AEFS.L Regulatory News (AEFS)

ALCENTRA EUROPEAN FLOATING RATE INCOME FUND LIMITED

3 JULY 2020

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 2020.

Strategic Report 

Financial Highlights and Performance Summary

Financial Highlights

The NAV total return since inception achieved by Alcentra European Floating Rate Income Fund Limited (the "Company") was 24.90%3, an annualised return of 2.79%3. The NAV total return details the change in NAV from the start of the relevant period and assumes that dividends paid to shareholders are reinvested at NAV.

The Company repurchased 26,776,226 Ordinary Shares during the year for a total cost of €31,176,890 (£26,922,176) (Year ended 31 March 2019: 28,195,844 Ordinary Shares were repurchased for a total cost of €31,609,204 (£27,844,835)).

Performance Summary

Ongoing Charges3

The ongoing charges for the year ended 31 March 2020 were 1.29% (31 March 2019: 1.14%).

Dividend History

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

1 Source: London Stock Exchange

2 Published NAV per Ordinary Share as at 31 March 2020 (29 March 2019). Based on mid price (bid pricing used in financial statements)

3 Refer below for the calculation of these alternative performance measures.

Chairman's Statement

Dear Shareholder,

The Company's NAV per share showed a significant decline over the past year, decreasing from 103.61p as at 31 March 2019 to 82.68p as at 31 March 2020 based on bid prices as reflected in these financial statements. The daily NAV per share based on mid prices published daily on the Regulatory News Service (the "RNS") moved from 104.05p to 84.69p. The majority of this decline occurred in March 2020 and directly reflected the turmoil in the markets around the world from the impact of coronavirus ("COVID-19").

The Company maintained its dividend policy throughout the year declaring and paying dividends of 4.59p per Ordinary Share. Additionally, subsequent to the year-end, the Company declared and paid a dividend of 1.00p per Ordinary Share. As at 31 March 2020, total dividends paid since inception were 38.54p per Ordinary Share, giving an overall total return since inception of 24.90% which equates to an annualised return of 2.79%.

The last financial year has been a year of reflection. Established in 2012, the Company has provided shareholders with regular dividends and capital growth and has been well received by our investors. The Company was listed against a back drop of a low interest rate environment, which was anticipated to give way to one of increasing rates, however this did not happen. As a consequence, the Company's investment proposition has failed to attract wide investor appeal and management of the discount to NAV became a constant issue for the Board.

In September 2019, after some concern over trading liquidity in the shares and the contraction in the Company's share capital base because of share buybacks, the Company amended its existing discount control mechanism and introduced a quarterly tender offer. This allowed shareholders to tender, on a quarterly basis, up to 20% of their holdings at a 1.5% discount to NAV, subject to certain terms.

Prior to the implementation of the quarterly tender offer, the Board was actively monitoring the share price, working closely with the Company's brokers within an agreed framework. The buyback programme was maintained up until September 2019 with the aim of limiting the discount to NAV. Between April and October 2019, 10,266,098 Ordinary Shares were repurchased and cancelled.

On the announcement of the quarterly tender offer the Company was re-rated and its discount narrowed. Nevertheless, in Q4 2019 16,510,128 shares were tendered, bringing the issued share capital of the Company to 103,361,401 Ordinary Shares at 31 March 2020. An additional 11,683,734 shares were tendered post year-end as a result of the Q1 2020 tender offer.

Following this significant contraction in the capital base of the Company, your Board and Alcentra Limited (the "Investment Manager") had serious concerns that the Company could not continue to provide an appropriately diversified portfolio going forward, while also to remaining a cost effective vehicle for investors. After consultations with major shareholders, the Board took the decision to propose changes to the investment objectives and investment policy. These changes were approved by the Financial Conduct Authority ("FCA") on 20 April 2020. It was therefore proposed to shareholders that the Company undergo a managed wind-down in which investments would be realised in a manner that achieved a balance between a timely return of cash to shareholders and a favourable realisation value with regards to cost efficiency, working capital requirements and current market conditions. It was also proposed that the Company cease making new investments or undertaking capital expenditure except to protect or enhance the value of any existing investments.

The realisation programme has taken place in times of difficult markets. On 31 December 2019, the World Health Organisation was notified of an outbreak of COVID-19 in China. During the first quarter of 2020, the virus spread across other countries including the UK. This led to an increased level of uncertainty in the financial markets which triggered volatility in interest rates, foreign exchange rates, equity prices and materialised credit risks among others. The COVID-19 crisis has had a significant effect on the performance of financial markets, with sharp declines seen in many asset classes in March 2020. European and US sub investment grade loans and bonds all returned between -13% and -14.5% over the month.

The most affected borrowers were those with direct end-markets most affected by the widespread travel restrictions, but many others would also be impacted by the hit to global GDP over the remainder of the year. We anticipate that defaults, coercive exchanges and out-of-court restructurings will ramp up in coming weeks and months owing to mounting debt levels, depressed loan and bond prices and minimal operating visibility. The Investment Manager thinks the most vulnerable sectors will include energy, healthcare, retail, leisure and transportation. Going forward markets are expected to remain challenging.

The Investment Manager took the view that the strengthening market seen at the beginning of June 2020 was a window of opportunity, following the lows of March 2020, in which to realise investments. The uncertainties around a potential second peak in the virus, further bad news about the economic impact on the global and European economies and the continued uncertainty surrounding Brexit meant that it was by no means certain that a better opportunity would present itself in the near term and selling now was in the interests of all shareholders.

The Investment Manager instigated a phased realisation programme in May and June 2020 and has sold 100% of the investment portfolio by two competitive auctions known as Bids Wanted in Competition. The final sale completed on 10 June 2020 at a result close to the market value of the portfolio and up on the 31 March 2020 market value. This will now be followed by the commencement of a process to place the Company and its subsidiary into voluntary liquidation.

It has been a pleasure and honour to act as Chairman to the Company and on behalf of the Board, I would like to close by thanking shareholders for your continued support and commitment to the Company over the past eight years.

Ian Fitzgerald

Chairman

2 July 2020

Executive Summary

This report is designed to provide information about the business and results of the Company for the year ended 31 March 2020. 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 and 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 a 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 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 2020 was 103,361,401 (31 March 2019: 130,137,627) Ordinary Shares, which are denominated in Sterling. As at 31 March 2020 16,510,128 Ordinary Shares were held in treasury (31 March 2019: nil). For details of the Company's share capital, refer to note 9.

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

The Company is a member of the AIC.

