in this year's Board performance evaluation, the Board has agreed:

· that all Directors are considered independent; and

· all Directors should be proposed for reappointment at the 2018 AGM.

The Remuneration and Nomination Committee considers that while the Board is small in number, it is very well balanced, works well together and has diversity through thought, experience, skills, qualifications, gender and age.

It is intended that the Board shall, at least once every three years, engage a third-party to perform an external review of the Board's performance. An external evaluation of the Board was undertaken by Optimus Group Limited ("Optimus") during the year ended 31 March 2016 (the "External Board Evaluation Report"). The next external review will be undertaken in 2019. An internal review was undertaken during the year ended 31 March 2018. There were no significant findings noted.

Management Engagement Committee

The Management Engagement Committee is responsible for reviewing the performance of all service providers (including the Investment Manager).

The Board reviews the performance of the Company's third-party service providers together with their anti-bribery and corruption policies to ensure that they comply with the Bribery Act 2010 and the Prevention of Corruption (Bailiwick of Guernsey) Law 2003, and ensure their continued competitiveness and effectiveness.

As part of the Board's ongoing evaluation of third party service providers, it considers and reviews on a periodic basis contractual arrangements with the major service providers of the Company. A review of the major service providers was conducted on 1 February 2018 and the Committee concluded the performance of all the providers had been satisfactory.

During the year, the registrar Link Market Services (Guernsey) Limited (formerly Capita Registrars (Guernsey) Limited) was replaced by Computershare Investor Services (Guernsey) Limited.

The Committee also performs periodic reviews of the Investment Manager's procedures for undertaking investment decisions to ensure decisions are consistent with the approved investment policy and strategies of the Company.

The Directors have adopted a procedure whereby they are required to report any potential acts of bribery and corruption in respect of the Company to the Company's Compliance Officer.

Risk Committee

The main roles of the Risk Committee are identifying and assessing the key risks and uncertainties facing the Company, recording and monitoring the position of such risks on a periodic basis and assessing any mitigating factors of such risks and the controls implemented by the Risk Committee to mitigate such risks. This analysis is performed as part of the Business Risk Assessment.

The key risks and uncertainties facing the Company that the Board have identified are detailed in the Executive Summary.

The Risk Committee is also responsible for the oversight of the operational activity including working capital, corporate governance of the Company and monitoring the regulatory requirements applicable to the Company under the Alternative Investment Fund Manager Directive ("AIFMD"). The Committee will also examine the valuation of the Company investments periodically throughout the year.

Attendance at scheduled meetings of the Board and its committees for the year ended 31 March 2018

The Committees report to the Board as part of a separate agenda item, on the activity of the Committee and matters of particular relevance to the Board in the conduct of their work.

1 Ian Fitzgerald is resident in the UK and prevented by the Company's Articles of Incorporation from attending Board meetings from the UK. He attends all quarterly Board meetings, but it is not deemed cost-effective for the Company for him to travel to Guernsey for the regular meetings to approve dividends to be declared in line with the Company's dividend policy.

In addition to the four quarterly Board meetings, an additional full Board meeting and seven ad-hoc Board meetings were held during the year for various matters.

Directors unable to attend a Board meeting are provided with the board papers and can discuss issues arising in the meeting with the Chairman or another Director.

Directors' Appointment, Retirement and Rotation

The Articles of Incorporation require that all Directors submit themselves for election by shareholders at the first opportunity following their appointment and shall not remain in office longer than three years since their last election or re-election without submitting themselves for re-election. The AIC guide states that all non-executive Directors should be submitted for re-election by shareholders at regular intervals and that nomination for re-election should not be assumed but be based on disclosed procedures and continued satisfactory performance. 

All Directors will stand for re-election at the AGM on 27 September 2018 and annually thereafter.

No Director has a service contract with the Company. Directors have agreed letters of appointment with the Company, copies of which are available for review by shareholders at the Registered Office and will be available at the AGM. Any Director may resign in writing to the Board at any time by providing the required notice.

Tenure of Non-Executive Directors

The Board has adopted a policy on tenure that is considered appropriate for an investment company. The Board considers that length of service does not, by itself, lead to a closer relationship with the Investment Manager or necessarily affects a Directors' independence.

The Board's tenure policy seeks to ensure that the Board is well balanced and will be refreshed from time to time by the appointment of new Directors with the skills and experience necessary to replace those lost by Directors' retirements or to complement those of the existing Directors. The achievement of a sensible balance is the most important objective for the Board. Directors must be able to demonstrate their commitment to the Company. The Board seeks to encompass relevant past and current experience of various areas relevant to the Company's business. The Board will further consider succession planning and the possibility of appointing an additional Director to aid succession planning as the Company grows.

Conflict of Interests

The Directors have a duty to avoid situations where they have, or could have, a direct or indirect interest that conflicts, or possibly could conflict, with the Company's interests. Directors are required to disclose all actual and potential conflicts of interest to the Chairman in advance of any proposed external appointment. Only Directors who have no material interest in the matter being considered will be able to participate in the Board approval process. In deciding whether to approve an individual Director's participation, the other Directors will act in a way they consider to be in good faith in assessing the materiality of the conflict in accordance with the Company's Articles of Incorporation.

The Board believes that its powers of authorisation of conflicts of interest have operated effectively. The Board also confirms that its procedure for the approval of conflicts of interest has been followed by the Directors.

Board Diversity

The Board supports the recommendations of the Davies Report and believes in and values the importance of diversity, including gender, to the effective functioning of the Board.

However, the Board does not consider it appropriate or in the interest of the Company and its shareholders to set prescriptive targets for gender or nationality on the Board. Any future appointments would be primarily based on merit of skills, experience and knowledge.

Induction/Information and Professional Development

Directors are provided, on a regular basis, with key information on the Company's policies, regulatory requirements and its internal controls. Regulatory and legislative changes affecting Directors' responsibilities are advised to the Board as they arise along with changes to best practice from, amongst others, the Company Secretary and the auditor. Advisers to the Company also prepare reports for the Board from time to time on relevant topics and issues. In addition, Directors attend relevant seminars and events to allow them to continually refresh their skills and knowledge and monitor changes within the investment industry. The Chairman reviewed the training and development needs of each Director during the annual Board evaluation process. The Chairman confirmed that all Directors actively kept up to date with industry developments and issues. Seminars and events attended include those provided by the AIC.

When a new Director is appointed to the Board, they will be provided with all relevant information regarding the Company and their duties and responsibilities as a Director. In addition, a new Director will also spend time with representatives of the Investment Manager in order to learn more about their processes and procedures.

