18 May 2020 07:00
Invesco Enhanced Income Ltd - Half-year ReportInvesco Enhanced Income Ltd - Half-year Report
PR Newswire
London, May 15
Invesco Enhanced Income LimitedHalf-Yearly Financial Report Announcement for the Six Months to 31 March 2020
Key Facts
Invesco Enhanced Income Limited is a closed-end investment company with limited liability incorporated in Jersey. The Company’s ordinary shares are listed on the London Stock Exchange.
Investment Objective of the Company
The Company’s principal objective is to provide shareholders with a high level of income whilst seeking to maximise total return through investing in a diversified portfolio of high yielding corporate and government bonds. The Company may also invest in equities and other instruments that the Manager considers appropriate. The Company seeks to balance the attraction of high yield securities with the need for protection of capital and to manage volatility. The Company generally employs gearing in its Investment Policy.
Full details of the Company’s Investment Policy (incorporating the Company’s investment objective, investment policy and risk and investment limits) can be found on pages 9 and 10 of the Company’s 2019 annual financial report.
Performance Statistics
| At | At | ||
| 31 MAR | 30 SEPT | % | |
| 2020 | 2019 | Change | |
| Balance sheet | |||
| Shareholders' funds (£'000)(1) | 107,976 | 126,157 | –14.4 |
| Net asset value(2) per ordinary share | 62.1p | 74.2p | –16.3 |
| Share price(3) | 56.4p | 75.2p | –25.0 |
| (Discount)/premium per ordinary share(2) | (9.2)% | 1.3% | |
| Gross borrowing(2) | 19% | 19% | |
| Net borrowing(2) | 14% | 15% | |
| SIX MONTHS | SIX MONTHS | YEAR | |
| ENDED | ENDED | ENDED | |
| 31 MAR | 31 Mar | 30 SEPT | |
| 2020 | 2019 | 2019 | |
| Total Return(3) | |||
| Net asset value(2) | –13.4% | +1.9% | +8.9% |
| Share price(2) | –22.5% | –2.3% | +6.7% |
| 3 month LIBOR rate | +0.4% | +0.8% | +0.8% |
| Revenue | |||
| Net revenue return (£'000) | 3,953 | 3,793 | 7,808 |
| Revenue return per ordinary share | 2.3p | 2.3p | 4.7p |
| Dividends per ordinary share: | |||
| – first interim | 1.25p | 1.25p | 1.25p |
| – second interim | 1.25p | 1.25p | 1.25p |
| – third interim | — | — | 1.25p |
| – fourth interim | — | — | 1.25p |
| Total | 2.50p | 2.50p | 5.00p |
(1) For the period to 31 March 2020, 3,750,000 ordinary shares were issued for net proceeds, after issue costs, of £2,865,000 (2019: nil).
(2) Alternative Performance Measures (APM) see page 7 for the explanation and calculation of APMs. Further details are provided in the Glossary of Terms and Alternative Performance Measures in the 2019 annual financial report.
(3) Source: Refinitiv.
Interim management report incorporating the Chairman’s Statement
Chairman’s Statement
The period running up to and since our year end has been one of the most challenging in recent times. So, I would firstly like to say thank you to you, our shareholders, for your support and, as importantly, to everyone involved in the management and operation of this Company. Our portfolio manager, Rhys, has been working very hard to make good investment decisions and remains diligent in keeping the Board apprised of market changes and their impact on the Company. Operationally, the move to remote working has been accomplished by all of our service providers in a seamless manner and as a Board we would like to reassure you that we remain confident that the Company is in good hands.
Results for the six months to 31 March 2020
Turning now to the six months under review, the Company has delivered a total net asset value return of –13.4%. This compares to 3 month LIBOR of +0.4%. The share price premium decreased from 1.3% to a discount of 9.2%. Since the end of the reporting period, the Company has returned to a premium and has recommenced issuance of shares. This reflects not only the improving market environment but also the Company’s strong performance relative to both its peers and 3 month LIBOR. On behalf of the Board, I would like to thank the portfolio managers for their continued hard work on behalf of shareholders.
The Portfolio Managers’ Report which follows continues the cautionary tone of much of their recent reporting. Borrowing at the period end was 19% gross and 14% net of cash balances.
Outlook
During this extremely challenging time, there has been no material change in portfolio strategy. The Company’s closed ended structure means the Manager does not have to realise investments in these volatile markets to meet redemptions. It enables the Manager to utilise borrowings to take advantage of opportunities to purchase bonds at attractive prices and enhance income as and when they present themselves. The Company has material revenue reserves available to support the payment of the quarterly dividend. The Company’s dividend policy remains unchanged and, whilst the Board is closely monitoring developments throughout the COVID-19 crisis, it remains confident that the portfolio is in good hands.
Kate Bolsover
Chairman
15 May 2020
Portfolio Managers’ report
Market background
The performance of the high yield bond market over the six months to the 31 March 2020 was dominated by the market’s reaction to the impact of Covid-19 in late February and March 2020. The deterioration in sentiment was further compounded by a collapse in the oil price. This had a significant impact on the US high yield market, which has a high number of energy companies.
By end of March, most countries across the world had, in response to the virus, introduced some form of lockdown. Economic activity has been significantly curtailed and many companies shuttered.
The world’s central banks have responded to these shocks with unprecedented stimulus, slashing interest rates and restarting Quantitative Easing programmes. In the US, the Federal Reserve has committed to direct support of the corporate bond market including the unprecedented step of announcing it will purchase high yield bonds under certain conditions. After a very sharp market correction from late February, these announcements sparked the biggest rally in high yield bonds since the global financial crisis in 2008.
Large fiscal policy stimulus programmes have also been a part of the response of many governments. This has included loans and support for companies. Nonetheless, the period has been extremely difficult for many companies, in particular those in leisure, travel and parts of the retail sector. For many companies the impact of this crisis will be felt for some time.
The banking sector has also come under pressure and many banks have announced that they are stopping dividends, in-line with recommendations from both the European Central Bank and the Bank of England. The payment of interest on bank capital bonds, including additional tier 1 (AT1) bonds, is not affected.