Significant Events During the Year Ended 31 March 2020

Share Buybacks

As part of its active discount management policy, in addition to the tendered shares detailed below, the Company repurchased and cancelled 10,266,098 Ordinary Shares during the year for a total cost of €11,444,480 (£10,119,819) (Year ended 31 March 2019: 28,195,844 Ordinary Shares were repurchased for a total cost of €31,609,204 (£27,844,835)).

Quarterly Tender Offer

Following a comprehensive review of the outlook for the Company, in tandem with extensive shareholder consultation, the Board concluded that shareholders would be best served by strengthening the Company's approach to discount control through the introduction of quarterly tender offers to replace the existing redemption mechanism. This was approved by shareholders at the Annual General Meeting held on 26 September 2019 (the "2019 AGM").

The following shares have been tendered:

Managed wind down

On 12 March 2020, the Board announced that it had conducted a comprehensive review of the outlook for the Company and had determined that the Company should be put into a managed wind-down, with cash returned to shareholders in a timely and efficient manner. In light of this decision, the Board suspended further quarterly tender offers.

On 22 April 2020, the Company published a circular convening an Extraordinary General Meeting for 18 May 2020 ("2020 EGM") at which it sought approval from shareholders to amend the Company's investment objective and policy and approve any related matters necessary to facilitate a managed wind-down. All of the resolutions proposed at the 2020 EGM were duly passed, refer to Directors' Report for further information.

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 and Investment Policy

Detailed below are the Company's investment objective and policy as at and for the year ended 31 March 2020. These were subsequently amended following approval by the Company's shareholders at the 2020 EGM, Refer to Directors' Report for further information.

Original 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. 

Original 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).

The above investment objective was in force until 18 May 2020, when the investment policy changed to facilitate an orderly realisation of all assets and a return of capital to shareholders.

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 total return in excess of 5% per annum over the longer term.

The NAV total return of the Company's Ordinary Shares is 24.90% since inception to 31 March 2020. 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 RNS of the LSE. This figure is calculated in accordance with the AIC formula which includes current financial year revenue. 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. Each year the Board carries out a comprehensive and robust assessment of the principal risks and emerging risk and uncertainties that the Company faces. As at the reporting date the risks identified 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 reviews the limits and restrictions on a regular basis, while 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.

As the size of the Company has reduced due to share buy backs and latterly tender offers ensuring appropriate diversification has been seen as an increasing risk. Therefore the Board, on the recommendation of the Investment Manager, put to a shareholder vote that the investment objective and policy be changed to pursuing a strategy of realisation of the Company's investments and a return of capital to shareholders. This new policy was adopted on 18 May 2020 and has largely mitigated the investment activity and performance risks described above.

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.

On 18 May 2020, the Company's investment policy was amended to pursue an orderly realisation strategy and a return of capital to investors. Market conditions were seen as the principal risk to the realisation programme, especially as the impact of COVID-19 was not fully known and the economic impact factored into market prices. The Investment Manager had sold 100% of the Subsidiary's investments by competitive auction by early June and consequently this risk has been fully mitigated. As the transactions were with known counterparties and settlement is due within 4 to 6 weeks, counterparty risk is considered to be minimal.

Accounting, legal and regulatory risk

The Company must comply with the provisions of the Companies Law. The Companies 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 ("IFRS") and applicable law. Under the Companies 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.

Since the Company's 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, with the assistance of the Company Secretary and advisers, ensures adherance 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, with the assistance of the Company Secretary and advisers, 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 below.

COVID-19

The beginning of 2020 has seen a dramatic increase in the volatility of global financial markets due to the COVID-19 pandemic. The Company does not employ leverage and as at 31 March 2020 had a well-diversified portfolio of liquid assets and had adequate resources to meet is ongoing expenses and obligations as they fall due. Some of the underlying portfolio was exposed to the financial impact of COVID-19, which the Investment Manager kept under review.

Subsequent to the reporting date all investments held by the Company's Subsidiary have been sold.

Company Purpose

The Company has been established as an investment Company to provide shareholders with regular dividends and to provide capital growth in the longer term by investing in a diversified portfolio of floating rate secured loans issued by European and US entities. Due to a continued low interest rate environment it has become harder to achieve the Company's long term purpose. As a consequence, on 18 May 2020, the shareholders voted to change the investment policy of the Company to allow for an orderly realisation strategy and a return of capital to shareholders, following which the Company will be wound up.

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 FCA as well as other relevant bodies such as the GFSC and the AIC. Central to the culture is communication, respect and trust which is integral to the relationship between the Company and all of its stakeholders. The Board continue to monitor the Company's culture on an on-going basis and provides feedback to shareholders and other stakeholders as appropriate. Both the Board and the Investment Manager believe responsible investing can help enhance society and apply Environmental, Social and Governance (the "ESG") criteria when investing.

Section 172(1) Statement

Through adopting the AIC Code, the Board acknowledges its duty to comply with section 172 of the UK Companies Act 2006 to act in a way that promotes the success of the Company for the benefit of its members as a whole, having regard to (amongst other things):

a) consequences of any decision in the long-term;

b) the interests of the Company's employees;

c) need to foster business relationships with suppliers, customers and others;

d) impact on community and environment;

e) maintaining reputation; and

f) act fairly as between members of the Company

Information on how the Board has engaged with its stakeholders is outlined below.

The Board considers the factors outlined under section 172 and the wider interests of stakeholders as a whole in all decisions it takes on behalf of the Company.

The Board recognises that stakeholder relationships are key to ensuring the Company's continued success. As an investment company, with no employees, the Company's principal working relationships are with the Investment Manager and the Company's service providers.

The Company's main working relationship is with the Investment Manager who the Board hold to account for the management of the Company's investments, ensuring that the Investment Manager remains responsible for ethical investment and since 18th May 2020 to ensuring that assets are realised in an appropriate time scale and to the benefit of shareholders. Engagement with the Investment Manager is via their regular attendance at Board meetings where they updated the Board on matters which affect the Company, its investments and the loan market in general.

To ensure the success of the Company, good relationships with our service providers, including the Administrator, the Company's lawyers, Custodian, registrar and broker is vital. We maintain and monitor our relationships with regular reporting from the key providers to the Board and by providing appropriate compensation. Each relationship is reviewed annually by the Management Engagement Committee, with a questionnaire being completed by each service provider, to allow them an opportunity to provide feedback to the Company.