Director's Remuneration and Annual Evaluation of the Board and that of its Audit Committee and Individual Directors

The Remuneration and Nomination Committee periodically reviews the fees paid to the Directors and compares these with the fees paid by listed companies generally.

An evaluation of the Board is undertaken annually and considers the balance of skills, experience, independence and knowledge, its diversity, how the Board works together as a unit, and other factors relevant to its effectiveness.

It is intended that the Board shall, at least once every three years, engage a third-party to perform an external review of the Board's performance, constitution and terms of reference to ensure that it is operating effectively and to recommend any changes it considers necessary. Refer above for a summary of the internal review performed during the year.

There was no change to the Director's remuneration during the year ended 31 March 2018. Details of the remuneration arrangements for the Board can be found in the Directors' Remuneration Report.

Independent Advice

The Board recognises that there may be occasions when one or more of the Directors feels it is necessary to take independent legal advice at the Company's expense. A procedure has been adopted to enable them to do so, which is managed by the Company Secretary.

Indemnities

To the extent permitted by the Companies Law, the Company's Articles of Incorporation provide an indemnity for the Directors against any liability except such (if any) as they shall incur by or through their own breach of trust, breach of duty or negligence.

During the year, the Company has maintained insurance cover for its Directors and Officers under a Directors' and Officers' liability insurance policy.

Relationship with the Investment Manager and the Administrator

The Board has delegated various duties to external parties including the management of the investment portfolio, the custodial services (including the safeguarding of assets), the registration services and the day-to-day company secretarial, administration and accounting services. Each of these contracts was entered into after full and proper consideration by the Board of the quality and cost of services offered, including the control systems in operation in so far as they relate to the affairs of the Company.

The Board receives and considers reports regularly from the Investment Manager and ad hoc reports and information are supplied to the Board as required. The Investment Manager takes decisions as to the purchase and sale of individual investments. The Investment Manager complies with the risk limits as determined by the Board and has systems in place, including stress testing, to monitor the liquidity risk of the Company. The Investment Manager and Administrator also ensure that all Directors receive, in a timely manner, all relevant management, regulatory and financial information. Representatives of the Investment Manager and Administrator attend each Board meeting enabling the Directors to probe further on matters of concern.

A formal schedule of matters specifically reserved for decision by the full Board has been defined and a procedure adopted for Directors, in the furtherance of their duties, to take independent professional advice at the expense of the Company within certain parameters. The Directors have access to the Company Secretary who is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. The Board, the Investment Manager and the Administrator operate in a supportive, co-operative and open environment.

Continued Appointment of the Investment Manager

The Board reviews investment performance at each Board meeting and a formal review of all service providers is conducted annually by the Management Engagement Committee. As a result of the review it is the opinion of the Directors that the continued appointment of the current Investment Manager on the terms agreed is in the interest of the Company's shareholders as a whole.

The Investment Manager has extensive investment management resources and wide experience in managing investment companies.

Shareholder Engagement

The Board believes that the maintenance of good relations with shareholders is important for the long-term prospects of the Company. It has, since admission, offered to engage with investors and liaises closely with the Company's corporate broker in this respect. During the year the Chairman has met with a range of investors. The Chairman and other Directors are available for discussion about governance and strategy with shareholders and the Chairman ensures communication of shareholders' views to the Board. The Board receives feedback on the views of shareholders from its corporate broker and the Investment Manager, and shareholders are welcome to contact the Directors at any time via the Company Secretary.

The Board believes that the AGM provides an appropriate forum for investors to communicate with the Board, and encourages participation. The AGM is attended by the Directors. There is an opportunity for individual shareholders to question the Chairman, the Audit Committee, the Management Engagement Committee, Risk Committee and the Remuneration and Nomination Committee at the AGM. Details of proxy votes received in respect of each resolution will be made available to shareholders at the meeting and will be posted on the Company's website following the meeting.

The Annual and Interim Reports and a monthly fact sheet are available to provide shareholders with a clear understanding of the Company's activities and its results. This information is supplemented by the daily calculation and publication on the LSE of the NAV of the Company's Shares. All documents issued by the Company can be viewed on the website: www.aefrif.com.

2018 AGM

The 2018 AGM will be held in Guernsey on 27 September 2018 at 10:00 BST. The notice for the AGM sets out the ordinary and special resolutions to be proposed at the meeting. Separate resolutions are proposed for each substantive issue.

It is the intention of the Board that the Notice of AGM be issued to shareholders so as to provide at least twenty working days' notice of the meeting. Shareholders wishing to lodge questions in advance of the meeting and specifically related to the resolutions proposed are invited to do so by writing to the Company Secretary at the address below. At other times the Company Secretary responds to letters from shareholders on a range of issues.

Voting on all resolutions at the AGM is by poll. The proxy votes cast, including details of votes withheld, are disclosed to those in attendance at the meeting and the results are published on our website and announced via the RNS.

AIFMD 

AIFMD seeks to regulate alternative investment fund managers ("AIFM") and imposes obligations on managers who manage alternative investment funds ("AIF") in the EU or who market shares in such funds to EU investors. The Company is categorised as a self-managed Non EEA AIF for the purposes of the AIFM Directive. In order to maintain compliance with the AIFM Directive, the Company needs to comply with various organisational, operational and transparency obligations.

The Company has registered with the UK FCA, under the relevant national private placement regime.

This Corporate Governance Report was approved by the Board of Directors on 3 July 2018 and signed on its behalf by:

Ian Fitzgerald Jonathan Bridel

Chairman Audit Committee Chairman

Audit Committee Report

The Audit Committee comprises all of the Directors. All of the Audit Committee's members have recent and relevant financial experience. The Chairman of the Audit Committee, Jonathan Bridel, is a Fellow of the Institute of Chartered Accountants in England and Wales and in addition serves as chairman of the audit committee for some other listed investment companies. Previously Jonathan worked in senior positions in investment, corporate finance and credit and was Chief Financial Officer of two private multinational businesses. The Board is satisfied that Jonathan has recent and relevant financial experience, as required under the UK Corporate Governance Code. The qualifications of the members of the Audit Committee are outlined in Director's Biographies and can be found above.

Role of the Audit Committee

The main roles and responsibilities of the Audit Committee are the provision of effective governance over the appropriateness of the Company's financial reporting including the adequacy of related disclosures, the performance of the external auditor and the management of the Company's systems of internal controls and business risks.

