Athelney Tst. Regulatory News (ATY)

2 Apr 2008 07:00

Athelney Trust PLC02 April 2008 Embargoed 7 am Wednesday April 2 2008 ATHELNEY TRUST plc: PRELIMINARY RESULTS Athelney Trust plc ("Athelney"), the AIM-listed investor in junior markets andsmall companies, announces its audited preliminary results for the year endedDecember 31 2007. Highlights: • Recommended dividend of 3.5p per share (2006 recommended: 3.25p), a rise of 7.7 per cent • Net Asset Value at 173.1p per share, down 8.8 per cent (2006: 189.7p) • Gross revenue increased by 26 per cent to £120,488 (2006: £95,614) • Like for like basis revenue up 18.3 pe rcent, dividend income up by 17.6 per cent • Revenue return per ordinary share at 3.9p up 18.2 per cent (2006: 3.3p) Athelney Chairman, Hugo Deschampsneufs, said: "Everything that could go wrongwith 2007 did. The result was a very poor equity market in the second half ofthe year which undid all the good work of the first. "Here we are right in the middle of a credit crisis which originated not inLombard Street but in the trailer parks of the United States. How did we getinto this mess? How is it that we have not had a run on a bank for 141 years,yet pictures of solid British subjects queuing outside branches of Northern Rockhave flashed round the world to the apparent amusement of everyone who wanted totake business away from the City of London? "Mr G Brown, ex-Chancellor of the Exchequer, is to my mind the culprit. He tookaway the Bank of England's historic role as guardian of the City and spreadresponsibility between the Bank, the Financial Services Authority and theTreasury. This did not seem very clever at the time and has subsequently provedso. "There is a danger that we can just become too gloomy about everything. It isworth bearing in mind that in the midst of the Great Depression up to 50 percent of mortgages in America were in default - today's equivalent figure is sixper cent. Mr Ben Bernanke, Chairman of the US Federal Reserve Board hasannounced seven initiatives since August. His aim is to improve substantiallyboth liquidity and solvency. "One can only blush at the British Chancellor's statement that the UK is betterplaced than other leading economies to cope with a slowdown. With 30 per cent ofoutput coming from the City of London, finance and business services how canthis be anything other than dangerous complacency? "Yes I do believe that Mr Bernanke will succeed in his laudable ambitions and,yes, I do believe that recovery prospects in equity markets are excellent - butpatience will be required!" -ends- For further information: Robin Boyle, Managing DirectorAthelney Trust plc 020 7628 7937 Paul Quade 07947 186694CityRoad Communications 020 7248 8010 John Riddell, DirectorNoble & Company Ltd 020 77632200 Chairmans's statement and business review I announce the audited results for the year ended 31 December 2007. The salientpoints are as follows: • Recommended dividend of 3.5p per share (2006 recommended: 3.25p), an increase of 7.7 per cent • Audited Net Asset Value ("NAV") is 173.1p per share (31 December 2006: 189.7p), a fall of 8.8 per cent. • Gross Revenue increased by 26 per cent to £120,488 (31 December 2006: £95,615). • On a like-for-like basis revenue increased by 18.3 per cent and dividend income rose by 17.6 per cent. • Revenue return per ordinary share was 3.9p, an increase of 18.2 per cent (31 December 2006: 3.3p). Review of 2007 The year 2007 turned out to be a particularly disappointing and frustratingperiod in that Athelney's unaudited NAV as at 30 June 2007 was up by 6.1 percent but we finished the year down by 8.8 per cent. The second half of the year will principally be remembered for those ThreeAmigos, sub-prime lending, the credit crunch and Northern Rock which caused adisorderly retreat from small caps into blue chips and the latter into gilts andcash. More of the Three later. A good place to start a review of the year is with the international situationbut, rather than list a long liturgy of trouble-spots, allow me to mention twoplaces which exemplify just what a dangerous world we live in today. On 6September, Israeli jets bombed a mysterious site near Deir-ez-Zor on theEuphrates River, eastern Syria: could it have been missiles on their way toHezbollah, the Shia movement that Syria backs in Lebanon? Or was it perhaps anuclear reactor in the early stages of construction and were North Koreantechnicians involved? Was the raid an indirect way for Israel