CQS New City High Yield Fund Limited : Final Re...
To: THOMSON REUTERS
Date: 22 October 2015
From: CQSNew City High Yield Fund Limited
Results for the year ended 30 June 2015
- Net asset value total return of 1.0 per cent.
- Ordinary share price total return of -3.6 per cent.
- Dividend yield of 7.3 per cent, based on dividends at an annualised rate of 4.31 pence and a share price of 58.88 pence at 30 June 2015.
- Prospectus relating to initial placing, offer for subscription and placing programme published in March 2015.
- £39.3m of equity raised during the year to 30 June 2015.
Chairman's Statement
Investment and Share Price Performance
The Company's net asset value total return was 1.0% for the year ended 30 June 2015. The share price total return for the same period was a little weaker at -3.6%. Investment returns were muted due to Eurozone concerns and the strength of the US dollar. Further information is set out in the Investment Manager's Review.
Earnings and Dividends
The Company declared one interim dividend of 0.94 pence in respect of the period, two of 0.96 pence, and one of 1.45 pence. The Company has in recent years paid three interim dividends at the same rate and a larger fourth interim dividend. The gap between the size of the first three interim dividends and the fourth had become increasingly large, and the Board concluded that it would be in shareholders' interests for the gap to be narrowed. The aggregate payment of 4.31 pence per share represents a 2.4% increase on the 4.21 pence paid last year. Based on an annualised rate of 4.31 pence and a share price of 58.5 pence at the time of writing, this represents a yield of 7.4%. Since inception the level of dividends paid has increased every year.
Gearing
The Company replaced its existing £20m loan facility with a new £30m loan facility with Scotiabank in December 2014. At an all-in rate of 1.42% the new facility is significantly cheaper than the one that it replaced and shareholders benefited from this reduction in cost. £23m was drawn down at 30 June 2015 and the Company had effective gearing of 11%.
Rating and Fund Raising
The market continues to attach a premium rating to the shares of your Company. At an Extraordinary General Meeting in March 2015 shareholders approved a resolution granting authority to issue shares equivalent to 50% of the Company's issued share capital, and a prospectus was published in March this year. £15.2m had been raised by February 2015, and £24.1m was raised from new and existing shareholders under the subsequent placing programme. The Directors anticipate issuing further shares as necessary as part of the process of managing the premium to net asset value at which your Company's shares trade, and in order to ensure maximum flexibility a resolution will be proposed at the Annual General Meeting to renew the Directors' authority to issue shares equivalent to 10% of the Company's share capital. As well as a modest increase in net asset value, existing shareholders can look to benefit from a lower ongoing charges ratio and greater liquidity in the Company's shares.
Management Arrangements
The Investment Manager agreed to absorb the costs of acting as our Alternative Investment Fund Manager ("AIFM") within the existing fee arrangements, but the Board felt that the growing size of your Company should be reflected in the fee arrangements. The management fee of 0.8% per annum on total assets was reduced to 0.7% per annum on total assets in excess of £200m with effect from 1 January 2015. The Company's total assets are currently £233.1m and shareholders should increasingly benefit from this reduction in ongoing charges as the Company grows.
Board
I would like to thank Graeme Ross who, as a founder Director, retired in July having served the Company since its inception in 2007. Graeme has contributed substantially to the successful development and management of the Company throughout his time in office. I welcome Duncan Baxter to the Board, having joined us on 31 July 2015. Duncan, a retired Senior Banker residing in Jersey, is an experienced Investment Trust director who will add considerably to the strength of the Board. The Board is in the process of further refreshing its directors.
Outlook
Our portfolio manager, Ian Francis, continues to find value in the bond markets and is placing a particular emphasis on providing additional protection by increasing diversity, something made easier by our increasing size. As further explained in the Investment Manager's Review, the recent rout in Chinese equity markets has made stock markets everywhere jittery, and provided the latest exercise to delay tightening global monetary policy. Your Company, and its shareholders, remain well positioned to benefit from the prevailing market trends.