The Audit Committee's main functions are:

· reviewing the Company's financial results announcements and audited financial statements and monitoring compliance with relevant statutory and listing requirements;

· reporting to the Board on the appropriateness of the Company's accounting policies and practices including critical accounting policies and practices;

· advising the Board on whether the Committee believes the Annual Report and financial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy;

· agreeing with the auditor the external audit plan including discussions on the key risk areas within the audited financial statements;

· overseeing the relationship with and appointment of the external auditor;

· considering the financial and other implications on the independence of the auditor arising from any non-audit services to be provided by the auditor;

· considering the appropriateness of appointing the auditor for non-audit services;

· scrutiny of the investment valuations, and

· compiling a report on its activities to be included in the Company's Annual Report.

Internal Controls

The Audit Committee is responsible for reviewing the effectiveness and internal control policies and procedures over financial reporting and identification, assessment and reporting of risk. The Directors have reviewed the BNP Paribas Securities Services ISAE 3402 Report for the period from 1 October 2016 to 30 September 2017 (on the description of controls placed in operation, their design and operating effectiveness) on Fund Administration and Middle Office Outsourcing, and are pleased to note that no significant issues were identified.

In accordance with the FRC's Internal Control: Guidance to Directors, and the FRC's Guidance on Audit Committees, the Board confirms that there is an on-going process for identifying, evaluating and managing the significant internal control risks faced by the Company.

As the Company does not have any employees it does not have a "whistleblowing" policy in place, however the Board has reviewed the whistleblowing procedures of the Investment Manager with and have noted no issues. The Company delegates its main administrative functions to third-party providers who report on their policies and procedures to the Board. Key service providers have the option to contact the Audit Chairman directly if they have any issues.

The Board believes that as the Company delegates its day-to-day administrative operations to third-parties (which are monitored by the Board), it does not require an internal audit function.

Committee Meetings

The Committee meets formally at least three times a year. Only members of the Audit Committee have the right to attend Audit Committee meetings. However, other Directors and representatives of the Investment Manager and Administrator will be invited to attend Audit Committee meetings on a regular basis and other non-members may be invited to attend all or part of the meeting as and when appropriate and necessary. The Company's external auditor, KPMG is also invited to each meeting.

In the year ended 31 March 2018, the Audit Committee met on five occasions and the members' attendance record can be found above.

Significant Risks in Relation to the Audited Financial Statements

In relation to the Annual Report and audited financial statements for the year ended 31 March 2018, the Audit Committee views the valuation of Company's investments as a significant risk.

The Company's investment is the Profit Participating Bonds held in the Subsidiary, which are designated as fair value through profit or loss. The fair value of the Profit Participating Bonds are based on the NAV of the Subsidiary, which has been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS") and applicable law.

The Audit Committee confirms that the Risk Committee continues to examine the valuation of the Company's investment and the underlying investments held in the Subsidiary periodically throughout the year. Additionally, as in prior years, the Audit Committee as part of its annual audit procedures visited the Investment Manager to discuss and review the valuation methodology of the Subsidiary's investments, internal controls and operations used by the Investment Manager. This meeting allowed the Audit Committee to gain assurances as to the appropriateness and robustness of the valuation methodology applied by the Investment Manager. The Audit Committee Chairman also visited and reviewed the administration and custody operations of BNP in Luxembourg during the year and the Management Engagement Committee Chairman reviewed operations in Jersey.

The Committee regularly reviews the valuations prepared by the Investment Manager for the Subsidiary's investments where readily available market prices are not available. The valuations of these investments are scrutinised and compared against valuations of investments with similar characteristics and are also subject to a sensitivity analysis based on changes in key assumptions. As at 31 March 2018, these represented 1.93% of total investments.

In addition to the above the Committee reviewed the quarterly pricing committee minutes and also considered KPMG's approach to its audit of the valuation in respect of the Company's investment and the Subsidiary's investments. The Committee discussed in depth with KPMG its approach to testing the appropriateness and robustness of the valuation methodology applied by the Investment Manager to the Subsidiary's investments. The members of the Committee had meetings with KPMG, where the audit findings were reported. KPMG did not report any significant differences between the valuations used by the Subsidiary and the work performed during their testing process.

Based on the above review and analysis, the Committee confirmed that they were satisfied with the valuation of the Subsidiary's investments and subsequently the Company's investment designated as fair value through profit or loss.

External Audit Process

The effectiveness of the external audit process is dependent on appropriate audit risk identification at the start of the audit cycle. The Committee received a detailed audit plan from KPMG, identifying their assessment of these key risks. For the year ended 31 March 2018, the primary risk identified was in relation to valuation of investments. The risk is tracked through the year and the Committee challenged the work done by KPMG to test management's assumptions and estimates around this area.

The Committee assessed the effectiveness of the audit process addressing these matters through the reporting received for both the interim and year-end financial statements. The Committee sought feedback from the Investment Manager and the Administrator on the effectiveness of the audit process.

Appointment and Independence

The Committee considers the reappointment of KPMG, including the rotation of the Audit Engagement Partner, and assesses its independence on an annual basis. KPMG is required under Ethical Standards to rotate the Audit Engagement Partner responsible for the Company audit every five years. The current Audit Engagement Partner, Dermot Dempsey, has overseen the audit of the Company for four audit cycles commencing in March 2015. KPMG has been the Company's auditor since the Company's listing in 2012.

The Committee reviews the objectivity and effectiveness of the audit process on an annual basis and considers the audit tendering provisions of the revised UK Code in determining whether the Company should put the audit engagement out to tender. The Company will put the audit services contract out to tender in 2019, or earlier if in the best interests of the Company. Having considered the quality and level of service currently being provided by KPMG, the Committee believes that it is in the best interests of the shareholders to retain its services and has therefore provided the Board with its recommendation to the shareholders on the reappointment of KPMG as external auditor for the year ending 31 March 2019.

Accordingly, a resolution proposing the reappointment of KPMG as the Company's auditor will be put to the shareholders at the AGM. There are no contractual obligations restricting the Committee's choice of external auditor.

Non Audit Services

To safeguard the objectivity and independence of the external auditor from becoming compromised, the Committee has a formal policy governing the engagement of the external auditor to provide non-audit services. No material changes have been made to this policy during the year. KPMG will only be appointed to provide non audit services if it is in the best interests of the Company. KPMG and the Directors have agreed that all non-audit services require the pre-approval of the Audit Committee prior to commencing any work. Fees for non-audit services are tabled annually so that the Audit Committee can consider the impact on auditor objectivity.

KPMG were remunerated as follows from 1 April 2017 to the date of approval of the audited financial statements:

During the year ended 31 March 2018, the only non-audit services provided by KPMG was the interim review, therefore the ratio of non-audit related services to audit-related and audit services for the year is 25%.