and its Americanally to warn the Iranians of what might happen if they continue to enrichuranium? Or simply an Israeli exercise to test Syria's air defence system, saidto have been upgraded by the Russians? George W. Bush, who obviously knows whatis happening, is saying nothing: 'This is not my first rodeo' he stalled at apress conference in October. Meanwhile, in the Swat Valley in Pakistan, an area famous in that part of theworld for its beautiful mountains and lakes and superb skiing has reputedly beenover-run by a combustible cocktail of local malcontents, al Qaeda and theTaliban even though the area is being patrolled by 20,000 less-than-enthusiasticPakistani soldiers. All this is happening less than two hours' drive from thecapital Islamabad - the chilling thought is accompanied by another, namely thatPakistan is a nuclear power. 'It seems that' mused a member of the MusharrafGovernment a few short weeks before the assassination of Benazir Bhutto 'we havea University of Terrorism in the Tribal Areas as good as Harvard, in its field.' Everything that could go wrong with 2007 did. What started with unsoundsub-prime mortgages, spread to collateralized debt obligations (CDOs) in whichthose mortgages were wrapped, endangered municipal bond insurance and threatenedto unravel the credit default swap (CDSs) market. Furthermore, investment banks'commitments to leveraged buyouts (LBOs) became liabilities and hedge fundsdesigned to be market-neutral turned out not to be and had to be unwound. Theasset-backed commercial paper market came to a standstill and the specialinvestment vehicles (SIVs) set up by the banks to move mortgages off balancesheet could no longer obtain outside financing. Worst of all, inter-banklending, which is central to the financial system, was badly disrupted becausebanks had to conserve resources and no longer knew which of the other banks totrust. As a consequence, the central banks had to inject an unprecedented amountof liquidity into the system and extend credit on a much wider range ofsecurities than ever before. Thus the credit crunch trundled onwards. Away from the world of high finance, we in the UK had three rises in interestrates - most or all of them ill-advised in my opinion - with which to cope, plusfloods, foot and mouth, blue tongue, avian 'flu (twice) and an unsuccessfulterrorist attack. The result of all this was a very poor equity market in the second half of theyear which undid all the good work of the first so that the FT Small Cap Indexfell by 12.4 per cent over the twelve-month period and, as far as the wholemarket was concerned, the median share fell by 10.1 per cent. Some popularsectors did far worse, for example: retailers 26 per cent; house-builders (myestimate) 45 per cent; commercial property 38 per cent; banks 21 per cent and soon. Compare and contrast with the Shanghai and Indian indices, which jumped by95.6 per cent and 46.5 per cent respectively as investors strove to buy intothose nations' sparkling economic growth. So here we are right in the middle of a credit crisis which originated, not inLombard Street, but in the trailer parks of the United States, and how did weget into this mess? How is it that we have not had a run on a bank for 141years, yet pictures of solid British subjects queuing up outside branches ofNorthern Rock have flashed round the world to the apparent amusement of everyonewho wanted to take business away from the City of London? Mr. G. Brown,ex-Chancellor of the Exchequer, is to my mind the culprit. In 1866, the firm of Overend, Gurney & Co. had, next to the Bank of Englanditself, the biggest balance sheet in London and took deposits from all over thecountry. However, it was not sound and had taken speculative and disastrousinterests in shipbuilding, steel, land and so on through a complex web of over200 companies. When the run started, the Bank appointed a committee of threewise men to have a look at Overend, Gurney's books who reported back that thelatter was 'rotten to the core' and that nothing could be saved. That was theend of Overend, Gurney but the Bank next day lent secretly the then-amazing sumof £4m to banks, discount houses and merchants to see them over any difficulty.This was entirely successful. Coming up to date, the sums involved are very much larger, of course, but surelythe principle is the same isn't it? No, the man some call Mr Tinkerman from hisconstant habit of messing and tinkering with things and yet not