James G West
21 October 2015
Investment Manager's Review
The last twelve months has been very complex and volatile for global markets, with politics being one of the main drivers of sentiment.
Complexity in the first six months to December 31st 2014 was firstly provided by the US. With a recovering economy, the market began to anticipate a tapering of Quantitative Easing (QE) and a path to interest rate rises. This led to the strengthening of the US dollar in what turned out to be a very linear fashion against all major currencies. Against sterling for example it opened July at $1.7150/£ and closed December 31st at $1.5577/£.
A direct effect of the strong US dollar was the weakness of commodities. In addition the oil price nearly halved, from $112.29 to $57.33, over the same period as a result of high production and market oversupply.
At the other end of the scale Europe had a fairly torrid first six months of the year under review. This started with the default of the Portuguese bank Banco Espirito Santo, plus further evidence that the Eurozone was still in a period of economic stagnation. The European markets subsequently rallied following Mario Draghi's speech at Jackson Hole in August reiterating the "use of all instruments needed", a strong hint that QE would be used by the European Central Bank (ECB). This had the desired effect in the short term with European markets rallying strongly.
Negative news in the Eurozone reappeared in November. The inflation figure of 0.4% undershot the ECB medium-term target of 2%, leaving investors worried that Europe was heading for a Japanese style lost decade of deflation and recession. Encouraging Mario Draghi to what was almost a rerun of his "do whatever it takes" speech of 2012, putting pressure on Germany to accept QE to restart the Eurozone inflation engine, which duly happened a couple of months later.
The second half of the Company's fiscal year had one major feature, the Greek debt crisis. Following the election of a radical far-left led coalition in Greece, the subsequent multiple negotiations on terms to bail out a bankrupt nation took six months to agree and still rumbles on at the time of writing.
Elsewhere in Europe, January produced two major events which impacted the European economy, firstly the surprise move by the Swiss National Bank breaking its tie with the euro which had been around 1.20 Swiss francs (SFC)/euro strengthening immediately to SFC 0.95/euro before settling back to SFC 1.04/euro on the day (at the time of writing the rate was SFC 1.07/euro). This was taken by most as a pre-emptive move to cut the tie before any QE was implemented by the ECB.
Second, the ECB announced a euro 60bn/month sovereign bond purchase programme, lasting until at least September 2016. This commenced in March 2015 and happened to coincide with the first shoots of European economic recovery, although a warning came from the IMF in April that the European job market was not growing fast enough. With all of the Greek negotiations going on in the background the result was extremely volatile markets in currency, bonds and equities.
The US continued to recover fairly consistently from January to June, with jobless claims hitting a 15-year low in May and June. Home sales hit a 5.5-year high, with more first-time buyers entering the market. While factors pointed to the first rate rise coming in the autumn of 2015, interestingly the Federal Reserve (Fed) stated during May that rate rises would be slower than market expectations, which shows that the fear that the first rate rise will choke off the current growth in the economy remains foremost in the minds of Fed Open Market Committee members.
The UK election in May proved opinion polls to be the least accurate in living memory, with none predicting the 12-seat Conservative majority, along with the decimation in Scotland of Labour and Liberal Democrats by the Scottish Nationalist Party.
The UK continued to have a stream of positive data throughout the rest of the second half of the Company's fiscal year, with GDP forecasts rising to 2.9%, up from 2.5%, and UK consumer confidence reaching a 15-year high at the end of the period under review.
For the Company's portfolio one of the more interesting points has been the increase in the number of bonds called by the issuers at the first possible opportunity, more noticeable than last year as we are in a more sustained recovery. Examples of this are Moto Finance 10.25%, Europcar 9.375%, and both AA 9.5% bonds. Most refinancings were by bonds yielding on average 3% less than those they replaced. This aside, there have been ongoing opportunities to replace these bonds with issues such as Integrated Dental Holdings 8.5% 2019, Pizza Express 8.625% 2022, Johnston Press 8.875% 2019 and Matalan 8.875% 2020 to name a few. In the equity element of the portfolio we continued to add to NewRiver Retail and Greencoat UK Wind, and initiated a new holding in Channel Islands Property Fund, partially replacing some Standard Life Property Income.