Committee Evaluation

The Committee's activities formed part of the Board evaluation performed in the year. Details of this process can be found under "Performance Evaluation".

Jonathan Bridel

Audit Committee Chairman

3 July 2018

Directors' Remuneration Report

Annual Remuneration Statement

This report meets the relevant rules of the Listing Rules and the AIC Code describes how the Board has applied the principles relating to Directors' remuneration. An ordinary resolution to ratify this report will be proposed at the AGM on 27 September 2018.

Changes to the Board

There were no changes to the Board during the year. All Directors will retire and stand for re-election annually.

Remuneration Summary

The Directors of the Company are remunerated per annum as follows:

· Chairman, Chairman of the Management Engagement Committee and Chairman of the Risk Committee - £50,000.

· Chairman of the Audit Committee - £42,000.

· Chairman of the Remuneration and Nomination Committee - £40,000.

The Company's policy is that Directors may receive a fee of £5,000 each for a C-share issue or similar placement programme.

The remuneration for the Chairman, Chairman of the Management Engagement Committee and Chairman of the Risk Committee will increase to £52,500 per annum from 1 April 2018.

Remuneration Policy

The determination of the Directors' fees is a matter dealt with by the Remuneration and Nomination Committee and the Board. The Committee considers the remuneration policy annually to ensure that it remains appropriately positioned. Directors will review the fees paid to the boards of directors of similar investment companies. No Director is to be involved in decisions relating to his or her own remuneration.

The Company's policy is for the Directors to be remunerated in the form of fees, payable quarterly in arrears. No Director has any entitlement to a pension, and the Company has not awarded any share options or long-term performance incentives to any of the Directors. No element of the Directors' remuneration is performance related.

Directors are authorised to claim reasonable expenses from the Company in relation to the performance of their duties.

The Company's policy is that the fees payable to the Directors should reflect the time spent by the Board on the Company's affairs and the responsibilities borne by the Directors and should be sufficient to enable high calibre candidates to be recruited. The policy is for the Chairman of the Board and Chairman of the Audit Committee to be paid a higher fee than the other Directors in recognition of their more onerous roles and more time spent. The Board may amend the level of remuneration paid within the limits of the Company's Articles of Incorporation.

Policy Table

Service Contracts and Policy on Payment of Loss of Office

Any Director may resign in writing with six months' notice to the Board at any time. Directors' appointments are reviewed during the annual board evaluation.

No Director has a service contract with the Company. Directors have agreed letters of appointment with the Company.

All Directors will stand for re-election annually and will be put forward for re-election by shareholders at the AGM on 27 September 2018. The names and biographies of the Directors holding office at the date of this report are listed above.

Directors' Letters of Appointment

Copies of the Director's letters of appointment are available for inspection by shareholders at the Company's registered office, and are available at the AGM. The dates of their letter of appointments are shown below:

Directors' Interests

The Company has not set any requirements or guidelines for Directors to own shares in the Company. Refer above for details on Directors' shareholdings in the Company.

Annual Report on Remuneration

The Company paid the following fees to the Directors for the year ended 31 March 2018.

No other remuneration or compensation was paid or is payable by the Company during the year to any of the Directors and there were no travel expenses.

Anne Ewing

On behalf of the Remuneration and Nomination Committee

3 July 2018

1 The Directors were not paid any other fees during the year.

Directors' Responsibilities Statement

The Directors are responsible for preparing the Annual Report and financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they are required to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and applicable law.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period.

In preparing these financial statements, the Directors are required to:

· select suitable accounting policies and then apply them consistently;

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

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

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

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

The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies (Guernsey) Law, 2008. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website, and for the preparation and dissemination of the financial statements. Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement of the directors in respect of the Annual Report and financial statements

We confirm that to the best of our knowledge:

· the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and 

· the Directors' Report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face. 

We consider the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

By order of the Board

Ian Fitzgerald Jonathan Bridel

Chairman Audit Committee Chairman

3 July 2018 3 July 2018

Independent Auditor's Report to the Members of Alcentra European Floating Rate Income Fund Limited

Our opinion is unmodified

We have audited the financial statements (the "Financial Statements") of Alcentra European Floating Rate Income Fund Limited (the "Company"), which comprise the Statement of Financial Position as at 31 March 2018, the Statements of Comprehensive Income, Changes in Shareholders' Equity and Cash Flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information.

In our opinion, the accompanying Financial Statements:

· give a true and fair view of the financial position of the Company as at 31 March 2018, and of the Company's financial performance and the Company's cash flows for the year then ended;

· are prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the EU; and

· comply with the Companies (Guernsey) Law, 2008.

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (UK) ("ISAs (UK)") and applicable law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the Company in accordance with, UK ethical requirements including FRC Ethical Standards as applied to listed entities. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion.

Key Audit Matters: our assessment of the risks of material misstatement

Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the Financial Statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the Financial Statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In arriving at our audit opinion above, the key audit matter was as follows (unchanged from 2017):

Valuation of investment at fair value through profit or loss

€186,463,716 (2017: €203,860,076)

Refer the Audit Committee Report, note 3.3 accounting policy and note 7 disclosures.

Our application of materiality and an overview of the scope of our audit

Materiality for the Financial Statements as a whole was set at €5.6m, determined with reference to a benchmark of Net Assets of €188m, of which it represents approximately 3% (2017: 3%).

We reported to the Audit Committee any corrected or uncorrected identified misstatements exceeding €0.3m, in addition to other identified misstatements that warranted reporting on qualitative grounds.

Our audit of the Company was undertaken to the materiality level specified above, which has informed our identification of significant risks of material misstatement and the associated audit procedures performed in those areas as detailed above.

We have nothing to report on going concern

We are required to report to you if we have anything material to add or draw attention to in relation to the Directors' statement in note 2 to the Financial Statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Company's use of that basis for a period of at least twelve months from the date of approval of the Financial Statements. We have nothing to report in this respect.

We have nothing to report on the other Information in the Annual Report

The Directors are responsible for the other information presented in the Annual Report together with the Financial Statements. Our opinion on the Financial Statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon.

Our responsibility is to read the other information and, in doing so, consider whether, based on our Financial Statements audit work, the information therein is materially misstated or inconsistent with the Financial Statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information.

Disclosures of principal risks and longer-term viability

Based on the knowledge we acquired during our Financial Statements audit, we have nothing material to add or draw attention to in relation to:

· the Directors' confirmation within the Viability Statement that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity;

· the Principal Risks disclosures describing these risks and explaining how they are being managed or mitigated;

· the Directors' explanation in the Viability Statement as to how they have assessed the prospects of the Company, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions; 

Corporate governance disclosures

We are required to report to you if:

· we have identified material inconsistencies between the knowledge we acquired during our Financial Statements audit and the Directors' statement that they consider that the Annual Report and Financial Statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy; or

· the section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.