The Board places great importance on communications with our shareholders. The Annual General Meeting provides an opportunity for shareholders to raise questions of the Board and the Investment Manager. In addition, the Chairman, met with major shareholders during the year. Shareholders may also communicate with the Board at any time by contacting the Company's registered office or through the broker.

The Board has engaged directly with all stakeholders concerning discount management, whether a change in investment policy was appropriate and ultimately the decision, taken post year end, to commence an orderly realisation of the Company's assets and return capital to shareholders.

Viability Statement

Under the AIC Code of Corporate Governance, issued in February 2019 (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 and emerging risks.

At the 2020 EGM, shareholders approved a change in the investment objective and policy in order to pursue a strategy of realisation of the Company's investments and to return capital to shareholders.

Subsequently, in June 2020, the Subsidiary has realised the loan portfolio and the Company, through the redemption of the Profit Participating Bonds it holds with the Subsidiary, will shortly receive and hold only cash. The Company will now return capital to shareholders through a redemption of shares and subsequently place both the Subsidiary and the Company into voluntary liquidation.

The Directors have modelled the cash required for the wind down and liquidation process, over the twelve month period from 1 July 2020 to 30 June 2021 at which point the directors consider that the Company will have been liquidated. This will be used by the Directors to determine the timing of the return of capital and the level of cash which needs to be retained by the Company to fund the liquidation process.

Although it is impossible to determine with complete accuracy how long the final liquidation process will take, the Directors conclude that the Company has sufficient cash and liquid resources to complete its wind down and liquidation in an orderly manner including paying all future operating and liquidation expenses.

Going Concern

Under the AIC Code 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.

For the December 2019 quarterly tender, 16.5 million Ordinary Shares were tendered and repurchased by the Company during the year. Subsequent to the year-end, for the March 2020 quarterly tender an additional 11.7 million Ordinary Shares were repurchased by the Company. These two quarterly tenders represent 23% of the Ordinary Share capital of the Company. The Directors conducted a comprehensive review of the outlook for the Company due to the number of Ordinary Shares that had been repurchased and assessed the Company's ability to continue as a going concern. The Directors conducted extensive shareholder consultation and believed that shareholders would not be supportive of a reconstruction or reorganisation of the Company and therefore recommended to shareholders a change in the investment objective and policy in order to pursue a strategy of realisation of the Subsidiary's investments and return of capital to shareholders. Changes to the investment objective and policy were approved by shareholders at the 2020 EGM, as further detailed in the Directors' Report below.

As a consequence of the above, the Directors consider it is appropriate to adopt a basis other than going concern in preparing the financial statements given the fact that the investments held by the Subsidiary have been fully realised post year end and that the Company is expected to be put into liquidation within 6 months from the date of approval of these financial statements.

As a result of the application of a basis other than going concern, costs expected to be paid in relation to the wind-up of the Company have been accounted for as part of a provision.

Discount Control Mechanism

From 1 April 2019 to 26 September 2019 the Company's Articles of Incorporation detailed the following 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 had, 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 would, 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.

The Company's Ordinary Shares traded at an average discount of less than 5% of the NAV per Ordinary Share in each Discount Calculation Period during the period from 1 April 2019 to 26 September 2019, at which point the discount control mechanism was removed pursuant to the amended Articles of Incorporation adopted at the 2019 AGM.

Share Buybacks

At the Extraordinary General Meeting held on 3 April 2019 (the "2019 EGM"), the Directors were granted authority to repurchase 20,106,191 Ordinary Shares for cancellation or to be held as treasury shares. This authority expired at the 2019 AGM. At the 2019 AGM the Directors were granted authority to repurchase 18,295,003 Ordinary Shares for cancellation or to be held as treasury shares. The Company repurchased and cancelled 10,230,098 Ordinary Shares during the year.

Quarterly Tender Offer

At the 2019 AGM, the Directors were granted authority to repurchase, by way of quarterly tender offer, an amount equal to 20 per cent of each shareholders' Ordinary Shares in issue. During the year, the Company repurchased 16,510,128 Ordinary Shares by way of tender offer for the quarter ended 31 December 2019 and holds these shares in treasury. Subsequent to the year end, the Company repurchased a further 11,683,734 Ordinary Shares by way of tender offer for the quarter ended 31 March 2020 and holds these shares in treasury.

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 will have a social and environmental impact over which the Company has little to 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.

The ESG criteria, is applied to ensure the Company undertakes sustainable and or socially responsible investing. In formulating and implementing a responsible investment policy, the Investment Manager takes into account its responsibilities towards protecting all stakeholders including its clients, shareholders and employees with regard to investment and performance as well as its position as an agent acting on behalf of these clients.

1 Calculated by reference to the middle market quotations (mid price) 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. In accordance with the Company's accounting policies, the financial statements have been prepared using bid price.

Responsible investment forms an integral part of the investment research process. The Investment Manager believes that responsibly managed companies are better placed to achieve sustainable competitive advantage and provide strong long-term growth.

The Company is not within scope of the Modern Slavery Act 2015 ("the Act"), because it has no turnover as defined by the Act and is therefore not obliged to make a human trafficking statement.

Gender Metrics

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

Life of the Company

The Company does not have a fixed life. At the 2019 AGM a continuation resolution proposing that the Company continue its business as a closed-ended investment company was passed.

At the 2020 EGM, approval was gained from shareholders to amend the Company's investment objective and policy and approve any related matters necessary to facilitate a managed wind-down, as further detailed in the Directors' Report below.

Since the passing of the resolution all investments within the Subsidiary's portfolio have been realised and the Company will now commence the process of returning capital to shareholders and placing the Subsidiary and the Company into voluntary liquidation. The Board expect to recommend to shareholders to appoint a liquidator within 6 months from the date of approval of these financial statements, terminating the life of the Company.

This Strategic Report was approved by the Board of Directors on 2 July 2020 and signed on its behalf by:

Ian Fitzgerald Trudi Clark

Chairman Audit Committee Chairman

Investment Manager's Report

Summary

· The Sterling NAV per Ordinary Share declined during the 12 months to 31 March 2020 from 104.05p to 84.69p as published in RNS. This was predominantly driven by market specific conditions during the period;

· In latter quarters of 2019 the NAV per share enjoyed a relatively steady growth which continued to January 2020 this was due to the broadly stable market conditions with good loan issuance and robust demand.

· The dividend has grown from 4.46p for the 12 months ending March 2019 to 4.59p the 12 months ending March 2020. This was predominantly driven by exceptional dividend payment in relation to Q4 2019, in that 0.18p per share was paid out of capital.

