Half Yearly Report

RNS Number : 7077H

New City High Yield Fund Limited

26 February 2010

 



To:         RNS

Date:      26 February 2010

From:     New City High Yield Fund Limited

Subject: Half Yearly Report

Unaudited statement of results for the half-year ended 31 December 2009

·      Net asset value total return of 26.0 per cent since 1 July 2009.

·      Ordinary share price total return of 22.2 per cent since 1 July 2009.

·      Dividend yield of 6.9 per cent, based on dividends at an annualised rate of 3.65p and a share price of 53.25p at 31 December 2009.

·      Ordinary share price at a premium of 3.7 per cent to published net asset value at 31 December 2009.

Chairman's Statement

Investment Performance

During this six month period the Company's net asset value per share rose by 20.9 per cent to 51.33 pence.  When this capital measure is adjusted for the payment of dividends totalling 1.95 pence per share in the period, the net asset value total return was 26.0 per cent.  The share price total return was 22.2 per cent. 

At 31 December 2009 the Company's shares were trading at a 3.7 per cent premium to net asset value, and they have continued to trade at a premium since the period end.  The average discount for the UK High Income sector at 31 December 2009 was 0.9 per cent.

Dividends

In line with last year, two interim dividends of 0.85 pence each per share have been declared, while last year's fourth interim dividend of 1.10 pence per share was paid in August.  Based on total annual dividends of 3.65 pence and a share price of 53.25 pence at 31 December 2009, this represents a yield of 6.9 per cent. After providing for the second interim dividend, the Company's revenue reserve stood at 1.93 pence per share as at 31 December 2009, an increase of 0.34 pence during the period.

Background and Outlook

The worldwide depression that threatened when I wrote to you at this time last year was averted, with central banks and finance ministries taking unprecedented and co-ordinated emergency action in the shape of bank bail outs, low interest rates, quantitative easing - and allowing budget deficits to balloon.

Our own high yield sector has seen a flood of new issuance, especially in the last quarter, as companies, confronted by continuing frustrations with the banking system, have sought ways to raise capital and repair balance sheets.

At the portfolio level this gave us a number of attractive opportunities; the unresolved question is whether, at the macro level, the initiatives that have been put in place amount to a programme that will encourage sustained recovery.

During the period the Company replaced its existing bank loan facility with Allied Irish Bank plc, with a flexible bank loan facility with HSBC Bank plc.

We remain somewhat cautious, especially concerning the UK, and the Manager has positioned the portfolio accordingly.

James G West

Chairman

25 February 2010

Investment Manager's Review

This period in the market saw many positive indications for the High Yield sector.

We continued to see a rally in high yield and investment grade markets throughout the half year to 31 December 2009. Equity markets also saw substantial recoveries, the UK All-Share was up 29.1%, the Dow Jones Industrial was up 23.4%, the Toronto TSX was up 13.2% and the S&P AUX 300 Index was up 23.4%. Other positives were both the French and German economies showing GDP growth of 0.3% during the second quarter of 2009. Stronger exports, consumer spending, as well as the major Government stimulus packages, kick-started the growth in these economies. Halfway through the period we actually witnessed both Australia and Norway increasing rates by 25 basis points, along with more hawkish comments from the ECB. In November all eyes were on Dubai with the potential default of the Nakheel Sukuk, which resulted in a $10 billion bailout package for Dubai World by the Abu Dhabi government in early December.

On the corporate level, high yield bonds performed positively against weaker earnings, which appears to be due to the continued caution of the corporate sector targeting debt reduction, aided by the low interest rate environment in which we find ourselves, added to the demand for income from investors, demonstrated by the vast global issuance we have seen in the period, with $10.9 billion coming in November alone and over $35 billion for the year. This issuance is set to continue in 2010 as we see further refinancing of loan/bond maturities, mid-cap companies broadening their finance base in a more risk adverse environment, and the continued structural change from bank to bond financing - a trend which is already well established in the High Grade and Natural Resource sectors.

The major investment theme for the period has been the increase in the financials sector of the portfolio. In particular the restructuring of Lloyds Bank, where the Company opened and closed positions in the Lloyds Bank 13% Euro Perpetual Bond for a substantial profit, and opened a position in the HBOS 13⁵/₈% Perpetual (Ex Halifax PIB). This bond moved from tier 1 to upper tier 2 and became cumulative during the merger of HBOS and Lloyds, but the pricing had not moved to take account of that change. In November, when the restructuring occurred, a £7bn exchange from existing bonds into the Enhanced Capital Notes (ECN's) saw an 87.7% take up rate for the first 30 bonds in the "waterfall", higher than most expected. The 13⁵/₈%   Perpetual was near to the top of the waterfall and has been exchanged into Lloyds Bank Group 16¹/₈% ENC 2024, which is currently trading at 28% above its purchase price. Other bonds held in the Bank, namely HBOS 6.85% US$ Perpetual and HBOS 6.461% sterling Perpetual had "must pay" wording in their prospectuses and therefore did not take part in the exchange. Also in the Financials sector the Company opened positions in Prudential 11³/₄% Perpetual, Royal London 6¹/₈% Perpetual, AXA 6.6862% Perpetual and Clerical Medical 7³/₈% Perpetual - all of these being Perpetual Bonds trading at par or below at purchase, giving the potential of long term income plus the opportunity for capital gain.

One of the mainstays of our investment policy for the last three years remains in place, our negative view on sterling with the UK's growing level of debt and the inability of the current Government to effect any spending cuts to make any inroads into this vast debt mountain, with the lack of tax revenues, a weak economy is not conducive to expanding corporate profits.

We will be maintaining this view for the time being, and do not currently intend to increase our sterling

exposure.

Richard Lockwood / Ian Francis

New City Investment Managers Limited

25 February 2010

Unaudited Condensed Income Statement

For the six months ended 31 December 2009

	Six months ended 31 December 2009
		£'000	£'000	£'000
	Notes	Revenue	Capital	Total
Capital gains on investments
Gains on investments		-	13,605	13,605
Exchange losses		-	(28)	(28)
Revenue
Investment Income	3	3,633	-	3,633
Total Income		3,633	13,577	17,210
Expenses
Investment management fee		(247)	(82)	(329)
Other expenses		(164)	-	(164)
Total Expenses		(411)	(82)	(493)
Profit/(loss) before finance costs and taxation		3,222	13,495	16,717
Finance costs
Interest payable and similar charges		(70)	(23)	(93)
Profit/(loss) before taxation		3,152	13,472	16,624
Irrecoverable withholding tax		(28)	-	(28)
Profit/(loss) after taxation		3,124	13,472	16,596
Earnings per ordinary share (pence)	4	2.04p	8.79p	10.83p

The total column of this statement represents the Company's Income Statement, prepared in accordance with IFRS.  The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in the above statement are derived from continuing operations.

Unaudited Condensed Income Statement

For the six months ended 31 December 2008

	Six months ended 31 December 2008
		£ '000	£'000	£'000
	Notes	Revenue	Capital	Total
Capital losses on investments
Losses on investments		-	(16,764)	(16,764)
Exchange losses		-	(280)	(280)
Revenue
Investment Income	3	4,459	-	4,459
Total Income		4,459	(17,044)	(12,585)
Expenses
Investment management fee		(234)	(78)	(312)
Other expenses		(171)	(5)	(176)
Total Expenses		(405)	(83)	(488)
Profit/(loss) before finance costs and taxation		4,054	(17,127)	(13,073)
Finance costs
Interest payable and similar charges		(427)	(142)	(569)
Profit/(loss) before taxation		3,627	(17,269)	(13,642)
Irrecoverable withholding tax		(94)	-	(94)
Profit/(loss) after taxation		3,533	(17,269)	(13,736)
Earnings per ordinary share (pence)	4	2.53p	(12.39)p	(9.86)p

Audited Condensed Income Statement

For the year ended 30 June 2009

	Year ended 30 June 2009
		£'000	£'000	£'000
	Notes	Revenue	Capital	Total
Capital losses on investments
Losses on investments		-	(12,627)	(12,627)
Exchange losses		-	(299)	(299)
Revenue
Investment Income	3	7,880	-	7,880
Total Income		7,880	(12,926)	(5,046)
Expenses
Investment management fee		(454)	(151)	(605)
Other expenses		(371)	(9)	(380)
Total Expenses		(825)	(160)	(985)
Profit/(loss) before finance costs and taxation		7,055	(13,086)	(6,031)
Finance costs
Interest payable and similar charges		(637)	(212)	(849)
Profit/(loss) before taxation		6,418	(13,298)	(6,880)
Irrecoverable withholding tax		(189)	-	(189)
Profit/(loss) after taxation		6,229	(13,298)	(7,069)
Earnings per ordinary share (pence)	4	4.46p	(9.53)p	(5.07)p

Condensed Balance Sheet

		As at	As at	As at
		31 December 2009	31 December 2008	30 June 2009
		(unaudited)	(unaudited)	(audited)
	Notes	£'000	£'000	£'000
Non-current assets
Investments held at fair value		86,251	62,578	62,161
Current assets
Other receivables		2,512	2,622	2,384
Cash at bank		61	5,968	9,206
		2,573	8,590	11,590
Total assets		88,824	71,168	73,751
Current liabilities
Bank loan		(9,943)	(16,000)	(8,000)
Other payables		(193)	(386)	(670)
Total liabilities		(10,136)	(16,386)	(8,670)
Net assets		78,688	54,782	65,081
Share capital and reserves
Stated capital account		29,455	23,452	29,455
Special distributable reserve		50,385	50,385	50,385
Capital reserves		(5,421)	(22,864)	(18,893)
Revenue reserve		4,269	3,809	4,134
Equity shareholders' funds		78,688	54,782	65,081
Net asset value per ordinary share (pence)	4	51.33p	39.31p	42.45p

Condensed Statement of Changes in Equity

For the six months ended 31 December 2009 (unaudited)

		Stated	Special
		capital	distributable	Capital	Revenue
		account	reserve	reserves	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000
As at 30 June 2009		29,455	50,385	(18,893)	4,134	65,081
Profit for the period		-	-	13,472	3,124	16,596
Dividends paid	2	-	-	-	(2,989)	(2,989)
At 31 December 2009		29,455	50,385	(5,421)	4,269	78,688

For the six months ended 31 December 2008 (unaudited)

		Stated	Special
		capital	distributable	Capital	Revenue
		account	reserve	reserves	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000
At 30 June 2008		23,452	50,385	(5,595)	2,882	71,124
(Loss)/profit for the period		-	-	(17,269)	3,533	(13,736)
Dividends paid	2	-	-	-	(2,606)	(2,606)
At 31 December 2008		23,452	50,385	(22,864)	3,809	54,782

For the year ended 30 June 2009 (audited)

		Stated	Special
		capital	distributable	Capital	Revenue
		Account	reserve	reserves	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000
As at 30 June 2008		23,452	50,385	(5,595)	2,882	71,124
(Loss)/profit for the period		-	-	(13,298)	6,229	(7,069)
Dividends paid	2	-	-	-	(4,977)	(4,977)
Issue of shares		6,003	-	-	-	6,003
At 30 June 2009		29,455	50,385	(18,893)	4,134	65,081

Condensed Cash Flow Statement

	Six months	Six months
	ended	ended	Year ended
	31 December 2009 (unaudited)	31 December 2008 (unaudited)	30 June 2009 (audited)
	£'000	£'000	£'000
Operating activities
Profit/(loss) before finance costs and   Taxation	16,717	(13,073)	. (6,031)
(Profits)/losses on investments	(13,605)	16,764	12,627
Exchange losses	28	280	299
(Increase)/decrease in other receivables	(523)	(218)	418
(Decrease)/increase in other payables	(41)	(18)	28
Net cash inflow from operating activities before interest and taxation	2,576	3,735	7,341
Interest paid	(133)	(551)	(986)
Irrecoverable withholding tax paid	(27)	(96)	(198)
Net cash inflow from operating activities	2,416	3,088	6,157
Investing activities
Purchase of investments	(29,533)	(10,274)	(17,641)
Sales of investments	18,746	13,937	26,159
Net cash (outflow)/inflow from investing activities	(10,787)	3,663	8,518
Financing activities
Equity dividends paid	(2,989)	(2,606)	(4,977)
Drawdown/(repayment) of bank loan	1,943	-	(8,000)
Issue of ordinary shares	300	-	5,704
Net cash outflow/inflow from financing	(746)	(2,606)	(7,273)
(Decrease)/increase in cash and cash equivalents	(9,117)	4,145	7,402
Cash and cash equivalents at the start of the period	9,206	2,103	2,103
Exchange losses	(28)	(280)	(299)
Cash and cash equivalents at end of period	61	5,968	9,206

Notes

1.     The unaudited interim results which cover the six month period to 31 December 2009 have been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the International Accounting Standards Board (IASB).  These financial statements have been prepared in accordance with (IAS) 34 - 'Interim Financial Reporting', and the accounting polices as set out in the statutory accounts of the Company for the year ended 30 June 2009.

2.     Dividends

Amounts recognised as distributions to equity holders in the period.

	Six months ended 31 December 2009		Six months ended 31 December 2008		Year ended 30 June 2009
		Rate		Rate		Rate
	£'000	(pence)	£'000	(pence)	£'000	(pence)
In respect of the previous period
Fourth/Fifth interim dividend	1,686	1.10	1,421	1.02	1,421	1.02
In respect of the period under review:
First interim dividend	1,303	0.85	1,185	0.85	1,185	0.85
Second interim dividend	-	-	-	-	1,185	0.85
Third interim dividend	-	-	-	-	1,186	0.85
	2,989		2,606		4,977

        A second interim dividend in respect of the year ended 30 June 2010 of 0.85p per ordinary share will be paid on 26 February 2010 to shareholders on the register on 29 January 2010. In accordance with IFRS this dividend has not been included as a liability in these accounts.

3.     Income

        The breakdown of income was as follows:

                                                                        Six months ended  Six months ended            Year ended

                                                                               31 December         31 December                 30 June

                                                                                           2009                     2008                      2009

                                                                                    £'000                     £'000                     £'000

        Income from investments

        Dividend income                                                              298                       478                       790

        Interest on fixed interest securities                                 3,335                    3,937                     7,040

                                                                                   3,633                    4,415                     7,830

        Other income

Deposit interest                                                                   -                         44                         50

 Total income                                                                3,633                      4,459                   7,880

4.     Earnings per ordinary share

        The earnings per ordinary share is based on the profit/(loss) after taxation of £16,596,000 (31 December 2008: £(13,736,000); 30 June 2009: £(7,069,000) and on a weighted average of 153,303,028 (31 December 2008: 139,366,428; 30 June 2009: 139,595,523) ordinary shares in issue throughout the period.

        Net asset value per ordinary share

        The net asset value per ordinary share is based on net assets at the period end of £78,688,000  (31 December 2008: £54,782,000; 30 June 2009: £65,081,000) and on 153,303,028

(31 December 2008: 139,366,428; 30 June 2009: 153,303,028) ordinary shares, being the number of ordinary shares in issue at the period end.

5.     Related parties

        The Company's investment manager is CQS Cayman Limited Partnership who has delegated this function to its wholly owned subsidiary New City Investment Managers Limited. CQS receive a basic monthly fee at the rate of 0.8 per cent per annum of the Company's total assets (less current liabilities other than bank borrowings), payable in arrears. During the period investment management fees of £329,000 were incurred, of which £60,000 was payable at the period end.

        Mr G Ross is a Director of the Company Secretary and Administrator, R&H Fund Services (Jersey) Limited which receives fees from the Company. During the period fees of £7,500 were incurred (excluding the director's fee to G Ross), of which £3,750 was payable at the period end.

        Mr G Ross is also a Director of the Registrar, Computershare Investor Services (Jersey) Limited which receives fees from the Company. During the period fees and expenses of £9,000 were incurred of which £2,000 was payable at the period end.

        Intelli Corporate Finance Limited ("ICF") provided advisory and brokerage services to the Company.  Mr A Collins is a Director of Midas Capital plc, which was the parent company of ICF until 1 October 2009 when ICF was acquired by Canaccord Adams Ltd.  Mr J West is Chairman of Canaccord Adams Ltd.

6.     Contingent asset

In June 2007 the European Court of Justice ('ECJ') ruled that investment trusts should be treated as special investment funds and thus exempted from VAT on management fees. While the Company does not incur VAT on management fees, its predecessor, New City High Yield     Trust plc, did incur VAT. Accordingly the liquidator of New City High Yield Trust plc may be able to reclaim amounts in respect of VAT previously charged by its investment managers.  In accordance with the terms of the voluntary winding-up of New City High Yield Trust plc and the rollover of shareholders' interests into New City High Yield Fund Limited, any VAT reclaimed, net of any liquidators costs will be paid to New City High Yield Fund Limited.  The mechanics and, in particular, the quantum of any recovery is so uncertain that it has not been recognised as an asset in the accounts.

7.     Financial information

        The financial information for the six months ended 31 December 2009 and the six months ended 31 December 2008 comprise non-statutory accounts. The full audited accounts for the year ended 30 June 2009, which were unqualified, have been lodged with the Registrar of Companies.

8.     The report and accounts for the six months ended 31 December 2009 will be posted to shareholders and made available on the website www.ncim.co.uk.  Copies may also be obtained from the Company's registered office, Ordnance House, 31 Pier Road, St. Helier, Jersey, JE4 8PW, Channel Islands

Directors' Statement of Principal Risks and Uncertainties

The Company's assets consist principally of listed fixed interest securities and its principal risks are therefore market related.  The Company is also exposed to currency risk in respect of the markets in which it invests. Other key risks faced by the Company relate to investment and strategic, regulatory, operational matters and financial controls.  These risks, and the way in which they are managed, are described in more detail under the heading 'Principal risks and risk management' within the Directors' Report and Business Review contained within the Company's annual report and accounts for the period ended 30 June 2009.  The Company's principal risks and uncertainties have not changed materially since the date of the report.

Directors' Responsibility Statement in Respect of the Interim Report

The Directors are responsible for preparing the Interim Report.

We confirm that to the best of our knowledge:

·      the condensed set of financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting' issued by the International Accounting Standards and give a true and fair view of the assets, liabilities, financial position and return of the Company;

·      the Chairman's Statement includes a fair review of the information required by DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the financial statements;

·      the Statements of Principal Risks and Uncertainties shown above is a fair review of the information required by DTR 4.2.7R; and

·      the condensed set of financial statements include a fair review of the information required by DTR 4.2.8R, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Company during that period and any changes in the related party transactions described in the last Annual Report that could do so.

On behalf of the Board

JG West

Chairman

25 February 2010

Enquiries:

Ian Francis, New City Investment Managers:                    020 7201 5366

Graeme Ross, Company Secretary:                                01534 825 200

 

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