We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the eleven provisions of the 2016 UK Corporate Governance Code specified by the Listing Rules for our review.

We have nothing to report to you in these respects.

We have nothing to report on other matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies (Guernsey) Law, 2008 requires us to report to you if, in our opinion:

· the Company has not kept proper accounting records; or

· the Financial Statements are not in agreement with the accounting records; or

· we have not received all the information and explanations, which to the best of our knowledge and belief are necessary for the purpose of our audit.

Respective responsibilities

Directors' responsibilities

As explained more fully in their statement, the Directors are responsible for: the preparation of the Financial Statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of Financial Statements that are free from material misstatement, whether due to fraud or error; assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities

Our objectives are to obtain reasonable assurance about whether the Financial Statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor's report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Statements.

A fuller description of our responsibilities is provided on the FRC's website at www.frc.org.uk/auditorsresponsibilities.

The purpose of this report and restrictions on its use by persons other than the Company's members as a body

This report is made solely to the Company's members, as a body, in accordance with section 262 of the Companies (Guernsey) Law, 2008 and, in respect of any further matters on which we have agreed to report, on terms we have agreed with the Company. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members, as a body, for our audit work, for this report, or for the opinions we have formed.

Dermot Dempsey

For and on behalf of KPMG Channel Islands Limited

Chartered Accountants and Recognised Auditors

Glategny Court, Glategny Esplanade,

St Peter Port, Guernsey

GY1 1WR

3 July 2018

Statement of Comprehensive Income

For the year ended 31 March 2018

All results are derived from continuing operations.

The accompanying notes form an integral part of these audited financial statements.

Statement of Financial Position

As at 31 March 2018

These audited financial statements were approved and authorised for issue by the Board of Directors on 3 July 2018, and signed on its behalf by:

The accompanying notes form an integral part of these audited financial statements.

Statement of Changes in Shareholders' Equity

For the year ended 31 March 2018

For the year ended 31 March 2017

The accompanying notes form an integral part of these audited financial statements.

Statement of Cash Flows

For the year ended 31 March 2018

The accompanying notes form an integral part of these audited financial statements.

Notes to the Audited Financial Statements

For the year ended 31 March 2018

1. General Information

The Company is a non-cellular company limited by shares and was registered in Guernsey under the Companies (Guernsey) Law, 2008 (as amended) (the "Companies Law") on 3 November 2011 with registered number 54200 as a closed-ended investment company. The Company's Ordinary Shares are listed on the FCA's Official List and on the main market of the London Stock Exchange.

The registered office and principal place of business of the Company is BNP Paribas House, St Julian's Avenue, St Peter Port, Guernsey, GY1 1WA.

The Company controls its subsidiary, Alcentra European Floating Rate Income S.A. (the "Subsidiary"), through a holding of 100% (31 March 2017: 100%) of its shares. The Subsidiary is domiciled in Luxembourg and has no subsidiaries. No financial or other support was provided without a contractual obligation to do so during the reporting period. As at 31 March 2018, there were no significant restrictions on the ability of the Subsidiary to transfer funds to the Company in the form of redemption of the shares held by the Company.

The Company's investment objective is to provide its shareholders with regular quarterly dividends and the opportunity for capital growth by utilising the skills of the Investment Manager in selecting suitable investments. To pursue its investment objective, the Company uses net issue proceeds to invest into Profit Participating Bonds issued by the Subsidiary. The Subsidiary then uses these proceeds to invest in floating rate, secured loans or high-yield bonds issued by European or US corporate entities predominantly rated below investment grade or deemed by the Investment Manager to be of corresponding credit quality.

The Company expects at least 80% of the Subsidiary's investments to be debt obligations of corporate entities domiciled or with significant operations in Western Europe (including the UK). Investments are expected to be denominated in Euros, Sterling or US Dollars.

Alcentra Limited has been appointed by the Company as the investment manager (the "Investment Manager") and the administration of the Company is delegated to BNP Paribas Securities Services S.C.A., Guernsey Branch (the "Administrator").

2. Going Concern

Going concern refers to the assumption that the Company has the resources to continue in operation for the foreseeable future being twelve months from the date of approval of the financial statements. The Directors believe that it is appropriate to adopt the going concern basis in preparing these audited financial statements based on the following assessment:

1. Working capital - As at 31 March 2018, the working capital surplus in the Company was approximately €2.03 million. The Company has the ability to sell bonds in the Subsidiary and/or request repayment of accrued interest. The Subsidiary has a working capital surplus of approximately €1.75 million.

2. Closed-ended company - The Company has been registered with the GFSC as a registered closed-ended collective investment scheme. As such shareholders have no right to have their Ordinary Shares redeemed, and therefore no cash flows out of the Company in this respect.

3. In accordance with the Articles of Incorporation, a continuation resolution was passed at the AGM on 20 September 2017. The next continuation resolution will be considered at the AGM on 27 September 2018. If the continuation resolution is not passed, the Directors shall put proposals to the shareholders for the reconstruction or reorganisation of the Company. The Board have a reasonable expectation that the continuation resolution will be passed.

4. Discount Control Mechanism - the Company's Ordinary Shares did not trade at an average discount in excess of 5% of the Net Asset Value ("NAV") per share over the Discount Calculation Period ended 31 March 2018 and as a result the Discount Control Mechanism has not been triggered. The Company has repurchased Ordinary Shares in the market for cancellation to assist in controlling the discount in the Ordinary Share price to NAV per Ordinary Share. Although the Board operates an active discount management policy to mitigate any discount to NAV per Ordinary Share, there can be no guarantee that they will do so or that such mechanisms will be successful. Please refer to the Executive Summary for details regarding the Discount Control Mechanism and Redemption Offer and note 9 for details of Ordinary Share buybacks.

Taking into consideration the analysis detailed above, the Company's ability to meet its liabilities as they fall due and reasonably manage any uncertainties as they arise, and after making enquiries of the Company's Investment Manager and Corporate Brokers, the Directors who are also in regular contact with a range of investors, are satisfied that it is appropriate to continue to prepare the financial statements on a going concern basis.

3. Accounting Policies

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied throughout the year presented.

3.1. Basis of Preparation

(a) Statement of Compliance

The audited financial statements for the year ended 31 March 2018 have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS"). They give a true and fair view of the Company's affairs and comply with the Companies Law.