improving them,became Chancellor of the Exchequer in 1997 and everyone remembers how he gaveindependence to the Bank of England - except that he didn't. Or rather, he gaveresponsibility to the Bank for monetary policy (i.e. setting interest rates) buttook away the Bank's historic role as guardian of the City and spreadresponsibility between the Bank, the Financial Services Authority and theTreasury. This did not seem very clever at the time and has subsequently provedto be so. The highly public support operation for Northern Rock had the sameeffect as a lion ambling up to a herd of wildebeest: a mass depositor stampedewhich has destroyed so much value for Ordinary shareholders and holders of the12.625% Subordinated Loan Notes. Was Northern Rock as unsound as Overend, Gurney was 141 years ago? No, NorthernRock was solvent, profitable but illiquid, had a low number of slow payers andwas the most efficient lender in the market-place. What it couldn't do wasborrow money quietly from the Bank when the credit crisis skipped continents.The consequences of all this are profound: a financial institution that hadunderpinned the economy and self-image of one of England's poorest regions, theNorth East, has been destroyed, the reputation of a good central bank governorhas been tarnished and an internationally admired regulatory system has falleninto disrepute. The trouble with taking out a mortgage these days is that you don't know whereit is going to end up - before you can say knife, your bank has thrown it inwith a few thousand others, sliced, diced and wrapped them into a package andsold them on to other parties or perhaps to its own trading desk. This processis known as securitization which, for a brief moment, turned investment banksinto mega-growth stocks but now threatens to bring them back down to mortalstatus. CDOs repackaged mortgages, CLOs did the same for leveraged (geared)corporate loans and there are also specialist products involving both studentand auto loans. Structured investment vehicles (SIVs) are also full of danger:they borrow short-term to invest in long-dated assets but investors will nolonger tolerate such a mismatch and so banks have had to bring back over $136billion onto their books. That comes on top of $160 billion so far, and possibly$400 billion in total sub-prime write-downs. This practice of securitization hasexposed four deep flaws: severing the link between those who scrutiniseborrowers and those who lose when the borrower defaults has resulted in a lackof accountability; second, the new products are opaque and incredibly complex;third, some securities were badly structured and their risks not fullyunderstood and, fourth, investors relied too much on the rating agencies whowere themselves compromised from the start by being paid for their research bythe seller not the buyer. Essentially, there are only three Nationally Recognised Rating Organizations(ratings agencies): Standard & Poor's (S&P); Moody's and Fitch. All three ratesecurities using a nine-point scale which they label differently. S&P and Fitchuse: AAA, AA, A, BBB, BB, etc. whereas Moody's prefers: Aaa, Aa, A, Baa, Ba, andso on. Many think that AAA/Aaa means armour-plated, BBB/Baa is riskier and CCC/Caa suggests that you run for the hills. Oh, were it so simple: first, there aremany ways to measure credit risk; second, S&P and Moody's employ differentapproaches so that the former rates are based on default probability with a BBBrating, for instance, reflecting a 7.1% default probability. Moody's, on theother hand, goes by expected loss, which is calculated as default probabilitymultiplied by the severity of the loss. So much for the methodology but the fact of the matter is that that the ratingsagencies have earned huge fees by offering opinions on the creditworthiness ofan alphabet soup of mortgage-related securities created by over-eager banks. Asthe market expanded, so did the agencies' profits - Moody's net income rose from$289 million in 2002 to $754 million in 2006. Did these huge fees lead to a dropin standards? I am sure that the agencies would say not but if a security istrading at 70 cents on the dollar, it is no use saying that S&P rates it AAA -the extra 30 cents will not magically appear just because the agency says so.The solution, in my opinion, is to force brokers and investors to pay for theratings - that way there can be no doubt as to whether there is a conflict ofinterest. Another obscure corner