The year ahead holds a new phase for markets as we enter into rate rises in the US and UK with continued QE in Europe, with China and the Far East trying to rekindle their growth. This undoubtedly will add volatility to the market and we believe will provide opportunities for the Company in the forthcoming year.
Ian Francis
New City Investment Managers
21 October 2015
Audited Income Statement
For the year ended 30 June 2015
| £ '000 | £'000 | £'000 | ||
| Notes | Revenue | Capital | Total | |
| Capital losses on investments | ||||
| Losses on investments | - | (12,898) | (12,898) | |
| Exchange gains | - | 130 | 130 | |
| Revenue | ||||
| Income | 16,602 | - | 16,602 | |
| 16,602 | (12,768) | 3,834 | ||
| Expenses | ||||
| Investment management fee | (1,241) | (414) | (1,655) | |
| Other expenses | (749) | (94) | (843) | |
| Total expenses | (1,990) | (508) | (2,498) | |
| Profit before finance costs and taxation | 14,612 | (13,276) | 1,336 | |
| Finance costs | ||||
| Interest receivable | 7 | - | 7 | |
| Interest payable and similar charges | (208) | (69) | (277) | |
| Profit before taxation | 14,411 | (13,345) | 1,066 | |
| Irrecoverable withholding tax | (264) | - | (264) | |
| Profit after taxation | 14,147 | (13,345) | 802 | |
| Earnings per ordinary share (pence) | 1 | 4.51 | (4.25) | 0.26 |
The total column of this statement represents the Company's Statement of Comprehensive Income, 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 in the year.
Audited Income Statement
For the year ended 30 June 2014
| £'000 | £'000 | £'000 | ||
| Notes | Revenue | Capital | Total | |
| Capital gains on investments | ||||
| Gains on investments | - | 2,948 | 2,948 | |
| Exchange gains | - | 57 | 57 | |
| Revenue | ||||
| Income | 14,269 | - | 14,269 | |
| 14,269 | 3,005 | 17,274 | ||
| Expenses | ||||
| Investment management fee | (1,037) | (346) | (1,383) | |
| Other expenses | (567) | (90) | (657) | |
| Total expenses | (1,604) | (436) | (2,040) | |
| Profit before finance costs and taxation | 12,665 | 2,569 | 15,234 | |
| Finance costs | ||||
| Interest payable and similar charges | (211) | (70) | (281) | |
| Profit before taxation | 12,454 | 2,499 | 14,953 | |
| Irrecoverable withholding tax | (182) | - | (182) | |
| Profit after taxation | 12,272 | 2,499 | 14,771 | |
| Earnings per ordinary share (pence) | 1 | 4.76 | 0.97 | 5.73 |
Audited Balance Sheet
| As at | As at | ||
| 30 June 2015 | 30 June 2014 | ||
| Notes | £'000 | £'000 | |
| Non-current assets | |||
| Investments held at fair value | 223,365 | 194,441 | |
| Current assets | |||
| Other receivables | 3,543 | 5,027 | |
| Cash and cash equivalents | 6,220 | - | |
| 9,763 | 5,027 | ||
| Total assets | 233,128 | 199,468 | |
| Current liabilities | |||
| Bank loan facility | (23,000) | (15,360) | |
| Other payables | (1,452) | (2,247) | |
| Total liabilities | (24,452) | (17,607) | |
| Net assets | 208,676 | 181,861 | |
| Stated capital and reserves | |||
| Stated capital account | 150,963 | 111,638 | |
| Special distributable reserve | 50,385 | 50,385 | |
| Capital reserve | (7,775) | 5,570 | |
| Revenue reserve | 15,103 | 14,268 | |
| Equity shareholders' funds | 208,676 | 181,861 | |
| Net asset value per ordinary share (pence) | 2 | 58.63 | 62.41 |
Audited Statement of Changes in Equity
For the year ended 30 June 2015
| Stated | Special | |||||