Unsurprisingly, this difficult environment for companies has led the rating agencies to revise their predictions of default rates higher. The market has also aggressively repriced the risk of default with large moves in credit spreads (the premium over government bonds that companies need to pay to borrow). By 31 March 2020 European high yield spreads had increased to 854 basis points (bps). This compares to a level of 405 bps at the 30 September 2019 and a low of 316 in mid-January 2020.
With a recessionary backdrop it is inevitable that default rates will rise, and indeed we have already observed several high yield issuers appoint financial advisors with a view to restructuring their debt.
Portfolio strategy
The Company entered the crisis on a relatively strong footing. The portfolio was cautiously positioned by the end of 2019, which was a natural response to yields having fallen so much and our sober view on valuations. At the very early stages of the virus outbreak we raised cash in the portfolio significantly. This defensive stance, combined with the closed-ended structure, meant that we were well positioned to take advantage of the re-pricing that occurred. Slowly and cautiously credit risk was added.
The focus of these purchases was on companies that we think have the balance sheet and business profile to survive the economic shock. Names added included Ziggo, Pinewood, IHO Schaeffler and Teva. The financial sector also provided some very attractive opportunities during March. Both Senior and AT1 bonds were added across multiple issuers with a focus on large European banks.
Following these purchases, subordinated financials remain the fund’s largest sectoral allocation. Despite European banks having been asked to halt dividends and share buy-backs, the current situation is very different to the 2008 crisis. Then, banks and other financial institutions were the problem. This is a real economy shock and banks have come into it with much stronger liquidity and higher capital levels and asset quality. The announcement to halt shareholder payments has no bearing on banks’ intentions to pay AT1 coupons and we believe they will continue to do so. Outside of subordinated financials, the three largest sectors in the portfolio are telecoms, food and utilities.
Over the period under review, the Company’s NAV fell from 74.2p to 62.1p. The NAV total return was –13.4%. The portfolio maintained gross borrowing of 19%.
Outlook
High yield bond markets have repriced to reflect the severe economic shock that the crisis is inflicting. A lack of market liquidity at the start of the crisis exacerbated price moves and created some very attractive opportunities for the Company. We were able to add positions to the portfolio, buying bonds from companies that we believe have a balance sheet and business profile that can survive.
Looking ahead, although markets have rallied from the lows of 23 March 2020, credit spreads still offer some of the best value we have seen for many years. That said, there are undoubtedly challenging times ahead for many companies and default rates are likely to increase. A thorough and comprehensive analysis of each issuer and maintaining a diversified portfolio remain a crucial part of our approach, as we seek to add exposure and lock in value for when markets do recover.
Paul Read/Paul Causer/Rhys Davies
Portfolio Managers
15 May 2020
Principal Risks and Uncertainties
The Board carries out a review, regularly, of the risk environment in which the Company operates, including consideration of emerging risks and now COVID-19. The principal risks and uncertainties relating to the Company can be summarised as:
– Investment Policy – the adopted investment policy and process may not achieve the Company’s published investment objective.
– Market Risk – a fall in the stock markets and/or a prolonged period of decline in the stock markets relative to other forms of investments will affect the performance of the portfolio, as well as the performance of individual portfolio investments.
– Investment Risk – the investment process employed by the Manager is likely to result, from time to time, in a more concentrated portfolio than those of other investment funds.
– Foreign Exchange Risk – the movement of exchange rates may have an unfavourable or favourable impact on returns as the Company holds non-sterling denominated investments and cash.
– Shares – share price is affected by market sentiment, supply and demand for the shares, dividends declared, portfolio performance as well as wider economic factors and changes in the law. The market value of, and the income derived from, the Company’s ordinary shares can fluctuate and may go down as well as up.
– Gearing Returns Using Borrowings – the net borrowing may not exceed, at the time of drawdown, 50% of shareholders’ funds. Borrowing levels may change from time to time in accordance with the Manager’s assessment of risk and reward. As a consequence, any reduction in the value of the Company’s investments may lead to a correspondingly greater percentage reduction in its NAV (which is likely to adversely affect the Company’s share price). The Company borrows principally using repo financing arrangements. In certain circumstances it may have to realise investments at short notice to repay amounts owing under those arrangements and may not be able to realise the expected market value of those assets.
– High Yield Corporate Bonds – corporate bonds are subject to credit, liquidity, duration and interest rate risk. Adverse changes in the financial position of the issuer of corporate bonds or in general economic conditions may impair the ability of the issuer to make payments of principal interest or may cause the liquidation or insolvency of the issuer.
– Derivatives – the Company may enter into derivative transactions for the purpose of efficient portfolio management. The Company will not enter into derivative transactions for speculative purposes.
– Reliance on External Service Providers – failure by any service provider to carry out its obligations to the Company could have a materially detrimental impact on the operation of the Company and affect the ability of the Company to successfully pursue its investment policy. The Company’s operations and reputation could be affected if any of its service providers suffered a major cyber security breach.
– Regulatory – whilst compliance with rules and regulations is closely monitored, breaches and changes could affect returns to shareholders.
– Pandemic (COVID-19) Risk – restrictions to movement of people and disruption to business operations are impacting portfolio company valuations and returns and could impact operational resilience of service providers. As the spread of COVID-19 continues, the Directors are monitoring the situation closely, together with the Manager and third-party service providers. A range of actions has been implemented to ensure that the Company and its service providers are able to continue to operate as normal, even in the event of prolonged disruption. The Manager’s business continuity plans are reviewed on an ongoing basis and the Directors are satisfied that the Manager has in place robust plans and infrastructure to minimise the impact on its operations so that the Company can continue to trade, meet regulatory obligations, report and meet shareholder requirements.
The Manager has mandated work from home arrangements and implemented split team working for those whose work is deemed necessary to be carried out on business premises. Any meetings are being held virtually or via conference calls.
Other similar working arrangements are in place for the Company’s third-party service providers. The Directors remain confident that with these measures in place, the Company is in a good position to continue operating largely as normal in these extreme market conditions. In addition, due to the nature of the Company being a closed end investment company, the Portfolio Manager is not presented with regular daily inflows and outflows that require managing.