The Directors have determined that the Company continues to meet the investment entity criteria. Therefore, in accordance with the investment entity exemption within IFRS 10 - Consolidated Financial Statements, the Company has prepared individual audited financial statements and measures its investment in the Subsidiary at fair value.

As detailed in note 2, the financial statements have been prepared on a going concern basis. The Directors are satisfied that, at the time of approving the audited financial statements, it is appropriate to adopt the going concern basis.

(b) Basis of Measurement

These audited financial statements have been prepared on a historical cost basis adjusted to take account of the revaluation of the investment and derivatives at fair value through profit or loss.

(c) Critical Accounting Judgements and Key Sources of Estimation Uncertainty

The preparation of the audited financial statements in accordance 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. 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. Actual results may differ from these estimates.

(c) Critical Accounting Judgements and Key Sources of Estimation Uncertainty (continued)

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.

Information about critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the audited financial statements are set out in the paragraph below, Functional and Presentation Currency, and in note 3.3.

Information about significant areas of estimation uncertainty that have the most significant effect on the amounts recognised in the audited financial statements are set out in note 7.

Functional and Presentation Currency

The Company's functional and presentation currency is Euro, which is the currency of the primary economic environment in which it operates. The Company's performance is evaluated and its liquidity is managed in Euro. Euro is therefore considered as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions.

(d) New Standards, Amendments and Interpretations

Standards, amendments and interpretations to existing standards that become effective in future accounting periods and have not been adopted by the Company are as follows:

IFRS 9 addresses the classification, measurement and recognition of financial assets and financial liabilities and requires financial assets to be classified into two categories: those measured at fair value and those measured at amortised cost. The determination is made on 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 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 in profit or loss.

The Board has undertaken an assessment of the impact of IFRS 9 on the Company's financial statements and concluded that there will be no material impact to the recognition and measurement of the Company's financial assets, the investment in the Subsidiary will continue to be measured at fair value through profit or loss and the derivative assets will be measured at fair value through profit or loss and not held for trading.

IFRS 15 will supersede IAS 11 - Construction Contracts and establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers.

The Board has undertaken an assessment of the impact of IFRS 15 on the Company's financial statements and concluded that there will be no impact on the Company financial statements.

3.2. Foreign Currency Translation

Transactions in currencies other than the functional currency are recorded using the exchange rate prevailing at the transaction date. Foreign exchange gains and losses resulting from the settlement of such transactions, and those from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss in the Statement of Comprehensive Income.

3.3. Investments at Fair Value Through Profit or Loss

(a) Recognition and Initial Measurement

Financial assets and liabilities at fair value through profit or loss are initially measured at fair value and recognised on the trade date at which the Company becomes a party to the contractual provisions of the instrument. Other financial assets and liabilities are recognised on the date they originated.

(b) Classification

The Company measures its investment in the Subsidiary as a financial asset at fair value through profit or loss. The underlying investments of the Subsidiary are purchased principally for capital growth and income generation and the Subsidiary's portfolio is managed, and performance evaluated, on a fair value basis in accordance with the Company's documented investment strategy.

Forward foreign exchange contracts entered into by the Company are designated as held for trading and classified as fair value through profit or loss.

The carrying amount of certain financial instruments in the Company, including cash and cash equivalents approximates fair value.

(c) Derecognition

Derecognition of financial assets occur when the rights to receive cash flows from financial instruments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred.

On derecognition of a financial asset, the difference between the weighted average carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised), and consideration received (including any new asset obtained less any liability assumed), is recognised in profit or loss.

The Company derecognises a financial liability when its contractual obligations are discharged, cancelled or expired.

(d) Measurement and Valuation

Investments at fair value through profit or loss is the fair value of the Subsidiary measured at its NAV, which includes the fair value of the Subsidiary's investments.

3.4. Realised and Unrealised Gains and Losses

Investment transactions are recorded on the trade date. Realised gains and losses arising on the disposal of investments are calculated by reference to the weighted average cost attributable to those investments and the sale proceeds and are included in profit or loss in the Statement of Comprehensive Income. All changes in fair value are recognised in profit or loss in the Statement of Comprehensive Income as net gain on investment at fair value through profit or loss.

Forward foreign exchange contracts are recorded on the trade date. Realised gains and losses arising on the expiry of forward foreign exchange contracts are included in profit or loss in the Statement of Comprehensive Income.

Unrealised gains and losses arising on the difference between the forward rate and the contract rate on the forward foreign exchange contracts held at the reporting date are also included in profit or loss in the Statement of Comprehensive Income.

3.5. Income

Income recognised in profit or loss in the Statement of Comprehensive Income relates to dividend income due to the Company from the Subsidiary.

3.6. Expenses

All expenses are recognised in profit or loss in the Statement of Comprehensive Income on an accruals basis. Costs incurred on the issuance of shares are netted off against the share issue proceeds.

3.7. Cash and Cash Equivalents

Cash and cash equivalents include cash in hand and deposits held at call with banks. Cash equivalents are short term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.

3.8. Taxation

The Company has applied for and been granted exemption from liability to income tax in Guernsey under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 as amended by the Director of Income Tax in Guernsey for the current period. The exemption must be applied for annually and will be granted, subject to the payment of an annual fee, which is currently fixed at £1,200 per applicant, provided the Company qualifies under the applicable legislation for exemption.

It is the intention of the Directors to conduct the affairs of the Company so as to ensure that it continues to qualify for exempt company status for the purposes of Guernsey taxation.

3.9. Dividends

In any financial year, the Company will aim to pay regular quarterly dividends to shareholders subject to the solvency test prescribed by the Companies Law. It is expected that a distribution will be made by way of a dividend with respect to each calendar quarter.

The Directors in their absolute discretion can offer a scrip dividend alternative to shareholders when a cash dividend is declared from time to time.

Distributions to the shareholders are recorded through the Statement of Changes in Shareholders' Equity when they are declared to shareholders.

3.10. Derivatives

The Company hedges the value of any non-Euro assets held at Subsidiary level into Euro using spot and forward foreign exchange contracts rolling on a monthly basis and, in relation thereto, has entered into a hedging master agreement with BNP Paribas Securities Services S.C.A. ("BNPP"). Under the same hedging master agreement, the Company hedges the value of any non-Euro share classes in their original currency against the Euro on a rolling-monthly basis.

The Company estimates fair values of forward foreign exchange contracts based on the latest available forward exchange rates extrapolated to the contract maturity date.

The Company does not apply hedge accounting.