of the world of high finance is surely needing a boldrescue plan. So-called monoline insurers guarantee the capital and interest onmunicipal bonds, in effect renting out their AAA ratings in return for a fee.For a long time, this business was dull, boring but nicely profitable. Ascompetition grew, however, the monolines were attracted by the higher returns ofinsuring CDOs and the rest of the alphabet soup. But as mortgage defaults roseso did monoline losses - two such insurers wrote off $8.5 billion in the lastquarter of the year. The monolines' thin capital cover, perfectly adequate whenthey were doing only safe municipal business, now looks to be worryinglythreadbare. Unless they raise more capital, it is likely that the ratingsagencies will downgrade them with the inevitable consequence that all the paperthat they have insured will have to be downgraded as well. Holders of downgradedbonds will have to mark them down in value under 'fair value' accounting rulesand some investors, who are only allowed to hold highest-grade bonds, may becomeforced sellers. Investment banks that were active in the CDO market may thinkthat it would be cheaper for them to ride to the rescue of the monolines ratherthan let the worst happen - perhaps a plan will have been hatched by the timethat you read this. In May, 2006 Alan Greenspan, the former Federal Reserve chairman, noted, 'Thecredit default swap is probably the most important instrument infinance......What CDS did is lay off all the risk of highly leveragedinstitutions - and that's what banks are, highly leveraged - on stable Americanand international institutions.' Reality may prove different: in recent monthswhole swathes of investors have suddenly realized just how opaque many of thenew complex instruments are. However, at its simplest, the CDS is similar tocredit insurance. The buyer of protection (typically a bank) transfers the riskof default by one of its borrower clients to a protection seller (perhaps amonoline insurer or hedge fund) who for a fee indemnifies the protection buyeragainst a credit loss. It seems to me that there are two problems at the moment:first, these contracts were taken out when credit was easy to obtain and defaultrates were therefore very low. Expect default rates to shoot up now that creditconditions are tight; second, there is a danger that the selling party may notbe able to keep its part of the bargain. Monoline insurers, as we have alreadydiscovered, are in dire straits. What is the damage? Anything between $30billion and $150 billion, it has been estimated. With the more complex stuff,frankly it is anybody's guess. There are three more worrying factors to mention before I close, the first beingthe increasing number of profit warnings. The 107 profit warnings from companiesin the last quarter of 2007 was the highest number since 2001 and represents a22 per cent increase on 2006. The pound suffered its weakest annual performance for 15 years in 2007, falling6.1 per cent in the past year which is the biggest annual decline since 1992 -the year in which Britain was ejected from the European Exchange Rate Mechanism.The Sterling Exchange Rate Index, which compares the pound with a comprehensivebasket of currencies, finished the year at 97.9 having weakened by 6.7 per centin the second half of the year. No review of 2007 would be complete without a paragraph on commodities, theprices of many of which have now been in an upswing for several years - crudeoil, for instance has surged by 450 per cent in the current cycle with the rallynow more than six years old, the most powerful and durable ever. Copper had atrough-to-peak rise of 570 per cent between November 2001 and May 2006 - whilethe rise in gold and silver has not yet surpassed the events of the 1970s inpercentage terms, it has been the most durable on record as the cycle approachesits seventh year. In 2007, wheat prices more than doubled and almost every cropunder the sun - maize, milk, oilseeds and so on - is at or near a peak innominal terms having risen on average by 26 per cent last year: even in realterms, food prices have risen by 75 per cent since 2005. Dearer food is likelyto persist for many years: that is because 'agflation' is underpinned by changesin diet that accompany the growing wealth of emerging economies such as Chinaand India - the Chinese consumer who ate 20kg of meat in 1985 now gets throughover 50kg. This in turn pushes up demand for grain since, for