CHY City Merch.

 
TIDMCHY 
 
City Merchants High Yield Trust plc 
 
                         Interim Management Statement 
 
                   for the Three Months ended 30 September 2011 
 
Objective of the Company 
 
The investment objective of City Merchants High Yield Trust plc is to seek to 
obtain both high income and capital growth from investment, predominantly in 
high-yielding fixed-interest securities. 
 
The Company seeks to provide a high level of dividend income relative to 
prevailing interest rates through investment in fixed-interest securities, 
various equity-like securities within fixed-income markets and equity-linked 
securities such as convertible bonds and in direct equities that have a high 
income yield. It seeks also to enhance total returns through capital 
appreciation generated by investments which have equity-related 
characteristics. 
 
Material Events 
 
On 3 October 2011 the Company announced that it is contemplating a move 
off-shore that will allow the Company to continue to deliver tax-efficient 
investment returns from high-yielding fixed-interest securities. 
 
Dividends 
 
As previously declared, in the period a second interim dividend of 2.5p per 
share was paid on 26 August 2011 to shareholders on the register on 29 July 
2011. 
 
Market background 
 
The Company's NAV fell 12.8% (source: Bloomberg) in the third quarter, a period 
that saw a strong trend of risk aversion and negative returns across the high 
yield corporate bond market. Returns were also negative for investment grade 
corporates. With core government bonds enjoying strong performance, corporate 
spreads widened considerably. 
 
According to data from Merrill Lynch, over the quarter the total sterling 
return for European high yield was -14.3%. Yields rose 316 basis points (bps) 
to 11.57% and the spread over government bonds widened 414bps to 990bps. The 
aggregate sterling investment grade yield rose 51bps to 5.94% (total return of 
-0.6%), but the BBB yield rose 96bps to 5.98% (total return of -2.2%). 
Financials was the weakest sector of the corporate market, with the more junior 
sterling Tier 1 Subordinated Debt index recording a negative total return of 
16.7%. Meanwhile, the 10 year Gilt yield fell 95bps to just 2.43%. Corporate 
fundamentals remain strong and default rates remain low. According to Moody's, 
the global high yield default rate was 1.8% in August 2011 compared to 1.9% in 
July and 5.1% in August last year. Volatile market conditions drove down 
corporate issuance to low levels. 
 
Investors have become more risk-averse over the past few months. This trend has 
been driven by continuing indications of slowing economic growth and 
developments in the eurozone sovereign debt crisis. Economic data is painting a 
picture of falling business confidence and activity, weak labour markets and 
low consumer confidence. This is depressing growth and inflation expectations 
and so is boosting interest rate-sensitive bonds and reducing appetite for more 
growth-sensitive corporate debt. The risks of contagion from the severe debt 
problems of Greece and other peripheral eurozone member states are a further 
weight on investor sentiment. Reacting to these developments, monetary 
authorities have become more `dovish'. 
 
Portfolio strategy & outlook 
 
The third quarter has been a period of high volatility and poor returns in high 
yield. However, our overall strategy has not changed. We 
continue to favour better quality (BB and B rated) high-yield issuers as well 
as higher yielding (BBB rated) investment-grade names. Following recent 
weakness, yields are higher than they have been for some time and we believe we 
can find opportunities, most notably in banks and other financials. We think 
that the combination of structural reform, conservative interpretations of 
Basel III guidelines and rising capital levels will be a powerful support for 
subordinated bank debt for years to come. In our opinion, aggregate yields on 
this type of debt offer real value despite their increased volatility. 
Elsewhere, recent months have seen sharp downward price moves in relatively 
thin trading conditions across the high yield market and we believe this can 
provide opportunities to lock in attractive yields. 
 
We have used the volatile conditions of the last months to top up favoured 
positions and to open new ones where we saw opportunities to lock in attractive 
yields for the portfolio. We bought EDP 8.625% (utility), Bormioli 10% 
(packaging) and Levi Strauss 7.75% (retail). We also added to Chrysler 8% 
(auto), Stena 6.125% (transport), Fiat 6.375% (auto) and Abengoa 8.5% 
(construction). In financials we added Intesa Sanpaolo 8.375% (bank). Sales 
included Rhodia 7% (chemical) and Ford Motor 7.45% (auto). 
 