Except for the pandemic risk above, a detailed explanation of these principal risks and uncertainties can be found on pages 12 to 16 of the Company’s 2019 annual financial report, which is available on the Company’s section of the Manager’s website at:
www.invesco.co.uk/enhancedincome
In the view of the Board, these principal risks and uncertainties are as much applicable to the remaining six months of the financial year as they were to the six months under review.
Going Concern
The half-yearly financial report has been prepared on a going concern basis. The Directors consider that this 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 considering this, the Directors took into account the Company’s investment objective, risk management policies and capital management policies, the diversified portfolio, the liquidity of the securities which can be used to meet short-term funding commitments, and the ability of the Company to meet all of its liabilities, including its repo financing, and ongoing expenses from its assets.
RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH THE MANAGER
Under International Financial Reporting Standards, the Company has identified the Directors as related parties. Transactions with Directors are limited to their remuneration. Transactions with the Manager comprise management fees. The basis of these has not changed from that reported in the latest annual financial report.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
in respect of the preparation of the half-yearly financial report
The Directors are responsible for preparing the half-yearly 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 the 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.
Kate Bolsover
Chairman
15 May 2020
BOND RATING ANALYSIS
At 31 March 2020
Standard & Poor’s (S&P) ratings. Where a S&P rating is not available, an equivalent average rating has been used. Investment grade is BBB– and above.
For the definitions of these ratings see the Glossary of Terms and Alternative Performance Measures on page 71 of the 2019 annual financial report.
| 31 MAR 2020 | 30 SEPT 2019 | |||
| % OF | CUMULATIVE | % OF | CUMULATIVE | |
| Rating | PORTFOLIO | TOTAL % | PORTFOLIO | TOTAL % |
| Investment Grade: | ||||
| A– | — | — | 1.8 | 1.8 |
| BBB+ | 3.8 | 3.8 | 3.0 | 4.8 |
| BBB | 10.3 | 14.1 | 9.8 | 14.6 |
| BBB– | 8.1 | 22.2 | 6.5 | 21.1 |
| Non-Investment Grade: | ||||
| BB+ | 13.0 | 35.2 | 13.8 | 34.9 |
| BB | 10.0 | 45.2 | 6.2 | 41.1 |
| BB– | 9.5 | 54.7 | 13.0 | 54.1 |
| B+ | 8.0 | 62.7 | 8.5 | 62.6 |
| B | 15.6 | 78.3 | 16.9 | 79.5 |
| B– | 7.6 | 85.9 | 8.5 | 88.0 |
| CCC+ | 4.0 | 89.9 | 1.8 | 89.8 |
| CCC | 1.6 | 91.5 | 1.4 | 91.2 |
| CCC– | 0.1 | 91.6 | 0.5 | 91.7 |
| D | — | 91.6 | 0.1 | 91.8 |
| NR (including equities) | 8.4 | 100.0 | 8.2 | 100.0 |
| 100.0 | 100.0 | |||
INVESTMENT PORTFOLIO
At 31 March 2020
All investments are fixed interest bonds unless otherwise stated; floating rates notes are depicted by FRN.
Bonds and Equity Investments
| VALUE | % OF | ||||
| ISSUER | ISSUE | RATING(1) | £’000 | PORTFOLIO | |
| Euro | |||||
| Achmea | 6% 04 Apr 2043 | NR/BBB-/BBB | 1,794 | 1.5 | |
| Telecom Italia | 5.25% 17 Mar 2055 | Ba1/BB+/BB | 1,740 | 1.4 | |
| Banco Santander | 6.25% FRN Perpetual | Ba1/NR/BB | 1,583 | 1.4 | |
| 4.375% FRN Perpetual | Ba1/NR/BB | 132 | |||
| IHO Verwaltungs | 3.875% 15 May 2027 (SNR) | Ba2/BB+/BB | 745 | 0.9 | |
| 3.625% 15 May 2025 (SNR) | Ba2/BB+/BB | 409 | |||
| Burger King France | 8% 15 Dec 2022 (SNR) | NR/CCC/CCC | 639 | 0.9 | |
| FRN 01 May 2023 | B3/B-/B | 338 | |||
| 6% 01 May 2024 (SNR) | B3/B-/B | 158 | |||
| Banco BPM | 8.75% FRN Perpetual | B3/NR/B | 1,025 | 0.8 | |
| IM Group | 6.625% 01 Mar 2025 | B2/B-/B | 1,012 | 0.8 | |
| Permanent TSB | 8.625% FRN Perpetual | NR/NR/NR | 970 | 0.8 | |
