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City Merchants High Yield Trust Ltd - Half-year Report

PR Newswire

London, August 11

City Merchants High Yield Trust Limited

Half-Yearly Financial Report for the Six Months to 30 June 2017

KEY FACTS

City Merchants High Yield Trust Limited is a Jersey incorporated investment company listed on the London Stock Exchange. The Company commenced trading on 2 April 2012 as a successor company to City Merchants High Yield Trust plc.

Investment Objective

The Company’s investment objective is to seek to obtain both high income and capital growth from investment, predominantly in high-yielding fixed-interest securities.

Investment Policy

The Company seeks to provide a high level of dividend income relative to prevailing interest rates mainly through investment in bonds and other fixed-interest securities. The Company also invests in equities and other equity-like investments consistent with the overall objective.

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Performance Statistics

* Source: Thomson Reuters Datastream.

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INERIM MANAGERMENT REPORT INCORPORATING THE CHAIRMAN’S STATEMENT

Chairman’s Statement

For the benefit of those shareholders who did not attend the AGM or see the announcement of my appointment on the same day, I was appointed as a Director and have been Chairman of the Board since 15 June 2017. I look forward to working with my fellow Directors, the Manager and shareholders in guiding the Company into the future.

I am pleased to report that the Company’s net asset value (NAV) total return for the six months to 30 June 2017 was +5.8%. This compares favourably with a total return of +3.3% for the Merrill Lynch European High Yield Index and an average return of +3.1% for funds in the Investment Association Sterling Strategic Bond sector.

Improving economic data combined with continued monetary stimulus and easing political uncertainty provided a supportive environment for high yield bond markets during the first half of 2017. Despite yields continuing to fall the Company remains on course to match last year’s total dividend with first and second interim dividends of 2.5p each declared in respect of the year ending 31 December 2017. The Manager’s Investment Report provides further information on the market background and portfolio strategy during the review period.

Demand for the Company’s shares continued to be strong during the six months. The Company’s share price remained at a premium to NAV for most of the period under review and a total of 1.88 million shares were issued to satisfy demand. The average price of these shares issued was 197.83p. A further 775,000 shares have been issued since the half year end. The growth in the size of the Company provides two important benefits to shareholders. First, stock market liquidity is improved and secondly the Company’s fixed costs as a percentage of the NAV are reduced.

The supportive environment enjoyed by high yield markets in the first half of the year might suggest that prospects are set fair. However, the Board agrees with the Manager’s view that a note of caution is appropriate. Yields and credit spreads are at exceptionally low levels and history suggests that in this type of environment there is growing risk that prices might not fully reflect an issuer’s long-term fundamental prospects. Moreover, low yields owe much to the exceptionally easy monetary conditions maintained by central banks since the global financial crisis and toward the end of the period under review we were reminded of the challenges markets may well face when this largesse eventually starts to be unwound.

The Board is confident that the Manager’s disciplined and rigorous approach ensures that it is well equipped to navigate the challenges of the current market environment; patience should ultimately be rewarded and the portfolio remains well placed to take advantage of any opportunities provided by any future market volatility.

Finally, I would like to take this opportunity on behalf of the Board and shareholders to thank my predecessor Clive Nicholson for his long and successful contribution both as Chairman of this Company and prior to that as a Director and Chairman of its predecessor. Clive retired as Chairman at the 2017 AGM having served the Company and its predecessor for a combined total of 12 years.

Tim Scholefield

Chairman

15 August 2017

MANAGER’S INVESTMENT REPORT

Market Background

Accommodative monetary policy from central banks combined with a broadly supportive economic and political backdrop helped high yield bond markets to deliver positive returns during the first six months of 2017.

In the European high yield market, returns were driven by a further decline in yields – which move inversely to a bond’s price. This fall in yields occurred despite the European high yield market having entered 2017 with its lowest ever starting yield (3.3% on the Merrill Lynch European High Yield index). At the end of June the yield on the index had fallen to 2.7%.

After the very low levels of issuance during the first half of 2016, European high yield bond gross issuance (total amount of bonds issued) in 2017 has been much higher, with data from Barclays indicating a 69% increase in European currency issuance. Net issuance (gross issuance less bonds that have redeemed), however, remains low with companies redeeming bonds at a relatively rapid pace. Although there has been a deterioration in the quality of issuance we do not believe that lending standards within the European high yield market have yet deteriorated to the levels seen prior to the financial crisis.