| capital | distributable | Capital | Revenue | |||
| account* | reserve+ | reserve* | reserve# | Total | ||
| £'000 | £'000 | £'000 | £'000 | £'000 | ||
| At 1 July 2014 | 111,638 | 50,385 | 5,570 | 14,268 | 181,861 | |
| Total comprehensive income for the year: | ||||||
| Profit for the year | - | - | (13,345) | 14,147 | 802 | |
| Transactions with owners recognised directly in equity: | ||||||
| Dividends paid | - | - | - | (13,312) | (13,312) | |
| Issue of shares | 39,325 | - | - | - | 39,325 | |
| At 30 June 2015 | 150,963 | 50,385 | (7,775) | 15,103 | 208,676 | |
Audited Statement of Changes in Equity
For the year ended 30 June 2014
| Stated | Special | |||||
| capital | distributable | Capital | Revenue | |||
| account* | reserve+ | reserve* | reserve# | Total | ||
| £'000 | £'000 | £'000 | £'000 | £'000 | ||
| At 1 July 2013 | 81,890 | 50,385 | 3,071 | 12,503 | 147,849 | |
| Total comprehensive income for the year: | ||||||
| Profit for the year | - | - | 2,499 | 12,272 | 14,771 | |
| Transactions with owners recognised directly in equity: | ||||||
| Dividends paid | - | - | - | (10,507) | (10,507) | |
| Issue of shares | 29,748 | - | - | - | 29,748 | |
| At 30 June 2014 | 111,638 | 50,385 | 5,570 | 14,268 | 181,861 | |
* Following a change in Jersey Company Law effective 27 June 2008 dividends can be paid out of any capital account of the Company subject to certain solvency restrictions. It is the Company's policy however to account for revenue items and pay dividends through a separate revenue reserve.
+ The balance on the special distributable reserve of £50,385,000 (2014: £50,385,000) is treated as distributable profits available to be used for all purposes permitted by Jersey Company Law including the buying back of ordinary shares, the payment of dividends and the payment of preliminary expenses.
# The balance on the revenue reserve of £15,103,000 (2014: £14,268,000) is available for paying dividends.
Audited Cash Flow Statement
| Year | Year | |
| ended | ended | |
| 30 June 2015 | 30 June 2014 | |
| £'000 | £'000 | |
| Operating activities | ||
| Profit before finance costs and taxation | 1,336 | 15,234 |
| Losses/(gains) on investments | 12,898 | (2,948) |
| Exchange gains | (130) | (57) |
| Decrease in other receivables | 77 | 297 |
| Increase in other payables | 35 | 18 |
| Net cash inflow from operating activities before interest and taxation | 14,216 | 12,544 |
| Interest received | 7 | - |
| Interest paid | (306) | (274) |
| Irrecoverable withholding tax paid | (264) | (182) |
| Net cash inflow from operating activities | 13,653 | 12,088 |
| Investing activities | ||
| Purchases of investments | (88,626) | (102,911) |
| Sales of investments | 47,588 | 67,390 |
| Net cash outflow from investing activities | (41,038) | (35,521) |
| Financing | ||
| Equity dividends paid | (13,312) | (10,507) |
| Drawdown of bank loan facility | 7,640 | 3,146 |
| Issue of ordinary shares | 39,325 | 29,748 |
| Net cash inflow from financing | 33,653 | 22,387 |
| Increase/(decrease) in cash and cash equivalents | 6,268 | (1,046) |
| Net debt at the start of the year* | (15,572) | (11,437) |
| Drawdown of bank loan facility | (7,640) | (3,146) |
| Exchange gains | 130 | 57 |
| Net debt at the end of the year+ | (16,814) | (15,572) |
+ Net debt includes cash held at bank and bank loan facility.