| Frigoglass Finance | 6.875% 12 Feb 2025 | B3/B-/B | 873 | 0.7 | |
| Picard | FRN 30 Nov 2023 | B3/B/B | 823 | 0.7 | |
| Loxam SAS | 5.75% 15 Jul 2027 | NR/CCC+/CCC | 403 | 0.6 | |
| 3.75% 15 Jul 2026 (SNR) | NR/B/B | 395 | |||
| Platin | 5.375% 15 Jun 2023 (SNR) | B3/B/B | 740 | 0.6 | |
| Intesa Sanpaolo | 7% Perpetual | Ba3/BB-/BB | 700 | 0.6 | |
| Quintiles IMS | 3.25% 15 Mar 2025 (SNR) | Ba3/BB/BB | 689 | 0.6 | |
| Banco Comercial Portugues | 9.25% 30 Apr 2067 | B2/CCC+/B | 688 | 0.6 | |
| Ziggo Bond Finance | 3.375% 28 Feb 2030 (SNR) | B3/B-/B | 674 | 0.6 | |
| DKT Finance | 7% 17 Jun 2023 (SNR) | Caa1/CCC+/CCC | 669 | 0.5 | |
| Banco Sabadell | 6.5% FRN Perpetual | B2/NR/B | 640 | 0.5 | |
| Teva Pharmaceutical Finance | 6% 31 Jan 2025 (SNR) | Ba2/BB/BB | 383 | 0.5 | |
| 1.125% 15 Oct 2024 (SNR) | Ba2/BB/BB | 246 | |||
| CNP Assurances | FRN Perpetual | NR/NR/NR | 624 | 0.5 | |
| Tereos Finance | 4.125% 16 Jun 2023 (SNR) | NR/B+/B | 596 | 0.5 | |
| INEOS Group | 5.375% 01 Aug 2024 (SNR) | B1/B+/B | 437 | 0.5 | |
| 2.875% 01 May 2026 (SNR) | Ba1/BB+/BB | 158 | |||
| Maxeda DIY | 6.125% 15 Jul 2022 (SNR) | Caa1/B-/CCC | 581 | 0.5 | |
| Yew Grove REIT | Common Stock | NR/NR/NR | 539 | 0.4 | |
| Banca Monte Dei Paschi – Siena | 8% FRN 22 Jan 2030 | Caa1/NR/CCC | 296 | 0.4 | |
| 10.5% 23 Jul 2029 (SUB) | Caa1/NR/CCC | 225 | |||
| PrestigeBidCo | 6.25% 15 Dec 2023 (SNR) | B2/B/B | 496 | 0.4 | |
| Aegon | 5.625% FRN Perpetual | Baa3/BBB-/BBB | 489 | 0.4 | |
| Crystal Almond | 4.25% 15 Oct 2024 (SNR) | NR/B/B | 469 | 0.4 | |
| Barclays | 3.375% FRN 2 April 2020 (SNR) | NR/NR/NR | 462 | 0.4 | |
| La Financière ATALIAN | 4% 15 May 2024 (SNR) | Caa1/B/CCC | 460 | 0.4 | |
| Lloyds Banking Group | 3.5% FRN (SNR) | A3/BBB+/A | 307 | 0.4 | |
| 6.375% FRN Perpetual | Baa3/BB-/BB | 130 | |||
| Crown European Holdings | 2.875% 01 Feb 2026 (SNR) | Ba2/BB+/BB | 434 | 0.4 | |
| National Bank Of Greece | 8.25% FRN 18 Jul 2029 | Caa2/CCC/CCC | 414 | 0.3 | |
| Tasty Bondco | 6.25 15 May 2026 (SNR) | B2/B/B | 396 | 0.3 | |
| EDP – Energias de Portugal | 4.496% 30 Apr 2079 | Ba2/BB/BB | 364 | 0.3 | |
| EG Global Finance | 4.375% 07 Feb 2025 (SNR) | B2/B/B | 354 | 0.3 | |
| Codere Finance | 6.75% 01 Nov 2021 (SNR) | Caa1/CCC+/CCC | 321 | 0.3 | |
| BNP Paribas | Cnv FRN Perpetual | Baa3/BB+/BBB | 299 | 0.3 | |
| Caixabank | 6.75% FRN Perpetual | Ba3u/BB/BB | 288 | 0.2 | |
| Trafigura | 7.5% FRN Perpetual (SUB) | NR/NR/NR | 284 | 0.2 | |
| Odyssey Europe | 8% 15 May 2023 (SNR) | B2/B/B | 269 | 0.2 | |
| Motion Bondco | 4.5% 15 Nov 2027 (SNR) | B3/B-/B | 257 | 0.2 | |
| Bayer AG | 3.125% FRN 12 Nov 2079 (SUB) | Baa3/BB+/BBB | 243 | 0.2 | |
| UniCredit International Bank | 3.875% FRN Perpetual | Ba3/NR/BB | 242 | 0.2 | |
| Aviva | 6.125% FRN 05 Jul 2043 | A3/BBB+/BBB | 230 | 0.2 | |
| Europcar Mobility | 4.125% 15 Nov 2024 (SNR) | Caa1/B/CCC | 129 | 0.1 | |
| 4% 30 Apr 2026 (SNR) | Caa1/B/CCC | 68 | |||
| ASR Nederland | 4.625% Cnv FRN Perpetual | NR/BB+/BB | 150 | 0.1 | |
| Jaguar Land Rover | 5.875% 15 Nov 2024 (SNR) | B1/B+/B | 130 | 0.1 | |
| 29,609 | 24.1 | ||||
| Sterling | |||||
| Virgin Media Finance | 6.25% 28 Mar 2029 | Ba3/BB-/BB | 1,782 | 2.8 | |
| 5.75% 15 Apr 2023 (SNR) | B1/B/B | 1,635 | |||
| Barclays | 7.875% FRN Perpetual | Ba2/B+/BB | 1,479 | 2.2 | |
| 7.125% FRN Perpetual | Ba2/B+/BB | 645 | |||
| 6.375% FRN Perpetual | Ba2/B+/BB | 616 | |||
| Enel | 7.75% 10 Sep 2075 | Ba1/BBB-/BBB | 1,908 | 2.2 | |
| 6.625% 15 Sep 2076 | Ba1/BBB-/BBB | 774 | |||
| Sainsbury's | 6.5% FRN Perpetual | NR/NR/NR | 1,604 | 1.9 | |
| 6% FRN 23 Nov 2027 | NR/NR/NR | 753 | |||
| NWEN Finance | 5.875% 21 Jun 2021 (SNR) | NR/BB+/BB | 2,351 | 1.9 | |
| NGG Finance | 5.625% FRN 18 Jun 2073 | Baa3/BBB/BBB | 2,310 | 1.9 | |
| Arqiva Broadcast Finance | 6.75% 30 Sep 2023 | B2/NR/B | 2,100 | 1.7 | |