instance, it takes8kg of grain to produce one of beef. But the rise in prices is also the resultof American over-generous ethanol subsidies. This year biofuels will take athird of America's huge maize crop - fill up an SUV's fuel tank and you haveused up enough maize to feed a person for a year. At the moment, there aresomething like nine cars to every 1,000 people in China compared with more than900 in America - there is quite a lot of catching up to do. As far as uranium isconcerned, there are 442 nuclear reactors in the world needing 180 million lbseach year but only 110 million lbs was mined in 2005. There is a similar storyfor gold: in India, gold is often used for wedding gifts and, with increasingprosperity, there has been a huge rise in demand. And even with 23 new goldmines coming on stream world-wide, supply may not be enough. So, the era ofcheap food has gone for good and increasing demand for metals and minerals islikely, in many cases, to underpin high prices. Results Gross Revenue increased by 26 per cent compared to 2006. A breakdown of thecompanies paying dividends is given below: Number Companies paying dividends 95Companies sold (therefore no true comparison) 13Companies purchased (therefore no true comparison) 24Increased total dividends in the year 50Reduced total dividends in the year 6No change in dividend 2 Corporate Activity Six of our companies were taken over for cash: Enterprise; European MotorHoldings; City Lofts; Hitachi Capital, Ben Bailey and Domestic & Generalproducing a profit of 698 per cent, 242 per cent, 30.3 per cent, 9.5 per cent,83.8 per cent and 88.1 per cent respectively. Portfolio Review Holdings of Aero Inventory, Umeco, Character Group, Prime People, RenewHoldings, Smallbone, H&T Group, Ambrian Capital, FDM Group, Finsbury Food, M&CSaatchi, Quarto Group, Trifast, Creston, LSL Property Services, Avesco Group,Financial Objects and OPD Group were all purchased for the first time. BlacksLeisure, Johnson Service, AT Communications, Erinaceous Group, City of Londonand Speymill were all sold. In addition, a total of twenty-seven holdings weretop-sliced to provided capital for the new purchases. Dividend The Board is pleased to recommend an increased annual dividend of 3.5p perordinary share (2007: 3.25p). This represents an increase of 7.7 per cent overthe previous year. Subject to shareholder approval at the Annual General Meetingon 14 May 2008, the dividend will be paid on 16 May 2008 to shareholders on theregister on 18 April 2008. Update The unaudited NAV at 29 February 2008 was 160.3p whereas the share price on thesame day stood at 169.5p. Further updates can be found onwww.athelneytrust.co.uk Outlook When I look at the world-wide equity market, I am reminded of WinstonChurchill's famous phrase 'It is a riddle, wrapped in a mystery, inside anenigma ........' No matter that he was talking about something completelydifferent (Russia's attitude to the war in October 1939) it remains a tellingdescription of where we are now. But it is to a well-known American that we mustturn rather than a famous Englishman, so please step forward Mr. Ben Bernanke.So far, the Chairman of the U.S. Federal Reserve Board has announced seveninitiatives since last August including steep interest rate cuts, extraborrowing facilities and is now offering Treasury securities in exchange forAAA-rated mortgage-backed investments (poor old American tax-payer!). His aim isto improve substantially both liquidity and solvency - the former so that bankswill start to lend to each other again and the latter so that such as BearSterns are not overwhelmed by their losses in CDOs and CDSs (over 100 CDOs andSIVs are in default already) although hedge funds will be allowed to go to thewall and are starting so to do. Of course there is a danger that we can just become too gloomy about everything;it is worth bearing in mind that in the midst of the Great Depression up to 50per cent of mortgages in America were in default - today's equivalent figure is6 per cent. On the other hand, one can only blush at the British Chancellor'sassertion that the U.K. is better placed than other leading economies to copewith a slow-down. With 30 per cent of output coming from the City of London,finance and business services how can this be anything other than dangerouscomplacency? Yes, I do believe that Mr. Bernanke will succeed in his laudable ambitions and,yes, I do believe that recovery prospects in equity markets are