Principal Risks and Uncertainties
The principal risks faced by the Company are: investment and strategy risk; market risk; financial risk; earnings and dividend risk; operational risk and regulatory risk. These risks, which have not changed materially since the annual report for the year ended 30 June 2014, and the way in which they are managed, are described in more detail in the annual report for the year ended 30 June 2015. The report will be made available on the manager's website www.ncim.co.uk during October 2015.
Statement of Directors' Responsibilities in respect of the Annual Report and the Financial Statements
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable Jersey law and International Financial Reporting Standards ("IFRS") as adopted by the International Accounting Standards Board ("IASB").
Jersey law requires the Directors to prepare, in accordance with generally accepted accounting principles, financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the profit and loss of the Company for that year. Under Jersey law they have elected to prepare the financial statements in accordance with IFRS as adopted by the IASB.
In preparing these financial statements, the Directors are required to:
· select suitable accounting policies and then apply them consistently;
· make judgements and estimates that are reasonable and prudent;
· state whether applicable International Financial Reporting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies (Jersey) Law 1991. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. The financial statements are published on the www.ncim.co.uk website, which is a website maintained by the Company's Investment Manager. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The Directors confirm that to the best of their knowledge:
· the financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;
· that in the opinion of the Directors, the Annual Report and Accounts taken as a whole, is fair, balanced and understandable and it provides the information necessary to assess the Company's performance, business model and strategy; and
· the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that the Company faces.
On behalf of the Board
J G West
Chairman
21 October 2015
Notes (audited)
1. Earnings per ordinary share
The revenue earnings per ordinary share is based on the net profit after taxation of £14,147,000 (2014: £12,272,000) and on 313,955,040 (2014: 257,812,038) ordinary shares, being the weighted average number of ordinary shares in issue during the year.
The capital earnings per ordinary share is based on a net capital loss of £13,345,000 (2014: net capital gain of £2,499,000) and on 313,955,040 (2014: 257,812,038) ordinary shares, being the weighted average number of ordinary shares in issue during the year.
2. Net asset value per ordinary share
The net asset value per ordinary share is based on net assets of £208,676,000 (2014: £181,861,000) and on 355,903,477 (2014: 291,405,541) ordinary shares, being the number of ordinary shares in issue at the year end.
3. Dividends
A fourth interim dividend in respect of the year ended 30 June 2015 of 1.45p per ordinary share was paid on 28 August 2015 to shareholders on the register on 31 July 2015. In accordance with IFRS this dividend has not been included as a liability in these accounts and will be recognised in the period in which it is paid.
- Related parties
The following are considered related parties: the Board of Directors ("the Board") and CQS/New City Investment Managers ("the Investment Manager").
Mr G Ross, who was a director of the Company during the year, is also a director of the Company Secretary and Administrators, R&H Fund Services (Jersey) Limited and also the UK Administrator, R&H Fund Services Limited, which receive fees from the Company.
All transactions with related parties are carried out at an arms length basis.
There are no other transactions with the Board other than aggregated remuneration for services as Directors and there are no outstanding balances to the Board at the year end.
- Bank loan facility
The Company has a short term loan facility with Scotiabank. As at the year end the unsecured loan facility had a limit of £30 million of which £23 million was drawn down at the year end.
- Financial information
These are not full statutory accounts for the year ended 30 June 2015. The full audited annual report and accounts for the year ended 30 June 2015 will be sent to shareholders in October 2015 and will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The full audited accounts for the year ended 30 June 2014, which were unqualified, have been lodged with the Registrar of Companies.
7. The report and accounts for the year ended 30 June 2015 will be 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
Enquiries:
Ian Francis, New City Investment Managers: 020 7201 5366
Martin Cassels, UK Administrator 0131 524 6140
The issuer of this announcement warrants that they are solely responsible for the content, accuracy and originality of the information contained therein.
Source: CQS New City High Yield Fund Limited via Globenewswire
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