| Premier Foods Finance | 6.25% 15 Oct 2023 | B2/B/B | 1,556 | 1.7 | |
| FRN 15 Jul 2022 (SNR) | B2/B/B | 535 | |||
| Co-Operative Bank | 9.5% FRN 25 Apr 2029 | NR/NR/NR | 1,432 | 1.6 | |
| 5.125% 17 May 2024 (SNR) | NR/BB/BB | 451 | |||
| Eléctricité De France | 6% Perpetual | Baa3/BB/BBB | 1,248 | 1.5 | |
| 5.875% Perpetual | Baa3/BB/BBB | 590 | |||
| Virgin Money | 8.75% Perpetual | Ba2/B/BB | 1,671 | 1.4 | |
| Balfour Beatty | 10.75p Cnv Preference | NR/NR/NR | 1,549 | 1.3 | |
| Aviva | 6.125% Perpetual | A3/BBB+/BBB | 1,462 | 1.2 | |
| Pinnacle Bidco | 6.375% 15 Feb 2025 (SNR) | B2/B/B | 1,366 | 1.1 | |
| Pension Insurance | 7.375% FRN Perpetual | NR/NR/BBB | 1,302 | 1.1 | |
| Wagamama Finance | 4.125% 01 Jul 2022 (SNR) | B2/B-/B | 1,246 | 1.0 | |
| Matalan Finance | 6.75% 31 Jan 2023 (SNR) | B3/B-/B | 700 | 1.0 | |
| 9.5% 31 Jan 2024 (SNR) | Caa3/CCC/CCC | 509 | |||
| Orange | 5.875% Perpetual | Baa3/BBB-/BBB | 1,160 | 0.9 | |
| Vodafone Group | 4.875% 03 Oct 2078 | Ba1/BB+/BB | 967 | 0.9 | |
| 1.5% Cnv 12 Mar 2022 | NR/NR/NR | 183 | |||
| Time Warner Cable | 5.25% 15 Jul 2042 | Ba1/BBB-/BBB | 1,076 | 0.9 | |
| Iron Mountain | 3.875% 15 Nov 2025 | Ba3/BB-/BB | 896 | 0.7 | |
| Drax Finco | 4.25% 01 May 2022 (SNR) | NR/BB+/BB | 859 | 0.7 | |
| Scottish Widows | 5.5% 16 Jun 2023 | Baa1/BBB+/BBB | 847 | 0.7 | |
| William Hill | 4.75% 01 May 2026 | Ba1/BB/BB | 795 | 0.6 | |
| Bupa Finance | 5% 08 Dec 2026 | Baa1/NR/BBB | 752 | 0.6 | |
| Lloyds Banking Group | 7.875% Perpetual | Baa3/BB-/BB | 361 | 0.6 | |
| 7.625% FRN Perpetual | Baa3/BB-/BB | 335 | |||
| Miller Homes | FRN 15 Oct 2023 (SNR) | NR/BB-/BB | 475 | 0.5 | |
| 5.5% 15 Oct 2023 (SNR) | NR/BB-/BB | 168 | |||
| Pinewood | 3.25% 30 Sep 2025 (SNR) | NR/BB/BB | 554 | 0.5 | |
| OneSavings Bank | 9.125% FRN Perpetual | NR/NR/NR | 550 | 0.4 | |
| AXA | 5.453% FRN Perpetual | Baa1/BBB+/BBB | 501 | 0.4 | |
| Jaguar Land Rover | 2.75% 24 Jan 2021 | B1/B+/B | 465 | 0.4 | |
| Deutsche Bank | 7.125% Perpetual | B1/B+/B | 464 | 0.4 | |
| Experian Finance | 3.25% 07 Apr 2032 | Baa1/NR/0 | 302 | 0.2 | |
| Nationwide | 5.875% FRN Perpetual | Baa3/BB+/BB | 291 | 0.2 | |
| Rothesay Life | 8% 30 Oct 2025 | NR/NR/BBB | 267 | 0.2 | |
| CYBG | 9.25% Perpetual | Ba2u/B/BB | 231 | 0.2 | |
| AMC Entertainment | 6.375% 15 Nov 2024 (SUB NTS) | Caa1/CCC+/CCC | 224 | 0.2 | |
| Legal & General | 5.5% 27 Jun 2064 FRN (SUB) | A3/BBB+/BBB | 193 | 0.2 | |
| CIS General Insurance | 12% FRN 08 May 2025 | NR/NR/NR | 100 | 0.1 | |
| Petroleos Mexicanos | 8.25% 02 Jun 2022 (SNR) | Baa3/BBB/BBB | 83 | 0.1 | |
| 46,673 | 38.1 | ||||
| US Dollar | |||||
| Altice | SFR 7.375% 01 May 2026 | B2/B/B | 2,478 | 2.4 | |
| 7.5% 15 May 2026 | B2/B/B | 495 | |||
| Royal Bank of Scotland | 7.64% FRN Perpetual | Ba2/BB-/BB | 1,328 | 2.2 | |
| 8.625% FRN Perpetual | Ba2u/B+/BB | 814 | |||
| 8% Cnv FRN Perpetual | Ba2u/B+/BB | 375 | |||
| 7.5% Cnv FRN Perpetual | Ba2u/B+/BB | 155 | |||
| AT&T | 4.65% 01 Jun 2044 (SNR) | Baa2/BBB/BBB | 2,540 | 2.1 | |
| Teva Pharmaceutical Finance | 6.75% 01 Mar 2028 (SNR) | Ba2/BB/BB | 1,524 | 2.1 | |
| 7.125% 31 Jan 2025 (SUB) | Ba2/BB/BB | 994 | |||
| Stora Enso | 7.25% 15 Apr 2036 | Baa3/NR/BBB | 1,943 | 1.6 | |
| Ziggo Bond Finance | 6% 15 Jan 2027 (SNR) | B3/B-/B | 1,542 | 1.5 | |
| 4.875% 15 Jan 2030 (SNR) | B1/B+/B | 254 | |||
| Vodafone Group | 6.25% 03 Oct 2078 | Ba1/BB+/BB | 1,090 | 1.4 | |
| 7% FRN 04 Apr 2079 | Ba1/BB+/BB | 621 | |||
| Fiat Chrysler Automobiles | 4.5% 15 Apr 2020 | Ba2/BB+/BB | 1,600 | 1.3 | |
| Celanese | 4.625% 15 Nov 2022 | Baa3/BBB/BBB | 1,570 | 1.3 | |
| Aker BP | 5.875% 31 Mar 2025 (SNR) | Ba1/BBB-/BB | 1,421 | 1.2 | |
| Lloyds Banking Group | 7.5% 31 Dec 2065 | Baa3/BB-/BBB | 1,379 | 1.1 | |
| Panther BF Aggregator | 8.5% 15 May 2027 (SNR) | B3/CCC+/B | 1,253 | 1.0 | |
| Telecom Italia | 5.303% 30 May 2024 | Ba1/BB+/BB | 1,217 | 1.0 | |