· Q1 2020 saw unprecedented market disturbances due to global spread of COVID-19, the market for new loan issuance experienced closures with scant new deals pricing. Similarly CLO formation was muted, with only three deals pricing early in the month and with market closure to issuances towards the end of March 2020.

· The share price has fallen from 97.0p to 77.0p over the period, with the discount to NAV as of 31 March 2020 standing at -6.86%. Much of this drop can be attributed to the Company's performance in March of -17.18% gross. During the month, concerns about the impact of the COVID-19 virus outbreak evolved from an initial focus on the risk of a supply shock driven by Asian shutdowns to concerns about the impact of the pandemic on businesses globally. As a result of this, European loan prices were down -14% for the month. There were signs of improvement towards the end of the month that continued on into April as prices rallied in response to the unveiling of extraordinary fiscal stimulus and monetary support measures.

· The default rate for the 12 months ending March 2020 remained broadly stable at 0.43%1, however the impact of the COVID-19 on certain corporates is likely to lead to an increase from this low level. We believe businesses where travel and mobility restrictions as well as working capital unwinds are causing near term liquidity pressures are the most likely to bring this figure up - with S&P now forecasting an 8% default rate for the European market in 2020. However, the final figure on defaults and 2020 performance will be directly correlated with the duration and severity of the outbreak.

1 S&P Default Ratio 31 March 2020.

Note on Foreign Exchange Hedging in period

The Company maintains its accounts in EUR and with the outstanding Ordinary Shares in issue solely denominated in GBP, the Company activity hedges foreign exchange risk by utilising foreign exchange forward contracts.

Portfolio and Performance

· As at 31 March 2020, the portfolio was invested in line with the Company's investment policy and was diversified by obligor and industry with 76 issuers/borrowers across 18 different industry sectors and no individual borrower representing an exposure of more than 5% of the portfolio.

· Against a volatile financial markets backdrop over the past few years, the Company's performance has been strong and with lower volatility than HY and equity markets.

· The Company remains relatively conservatively positioned, with low exposure to Junior Debt (5.95%), High Yield (0%) and Fixed Rate Bonds (10%).

· The strong performance relative to the Loan Index was predominantly driven by strong asset selection within the Company during the period, partially offset by a small element of cash drag.

Key Portfolio Statistics and Positioning as at 31 March 2020

· The Company remains relatively conservatively positioned but with an attractive current floating rate margin of 4.37% and yield to maturity of 10.12%.

o The Company's current exposure to junior debt at 4.72% remains low as we do not currently believe that the risk adjusted return for junior debt is attractive.

o Similarly, exposure to fixed rate assets remains low at 7.94% for the same reason.

o The Company maintains a low exposure to USD debt at 0.88% as the cost of hedging these assets means the returns for a Euro NAV fund are not attractive, while volatility for USD Loans is higher than for EUR loans.

· From a sector point of view we are focussed on investing in more defensive sectors, with the largest sector exposure being Services and Healthcare. We remain underweight sectors such as Retail, which is experiencing structural changes away from the high street as well as more cyclical and capex intensive sectors such as Autos and Shipping.

· While headline UK at 21.92% appears high, a large portion of the issuers classified as UK are actually more global or pan-European in nature. As such, the Company's direct exposure to the UK economy is lower, with limited exposure to businesses at risk from Export tariffs.

1 Market value of the portfolio of investments held by the Subsidiary.

Senior Secured Loans -An Investment Opportunity

Key attractions of loans

· In Q1 2020 the average new issue spread was E + 3.56%, with an average interest rate floor of 6bps, mainly a reflection of the constructive market conditions earlier in the quarter3.

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

· Defaults have stayed low, with the S&P's default rate at 0.43% in March 20204. However, we would expect this to rise from here due to the impact of the COVID-19 corporates in the market.

3 Standard & Poor's LCD Global Leveraged Lending Review Q1 2020

4 Standard & Poor's LCD European Leveraged Lending Review March 2020

European Loan Market Commentary

· Despite a continued low growth environment in Europe, defaults have stayed low, with the S&P's default rate at 0.43% in March 2020, versus 0.00% in March 2019. As a result of the impact of COVID-19, the S&P now expects a material increase to the high single digits in Europe over the next 6 to 12 months.

· Before the actions taken to limit the spread of the COVID-19 virus, both Europe and the US were seeing positive GDP growth. The US saw a strong recovery while Europe's recovery differed country by country.

· Default rates are likely to rise from their pre-virus low levels with S&P forecasting a default rate of 8% for the European Loan market and 10% for the US market.

· While loan issuance was robust at €80.9bn, it was approximately -16% lower year-over-year. The main driver of the decline was lower M&A driven issuance volumes due to a lower share of "jumbo" leveraged buyouts (the "LBOs") compared to 2018.

· Issuance slowed in Q1 2020 with the primary markets closing in March and it is hard to see M&A activity picking up until the uncertainty abates.

Market Technicals and Outlook

· The onset of the coronavirus led to a significant widening in the market with prices moving from the 90s to the 70s.

· The first half of March 2020 saw a theme of dealer de-risking as spreads widened to 1200s and liquidity was constrained.

· We believe we have already seen significant correction for assets directly impacted by the lockdown.

· For those with an investment horizon of 2-3 years, the current technicals provide an attractive entry point for an asset class backed by large businesses that we expect to be able to support their obligations over the long term.

Source: EU HY: ICE BofAML European Currency High Yield Index, US HY: ICE BofAML US High Yield Master.

Change in Investment Policy to Realisation of Assets and Return of Capital

Following the recovery in loan market prices seen in April 2020 and May 2020, we took the decision in early June 2020 to take advantage of these improved conditions to realise the assets held in the Subsidiary. We felt this timing was best as asset prices had significant recovered from their March 2020 lows and it was prudent to take advantage of these stronger conditions when available, given the scope for further volatility from a second wave of the COVID-19 virus or negative macro-economic headlines.

We executed the sale of the assets in the Subsidiary via a competitive auction process where market participants provide their best bid on each asset. We felt that this process was the most efficient manner to execute the wind-down as it minimises transaction costs (both transfer fees and bid-ask spreads) and maximises prices. We undertook two auctions: the first, on 3 June 2020, focussed on a small number of less liquid assets held by the Subsidiary, and the second, on 10 June 2020, on the more liquid names. The rationale for this was to make sure that we received bids on the first auction for credits that had been more affected by COVID-19 and were not left with a tail of these less sought after credits at the end of the process. Demand was strong and we were able to execute sales on all assets held by the Subsidiary via these two auctions at prices that enabled us to realise the whole portfolio at close to NAV.