Toward the end of June, a change to a more hawkish tone in central bank rhetoric weighed on government bond markets. High yield bonds were less influenced by interest rate expectations than their investment grade counterparts. Nonetheless, with yields so low, the high yield market is left more exposed to a rise in government bond yields than has historically been the case.

Company Results

The NAV of the Company ended June 2017 at 195.23p, an increase of 5.91p on the close of 2016 NAV of 189.32p. The Company paid a total dividend of 5p over the period. The NAV total return for the 6 months was 5.8%.

Portfolio Strategy

The portfolio holds a core (36%) of non-financial high yield corporate bonds, focused on seasoned issuers that we consider have a low likelihood of default. In addition, we have significant exposure to areas of the market which we believe offer relatively attractive yields. Approximately 25% of the portfolio is invested in bank capital, predominantly in the subordinated debt of large European banks (Additional Tier 1 and Legacy Tier 1). We also have around a 10% allocation to subordinated bonds in the insurance sector. Elsewhere we have holdings in hybrid capital instruments (subordinated bonds with some equity-like characteristics). These instruments are held across various sectors including telecoms and utilities. We believe the subordination risk of these more junior debt instruments is attractive in the context of those companies’ relatively strong balance sheets.

Borrowings and Gearing

The Company has borrowing facilities and the authority to use borrowings in order to gear the portfolio up to 30% of NAV. We can employ borrowings as a form of additional liquidity during a market sell-off or during an extended period of low yields, or to take advantage of market opportunities. However, we did not feel it appropriate to employ borrowings during the first half of the year.

Outlook

Our view on the high yield market remains cautious. Yields are exceptionally low and credit spreads (the difference in yield between corporate and government bonds) are relatively tight. However, default rates remain low and, all else being equal, we would expect the default outlook to remain benign in the months ahead.

The focus of markets has now switched to the tapering of the European Central Bank’s asset purchase programme. Discussion around this will be an important factor for markets and could cause yields to rise. Meanwhile other risks have reduced. Politics in Europe is now supportive of markets and the Eurozone economy continues to show signs of strength. Furthermore, the rescue of troubled banks in Italy, Spain and the UK has taken some of the risk out of the banking sector.

Our overall approach in this ongoing low yield environment remains focused on seeking to deliver a consistent and attractive level of income.

Rhys Davies Paul Read Paul Causer

Portfolio Managers

15 August 2017

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PRINCIPAL RISK AND UNCERTAINTIES

The principal risk factors relating to the Company can be summarised as follows:

– Investment Objective – there is no guarantee that the Company’s investment objective will be achieved or will provide the returns sought by the Company.

– Investment Risk – material changes affecting global capital markets may have a negative effect on the Company’s business, financial condition and results of operations. The poor performance of any individual portfolio investment has a negative effect on the value of the portfolio and consequently the Net Asset Value (NAV) per share. A majority of the portfolio comprises high-yield fixed-interest securities – these are subject to credit, interest rate, liquidity and duration risks, and a significant proportion of these are non-investment grade securities.

– Foreign Exchange Risk – the movement of exchange rates may have unfavourable or favourable impact on returns as the majority of the assets are non-sterling.

– Derivatives – the Company may enter into derivative transactions for efficient portfolio management. Derivative instruments can be highly volatile and expose investors to a high risk of loss.

– Dividends – the ability of the Company to pay dividends is dependent on the level of income generated from the portfolio.

– Ordinary Shares and Discount – the shares may trade at a discount to NAV and shareholders may be unable to realise their investment through the secondary market at NAV. The existence of a liquid market in the shares cannot be guaranteed.

– Gearing of Returns through Borrowings – performance may be geared by means of the Company’s credit facility. Whilst gearing will be used with the aim of enhancing returns on the portfolio when the value of the Company’s assets is rising, it will have the opposite effect when the value is falling. There is no guarantee that any credit facility would be renewable at maturity on terms acceptable to the Company.

– Operational Risk, including Reliance on Third Party Providers – failure by any service provider to carry out its obligations in accordance with the terms of its appointment could have a materially detrimental impact on the effective operation of the Company and on the ability of the Company to pursue its investment policy successfully.

– Regulatory and Tax Related – whilst compliance with rules and regulations is closely monitored, breaches could affect returns to shareholders. Changes to regulation or to the Company’s tax status or tax treatment might adversely affect the Company.

A detailed explanation of these principal risks and uncertainties can be found on pages 11 to 13 of the Company’s 2016 annual financial report.

In the view of the Board, these principal risks and uncertainties are as applicable to the remaining six months of the financial year as they were to the period under review.