| Adient | 7% 15 May 2026 (SNR) | Ba3/BB-/BB | 1,201 | 1.0 | |
| Beazley | 5.875% 04 Nov 2026 | NR/NR/BBB | 1,158 | 0.9 | |
| Société Genérale | 7.375% 31 Dec 2065 | Ba2/BB+/BB | 1,024 | 0.8 | |
| DKT Finance | 9.375% 17 Jun 2023 (SNR) | Caa1/CCC+/CCC | 1,007 | 0.8 | |
| Marfrig Global Foods | 7% 15 Mar 2024 | NR/BB-/BB | 879 | 0.7 | |
| Algeco Scotsman | 8% 15 Feb 2023 (SNR) | B2/B-/B | 811 | 0.7 | |
| Diamond 1 | 5.45% 15 Jun 2023 | Baa3/BBB-/BBB | 802 | 0.7 | |
| Neptune Energy | 6.625% 15 May 2025 (SNR) | B1/BB-/BB | 793 | 0.6 | |
| Lamb Weston | 4.625% 01 Nov 2024 | Ba2/BB+/BB | 783 | 0.6 | |
| Verizon Communications | 4.272% 15 Jan 2036 | Baa1/BBB+/BBB | 780 | 0.6 | |
| Trinseo | 5.375% 01 Sep 2025 (SNR) | B2/B+/B | 777 | 0.6 | |
| VIVAT | 6.25% Perpetual | NR/NR/BB | 748 | 0.6 | |
| Owens | 5.875% 15 Aug 2023 | B1/B+/B | 725 | 0.6 | |
| Barclays | 8% FRN Perpetual | Ba2/B+/BB | 607 | 0.6 | |
| 2.75% FRN Perpetual | Ba1/BB+/BB | 116 | |||
| Sigma Holdco | 7.875% 15 May 2026 (SNR) | B3/B-/B | 650 | 0.5 | |
| XPO Logistics | 6.5% 15 Jun 2022 (SNR) | Ba3/BB-/BB | 637 | 0.5 | |
| FAGE International | 5.625% 15 Aug 2026 (SNR) | B2/B+/B | 626 | 0.5 | |
| UBS | 7% Perpetual | NR/BB+/BB | 345 | 0.5 | |
| 5% Perpetual | Ba1u/BB/BB | 248 | |||
| IHO Verwaltungs | 6% 15 May 2027 (SNR) | Ba2/BB+/BB | 569 | 0.5 | |
| Rothschilds Continuation Finance | FRN Perpetual | NR/NR/NR | 514 | 0.4 | |
| Walnut Bidco | 9.125% 01 AUG 2024 (SNR) | B1/B+/B | 482 | 0.4 | |
| Brink’s | 4.625% 15 Oct 2027 | Ba2/BB/BB | 474 | 0.4 | |
| Marb Bondco | 6.875% 19 Jan 2025 (SNR) | NR/BB-/BB | 462 | 0.4 | |
| DNO ASA | 8.375% 29 May 2024 | NR/NR/NR | 255 | 0.3 | |
| 8.75% 31 May 2023 | NR/NR/NR | 177 | |||
| CIRSA Finance | 7.875% 20 Dec 2023 | B2/B/B | 411 | 0.3 | |
| Motion Bondco | 6.625% 15 Nov 2027 (SNR) | B3/B-/B | 406 | 0.3 | |
| Petroleos Mexicanos | 6.95% 28 Jan 2060 (SNR) | Baa3/BBB/BBB | 197 | 0.3 | |
| 6.75% 21 Sep 2047 (SNR) | Baa3/BBB/BBB | 180 | |||
| Ithaca Energy | 9.375% 15 Jul 2024 (SNR) | B3/B/B | 355 | 0.3 | |
| Hertz | 7.625% 01 Jun 2022 | B2/BB-/B | 282 | 0.2 | |
| Codere Finance | 7.625% 01 Nov 2021 (SNR) | Caa1/CCC+/CCC | 280 | 0.2 | |
| UniCredit International Bank | 8% FRN Perpetual | NR/NR/BB | 273 | 0.2 | |
| Tesco | 6.15% 15 Nov 2037 (SNR) | Baa3/BBB-/BBB | 217 | 0.2 | |
| PGH Capital | 5.375% 06 Jul 2027 | NR/NR/BBB | 212 | 0.2 | |
| Millicom International Cellular | 5.125% 15 Jan 2028 | Ba2/NR/BB | 203 | 0.2 | |
| Petra Diamonds | 7.25% 01 May 2022 (SNR) | Caa1/CCC+/CCC | 139 | 0.1 | |
| 7.25% 01 May 2022 (SNR) | Caa1/CCC+/CCC | 46 | |||
| J. C. Penney | 8.625% 15 Mar 2025 (SNR) | Caa2/CCC-/CCC | 128 | 0.1 | |
| 6.375% 15 Oct 2036 (SNR) | Caa3/CCC-/CCC | 35 | |||
| Puma International | 5% 24 Jan 2026 | Ba3/NR/BB | 154 | 0.1 | |
| Nyrstar | 0% 31 Jul 2026 (SNR) | NR/NR/NR | 153 | 0.1 | |
| EG Global Finance | 8.5% 30 Oct 2025 (SNR) | B2/B/B | 144 | 0.1 | |
| BNP Paribas | 4.5% FRN Perpetual | Ba1/BBB-/BBB | 122 | 0.1 | |
| Deutsche Bank | 6% FRN Perpetual | B1/B+/B | 107 | 0.1 | |
| Trafigura | 5.25% 19 Mar 2023 (SNR) | NR/NR/NR | 93 | 0.1 | |
| Yum Brands | 7.75% 01 Apr 2025 (SNR) | NR/NR/NR | 33 | 0.0 | |
| 46,413 | 37.6 | ||||
| Total investments | 122,695 | 99.8 | |||
Derivative Instruments – Credit Default Swaps
| AT MARKET | |||||
| VALUE | % OF | ||||
| ISSUER | ISSUE | Nominal Exposure £ | £'000 | PORTFOLIO | |
| Euro | |||||
| iTraxx Eur Xover | Series 33 5% 5 Year 20 Jun 2025 | 5,334,300 | 159 | 0.1 | |
| iTraxx Eur Xover | Series 32 5% 5 Year 20 Dec 2024 | 2,667,150 | 53 | 0.1 | |
| iTraxx Eur Xover | Series 32 5% 5 Year 20 Dec 2024 | 1,778,100 | 36 | ||
| Total value of derivatives | 9,779,550 | 248 | 0.2 | ||
| Total investments and derivatives | 122,943 | 100.0 | |||
(1) Moody/Standard & Poor’s (S&P)/Equivalent average rating.