3.11. Share Capital

Ordinary Shares are classified as equity in accordance with IAS 32 - Financial Instruments: Presentation as these instruments include no contractual obligation to deliver cash.

4. Material Agreements

a) Investment Management Agreement

Under the terms of the Investment Management Agreement dated 9 January 2012 and amended on 21 July 2014, the Company appointed the Investment Manager to provide management services to the Company. The Investment Manager is entitled to a management fee which is calculated and accrued daily at a rate equivalent to 0.70% per annum based on the NAV of the Company. The management fee is payable quarterly in arrears by the Company. The Investment Manager is not entitled to any incentive or performance based fee.

b) Administration and Custodian Agreement

The Company has engaged the services of the Administrator, to provide administration and custodian services. Under the terms of the Administration and Custodian Agreement dated 9 January 2012, the Administrator is entitled to receive an annual administration fee based on the NAV of the Company on a tiered percentage basis.

The Administrator is entitled to receive an annual loan administration fee based on the NAV of the Company on a tiered percentage basis.

The Company Secretary, BNP Paribas Securities Services S.C.A., Guernsey Branch, is entitled to an annual fee of €41,000 plus fees for ad-hoc board meetings and services of €3,000 per meeting and an ad-hoc placing programme fee of £600 per placing.

c) Registrar's Agreement

Link Market Services (Guernsey) Limited (formerly Capita Registrars (Guernsey) Limited) were registrar of the Company during the period to 7 January 2018, pursuant to the Registrar Agreement dated 9 January 2012. The fee was charged at a rate of £2.00 per holder of Ordinary Shares appearing on the register during the fee year, with a minimum charge per annum of £8,250.

Computershare Investor Services (Guernsey) Limited are registrar of the Company (with effect from 8 January 2018), pursuant to the Registrar Agreement dated 29 November 2017. The fixed fee is £19,500 per annum.

d) Broker Agreements

On 28 June 2016, the Company and J.P Morgan Securities Plc (the "Broker") entered into an agreement to provide the Company with a shareholder analysis service and access to their system CBSDirect. The Broker is paid an annual fee of £2,000.

On 28 November 2017 the Company authorised the Broker to buy back Ordinary Shares where they are trading at a discount of 6.5% to NAV up to a total of 4 million Ordinary Shares. This authorisation superseded the Buy Back Engagement Confirmation Letters dated 14 September 2016, to buy back Ordinary Shares trading at a discount of 9% to NAV up to a total of 1.5 million Ordinary Shares and 20 September 2017 to buy back Ordinary Shares trading at a discount of 4.5% to NAV up to a total of 24,937,942 Ordinary Shares. The Broker is entitled to charge commission at a rate of 0.2% of the price paid.

e) Hedging Master Agreement

The Company and the Administrator entered into an International Forward Foreign Exchange Master Agreements dated 9 January 2012 (the "Hedging Master Agreement"), pursuant to which the parties enter into foreign exchange transactions with the intention of hedging against fluctuations in the exchange rate between the Euro and other currencies. The Hedging Master Agreement is governed by the laws of England and Wales. Note 7 details the gross derivative asset and liability position by contract type and the amount for these derivatives contracts.

5. Basic and Diluted Earnings per Ordinary Share

6. NAV per Ordinary Share

7. Financial Assets at Fair Value Through Profit or Loss

The Company's investment at fair value through profit and loss is the Profit Participating Bonds it holds in the Subsidiary. The fair value of the Profit Participating Bonds is based on the NAV of the Subsidiary, which has been prepared in accordance with IFRS.

Fair values of the Company's forward foreign exchange contracts are determined with reference to the forward exchange rates applicable as at valuation date.

Fair Value Hierarchy

The Company categorises its financial assets according to the following fair value hierarchy which reflects the significance of the inputs used in determining their fair values:

Level 1: Inputs that reflect unadjusted price quotes in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date;

Level 2: Inputs that reflect price quotes of similar assets and liabilities in active markets, and price quotes of identical assets and liabilities in markets that are considered to be less than active as well as inputs other than price quotes that are observable for the asset or liability either directly or indirectly; and

Level 3: Inputs that are unobservable for the asset or liability and reflect the Investment Manager's own assumptions.

The following table details the Company's fair value hierarchy.

Reconciliation of the Company's Financial Assets Categorised Within Level 3

The following table shows a reconciliation of all movements in the fair value of financial assets categorised within Level 3 during the reporting year.

During the years ended 31 March 2018 and 31 March 2017, there were no reclassifications between levels of the fair value hierarchy.

As at 31 March 2017, accumulated interest of €13,966,281 (31 March 2016: €42,123,590) was due to the Company by the Subsidiary. On 30 November 2017, the Subsidiary elected to pay the interest due to the Company by way of the issue and allocation to the Company of new Profit Participating Bonds for which no cash payment was required.

Company's Investment in the Subsidiary

The NAV of the Subsidiary predominantly comprises the fair values of the investment portfolio of the Subsidiary consisting of Level 1, Level 2 and Level 3 investments and other financial assets and liabilities at carrying value, which together form the NAV of the Subsidiary.

The investments in the Subsidiary's portfolio are valued as follows:

Fair values of debt instruments are initially based on price quotes, where available. Price quotes are sourced from the Company's approved pricing providers. The approved pricing providers source price quotes from brokers/market makers and determine an average bid price based on the quotes obtained, after adjusting for outliers as identified by the approved pricing providers.

Where price quotes are unavailable, the Investment Pricing Committee of the Investment Manager determines fair value using valuation techniques. Valuation techniques used include comparison to similar instruments for which market observable prices exist. Assumptions and inputs used in the valuation technique include interest rates and credit spreads used in estimating discount rates. The Investment Pricing Committee has applied judgment and estimation and used significant unobservable inputs in selecting the appropriate valuation technique used, consideration of identical or similar instruments, and selection of appropriate discount rates.

As at 31 March 2018 and 31 March 2017, the fair value measurement of the Profit Participating Bonds is categorised into Level 3 within the fair value hierarchy. This classification reflects the Company's ability to redeem its investment in the Subsidiary on the reported date at the NAV and whether adjustments to the NAV are required to reflect the inherent uncertainty in the timing and range of possible outcomes of any realisation between the NAV and the ultimate recoverable amount. The fair value level of the investment in the Subsidiary reflects management's consideration that this investment is not readily tradable. Management has considered that there are no reasonably possible alternatives in determining the fair value of the Subsidiary.

The fair value of the Subsidiary is predominantly influenced by the fair value determination of the underlying debt investments held by the Subsidiary. The Company recognises any transfers between levels of the fair value hierarchy as at the end of the reporting period during which the change occurred.