Alcentra Limited

2 July 2020

Directors' Report

The Directors present the Annual Report and audited financial statements of the Company for the year ended 31 March 2020.

Board of Directors

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

Jonathan Bridel retired from the Board on 30 June 2019.

Directors' Interests

None of the Directors had a material interest in any contract, which is significant to the Company's business. The Directors had the following interest in the Company's share capital during the year ended 31 March 2020 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 2020 and concluded that the performance of all had been satisfactory and no internal control issues were noted. The Committee determined that there had been no drop in service from any of the key service providers following the impact of COVID-19 and that all control systems appeared to be functioning normally.

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

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 2020 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 as at 31 March 2020.

The following notifications were received post year end:

· Israel Englander, Millennium Group Management Trust, Millennium Group Management LLC, Millennium International Management LP on 19 May 2020 - 4,854,694 number of voting shares representing 4.413% and on 30 June 2020 - 5,537,075 number of voting shares representing 5.033%.

· FIL Limited on 19 May 2020 - 10,857,750 number of voting shares representing 9.86%.

1 Combined balance as the entities have the same investment manager.

Borrowing Limits

During the year, the Company did not utilise leverage to achieve its investment objective. Following shareholders' approval of the new investment objective and investment policy at the 2020 EGM, the Company will not utilise leverage.

There were no borrowings as at 31 March 2020 (31 March 2019: £nil).

Global Greenhouse Gas Emissions

The Company has no greenhouse gas emissions to report from its operations for the year to 31 March 2020, 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

At the 2020 EGM shareholders approved the following new investment objective and investment policy:

Investment Objective

The Company will be managed with the intention of realising all remaining assets and investments of the Company, in a prudent manner consistent with the principles of good investment management with a view to returning capital to the shareholders in an orderly manner.

Investment Policy

A managed wind-down will be effected with a view to the Company realising its investments in a manner that achieves a balance between (i) a timely return of cash to shareholders; and (ii) seeking to obtain the most favourable realisation value of the Company's investments, having regard to cost efficiency, working capital requirements and current market conditions.

The Company will cease to make any new investments or to undertake capital expenditure except where necessary in the reasonable opinion of the Board or the Investment Manager in order to protect or enhance the value of any existing investments or to facilitate orderly disposals.

Any cash received by the Company as part of the realisation process prior to its distribution to shareholders will be held by the Company as cash on deposit and/or as cash equivalents.

The investment restrictions set out in the Prospectus will not apply during the managed wind-down.

The Company will not employ any gearing.

Subsequent to the 2020 EGM, all investments held by the Subsidiary have been realised and are either awaiting settlement or are held in cash.

For and on behalf of the Board

Ian Fitzgerald

Chairman

2 July 2020

Directors' Biographies

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

Ian was 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 formerly a non-executive Director of the Loan Market Association and chairman from 2009 to 2011.

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

Anne graduated with a 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 and a past Guernsey Chairman, a Retired Member of the Association of Corporate Treasurers, a member of the Institute of Directors and is a past Guernsey Branch Chairman. Anne is a personal member of the Guernsey Investment Fund Association.

Anne has over 35 years of financial services experience in banking, asset and fund management, corporate treasury, life insurance and the fiduciary sector. Anne has held senior roles in Citibank, Rothschilds, Old Mutual International and KPMG Channel Islands Limited and latterly has been instrumental in the start-ups of a Guernsey fund manager and two fiduciary licensees. Anne has a number of Non-Executive Directorships in private equity structures, and in a banking group in London and the Channel Islands. Anne is currently an Independent Non-Executive Director of Alcentra Structured Credit Opportunities Fund III GP Limited, Alcentra Structured Credit Opportunities Fund IV GP Limited and of Merian Chrysalis Investment Company Limited.

Trudi Clark (Non-Executive Director, Chairman of the Management Engagement Committee and Chairman of the Audit Committee)

Trudi Clark graduated with a first class honours degree in business studies and is a qualified Chartered Accountant. She spent 10 years in Chartered Accountancy practices in the UK and Guernsey. In 1991 she joined the Bank of Bermuda to head their European Internal Audit function before moving into private banking in 1993.

Between 1995 and 2005 she was with Schroders (C.I.) Limited, an offshore private bank and investment manager. She was appointed Banking Director in 2000 and Managing Director in 2003. In 2005 she left Schroders to establish and run a private family office. In July 2009 Trudi went on to establish the Guernsey practice of David Rubin & Partners Limited, an internationally known insolvency and liquidation specialist. Since 2018 Trudi is concentrating on a portfolio of non-executive directorships. Trudi is currently an Independent Non-Executive Director of BMO Commercial Property Trust, NB Private Equity Partners Limited, River and Mercantile UK Micro Cap Investment Company Limited and The Schiehallion Fund Limited.

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

In February 2019, the AIC released the AIC Code of Corporate Governance for accounting periods beginning on or after 1 January 2019 following the release of the revised UK Corporate Governance Code (the "UK Code") in July 2018. The AIC Code provides specific corporate governance guidelines to investment companies and requires listed companies to disclose how they have applied the principles and complied with the provisions of the UK Code. The Company has reported against the AIC Code in the Statement of Compliance section below and detailed within this Corporate Governance Report. The Board believes this allows shareholders to make a comprehensive assessment of how the Company has complied with the principles and provisions of the AIC Code. Following the requirements of the AIC Code will meet the obligations of the UK Code, Listing Rules and DTR.

Copies of the AIC Code and the UK Code can be found on the respective organisations' websites (www.theaic.co.uk and www.frc.org.uk). The AIC Code includes an explanation of how the AIC Code adapts the principles and provisions set out in the UK Code to make them relevant for investment companies.

Corporate Governance Statement

In reporting on the Company's compliance with the AIC Code, the Company has adopted a comply or explain approach. The Directors believe that during the year under review the Company has complied with all of the principles and provisions of the AIC Code insofar as they apply to the Company's business, with the exception of the following:

The Company has not adopted a policy in relation to the tenure of the Chair. With the Company commencing its managed wind-down, the Board considers that implementing its succession plan at this stage would not be in the best interests of the Company, or its shareholders.

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. Anne Ewing and Trudi Clark are resident in Guernsey, Ian Fitzgerald is resident in the UK. The Directors' biographies are listed below.