Condensed Statement of Comprehensive Income
| SIX MONTHS TO 31 MARCH 2020 | SIX MONTHS TO 31 MARCH 2019 | |||||
| REVENUE | CAPITAL | TOTAL | REVENUE | CAPITAL | TOTAL | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| Loss on investments held at fair value | — | (20,496) | (20,496) | — | (1,555) | (1,555) |
| Profit/(loss) on derivative instruments – currency hedges | — | 1,257 | 1,257 | — | (21) | (21) |
| Exchange differences | — | (1,227) | (1,227) | — | 125 | 125 |
| Income – note 2 | 4,406 | — | 4,406 | 4,236 | — | 4,236 |
| 4,406 | (20,466) | (16,060) | 4,236 | (1,451) | 2,785 | |
| Investment management fee - note 3 | (227) | (227) | (454) | (224) | (224) | (448) |
| Other expenses | (191) | (3) | (194) | (153) | — | (153) |
| (Loss)/profit before finance costs and taxation | 3,988 | (20,696) | (16,708) | 3,859 | (1,675) | 2,184 |
| Finance costs | (30) | (30) | (60) | (60) | (60) | (120) |
| (Loss)/profit before taxation | 3,958 | (20,726) | (16,768) | 3,799 | (1,735) | 2,064 |
| Taxation – note 4 | (5) | — | (5) | (6) | — | (6) |
| (Loss)/profit after taxation | 3,953 | (20,726) | (16,773) | 3,793 | (1,735) | 2,058 |
| Return per ordinary share | 2.3p | (12.1)p | (9.8)p | 2.3p | (1.1)p | 1.2p |
| Weighted average number of ordinary shares in issue during the period | 171,825,181 | 164,994,855 | ||||
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 European Union. The (loss)/profit after taxation is the total comprehensive (loss)/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 of the Company. No operations were acquired or discontinued in the period.
Condensed Balance Sheet
Registered number 75059
| AT | AT | |
| 31 MARCH | 30 SEPTEMBER | |
| 2020 | 2019 | |
| £’000 | £’000 | |
| Non-current assets | ||
| Investments held at fair value through profit or loss | 122,943 | 144,528 |
| Current assets | ||
| Margin held at brokers | 1,631 | 189 |
| Prepayments and accrued income | 2,605 | 2,529 |
| Cash and cash equivalents | 2,740 | 4,623 |
| 6,976 | 7,341 | |
| Total assets | 129,919 | 151,869 |
| Current liabilities | ||
| Amounts due to brokers | (1,082) | — |
| Accruals | (302) | (305) |
| Derivative financial instruments – unrealised net loss on currency hedges | (249) | (940) |
| Securities sold under agreements to repurchase | (20,004) | (24,161) |
| (21,637) | (25,406) | |
| Total assets less current liabilities | 108,282 | 126,463 |
| Provision for performance fee – note 3 | (306) | (306) |
| Net assets | 107,976 | 126,157 |
| Capital and reserves | ||
| Share capital – note 6 | 8,691 | 8,503 |
| Share premium | 157,729 | 155,068 |
| Capital reserve | (69,030) | (48,304) |
| Revenue reserve | 10,586 | 10,890 |
| Total shareholders’ funds | 107,976 | 126,157 |
| Net asset value per ordinary share | 62.1p | 74.2p |
| Number of 5p ordinary shares in issue at the period end – note 6 | 173,819,855 | 170,069,855 |
Condensed Statement of Cash Flows
| Six Months | Six Months | |||
| to 31 March | to 31 March | |||
| 2020 | 2019 | |||
| £’000 | £’000 | |||
| Cash flows from operating activities | ||||
| (Loss)/profit before finance costs and taxation | (16,708) | 2,184 | ||
| Tax on overseas income | (5) | (6) | ||
| Adjustments for: | ||||
| Purchase of investments | (30,166) | (20,261) | ||
| Sale of investments | 32,337 | 19,015 | ||
| 2,171 | (1,246) | |||
| (Decrease)/increase in securities sold under agreement to repurchase | (4,157) | 2,477 | ||
| Loss on investments held at fair value | 20,496 | 1,555 | ||
| Net movement from derivative instruments – currency hedges | (691) | 467 | ||
| Increase in receivables | (1,518) | (376) | ||
| Decrease in payables | (3) | (31) | ||
| Net cash (outflow)/inflow from operating activities | (415) | 5,024 | ||
| Cash flows from financing activities | ||||
| Finance cost paid | (60) | (106) | ||
| Net proceeds from issue of new shares | 2,865 | — | ||
| Dividends paid - note 5 | (4,273) | (4,124) | ||
| Net cash outflow from financing activities | (1,468) | (4,230) | ||
| Net (decrease)/increase in cash and cash equivalents | (1,883) | 794 | ||
| Cash and cash equivalents at start of the period | 4,623 | 2,775 | ||
| Cash and cash equivalents at end of the period | 2,740 | 3,569 | ||
| Reconciliation of cash and cash equivalents to the Balance Sheet is as follows: | ||||
| Cash held at custodian | 2,740 | 1,539 | ||
| Invesco Liquidity Funds plc* – money market fund | — | 2,030 | ||
| Cash and cash equivalents | 2,740 | 3,569 | ||
| Cash flow from operating activities includes: | ||||
| Dividends received | 99 | 85 | ||
| Interest received | 4,224 | 3,943 | ||
| Changes in liabilities arising from financing activities: | ||||
| Opening securities sold under agreements to repurchase | 24,161 | 22,109 | ||
| (Decrease)/increase from securities sold under agreements to repurchase | (4,157) | 2,477 | ||
| Closing securities sold under agreements to repurchase | 20,004 | 24,586 | ||
* Formerly Short-Term Investment Company (Global Series) plc.
CONDENSED STATEMENT OF CHANGES IN EQUITY
| SHARE | SHARE | CAPITAL | REVENUE | ||
| CAPITAL | PREMIUM | RESERVE | RESERVE | TOTAL | |
| £’000 | £’000 | £’000 | £’000 | £’000 | |
| For the six months ended 31 March 2020 | |||||
| At 30 September 2019 | 8,503 | 155,068 | (48,304) | 10,890 | 126,157 |
| Total comprehensive loss for the period | — | — | (20,726) | 3,953 | (16,773) |
| Dividends paid – note 5 | — | (16) | — | (4,257) | (4,273) |
| Net proceeds from issue of new shares – note 6 | 188 | 2,677 | — | — | 2,865 |
| At 31 March 2020 | 8,691 | 157,729 | (69,030) | 10,586 | 107,976 |
| For the six months ended 31 March 2019 | |||||
| At 30 September 2018 | 8,250 | 151,560 | (50,484) | 11,351 | 120,677 |
| Total comprehensive income for the period | — | — | (1,735) | 3,793 | 2,058 |
| Dividends paid – note 5 | — | — | — | (4,124) | (4,124) |
| At 31 March 2019 | 8,250 | 151,560 | (52,219) | 11,020 | 118,611 |
Notes to the Condensed Financial Statements
1. Basis of Preparation
The condensed financial statements have been prepared using the same accounting policies as those adopted in the 2019 annual financial report. They have been prepared on an historical cost basis, in accordance with the applicable International Financial Reporting Standards (IFRS), as adopted by the European Union and, where possible, 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 October 2019.
2. Income
| Six months | Six months | ||
| to 31 Mar 2020 | to 31 Mar 2019 | ||
| £’000 | £’000 | ||
| Income from investments: | |||
| UK dividends | 85 | 85 | |
| UK bond interest | 1,849 | 1,712 | |
| Overseas dividends | 16 | 5 | |
| Overseas bond interest | 2,449 | 2,426 | |
| Deposit interest | 7 | 8 | |
| Total | 4,406 | 4,236 |
3. Management Fee, Performance Fees and Finance Costs
Investment management fees and finance costs are allocated equally to revenue and capital. The management fee is 0.8% on the first £80 million of shareholders’ funds; 0.7% on the next £70 million; and 0.6% on any excess of shareholders’ funds over £150 million.
The performance fee arrangements were removed with effect 1 October 2017. The deferred performance fee arising in the year ended 30 September 2017, continues to be recognised as a provision of £306,000 as at 31 March 2020 (30 September 2019: £306,000).
4. Taxation
The Company is subject to Jersey income tax at the rate of 0% (2019: 0%). The tax charge consists of irrecoverable withholding tax on overseas income.
5. Dividends Paid
| Six months | Six months | ||
| to 31 Mar 2020 | to 31 Mar 2019 | ||
| £’000 | £’000 | ||
| Fourth interim of 1.25p | 2,126 | 2,062 | |
| First interim of 1.25p | 2,147 | 2,062 | |
| Total paid | 4,273 | 4,124 |
The first interim for the quarter ended 31 December 2019 was paid on 31 January 2020 to Shareholders on the register on 3 January 2020. The second interim for the quarter ended 31 March 2020 was paid on 30 April 2020 to Shareholders on the register on 3 April 2020.
6. Share Capital, including Movements
| Six months | Year to | ||
| to 31 Mar 2020 | 30 Sept 2019 | ||
| Share capital: | |||
| Brought forward | £8,503,000 | £8,250,000 | |
| Net issue proceeds | £188,000 | £253,000 | |
| Carried forward | £8,691,000 | £8,503,000 | |
| Number of ordinary shares: | |||
| Brought forward | 170,069,855 | 164,994,855 | |
| Issued in period | 3,750,000 | 5,075,000 | |
| Carried forward | 173,819,855 | 170,069,855 | |
| Per share: | |||
| – average issue price | 76.73p | 75.02p |
Subsequent to the period end 650,000 ordinary shares were issued at an average price of 63.93p.
7. Classification under Fair Value Hierarchy
| AT 31 MAR 2020 | AT 30 SEPT 2019 | ||||
| LEVEL 1 | LEVEL 2 | LEVEL 1 | LEVEL 2 | ||
| £’000 | £’000 | £’000 | £’000 | ||
| Financial assets designated at fair value through profit or loss: | |||||
| Debt securities | — | 120,607 | — | 142,722 | |
| Equities – convertible preference shares and common stock | 539 | 1,549 | 162 | 1,644 | |
| Derivative financial instruments: | |||||
| Credit default swaps | — | 248 | — | — | |
| Total for financial assets | 539 | 122,404 | 162 | 144,366 | |
| Financial liabilities designated at fair value through profit or loss: | |||||
| Derivative financial instruments: | |||||
| Currency hedges | — | 249 | — | 940 | |
| Total for financial liabilities | — | 249 | — | 940 | |
8. Status of Half-Yearly Financial Report
The financial information contained in this half-yearly report, which has not been reviewed or audited, does not constitute statutory accounts as defined in Article 104 of Companies (Jersey) Law 1991. The financial information for the half years ended 31 March 2019 and 2020 has not been audited. The figures and financial information for the year ended 30 September 2019 are extracted and abridged from the latest published accounts and do not constitute the statutory accounts for that year.
By order of the Board
JTC Fund Solutions (Jersey) LimitedCompany Secretary
15 May 2020