excellent - butpatience will be required! H.B. Deschampsneufs Chairman 2 April 2008 ATHELNEY TRUST PLC STATEMENT OF TOTAL RETURN (incorporating the revenue account) FOR THE YEAR ENDED 31 DECEMBER 2007 Audited Results to 31 December 2007 Audited Results to 31 December 2006 Revenue Capital Total Revenue Capital Total £ £ £ £ £ £Profits oninvestments - (362,778) (362,778) - 708,480 708,480 Income 120,488 - 120,488 95,615 - 95,615 Investmentmanagementexpenses (9,893) (28,979) (38,872) (8,216) (24,164) (32,380)Other expenses (52,362) - (52,362) (35,355) - (35,355) ________ _________ _________ ________ ________ _________ Return onordinaryactivitiesbeforetaxation 58,233 (391,757) (333,524) 52,044 684,316 736,360 Taxation 12,295 81,248 93,543 8,278 (122,442) (114,164) ________ ________ _________ ________ ________ _________Return onordinaryactivitiesafter taxation 70,528 (310,509) (239,981) 60,322 561,874 622,196 ________ ________ _________ ________ ________ _________ Return perordinaryshare 3.9p (17.2)p (13.3)p 3.3p 31.2p 34.5p Dividendpaid perordinaryshare- Finaldividend 3.25p 2.5p The revenue column of this statement is the profit and loss account for theCompany. All revenue and capital items in the above statement derive from continuingoperations. No operations were acquired or discontinued during the above financial years. There have been no recognised gains or losses, other than the results for thefinancial years shown above. ATHELNEY TRUST PLC BALANCE SHEET AS AT 31 DECEMBER 2007 2007 2006 (audited) (audited) £ £Fixed assetsInvestments 3,167,818 3,706,392 _________ _________ Current assets Debtors 205,773 105,603Cash at bank and in hand 45,335 32,486 _________ _________ 251,108 138,089 Creditors: amounts falling due within one year (41,921) (50,797) _________ _________ Net current assets 209,187 87,292 _________ _________Total assets less current liabilities 3,377,005 3,793,684 Provisions for liabilities and charges (256,283) (374,390) _________ _________Net assets 3,120,722 3,419,294 _________ _________Capital and reserves Called up share capital 450,700 450,700Share premium account 405,605 405,605Other reserves - non distributableCapital reserve - realised 892,893 719,086Capital reserve - unrealised 1,239,083 1,723,399Revenue reserve 132,441 120,504 _________ _________ Shareholders' funds - all equity 3,120,722 3,419,294 _________ _________Net Asset Value per share 173.1p 189.7p ATHELNEY TRUST PLC CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2007 2007 2006 (audited) (audited) £ £ £ £ Net cash inflow fromoperating activities (69,440) 68,111 Servicing of finance Dividends paid (58,591) (45,070) ________ ________Net cash (outflow) fromservicing of finance (58,591) (45,070) Taxation Corporation tax paid (34,916) (18,613) Investing activities Purchases of investments (1,247,174) (1,103,978)Sales of investments 1,422,970 1,091,988 ________ ________Net cash (outflow)/inflowfrom investing activities 175,796 (11,990) ________ ________ Decrease increase in cash 12,849 (7,562)in the year ________ ________ Notes: 1. The figures included in the above statement are an abridged version of Athelney's audited results for the year ended 31 December 2007 and do not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985, as amended. The figures for the year ended 31 December 2006 are extracted from the statutory accounts filed with the Registrar of Companies and which contained an unqualified audit report. 2. The calculation for the return per ordinary share is based on the return on ordinary activities after taxation shown below and on the average weighted number of shares in issue during the period of 1,802,802 (2006: 1,802,802). 2007 2006 Revenue Capital Total Revenue Capital Total £ £ £ £ £ £ 70,528 (310,509) (239,981) 60,322 561,874 622,196 3. Dividend information: Ex dividend date 16 April 2008Dividend payable to shareholders registered on 18 April 2008Dividend payable on 16 May 2008 4. Copies of this announcement are available, free of charge, for a periodof one month from Athelney's Nominated Advisor: Noble & Company Limited, 76 George Street, Edinburgh, EH2 3BU Copies of the full financial statements will be available on Athelney's websitewww.athelneytrust.co.uk on 02 April 2008. Paper copies of the full financialstatements specifically requested by some shareholders will be posted on 02April 2008. 02 April 2008 END This information is provided by RNS The company news service from the London Stock Exchange