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 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 the Senior Independent Director. Anne is also an independent director of two general partners of limited partnerships which are managed by the Investment Manager. The Board believe that Anne's relationship with the Investment Manager does not affect her judgement in respect of her duties. The Board have discussed Anne's independence with regard to the AIC's guidance on this matter and concluded that Anne is independent.

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.

Trudi Clark assumed the chair of the Audit Committee when Jonathan Bridel retired on 30 June 2019.

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. Anne Ewing is the Chairman of the Remuneration and Nomination Committee.

Performance Evaluation

The Remuneration and Nomination Committee undertakes an evaluation of the Board on an annual basis. The last evaluation of the Board took place in April 2020. 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. As the Company is expected to be put into liquidation within 6 months of the date of approval of these financial statements there will be no further Board evaluations.

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 Directors' contribution.

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

· that all Directors are considered independent; and

· all Directors, should be proposed for reappointment at the 2020 AGM, unless a resolution is proposed to place the Company into voluntary liquidation.

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.

Management Engagement Committee

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

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 30 January 2020 and the Committee concluded the performance of all the providers had been satisfactory. Since the year end, the Committee has made enquiries of all service providers as to their contingency plans as a result of the lockdown in regard to COVID-19. The Committee has concluded that there had been no deterioration in the level of service provided by any third party service provider as a result of the restrictions.

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. Ian Fitzgerald is the Chairman of the Risk Committee. The key risks and uncertainties facing the Company that the Board have identified are detailed above.

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 2020

1 Two meetings were held in Q2

2 Ian Fitzgerald is resident in the UK. The Articles of Incorporation prohibit Directors physically present in the UK from participating in, counting in the quorum or voting in any meetings. Ad hoc Board meetings are typically called at short notice, meaning that Ian was unable to travel to Guernsey for these meetings, however he did attend via telephone for 10 of the ad hoc board meetings from the UK and listened whilst complying with the restrictions imposed by the Articles. On three other occasions he attended via telephone from France and Norway.

3 Jonathan Bridel resigned on 30 June 2019.

The Committees report to the Board under separate agenda items, on the activity of each Committee and matters of particular relevance to the Board in the conduct of their work.

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

In accordance with the AIC Code, all Directors submit themselves annually for re-election by shareholders and will stand for re-election at the AGM on 24 September 2020, unless a resolution is proposed to place the Company into voluntary liquidation.

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.

As shareholders have voted to place the Company into a managed wind-down, the Board have concluded that it is in the best interests of shareholders that they remain in place (subject to shareholder approval) until the wind down has completed. Accordingly the Company has no formal succession plans for refreshment of the Board, however it does have contingency plans in place in the event of an emergency vacancy should they arise.

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 Directors' 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.

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.

Directors' 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.

There was no change to the Directors' remuneration during the year ended 31 March 2020. 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 published on the Company's website, 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 met with a number of the larger investors who are supportive of the Company. 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.

2020 AGM

The AGM will be held in Guernsey on 24 September 2020 (the "2020 AGM") at 09:30 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 given 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. It is currently the Board's intention to propose to shareholders at the 2020 AGM that the Company be wound up and a liquidator appointed. However, it is possible that this timetable may be delayed due to delays in settlement or other unforeseen circumstances.

AIFMD 

The Alternative Investment Fund Managers Directive (the "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 EU AIF for the purposes of the AIFMD. In order to maintain compliance with the AIFMD, 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 2 July 2020 and signed on its behalf by:

Ian Fitzgerald Trudi Clark

Chairman Audit Committee Chairman

Audit Committee Report

The Audit Committee (the "Audit Committee") comprises three Directors. Jonathan Bridel retired from the Board and the Audit Committee on 30 June 2019 and Ian Fitzgerald was appointed in his place. The AIC code of Corporate Governance permits the Chairman of the Board to be a member of the Audit Committee but not the Chair. All of the Audit Committee's members have recent and relevant financial experience. The qualifications of the members of the Audit Committee are outlined in Directors' Biographies and can be found above.

The Chairman of the Audit Committee, Trudi Clark, is a Fellow of the Institute of Chartered Accountants in England and Wales ("ICAEW"). She has acted as Audit Committee Chairman of a FTSE 250 Investment Company since 2014. After graduating in 1981 she spent 10 years in public practice before moving into Private Banking. From 2009 to 2018 she held a practicing certificate from the ICAEW. The Board is satisfied that Trudi Clark has recent and relevant financial experience, as required under the UK Code.

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 Audit 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 2018 to 30 September 2019 (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 as relevant to the Company.

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 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.

Audit Committee Meetings

The Audit 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 Channel Islands Limited ("KPMG") is also invited to each meeting.

In the year ended 31 March 2020, the Audit Committee met on three 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 2020, the Audit Committee views the valuation of Subsidiary's investments as a significant risk. This is considered a significant risk as the investment in the Subsidiary forms a substantial portion of the Company's assets and its determination requires judgments and estimates to be made in relation to certain assets within the Subsidiary's portfolio.

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.

The Audit 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 2020, these investments represented 1.78% of total investments. Since all investments held by the Subsidiary have been realised post year-end, this has given the Audit Committee the opportunity to compare the valuation as at 31 March 2020 to sales proceeds. The disposal of the Subsidiary's portfolio after the year-end achieved proceeds of EUR 6,651,372 in excess of the carrying value of the Subsidiary's portfolio at 31 March 2020.

In addition to the above the Audit 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 Audit 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 Audit 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 Audit 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 Audit Committee received a detailed audit plan from KPMG, identifying their assessment of these key risks. For the year ended 31 March 2020, the primary risk identified was in relation to valuation of investments. The risk is tracked through the year and the Audit Committee challenged the work done by KPMG to test management's assumptions and estimates around this area.

The Audit 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 Audit Committee sought feedback from the Investment Manager and the Administrator on the effectiveness of the audit process.

Appointment and Independence

The Audit Committee considers the reappointment of KPMG, including the rotation of the Audit Engagement Director, and assesses its independence on an annual basis. KPMG is required under Ethical Standards to rotate the Audit Engagement Director responsible for the Company audit every five years. The current Audit Engagement Director, David Alexander, has overseen the audit of the Company for one audit cycle commencing in September 2019. KPMG has been the Company's auditor since the Company's listing in 2012.

In accordance with the UK Code, the Audit Committee had intended to put the external audit out to tender following the completion of this year-end audit. However, in light of the vote by shareholders on the 18 May 2020 to pursue an orderly realisation of the Company's investments and return capital to shareholders there is not considered to be any benefit to shareholders or the Company to place the external audit service out for tender and consequently a resolution proposing the reappointment of KPMG as the Company's auditor will be put to the shareholders at the forthcoming AGM, except if a resolution is proposed to place the Company into liquidation at that meeting.

Non Audit Services

To safeguard the objectivity and independence of the external auditor from becoming compromised, the Audit 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 2019 to the date of approval of the audited financial statements:

During the year ended 31 March 2020, 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 26%.

Audit Committee Evaluation

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

Trudi Clark

Audit Committee Chairman

2 July 2020

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 2020 AGM.

Remuneration Summary

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

· Chairman and Chairman of the Risk Committee - £52,500.

· Chairman of the Audit Committee and Management Engagement 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.

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 monthly 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 2020 AGM. 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 Directors' 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 2020.

Anne Ewing

On behalf of the Remuneration and Nomination Committee

2 July 2020

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 have elected to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and applicable law.

The financial statements are required by law to 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 and prudent;

· 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. As detailed in Note 2, the financial statements have not been prepared on a going concern basis.

The Directors are responsible for keeping proper accounting records which 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 Trudi Clark

Chairman Audit Committee Chairman

2 July 2020 2 July 2020

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 of Alcentra Floating Rate Income Fund Limited (the "Company"), which comprise the statement of financial position as at 31 March 2020, the statements comprehensive income, changes in shareholders' equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information. These financial statements have not been prepared on the going concern basis for the reason set out in Note 2. 

In our opinion, the accompanying financial statements:

· give a true and fair view of the financial position of the Company as at 31 March 2020, and of the Company's financial performance and cash flows for the year then ended;

· are prepared in accordance with International Financial Reporting Standards 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 2019):

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

Materiality for the financial statements as a whole was set at €1,937,000, determined with reference to a benchmark of net assets of €96,566,911, of which it represents approximately 2.0% (2019: 3.0%).

We reported to the Audit Committee any corrected or uncorrected identified misstatements exceeding €96,000, 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. 

Other information

The directors are responsible for the other information. The other information comprises the information included in the annual report but does not include the financial statements and our auditor's report thereon. 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.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Disclosures of emerging and 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 (above) that they have carried out a robust assessment of the emerging and 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 (above) 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. These financial statements have not been prepared on the going concern basis for the reason set out in Note 2. 

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 provisions of the 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 set out above, 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. 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.

David Alexander

For and on behalf of KPMG Channel Islands Limited

Chartered Accountants and Recognised Auditors

Guernsey

2 July 2020

Statement of Comprehensive Income

For the year ended 31 March 2020

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

Statement of Financial Position

As at 31 March 2020

These audited financial statements were approved and authorised for issue by the Board of Directors on 2 July 2020, and signed on its behalf by:

Anne Ewing Trudi Clark

Director Director

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

Statement of Changes in Shareholders' Equity

For the year ended 31 March 2020

For the year ended 31 March 2019

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

Statement of Cash Flows

For the year ended 31 March 2020

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

Notes to the Audited Financial Statements

For the year ended 31 March 2020

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 2019: 100%) of the Subsidiary's 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 2020, 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.

The Company's investment objective and policy was changed post year end to pursue a strategy of realisation of the Company's investments and the return of capital to shareholders. Refer to note 16 for further details.

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

For the December 2019 quarterly tender, 16.5 million Ordinary Shares were tendered and repurchased by the Company during the year. Subsequent to the year-end, for the March 2020 quarterly tender an additional 11.7 million Ordinary Shares were repurchased by the Company. These two quarterly tenders represent 23% of the Ordinary Share capital of the Company. The Directors conducted a comprehensive review of the outlook for the Company due to the number of shares that had been repurchased and assessed the Company's ability to continue as a going concern. The Directors conducted extensive shareholder consultation and believed that shareholders would not be supportive of a reconstruction or reorganisation of the Company and therefore recommend to shareholders a change in the investment objective and policy in order to pursue a strategy of realisation of the Subsidiary's investments and the return of capital to shareholders. Changes to the investment objective and policy was approved by shareholders at the Extraordinary General Meeting held on 18 May 2020. Refer to note 16 for further details.

As a consequence of the above, the Directors consider it is appropriate to adopt a basis other than going concern in preparing the financial statements given the fact that all investments held by the Subsidiary have been fully realised and the Company is expected to be put into liquidation within 6 months from the date of approval of these financial statements.

As a result of the application of a basis other than going concern, costs expected to be paid in relation to the wind-up of the Company have been provided for. Refer to note 3.11 and 14 for further detail.

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 2020, 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 ("IFRS 10"), the Company has prepared individual audited financial statements and measures its investment in the Subsidiary at fair value.

IFRS 16 - Leases and IFRIC 23 - Uncertainty over Income Tax Treatments, became effective on 1 January 2019. As the Company does not participate in leasing arrangements and the Directors have determined that, as at 31 March 2020, the Company has no uncertain tax positions, these standards/interpretations do not have an impact on the Company's financial statements.

A number of amendments and interpretations to existing standards have been issued during the year ended 31 March 2020, that are not relevant to the Company's operations and therefore have no impact on the Company's financial statements.

The Directors are satisfied that, at the time of approving the audited financial statements, it is appropriate to adopt a basis other than going concern.

(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.

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 paragraphs below:

Fair value of financial assets designated at fair value through profit or loss

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 3.3 and 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.

Provision for winding-up

The financial statements have been prepared on a basis other than going concern and therefore the Company has recognised a provision in relation to the wind-up costs of the Company, as detailed in note 14. Note 3.11 outlines the judgements made by the Board, having liaised with the Investment Manager, in determining the provision.

(d) New Standards, Amendments and Interpretations issued but not yet effective for the financial year beginning 1 April 2020 and not early adopted

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:

The Board has undertaken an assessment of the impact of IFRS 17 and concluded that there will be no impact on the Company's financial statements as the Company does not participate in insurance contracts in the normal course of its business.

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. As at 31 March 2020, costs expected to be paid in relation to the wind-up of the Company have been provided for. Refer to notes 3.11 and 14 for further details.

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 Provision for winding-up

As the Company's financial statements are prepared on a basis other than going concern, the Board, in liaison with the Investment Manager, has recognised a provision for the estimated legal and liquidation costs which will be incurred on the wind-up of the Company. Refer to note 14 for further details.

3.12. 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.

The cost of the Company repurchasing Ordinary Shares which are subsequently held in treasury is deducted from equity. Gains or losses are not recognised on the purchase, sale, issue or cancellation of treasury shares. Treasury shares do not form part of the Company's issued share capital.