Paul Read, Paul Causer 
 
Portfolio Managers 
 
20 October 2011 
 
Performance - Total Return 
 
                                  3 Months      1 Year     3 Years     5 Years 
 
Share Price                         -11.6%       -6.3%       44.7%       21.0% 
 
Net Asset Value                     -11.8%       -6.5%       47.7%       26.0% 
 
FTSE All-Share Index                -13.5%       -4.4%       19.2%        4.0% 
 
FTSE Government Securities -          8.3%        7.8%       28.6%       38.1% 
 
All Stocks Index 
 
Source: Thomson Reuters/Morningstar 
 
Share Price and Discount 
 
                                        As at    For the Three Months Ended 
 
                                      30 Sept         30 September 2011 
 
                                         2011 
 
                                                    High        Low     Average 
 
Ordinary Shares mid-market             152.00     177.00     146.00      163.57 
 
price (pence) 
 
Premium                                  3.5% 
 
Source: Fundamental Data 
 
Assets and Gearing 
 
                           30 September 2011 
 
Total Gross Assets (GBPm)                107.0 
 
of which cash (GBPm)                       6.3 
 
Borrowings (GBPm)                            - 
 
Cum Income Net Asset                  146.93 
Value 
 
(pence) 
 
Actual Gearing                           100 
 
Asset Gearing                             90 
 
Gearing 
 
The term applied to the effect of borrowings on assets that will increase the 
return on investment when the value of the Company's investments is rising but 
reduce the return when values are declining. A gearing level of 100 or 0% 
indicates there is no gearing. 
 
Actual Gearing reflects the amount of loans already arranged and in use by the 
Company. This is the gearing figure published by the Association of Investment 
Companies. It is calculated by 
 
dividing the aggregate of shareholders' funds and all drawn down-loans by 
shareholders' funds. 
 
Asset Gearing reflects the amount of loans actively invested in assets and not 
held in cash. It is 
 
calculated by dividing fixed assets investments by shareholders' funds. 
 
Bond Rating 
 
                                 30 September 2011 
 
AA-                                           0.0% 
 
A+                                            0.5% 
 
A                                             1.7% 
 
A-                                            2.6% 
 
BBB+                                         11.1% 
 
BBB                                           8.6% 
 
BBB-                                          0.6% 
 
BB+                                           7.4% 
 
BB                                           13.2% 
 
BB-                                           8.5% 
 
B+                                            6.0% 
 
B                                             6.8% 
 
B-                                            3.4% 
 
CCC+                                          0.5% 
 
CCC                                           0.3% 
 
CCC-                                          0.0% 
 
CC                                            0.0% 
 
C                                             0.1% 
 
D                                             0.1% 
 
NR(including equity)                         28.6% 
 
                                            100.0% 
 
Top Ten Holdings 
 
Ranking  Top Ten Holdings                                       % of 
 
Now                                                        Portfolio 
 
1        LBG Capital         6.385% May 2020 & 16.125% Dec      5.0% 
                             2024 & 6.439% May 2020 & 
                             7.975% Sept 2024 & 9% Dec 
                             2019 
 
2        General Motors      Wts Jul 2016 & Jul 2019,           3.0% 
                             Common Stock & US Pref 
 
3        Premier Farnell     Pfd 89.2p Cum CNV Red              3.7% 
 
4        Intergen            9.5% Jun 2017 & 8.5% Jun 2017      2.3% 
 
5        Socitete Generale   8.875% NTS Jun 2049                2.6% 
 
6        Balfour Beatty      10.75P Gross Cnv Pref Share        2.4% 
 
7        Ecclesiastical      8.625% Prefs                       2.2% 
 
8        Citigroup           6.829% FRN, US Pref and            2.2% 
                             Common Stock 
 
9        Aviva               6.125% Perpetual                   2.2% 
 
10       First Hydro Finance 9% GTD 31 July 2021                1.9% 
 
Changes to Share Capital 
 
                             Ordinary Shares of 2p each 
 
                                    Issued   Treasury 
 
As at 31 Dec 2010               72,799,105             0 
 
Ordinary shares bought back              0             0 
 
Ordinary shares issued                   0             0 
 
As at 30 September 2011         72,799,105             0 
 
The Company has authority to buy back shares and to issue new shares 
(disapplying pre-emption rights), in each case within specified limits. The 
Company expects to renew these authorities each year. 
 
Price and Performance 
 
The Company's Ordinary shares are listed on the London Stock Exchange and the 
price is published in the Financial Times under `Investment Companies' and in 
the Daily Telegraph under `Investment Trusts'. 
 
The Company's net asset value is calculated daily and can be viewed on the 
London Stock Exchange website at www.londonstockexchange.com. 
 
Further information can be obtained from Invesco Perpetual as follows: 
 
Free Investor Helpline: 0800 085 8677 (available Monday to Friday from 8.30am 
to 6.00pm) 
 
Internet address: www.invescoperpetual.co.uk/investmenttrusts 
 
The information provided in this statement should not be considered as a 
financial promotion or recommendation. 
 
Interim management statements are expected to be published normally in April/ 
May and October each year. 
 
For and on behalf of 
 
Invesco Asset Management Limited 
 
20 October 2011 
 
Registered Office 
 
30 Finsbury Square, London, EC2A 1AG 
 
Telephone: 020 7065 4000 
 
Facsimile: 020 7065 3166 
 
Registered in England No 2649592 
 
An Investment Company under Section 833 
 
of the Companies Act 2006 
 
 
 
END 
 

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