The following table provides a reconciliation of the Company's investment in the Subsidiary measured at fair value:

As at 31 March 2018, the net gain on the Company's investment in the Subsidiary included in the Statement of Comprehensive Income amounted to €6,003,640 (31 March 2017: €13,973,386), the breakdown of the gain is detailed in the table below:

Subsidiary Financial Assets and Liabilities Designated at Fair Value Through Profit or Loss

The following table details the investment holding of the Subsidiary, categorising these assets by level, according to the fair value hierarchy. The disclosures have been included to provide an insight to shareholders of the asset class mix held by the Subsidiary.

8. Other Payables and Accrued Expenses

The Company has financial risk management policies in place to ensure that all payables are paid within the credit time frame. The Directors considers that the carrying amount of all payables approximates to their fair value.

9. Share Capital

The authorised share capital of the Company is represented by an unlimited number of Ordinary Shares with or without a par value, which upon issue, the Directors may designate as: (a) Ordinary Shares; (b) B Shares; (c) C Shares, in each case of such classes and denominated in such currencies as the Directors may determine. Since inception of the Company, no B or C shares have been issued.

Since inception of the Company, only Sterling Ordinary Shares have been issued, but the Company has the authority to issue Euro Ordinary Shares.

The Company had issued and fully paid up share capital as follows:

Rights attached to Ordinary Shares

The Company's share capital may be denominated in Sterling and Euro. At any general meeting of the Company each Euro share carries one vote and each Sterling share carries 1.2 votes. The shares also carry rights to receive all income and capital available for distribution by the Company.

Share Buybacks

The Directors operate an active discount management policy through the use of share buybacks. At the AGM held on 20 September 2017 the Directors were granted authority to repurchase 24,937,951 Ordinary Shares for cancellation or to be held as treasury shares. This authority will expire at the next AGM which will be held on 27 September 2018.

To assist in controlling the discount in the Ordinary Share price to NAV per Ordinary Share, during the year ended 31 March 2018, the Company used this authority to repurchase and cancel 11,277,425 Ordinary Shares in the market at a total cost of €12,739,819 (£11,272,921).

Significant Share Movements

10. Dividends

In any financial year, the Company will aim to pay regular quarterly dividends to shareholders subject to the solvency test prescribed by the Companies Law. It is expected that a distribution will be made by way of a dividend with respect to each calendar quarter. Immediately after the distribution of dividends the Board of Directors is of the opinion that the Company will satisfy the solvency test.

The Directors in their absolute discretion can offer a scrip dividend alternative to shareholders when a cash dividend is declared from time to time.

The Company has declared and paid the following dividends to its shareholders:

The dividend for the period 1 January 2018 to 31 March 2018 had an ex-dividend date after the year end and is detailed in note 15.

11. Reconciliation of NAV to Published NAV

1 The investments held by the Subsidiary have been valued at bid price which is consistent with the basis used in the prior year audited financial statements.

2 The published NAV was calculated as at 29 March 2018, which did not take into consideration expense accruals for the 30 and 31 March 2018 and changes in exchange rates from 29 to 31 March 2018.

12. Risk Management Policies and Procedures

This note presents information about the Company's exposure to risks. The majority of the Company's assets are invested in the Subsidiary through Profit Participating Bonds, therefore the majority of the risks that the Company is exposed to are borne out of the indirect exposure to the risks of the underlying portfolio held at the Subsidiary level.

The Board of Directors has established procedures for monitoring and controlling risk. The Company has investment guidelines that set out its overall business strategies, its tolerance for risk and its general risk management philosophy.

In addition, the Investment Manager monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities.

Market risk

The fair value of the Company's investment into the Subsidiary may fluctuate due to changes in market prices of the underlying portfolio of investments held by the Subsidiary. Market risk comprises market price risk, currency risk and interest rate risk. The Investment Manager moderates the risk through a careful selection of investments within specified limits. The maximum risk resulting from financial assets is determined by the fair value of the financial assets. The Company's overall market position at Company and Subsidiary level is monitored by the Investment Manager and is reviewed by the Board of Directors on an ongoing basis. The main market risk measures used by the Investment Manager are rolling 12 month volatility. Volatility is used as a standard market risk metric versus the Company's benchmark volatility.

Market price risk

The Company's investment at fair value through profit or loss is based on the NAV of the Subsidiary which is susceptible to the market price risk arising from uncertainties about future prices of the underlying portfolio of investments held by the Subsidiary.

The Board of Directors manages the risks inherent in the investment by ensuring full and timely reporting of the relevant information from the Investment Manager. Investment performance is reviewed at each Board meeting. The Board of Directors monitor the Investment Manager's compliance with the Company's objectives. At 31 March 2018, the overall market exposure of the Company is equivalent to the fair value of the underlying portfolio of investments held by the Subsidiary was €184,793,666 (31 March 2017: €202,478,555).

Market price risk sensitivity

The following table illustrates the sensitivity of the return for the year and the Company's net assets to an increase or decrease of 5% in the fair values of the underlying portfolio of investments held by the Subsidiary at the reporting date.

This level of change is considered to be reasonable based on observation of current market conditions.

Currency risk

The functional and presentation currency of the Company and its Subsidiary is Euro. The Company invests in its Subsidiary which in turn invests in financial instruments and enters into transactions that are denominated in currencies other than its functional currency, primarily in US Dollars and Sterling. Consequently, the Company is exposed to risk that the exchange rate of its functional currency relative to other foreign currencies may change in a manner that has an adverse effect on the fair value or future cash flows of that portion of the Company's financial assets or liabilities.

The Investment Manager monitors the exposure to foreign currencies and reports to the Board of Directors on a regular basis. The Investment Manager measures the risk of the foreign currency exposure by considering the effect on the NAV and income of a movement in the rates of exchange to which the assets, liabilities, income and expenses are exposed.

The Company also enters into forward foreign currency contracts to manage its exposure to currency risk due to the assets being in Euro and the issuance of shares in Sterling and its exposure to non-Euro investments held in the portfolio of the Subsidiary.

The Investment Manager seeks to engage in currency hedging contracts such as forward currency exchange contracts being available in a timely manner and on terms acceptable to them, in their sole and absolute discretion. The primary aim of the Investment Manager's use of hedging is to protect the Sterling shareholders return.

As at 31 March 2018, the Company had the following open forward foreign exchange contracts:

As at 31 March 2017, the Company had the following open forward foreign exchange contracts:

The tables below detail the carrying amounts of the Company's financial assets and liabilities that have foreign currency exposure: