New City High Yield Fund Ltd : Half-yearly report

To:         HUGIN
Date:      28 February 2012
From:     New City High Yield Fund Limited
Subject: Interim Report

Unaudited statement of results for the six months ended 31 December 2011

• Net asset value total return of -6.1 per cent since 1 July 2011. 

• Ordinary share price total return of -5.2 per cent since 1 July 2011. 

• Dividend yield of 6.9 per cent, based on dividends at an annualised rate of 3.96 pence and a share price of 57.1 pence at 31 December 2011. 

• £9.1 million raised through a block listing facility and placing with both existing and new investors. 

• Ordinary share price at a premium of 6.7 per cent to net asset value at 31 December 2011. 

Chairman's Statement

Investment and Share Price Performance
The Company's net asset value total return during a difficult six month period to 31 December 2011 was -6.1 per cent; the share price total return for the same period was a little better than this at -5.2 per cent.  

At 31 December 2011 the Company's shares were trading at a 6.7 per cent premium to net asset value and they have continued to trade at a premium since the period end.

Dividends
The Company declared two dividends of 0.88 pence each per share during the period, an increase of 3.5 per cent on those paid during the same period last year.  Based on an annualised rate of 3.96 pence and a share price of 61.6 pence at the time of writing, this represents a yield of 6.4 per cent.

Fund Raising
The continuing premium rating that the market attaches to the shares of the Company enabled it, for the fourth year in a row, to complete in November 2011 a share issue equivalent to 10 per cent of the Company's share capital.  £9.1 million was raised from new and existing shareholders.  As well as a modest increase in net asset value, continuing shareholders can expect to benefit from a lower total expense ratio and greater liquidity in the Company's shares.

Background andOutlook
An interesting six months.  While the markets may have been sanguine in the face of the downgrading of US Government debt, the same could not be said of their reaction to the downgrading of Italian and Spanish debt as the Euro crisis spiralled out of control.  Greece dominated European conversation in a way not seen for a couple of millennia and a string of politicians were forced out of office before some sense of order was restored, at least temporarily, by December's promise of a European "Fiscal Compact".

How the sovereign debt crisis will play out we do not know, but the virtually free money being offered by central banks across the developed world shows no sign of being withdrawn - indeed the Fed has stated that it will not tighten monetary policy for at least another two years.  Inflation may be falling at the moment, but one wonders how long it will remain off stage.

It is against this backdrop that the portfolio has been structured and is being managed (selected convertibles are, for example, of continuing interest to the Manager). We are, I believe, well positioned to make further progress.

James G West
Chairman
28 February 2012

Investment Manager's Review

The Eurozone slow-motion car crash continued; we have had another six months of heel dragging by Eurozone governments allied to over-reaction in both the media and markets, the classic situation which has occurred over the major economic crises of the modern era. The problem this time is the longevity and size of the crisis and the number of countries whose co-operation is needed and on the other side the global media circus and impatient global markets, all of which impacts on confidence and fear.  

We have always been strong believers that the cost of borrowing represents confidence in the ability of the borrower either to repay or refinance their debt burden on favourable terms.  This confidence is missing and has been replaced with fear, as we have seen in the periphery of Europe during the latter half of calendar year 2011.

It was not only the Eurozone causing mayhem in the markets. At the beginning of August, after many months of speculation about the state of the US economy, Standard & Poors finally downgraded US Government debt.  Coming as a surprise to many, was the subsequent rise in demand for US debt with it being viewed as a safe haven and witnessed by the fall in treasury yields. During this time corporate bond markets and equity markets suffered two weeks of high volatility at a time when markets are historically illiquid.  There followed in September another "flight to safety event", the strengthening of the Swiss franc. It grew too strong in the eyes of the Swiss National Bank (SNB) which intervened on the 6^th day of the month with the intention of substantially weakening the Swiss franc, actively selling against the Euro in particular.  The SNB stated it will enforce its aim of devaluation with the "utmost determination" and buy foreign currency in "unlimited quantities".  Even at the time of writing, in early January 2012, the current EUR/CHF rate of 1.2171 (source: Bloomberg) is still high and the SNB would like to see it weaken further over time.  It should be noted that firm words backed up by strong actions can bring about the required market reaction.

We then fast-forward to the beginning of December when the Euro crisis came to yet another head, costing another two prime ministers their jobs, Mr. Papandreou in Greece and Mr. Berlusconi in Italy, both being replaced by technocrats, Lucas Papademos, the former Vice President of the European Central Bank and Mario Monti, a former European Commissioner, saddled with Herculean tasks to restructure and change the economic culture of their respective countries.

The second weekend of December hosted the most important "do or die" summit to save the Euro and the Eurozone so far. It ended in 23 of the 27 countries in agreement to a closer fiscal union, tightening fiscal controls called by the EU officials a "Fiscal Compact". Three of the remaining four countries, all non Euro currency members, need to consult with their parliaments before agreeing and the United Kingdom deciding against.  The politicians have until the beginning of March to finalise the "Fiscal Compact" leaving the ECB to maintain orderly markets aided by the EFSF once the fund has sorted the technical details out of how to be able to undertake both secondary and primary bond market purchases.

It may well be worth noting that the ITraxx cross over generic index was trading at a margin of 394bp over at the end of June and at the end of December at 754bp, close to double the margin.  As a result of these ongoing fears quoted spreads on all securities widened, volumes were low resulting in even more volatile markets.

Major events in the six months for the Company included a tap issue of 16,863,332 new ordinary shares of no par value at 55.05p per share, a premium of approximately 2.75% to the then prevailing NAV on 15 November.  Also during the period the Company paid an increased fourth interim dividend of 1.32 pence per share on 26 August 2011 to shareholders on the register on 29 July 2011, and a first interim dividend of 0.88 pence per share payable on 25 November 2011 to shareholders on the register on 28 October 2011.  This too is an increase on the same period last year of 3.5%.

Regarding the portfolio, the unquoted element shrank further with the redemption of the MetalsEx convertible being redeemed at par at the beginning of September and the conversion and subsequent sale of the underlying equity in Kalahari Minerals at a price of 247p, against a conversion price of 196p.  

In the "quoted" arena, Noreco, an issuer in which the Company had previously invested, sold its stake in the South Arne field for $200m, realising a gain of more than $50m on the sale, largely compensating for the $60m loss taken on its Siri field earlier in the year.  Having sold the 12.9% 2014 NOK bonds at 105 1/2 in early April, we felt that this was a good opportunity to buy these bonds back at 94. This was funded by the sale of the Morpol FRN bonds back to the company, which had outperformed in the Norwegian high yield market.  Also in this space was the "Giant Oil Discovery" by STATOIL linking the Aldous and Araldenes structures potentially doubling the size of the resource.  Detnor had a 20% interest in the field and subsequently the bonds rose close to their 106 1/2 call level, the Company taking a profit on some of its bonds at the 105 - 105 1/2 level.  

We continue to look for income to replace bonds which are either called by their companies or have out performed and no longer meet our requirements.  We feel that we could see a greater global issuance of high yielding convertibles which could provide a hedge against future inflation.

Enquiries:

Ian Francis
Investment Manager
New City Investment Managers                        Tel:  [phone]

Martin Cassels
R&H Fund Services Limited                        Tel:  [phone]

Beth Harris
Newgate Threadneedle                                Tel:  [phone]

Unaudited Condensed Income Statement
For the six months ended 31 December 2011

	Six months ended 31 December 2011
		£ '000	£'000	£'000
	Notes	Revenue	Capital	Total
Capital (losses) / gains on investments
Losses on investments	3	-	(12,336)	(12,336)
Exchange gains		-	13	13
Revenue
Income	5	5,914	-	5,914
Total income		5,914	(12,323)	(6,409)
Expenses
Investment management fee	6	(375)	(125)	(500)
Other expenses		(243)	-	(243)
Total expenses		(618)	(125)	(743)
Profit / (loss) before finance costs and taxation		5,296	(12,448)	(7,152)
Finance costs
Interest payable and similar charges		(86)	(28)	(114)
Profit / (loss) before taxation		5,210	(12,476)	(7,266)
Irrecoverable withholding tax		(36)	-	(36)
Profit  / (loss) after taxation		5,174	(12,476)	(7,302)
Earnings per ordinary share (pence)	7	2.49p	(6.01p)	(3.52p)

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.

No operations were acquired or discontinued during the period.

Unaudited Condensed Income Statement
For the six months ended 31 December 2010

	Six months ended 31 December 2010
		£ '000	£'000	£'000
	Notes	Revenue	Capital	Total
Capital gains / (losses) on investments
Gains on investments		-	6,009	6,009
Liquidation distribution	4	-	259	259
Exchange losses		-	(63)	(63)
Revenue
Income	5	4,567	-	4,567
Total income		4,567	6,205	10,772
Expenses
Investment management fee	6	(314)	(105)	(419)
Other expenses		(174)	-	(174)
Total expenses		(488)	(105)	(593)
Profit before finance costs and taxation		4,079	6,100	10,179
Finance costs
Interest payable and similar charges		(65)	(22)	(87)
Profit before taxation		4,014	6,078	10,092
Irrecoverable withholding tax		(34)	-	(34)
Profit after taxation		3,980	6,078	10,058
Earnings per ordinary share (pence)	7	2.35p	3.58p	5.93p

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.

No operations were acquired or discontinued during the period.

Audited Condensed Income Statement
For the year ended 30 June 2011

	Year ended 30 June 2011
		£'000	£'000	£'000
	Notes	Revenue	Capital	Total
Capital gains /(losses) on investments
Gains on investments		-	9,612	9,612
Liquidation distribution		-	259	259
Exchange losses		-	(303)	(303)
Revenue
Income	5	10,030	-	10,030
Total income		10,030	9,568	19,598
Expenses
Investment management fee	6	(702)	(234)	(936)
Other expenses		(415)	-	(415)
Total expenses		(1,117)	(234)	(1,351)
Profit before finance costs and taxation		8,913	9,334	18,247
Finance costs
Interest payable and similar charges		(140)	(46)	(186)
Profit before taxation		8,773	9,288	18,061
Irrecoverable withholding tax		(69)	-	(69)
Profit after taxation		8,704	9,288	17,992
Earnings per ordinary share (pence)	7	4.67p	4.98p	9.65p

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.

No operations were acquired or discontinued during the year.

Condensed Balance Sheet
As at 31 December 2011

		As at	As at	As at
		31 December 2011	31 December 2010	30 June 2011
		(unaudited)	(unaudited)	(audited)
	Notes	£'000	£'000	£'000
Non-current assets
Investments held at fair value		119,947	116,979	130,773
Current assets
Other receivables		3,448	2,719	3,982
Cash at bank		-	53	15
		3,448	2,772	3,997
Total assets		123,395	119,751	134,770
Current liabilities
Bank loan facility		(5,314)	(3,471)	(12,927)
Other payables		(132)	(127)	(1,230)
Total liabilities		(5,446)	(3,598)	(14,157)
Net assets		117,949	116,153	120,613
Share capital and reserves
Stated capital account		66,680	57,583	57,567
Special distributable reserve		50,385	50,385	50,385
Capital reserve		(7,007)	2,259	5,469
Revenue reserve		7,891	5,926	7,192
Equity shareholders' funds		117,949	116,153	120,613
Net asset value per ordinary share (pence)	8	53.55p	57.10p	59.30p

Condensed Statement of Changes in Equity

For the six months ended 31 December 2011 (unaudited)

		Stated	Special
		capital	distributable	Capital	Revenue
		account	reserve	reserve	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000
At 1 July 2011		57,567	50,385	5,469	7,192	120,613
(Loss) / profit for the period		-	-	(12,476)	5,174	(7,302)
Dividends paid	2	-	-	-	(4,475)	(4,475)
Issue of shares	9	9,113	-	-	-	9,113
At 31 December 2011		66,680	50,385	(7,007)	7,891	117,949

For the six months ended 31 December 2010 (unaudited)

		Stated	Special
		capital	distributable	Capital	Revenue
		account	reserve	reserve	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000
As at 1 July 2010		29,455	50,385	(3,819)	5,219	81,240
Profit for the period		-	-	6,078	3,980	10,058
Dividends paid	2	-	-	-	(3,273)	(3,273)
Issue of shares		28,128	-	-	-	28,128
At 31 December 2010		57,583	50,385	2,259	5,926	116,153

For the year ended 30 June 2011 (audited)

		Stated		Special
		capital		distributable		Capital	Revenue
		Account		reserve		reserve	reserve	Total
	Notes	£'000		£'000		£'000	£'000	£'000
As at 1 July 2010		29,455		50,385		(3,819)	5,219	81,240
Profit for the year			-		-	9,288	8,704	17,992
Dividends paid	2		-		-	-	(6,731)	(6,731)
Issue of shares			28,112		-	-	-	28,112
At 30 June 2011			57,567		50,385	5,469	7,192	120,613

Condensed Cash Flow Statement
For the six months ended 31 December 2011

	Six months	Six months
	ended	ended	Year ended
	31 December 2011 (unaudited)	31 December 2010 (unaudited)	30 June 2011 (audited)
	£'000	£'000	£'000
Operating activities
(Loss) / profit before finance costs and taxation	(7,152)	10,179	18,247
Losses /(gains) on investments	12,336	(6,009)	(9,612)
Exchange (gains)/ losses	(13)	63	303
Increase in other receivables	(127)	(223)	(739)
(Decrease) / increase in other payables	(10)	51	(3)
Net cash inflow from operating activities before interest and taxation	5,034	4,061	8,196
Interest paid	(144)	(98)	(172)
Irrecoverable withholding tax paid	(36)	(24)	(69)
Net cash inflow from operating activities	4,854	3,939	7,955
Investing activities
Purchases of investments	(17,489)	(37,703)	(67,245)
Sales of investments	15,582	15,657	35,413
Net cash outflow from investing activities	(1,907)	(22,046)	(31,832)
Financing activities
Equity dividends paid	(4,475)	(3,273)	(6,731)
(Repayment)/drawdown of bank loan facility	(7,613)	(6,695)	2,761
Issue of ordinary shares	9,113	28,138	28,112
Net cash (outflow) / inflow from financing	(2,975)	18,170	24,142
(Decrease) / increase in cash and cash equivalents	(28)	63	265
Net debt at the start of the period	(12,912)	(10,113)	(10,113)
Repayment/(drawdown)of bank loan facility	7,613	6,695	(2,761)
Exchange gains / (losses)	13	(63)	(303)
Net debt at the end of the period	(5,314)	(3,418)	(12,912)

Notes

1. The unaudited interim results which cover the six month period to 31 December 2011 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 2011.

2.   Dividends
Amounts recognised as distributions to equity holders in the period.

	Six months ended 31 December 2011		Six months ended 31 December 2010		Year ended 30 June 2011
		Rate		Rate		Rate
	£'000	(pence)	£'000	(pence)	£'000	(pence)
In respect of the previous period
Fourth interim dividend	2,685	1.32	1,840	1.20	1,840	1.20
In respect of the period under review:
First interim dividend	1,790	0.88	1,433	0.85	1,433	0.85
Second interim dividend	-	-	-	-	1,729	0.85
Third interim dividend	-	-	-	-	1,729	0.85
	4,475		3,273		6,731

        A second interim dividend in respect of the year ended 30 June 2012 of 0.88p per ordinary share was paid on 24 February 2012 to shareholders on the register on 27 January 2012. In accordance with IFRS this dividend has not been included as a liability in these accounts.

3. Included within losses on investments for the period ended 31 December 2011 are realised losses of £929,000 and unrealised losses of £11,407,000. 

4. Liquidation Distribution 
        As a result of the European Court of Justice decision that investment management fees payable by investment trusts are not, and should never have been, liable to value added tax ('VAT'), the Company recovered during the six months ended 31 December 2010 VAT of £259,000 in respect of investment management fees paid by its predecessor, New City High Yield Trust plc.  The Company expects to recover another significantly smaller amount but as the exact amount is uncertain, it has not been recognised as an asset in the accounts.

5.     Income
        The breakdown of income for the period was as follows:

        Six months ended        Six months ended        Year ended
        31 December         31 December        30 June
        2011        2010         2011
  £'000   £'000   £'000
        Income from investments:
        Dividend income         627        396        1,019
        Interest on fixed interest securities        5,287        4,171        9,008
  Other income:
          Deposit interest        -        -        3
        Total income        5,914        4,567        10,030

6.  Investment Management Fee 

The Company's investment manager is CQS Cayman Limited Partnership which has delegated this function to its wholly owned subsidiary New City Investment Managers. 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 £500,000 were incurred, of which £82,000 was payable at the period end.

7.    Earnings per ordinary share

      The revenue earnings per ordinary share is based on the profit after taxation of £5,174,000 (31 December 2010: £3,980,000 and 30 June 2011: £8,704,000) and on a weighted average of 207,620,082 (31 December 2010: 169,648,833 and 30 June 2011: 186,387,820) ordinary shares in issue throughout the period.

        The capital profit per ordinary share is based on a net capital loss of £12,476,000 (31 December 2010: a net capital gain of £6,078,000 and 30 June 2011: a net capital gain of £9,288,000) and on a weighted average of 207,620,082 (31 December 2010: 169,648,833 and 30 June 2011: 186,387,820) ordinary shares in issue throughout the period.

8. Net asset value per ordinary share 

        The net asset value per ordinary share is based on net assets at the period end of £117,949,000 (31 December 2010: £116,153,000 and 30 June 2011: £120,613,000) and on 220,267,581 (31 December 2010: 203,404,249 and 30 June 2011: 203,404,249) ordinary shares, being the number of ordinary shares in issue at the period end.

9.Share issue 

16,863,322 ordinary shares were issued at a price of 55.05p per share pursuant to the Company's block listing facility on 15 November 2011, raising £9.1 million.

10 Related Parties 

        Mr G Ross is a Director of the Company Secretary and Administrators, R&H Fund Services (Jersey) Limited and R&H Fund Services Limited, which both eceive fees from the Company. During the period fees of £27,000 were incurred (excluding the director's fee to Mr G Ross).

        Canaccord Genuity Limited provides advisory and brokerage services to the Company.  

Mr J West is Chairman of Canaccord Genuity Limited.

 11. Financial information 

        The results for the half-years ended 31 December 2011 and 31 December 2010 which have not been audited or reviewed by the Company's auditors pursuant to the Auditing Practices Board guidance on the "Review of Interim Financial Information", constitute non-statutory accounts in terms of Section 434 of the Companies Act 2006.  The latest published accounts which have been delivered to the Registrar of Companies are for the year ended 30 June 2011; the report of the auditors thereon was unqualified and did not contain a statement under Section 498 of the Companies Act 2006.  The abridged financial statements shown above for the year ended 30 June 2011 are an extract from those accounts.

12.   The report and accounts for the six months ended 31 December 2011 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 year ended 30 June 2011.  The Company's principal risks and uncertainties have not changed materially since the date of the report and are not expected to change materially for the rest of the Company's financial year.

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 Board 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 Statement 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
J G West
Chairman
28 February 2012

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Source: New City High Yield Fund Ltd via Thomson Reuters ONE

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