RELATED PARTIES

Note 22 of the 2016 annual financial report gives details of related party transactions. The basis of these has not changed for the six months being reported. The 2016 annual financial report is available on the Company’s section of the Manager’s website at

www.invescoperpetual.co.uk/citymerchants.

GOING CONCERN

The financial statements are prepared on a going concern basis. The Directors consider that going concern is the appropriate basis as they have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. In reaching this conclusion, the Directors have taken into account the Company’s investment objective, its risk management policies, the diversified nature of its investment portfolio, the borrowing facility which can be used to meet short-term funding requirements, the liquidity of most of its investments which could be used to repay any borrowings in the event that the facility could not be renewed or replaced and the ability of the Company to meet all of its liabilities and ongoing expenses.

BOND RATING ANALYSIS (STANDARD AND POOR’S RATINGS)

The definitions of these ratings are set out on page 58 of the 2016 annual financial report.

* NR: not rated.

Directors’ Responsibility Statement

in respect of the preparation of the half-yearly financial report.

The Directors are responsible for preparing the financial report, using accounting policies consistent with applicable law and International Financial Reporting Standards.

The Directors confirm that to the best of their knowledge:

– the condensed set of financial statements contained within the half-yearly financial report have been prepared in accordance with International Accounting Standards 34 ‘Interim Financial Reporting’;

– the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R of the FCA’s Disclosure Guidance and Transparency Rules; and

– the interim management report includes a fair review of the information required on related party transactions.

The half-yearly financial report has not been audited or reviewed by the Company’s auditor.

Signed on behalf of the Board of Directors.

Tim Scholefield

Chairman

15 August 2017

tHIRTY LARGEST INVESETMENT AT 30 JUNE 2017

Condensed Statement of Changes in Equity

Condensed Statement of Comprehensive Income

The total column of this statement represents the Company’s statement of comprehensive income, prepared in accordance with International Financial Reporting Standards as adopted by the EU. The profit after tax is the total comprehensive income. The supplementary revenue and capital columns are both prepared in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations and the Company has no other gains or losses. No operations were acquired or discontinued in the period.

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CONDENSED BALANCE SHEET

Registered in Jersey No. 109714

Condensed Statement of Cash Flow

Notes to the Interim Financial Results

1. Basis of Preparation

The condensed financial statements have been prepared using the same accounting policies as those adopted in the 2016 annual financial report. They have been prepared on an historical cost basis, in accordance with the applicable International Financial Reporting Standards and in accordance with the Statement of Recommended Practice for Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in November 2014, as amended in January 2017.

2. Management Fees

Investment management fees and finance costs are allocated 35% to capital and 65% to revenue.

The management fee is payable quarterly in arrears and is equal to 0.1875% of the value of the Company’s total assets under management less current liabilities at the end of each quarter.

In addition, the Manager is paid a fixed administration fee of £25,000, based on £22,500 plus RPI per annum.

3. Taxation

The Company is subject to Jersey income tax at the rate of 0% (2016: 0%). The overseas tax charge consists of irrecoverable witholding tax.

4. Dividends Paid

Dividends paid in the period have been charged to revenue except for £10,000 (six months to 30 June 2016: £17,000) which was charged to stated capital. This amount is equivalent to the income accrued on the new shares issued in the period (see note 6).

A second interim dividend of 2.5p (2016: 2.5p) has been declared and will be paid on 25 August 2017 to ordinary shareholders on the register on 21 July 2017.

5. Income

6. Stated Capital, including Movements

Alloted ordinary shares of no par value.

Of the net issue proceeds of £3,700,000, an aggregate amount of £10,000 represented the accrued income element of the net asset value attributed to the new shares.

Subsequent to the period end 775,000 shares have been issued at an average price of 198.83p.

7. Classification Under Fair Value Hierarchy

Note 19 of the 2016 annual financial report sets out the basis of classification.

There were no Level 3 holdings at any period end, and the total (not shown) is therefore the aggregated of Level 1 and Level 2.

(1) Fixed interest securities include both fixed and floating rate securities.

8. Status of Half-yearly Financial Report

The financial information contained in this half-yearly report, which has not been audited by the Companies auditor and does not constitute statutory accounts as defined in Article 104 of Companies (Jersey) Law 1991. The financial information for the half year ended 30 June 2017 and the half year ended 30 June 2016 have not been audited. The figures and financial information for the year ended 31 December 2016 are extracted and abridged from the latest published accounts and do not constitute the statutory accounts for that year.

By order of the Board

R&H Fund Services (Jersey) LimitedCompany Secretary

15 August 2017