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. There is a minimum fee of £113,000 (€127,695) per annum for administration and custodian services.

The Administrator is entitled to receive an annual loan administration fee based on the NAV of the Company on a tiered percentage basis. There is a minimum fee of £40,000 (€45,201) per annum for loan administration services.

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 (€678) per placing.

c) Registrar's Agreement

Computershare Investor Services (Guernsey) Limited are registrar of the Company, pursuant to the Registrar Agreement dated 29 November 2017 and are entitled to a fixed fee of £19,500 (€22,036) 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 (€2,260).

The Broker was entitled to charge commission at a rate of 0.2% of the price paid for shares bought back under the share buyback programme, which ended in September 2019.

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 (Loss) / 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 or 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 recognition and measurement principles of IFRS.

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

1 The EUR/GBP exchange rate as at 31 March 2020 was 1.13005 and GBP/EUR 0.88492. (31 March 2019: EUR/GBP 1.15790 and GBP/EUR 0.86363). The EUR/GBP average exchange rate was 1.143975 and GBP/EUR average exchange rate was 0.87428. (31 March 2019: average EUR/GBP 1.14830 and average GBP/EUR 0.87092).

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 2020 and 31 March 2019, there were no reclassifications between levels of the fair value hierarchy.

As at 31 March 2020, accumulated interest of €6,449,578 (31 March 2019: €5,992,594) was due to the Company by the Subsidiary. On 6 September 2019, 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.

1Below details the Level of the investments held by the Subsidiary

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 (mid-price in the published NAV) based on the quotes obtained, after adjusting for outliers.

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 2020 and 31 March 2019, 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 2020, the net loss on the Company's investment in the Subsidiary included in the Statement of Comprehensive Income amounted to €18,477,204 (31 March 2019: a gain of €6,431,438), the breakdown of the (loss) / 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.

1 As at 31 March 2020, four Level 3 investments with a value of €1,360,684 were priced by the Alcentra Pricing Committee, while the other Level 3 investments with a value of €20,919,040 had one broker quote (31 March 2019: four Level 3 investments with a value of €2,816,512 were priced by the Alcentra Pricing Committee, while the other Level 3 investments with a value of €12,284,873 had one broker quote)

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

At the AGM held on 26 September 2019 the Directors were granted authority to repurchase 18,295,003 Ordinary Shares for cancellation or to be held as treasury shares. This authority will expire at the next AGM which will be held on 24 September 2020.

During the year ended 31 March 2020, the Company used the authorities detailed above to repurchase and cancel 10,266,098 Ordinary Shares in the market at a total cost of €11,444,481 (£10,119,819). There have been no share buy backs since 26 September 2019, the date when the quarterly tender offer was approved by shareholders.

Quarterly Tender Offer

The ordinary resolution proposing the quarterly tender offer was approved by shareholders at the AGM on 26 September 2019.

The details of the quarterly tender offer are as follows:

· On a quarterly basis (the last day of March, June, September, and December each year), ordinary shareholders will have the option to redeem up to 20% of their holding of ordinary shares (the "Basic Entitlement") as at the relevant record date (a "Quarterly Tender Offer").

· Quarterly Tender Offers will be made at a 1.5% discount to the NAV calculated on the final business day in each relevant quarter, or such other date as the Board in its absolute discretion may determine (the "Calculation Date"), such that ongoing shareholders are not disadvantaged by shareholders electing to redeem.

· No later than 30 business days prior to each quarter end, shareholders will be able to submit their redemption requests. The Company's NAV and therefore the Quarterly Tender Offer price will be struck on the last business day of each quarter. The Company will aim to settle each quarterly redemption 30 business days following a quarter end, however this may be delayed due to any abnormal market conditions arising at the relevant time impacting the underlying portfolio.

· Shareholders may request to redeem Ordinary Shares in excess of their Basic Entitlement and such requests will be satisfied on a pro rata basis to the extent that other shareholders do not request to redeem any or all of their Basic Entitlement.

· In each year, no more than 50% of the Ordinary Shares in issue (excluding Ordinary Shares held in treasury) may be redeemed.

· Ordinary Shares purchased will be held by the Company in treasury and will be available for reissue.

The Quarterly Tender Offer must comply with the Guernsey Law solvency requirements and also the realisation condition.

The first Quarterly Tender Offer took place for the quarter ending 31 December 2019 and 16,510,128 Ordinary Shares were repurchased and are being held in treasury as at 31 March 2020. Refer to note 16 for details on the tender for the quarter ended 31 March 2020. Subsequently, the Board has suspended further quarterly tender offers.

Significant Share Movements

The 103,361,401 Ordinary Shares in issue at 31 March 2020 (31 March 2019: 130,137,627 Ordinary Shares in issue) does not include the 16,510,128 shares held in treasury (31 March 2019: nil).

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. Since the realisation of the investments post year end, no further dividends will be declared or paid.

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

The dividend for the period 1 January 2020 to 31 March 2020 had an ex-dividend date after the year end and is detailed in note 16.

11. Reconciliation of NAV to Published NAV

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

2 The published NAV was calculated as at 29 March 2019, which did not take into consideration expense accruals for 30 and 31 March 2019 and changes in exchange rates from 29 to 31 March 2019.

3 €115,660 of the provision for winding up relates to the Subsidiary.

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.

COVID - 19

The COVID-19 outbreak has caused extensive disruption to businesses and economic activities globally. The uncertainties over the emergence and spread of COVID-19 have caused market volatility on a global scale. At the year-end the main risk for the Company as a result of the impact of COVID-19 related to potential defaults within the Subsidiary's portfolio. As explained in note 16, the Subsidiary's portfolio was disposed in full after the year-end and prior to the issuance of these financial statements, at a value in excess of the portfolio's fair value at 31 March 2020. As such, the risks arising as a result of COVID-19 are considered to have been fully mitigated, while the pricing risk associated with COVID-19 is considered to be captured within the range of sensitivities detailed below.

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 2020, the overall market exposure of the Company is equivalent to the fair value of the underlying portfolio of investments held by the Subsidiary was €76,329,318 (31 March 2019: €145,364,539).

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. The Investment Manager acknowledge the situation changed close to 31 March 2020 due to COVID-19, however a change of 5% is still considered to be reasonable based on the 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, acting on behalf of the Company, 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 2020, the Company had the following open forward foreign exchange contracts:

As at 31 March 2019, 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: