TIDMCIF
RNS Number : 0531F
Carador Income Fund PLC
15 April 2011
CARADOR INCOME FUND PLC
(FORMERLY CARADOR PLC)
Annual Report
and
Audited Financial Statements
for the year ended 31 December 2010
INVESTMENT OBJECTIVE
The Company's investment objective is to produce attractive and
stable returns, with low volatility compared to equity markets, by
investing in a diversified portfolio of senior, equity and
mezzanine tranches of collateralised loan obligations "CLOs".
The Company is listed on the London Stock Exchange ("LSE").
CONTENTS Page
Management and administration 1
Chairman's report 2
Investment manager's review 7
Directors' report 18
Statement of custodian's responsibilities & custodian's
report to the shareholders 27
Independent auditors' report 28
Financial statements
- Statement of financial position 30
- Statement of comprehensive income 31
- Statement of changes in equity 32
- Statement of cash flows 33
- Notes to the financial statements 34
Glossary of terms - unaudited 62
Summary of key financial information and net asset value
reconciliation - unaudited 66
Schedule of investments - unaudited 67
Portfolio changes - material acquisitions/disposals - unaudited
70
Company Registration Number: 415764
Euro Shares ISIN: IE00B10RXS64
US Dollar Shares ISIN: IE00B3D60Z08
MANAGEMENT AND ADMINISTRATION
Directors * Registered Office **
Werner Schwanberg (Chairman) Georges Court
Professor Claudio Albanese 54 - 62 Townsend Street
Fergus Sheridan Dublin 2
Adrian Waters Ireland
Edward D'Alelio
Nicholas Moss
Administrator and Company Investment Manager
Secretary ** GSO Capital Partners International
Northern Trust International LLP
Fund Administration Services 40 Berkeley Square
(Ireland) Limited London W1J 5AL
Georges Court United Kingdom
54 - 62 Townsend Street
Dublin 2
Ireland
Custodian ** Joint Financial Advisor
Northern Trust Fiduciary and Joint Corporate Broker
Services (Ireland) Limited RBS Hoare Govett Limited
Georges Court 135 Bishopsgate
54 - 62 Townsend Street London EC2M 3UR
Dublin 2 United Kingdom
Ireland
Solicitors as to US and Joint Financial Advisor
English Law and Joint Corporate Broker
Herbert Smith LLP Singer Capital Markets
Exchange House limited
Primrose Street One Hanover Street
London EC2A 2HS London W1S 1YZ
United Kingdom United Kingdom
Solicitors as to Irish Independent Auditors
Law KPMG
Arthur Cox 1 Harbourmaster Place
Earlsfort Centre IFSC
Earlsfort Terrace Dublin 1
Dublin 2 Ireland
Ireland
Registrar
Computershare Investor
Services (Ireland) Limited
Herron House
Corrig Road
Sandyford Industrial Estate
Dublin 18
Ireland
* All Directors of Carador Income Fund plc are Non-executive
Directors.
** The Administrator, Company Secretary, Custodian and
Registered Office changed with effect from midnight (Irish time) on
31 December 2011, see note 19 for further details.
CHAIRMAN'S REPORT
I herewith present the annual report and accounts for Carador
Income Fund PLC ('Carador' or the 'Company').
Performance
The Company's share price increased by 114.28% and 124.00% for
the US$ Share and EUR Share classes respectively, one of the best
performing listed funds on the London Stock Exchange in 2010.
Carador's Net Asset Value (NAV) increased from US$56.99c per US$
Share and EUR44.18c per EUR Share to US$74.89c and EUR56.77c
respectively, generating a total return for the year, net of fees,
based on NAV appreciation but excluding dividends, of +31.42% for
the US$ Share class and +28.51% for the EUR Share class. This
demonstrates the ability of the Investment Manager to generate
attractive returns for shareholders through active management of
the underlying portfolio while also taking a number of proactive
measures aimed at closing the discount to NAV.
The Company declared dividends of US$7.22c per US$ Share and
EUR5.49c per EUR Share over the four quarters in 2010, representing
a dividend payout of 12.67% of the NAV or 20.63% of the market
price as at 31 December 2009 for the US$ Class and 12.43% of the
NAV or 21.96% of the market price as at 31 December 2009 for the
EUR Class. The total dividends paid in 2010 resulted in an increase
of 4.18% (US$ Class) and 11.59% (EUR Class) on the prior year.
During 2010, the dividend increased from US$1.24c per US$ and
EUR0.91c per Euro in the first quarter to US$2.10c per US$ Share
and EUR1.57c per EUR Share respectively in the fourth quarter.
Chart 1: Dividend per Share (US$ Class)
As a result, the total return for the year, net of fees, based
on NAV appreciation and dividends was +44.09% for the US$ Class and
+40.94% for the EUR Class.
As at 31 December 2009, the US$ Class and EUR Class were trading
at a 38.6% and 43.4% discount to NAV respectively. In February
2010, the Company put in place a facility to enable the Board to
undertake a share repurchase program at their discretion, as a
means of narrowing the discount to NAV. However, the Company did
not acquire any shares in 2010 and the buyback facility remains
available to use in the future should the discount to NAV widen
again.
GSO principals(including employees of the Investment Manager),
both directly and via GSO Capital Partners Employee Side by Side
Fund LLC, continued to align their interest with shareholders, by
increasing their ownership of Shares in 2010 through the tender
offer which was announced on 26 April 2010. At the time of the
announcement, the tender price implied the following premia to the
market bid, the 30 day average bid and the twelve month average
bid([1]):
Tender Price Premia
to Market Bid
-------------------------------
30
26-Apr-10 Days Year
---------- -------- ---------
US$ Class +16.28% +20.69% +143.95%
----------- ---------- -------- ---------
EUR Class +12.12% +17.46% +164.73%
----------- ---------- -------- ---------
CHAIRMAN'S REPORT (continued)
Performance (continued)
A total of 1,179,932 US$ and 550,000 Euro Shares were validly
tendered, representing approximately 1.2% of the issued Shares of
the Company. All of the US$ Shares and Euro Shares tendered were
accepted.
The strong NAV performance, attractive yield and the tender
offer have all helped drive down the discount to NAV throughout
2010, resulting in the US$ Shares trading at a +0.14% premium and
the EUR Shares trading at a 1.36% discount as at 31 December 2010.
As a result, the total return to shareholders in 2010 based on
share prices and dividends paid reached +152.66% for the US$ Share
class and +162.30% for the EUR Share class([2]).
Chart 2: Share Price and NAV per Share (2010)
The Company also benefited from additional research coverage and
more active market making in its shares, aided by the appointed of
Singer Capital Markets Limited as joint corporate broker and joint
financial adviser on 28 January 2011.
Cash flow increased steadily throughout the year and cash flow
coverage of dividends continues to be stable. As the charts below
show, dividend coverage is anti-cyclical, increasing if the market
is weak. The Company believes that this adds stability to NAV and
future dividends.
CHAIRMAN'S REPORT (continued)
Performance (continued)
Chart 3: Carador - Cash Flow Coverage of Dividends
During 2010, the Company raised approximately US$43 million in
additional capital from new and current investors. As a result, the
portfolio as at 31 December 2010 had a par value of US$231 million
and NAV of US$156 million. The Company estimates that in excess of
20 new institutional investors participated in the placings.
The risk profile of the portfolio was adapted over the year, in
order to take advantage of relative value opportunities in the
market. As at the end of 2009, approximately 48% of the portfolio
was invested in senior CLO tranches or cash, 7% was invested in
mezzanine CLO tranches with the remaining 45% of the portfolio
invested in CLO equity notes.
Over the course of 2010, the portfolio allocated additional
capital to CLO mezzanine tranches which the manager considered
offered a very attractive risk/reward. As at 31 December 2010, the
allocation to senior notes had been reduced to 7%, with 51% of the
portfolio invested in mezzanine CLO notes and 42% invested in CLO
equity notes.
Chart 4: Portfolio as at 31 December 2009
CHAIRMAN'S REPORT (continued)
Performance (continued)
Chart 5: Portfolio as at 31 December 2010
Material Events
In addition to the events detailed above, the following material
events have occurred in respect of the Company during the
period.
In January 2010, the Company disposed of a portion of its
holding in Gale Force 4. This disposal resulted in the reduction of
its holding in the equity/mezzanine tranche of Gale Force 4 to
below 50% and as a result, in the future Gale Force 4 will no
longer be consolidated.
At the annual general meeting of the Company held on 30 June
2010, shareholders approved the following items of special
business:
(i) the change of name of the Company to Carador Income Fund
plc;
(ii) the amendment of the Articles of Association to change the
distribution policy of the Company to permit distributions
to be made out of realised and unrealised capital gains net of
realised and unrealised capital losses;
(iii) the amendment of the Articles of Association to adopt
pre-emption rights for shareholders in accordance with the
requirements of the United Kingdom Listed Authority (UKLA) and to
disapply such rights in relation to 200 million shares for a period
concluding the earlier of immediately prior to the AGM of the
Company to be held in 2011 or 31 December 2011; and
(iv) the amendment of the Articles of Association to introduce
the ability of the Company to charge fees and expenses to
capital.
The effective date of the changes other than the change of the
name of the Company (30 June 2010) was 14 July 2010.
Separately, the functional and presentational currency of the
Company was changed from Euro to US Dollars, effective 14 July
2010. Further details of this, and the changes summarized above,
are contained in an information memorandum issued by the Company on
14 July 2010.
CHAIRMAN'S REPORT (continued)
Outlook
With the likelihood of a rising inflationary environment in
2011, the outlook for the secured loan market remains positive. The
relative value of CLOs versus the underlying loan portfolios
remains strong, with the average price of CLO tranches trading at a
discount to the underlying loans([3]).
In addition, the strong focus on fundamental credit analysis
should continue to benefit the Company's investments in 2011. The
Investment Manager has also demonstrated superior access to
investment opportunities in the application of the funds raised in
2010, which it is believed should continue into 2011.
Werner Schwanberg
Chairman
14 April 2011
INVESTMENT MANAGER'S REVIEW
For the year ended 31 December 2010
Loan Market Review
The recovery phase of the credit cycle was in full force during
2010. The US economy stopped contracting and companies were focused
on repairing balance sheets. Asset prices stabilized and capital
raised through new equity and high yield bonds was primarily
allocated to repay debt and repair balance sheets.
Chart 1: High Yield Corporate Leverage
Source: Credit Suisse, "2011 Leveraged Finance Outlook and 2010
Annual Review", January 2011.
The default rate for US leveraged loans fell to 1.87% in 2010
from 9.61% in 2009([4]), a 2.5 year low. Current market
expectations point to a potentially lower default rate in 2011,
based primarily on a light maturity schedule ($50 billion of
high-yield debt and $20 billion of leveraged loans, historically
low figures([5])). To put this number into perspective,
institutional loan issuance in 2010 totaled $158 billion ([6]).
The correlation between higher recovery rates and lower default
rates was, as expected, high in 2010 and is likely to continue
through 2011. According to S&P LCD([7]), managers expect
average ultimate recoveries to climb to the low-to-mid 70's, in
line with historical values.
The High Yield bond default rate is also expected to fall to
1-3% in 2011 vs. 9.36% in 2009. Any improvement is likely to
support the high yield new issue market, which will facilitate
refinancing of existing loans. Unsecured high yield recoveries
continued to be lower than those of secured loans.
INVESTMENT MANAGER'S REVIEW (continued)
For the year ended 31 December 2010
Loan Market Review (continued)
Chart 2: Discounted Recoveries From Bankruptcy 2008-2010 Vs.
Historical Average
Over the last year, issuers have taken advantage of a strong
market to refinance or extend their loan maturities past 2014, in
order to limit refinancing risk associated with the "Maturity
Wall". Issuers have reduced the amount of loans maturing before the
end of 2014 by $154.0 billion during 2010. According to S&P,
approximately $44.5 billion of high yield new issues have been used
to pay down loans.
Chart 3: Leveraged Loans Maturity Wall: 31 December 2008 vs. 31
December 2010
Total repayments in 2010 (this $44.5 billion plus $107.4 billion
of full and partial pay-downs and $8.9 billion of defaults) have
exceeded new issuance ($158.0 billion) and, as a consequence, the
market has experienced a reduction in the total par amount of
outstanding loans.
INVESTMENT MANAGER'S REVIEW (continued)
For the year ended 31 December 2010
Loan Market Review (continued)
Chart 4: Combined Size of the US High Yield and Institutional
Leveraged Loan Markets
Demand, however, has increased, with new hedge, distressed, high
yield and prime funds entering the market. Hedge, distressed, high
yield and prime funds represented 41.0% of the primary market in
2010, compared to 21.3% in 2002. Meanwhile CLO funds' share of the
primary market dropped to 38.0% in 2010 from 66.7% in 2002. Banks
are also taking an increasing share of new issue deals,
representing 12.7% of the market in 2010, according to S&P.
CLO Market Review
CLOs rallied significantly in 2010. According to Citigroup([8]),
US CLO subordinated and mezzanine notes were the best performing
asset class in 2010, outperforming high yield bonds, investment
grade bonds, S&P500, emerging market, mortgages and REITs.
Chart 5: 2010 Total Returns Across Asset Classes, %
INVESTMENT MANAGER'S REVIEW (continued)
For the year ended 31 December 2010
CLO Market Review (continued)
CLO equity backed by US loans, in particular, benefited from
higher valuations (from 2-2.5x cash flows to 3-3.5x) and higher
cash flows as average portfolio spreads increased (thanks to loan
prepayments and the ability to reinvest proceeds in higher yielding
assets). Lower defaults, higher loan prices, Libor floors and
rating upgrades supported distributions as cash flow diversion
tests improved.
The importance of Libor floors for CLO equity cash flows cannot
be underestimated. According to S&P, over 25% of outstanding US
loans enjoyed floors in 4Q10 with an average level of 2%. CLO
liabilities do not enjoy similar floors and will generally reset
using 3 month Libor as a benchmark (0.30% as at 31 December 2010).
A hypothetical CLO with an average cost of funding of 3 month Libor
+ 1.0%, and an average portfolio spread of 3 month Libor + 3.0% and
25% of loans with 2% Libor floors will enjoy a net spread to the
equity (before expenses) of 2.43% vs. 2.00% for a CLO equity
investment with no Libor floors (21% higher).
European CLO portfolios saw lower increases in their average
spreads as the volume of amendments and prepayments has been lower
and Libor floors are rarely seen in Europe.([9])
Chart 6: Loan Repayment Rates in US and EUR, %
Chart 7: US Loans with Floors and Average Floor Level, %
INVESTMENT MANAGER'S REVIEW (continued)
For the year ended 31 December 2010
Relative Value: Loans vs. High Yield Bonds
Given loan and high yield bond spreads, as at 31 December 2010,
the discount margin over Libor for the CS Leverage Loan Index was
+558 bps vs. L+559 bps for the CS High Yield Bond Index([10]). This
result highlights the current relative value that loans offer,
given the higher historical recovery rates (senior secured loans
experienced recovery rates of 81% in the 1987-2009 period vs. 45%
for senior unsecured bonds and 31% for senior subordinated
bonds([11]))
The historical spread difference between both indices between
January 1992 (inception of the Credit Suisse Leveraged Loan Index)
and December 2010 is 150 bps or 176 bps for the period January 1992
to December 2007([12]).
In layman's terms, similar credit spreads and recoveries which
are roughly double in loans vs. bonds mean that the implied default
rate in loan spreads (19% over the life of the loan or 4% to 6% per
year) is roughly double the implied default rate in high yield bond
spreads and well above the 1.87% loan default rate experienced in
2010([13]). We believe that this inconsistency is partly due to
technical reasons, among them the fact that loans have a more
limited investor base.
The current economic environment and the risk of rising interest
rates should also make investors reconsider their previous
preference for long dated, fixed rate high yield bonds vs. floating
rate loans, accelerating the normalization of the spread between
unsecured high yield bonds and secured loans.
Relative Value: CLOs vs. Loans
A CLO offers exposure to a diversified loan portfolio through
the different tranches, with different levels of seniority. The CLO
allocates the interest and principal cash flows from the portfolio
based on the pre-established priority of payments. An investor
could effectively mimic the cash flows from the loan portfolio by
purchasing a proportional amount of each tranche.
Although the price rally of CLO tranches has reduced the
discount between unsecuritized loans and securitized CLOs
considerably, CLO notes are still cheap compared to loans.
According to RBS([14]), the valuation of CLO notes implies
approximately a 10% discount to the underlying loan portfolio.
Moreover, the Company believes that this discount is not
linearly distributed across tranches. According to the same RBS
report, it would take an annual default rate of 5.25% for the
average 2007 BB CLO to take a dollar of principal loss([15]). The
highest US loan annual default rate for ten consecutive years was
from 2000-2009 where the average annual default rate was 3.92%.
INVESTMENT MANAGER'S REVIEW (continued)
For the year ended 31 December 2010
Portfolio Review
The total return for Carador in 2010, net of fees, including NAV
appreciation and declared dividends, was +44.09% for the US$ Share
class and +40.94% for the EUR Share class.
As at 31 December 2010, Carador held 54 investments across 46
transactions managed by 29 managers. This represents over 1,800
issuers and a significant increase in diversity in relation to 2009
when the Company held 39 investments across 26 transactions managed
by 16 managers. The majority of the investments were in broadly
syndicated US loans.
Chart 8: Largest Sector Exposures as at 31 December 2010
(%)*
The portfolio benefited from additional investments purchased
with the proceeds from the share placings in 2010. The Company was
able to source a majority of the investments directly rather than
through intermediaries. The advantages of this approach were
potential better terms and more importantly longer periods during
which to analyze the investment on an exclusive basis.
As at 31 December 2010, the Investment Manager and affiliates
managed 38% of the underlying CLOs itself. No more than 11% of the
remainder was managed by any one manager, offering diversity in
terms of investment approaches and a large spread of risk.
* Forms an integral part of the audited Financial Statements
INVESTMENT MANAGER'S REVIEW (continued)
For the year ended 31 December 2010
Portfolio Review (continued)
Chart 9: Manager Concentration as at 31 December 2010 (%)
The Company believes that performance has also been strong on a
risk adjusted basis. Carador's portfolio started 2010 with 48% of
the portfolio invested in cash or originally rated AAA/AA CLO
notes. This risk profile was significantly more conservative than
comparable funds.
During 2010, the Company progressively took profits on senior
securities and increased its allocation to mezzanine CLO debt and
CLO equity. Carador's portfolio, as at 31 December 2010, was more
diversified and balanced, with 7.4% invested in originally rated
AAA/AA CLO notes, 50.7% invested in originally rated A/BBB/BB CLO
notes and 42.2% invested in CLO equity notes (cash stood at -0.3%
as a result of the pre-investment of proceeds raised from the
December share placing).
Chart 10: Portfolio Risk by Seniority as at 31 December 2010
(%)*
Portfolio as at 31 December 2010
* Forms an integral part of the audited Financial Statements
INVESTMENT MANAGER'S REVIEW (continued)
For the year ended 31 December 2010
Portfolio Review (continued)
The fundamental, bottom-up analysis of the loans in each
underlying CLO investment has also contributed to performance this
year. As at 31 December 2010, all investments in the portfolio were
fully compliant in all tests and were making distributions. To put
this in context, 75% of US CLOs were failing their diversion tests
during the middle of 2009 (vs. 22% for Carador) and were
subsequently paying no or only partial distributions to equity
holders. At the end of 2010, 20% of US CLO equity tranches were
still not receiving full cash flows([16]).
Despite the diversification present in Carador's portfolio
(estimated exposure to 1,479 US issuers and 353 European issuers),
the investment selection process has been predicated on detailed
analysis of the underlying loans, seeking to avoid transactions
with high exposure to loans which the Company considers exposed to
higher credit risk. The following two tables compare the top ten
exposures, on a look-through basis, for Carador and the Credit
Suisse Leveraged Loan Index as at 31 December 2010([17]).
Chart 11: Top underlying loan level exposures(*)
The "overlap" between Carador and the index is limited to five
issuers. Four of the top five largest issues in Carador are BB
rated and there are no CCC credits among them. In summary, the
Investment Manager believes that the diversification provided by
Carador does not imply passive exposure to the market but that it
has benefited from the selection and monitoring provided by the
Investment Manager.
In terms of regional diversification, the portfolio has
continued to overweight investments backed by US loans. The
exposure to European loans has decreased from 19% of the portfolio
as at December 2009 to 11% of the portfolio at the end of 2010.
This has proven to be a successful strategy as transactions backed
by US senior loans have outperformed those collateralized by
European loans. The average junior cash flow diversion test cushion
for CLOs backed by US loans was 2.5% vs. (-1.0)% for CLOs backed by
European loans ([18]).
INVESTMENT MANAGER'S REVIEW (continued)
For the year ended 31 December 2010
Portfolio Review (continued)
As a comparison, we estimate that the percentage of tranches
breaching their most junior trigger in the Company's portfolio as
at 31 December 2009 (peak for the US CLO market) was 21.05% (four
out of nineteen investments) versus 75.6% for the overall CLO
market as described in the chart above.
Note that Carador uses firm prices, traded or third party
valuations to calculate the NAV. As at 31 December 2010, 99.5% of
the portfolio was marked to market. There was a single investment
(Versailles CLO ME I SUBORD, 0.50% of NAV as at 31 December 2010)
which was valued using a cash flow model and a discount rate of
40.00%([19]) and a price of 38.30%. This investment paid a
distribution on January 2011 equivalent to 13.29% of par. As a
result, the December 2011 valuation implies a multiple of annual
cash flows of 2.88x. This investment was sold on 23 February 2011
at a price of 69.11c.
The Investment Manager continued to focus on active management
of the portfolio in order to take advantage of relative value
opportunities.
Dividends
Carador has paid dividends consistently since its inception.
Although, arising from a change in the distribution policy in 2010,
the Company may use net capital gains to fund dividend payments,
substantially all of the 2010 dividends have been funded from net
income generated by investments (an estimated $160,802, equivalent
to 0.10% of the December Net Asset Value was distributed in 4Q10
from capital).
The fundamental performance of the portfolio in 2010 (primarily
the full compliance with interest diversion tests and the
improvements in average portfolio spreads) supported a $7.22c
dividend per share in 2010 ($6.93c in 2009). Dividends also
increased quarter on quarter in 2010 ($1.24c in 1Q10, $1.78c in
2Q10, $2.1c in 3Q10 and 4Q10).
INVESTMENT MANAGER'S REVIEW (continued)
For the year ended 31 December 2010
Dividends (continued)
The Company does not consider all CLO equity cash flows as
income available for distribution. In addition to a cash flow
based amortization process which aims to ensure that the future
value of any CLO equity investment equals at least 105% of the
purchase price, any income recognition is capped at an annualized
20% until this threshold level is reached. As a result of this
policy, we estimate the approximately 29% of CLO equity
distributions in 2010 were retained and not paid out as dividends
equivalent to $0.0290 per share([20])
Chart 12: Net Cash Flow Allocation
As at 31 December 2010, nine CLO equity investments,
representing 6.96% of NAV had reached the 105% threshold and, as a
result, all future distributions from these investments will be
allocated to income. The Company announced on 19 January 2011 that
Gale Force 2, which represented 8.69% of NAV, had also reached the
threshold after the distribution received in January. As a result,
all future distributions from Gale Force 2 will be allocated to
income([21]).The allocation to capital from the January payment was
$532,516 or 0.026 per share.
Outlook for 2011
It is unlikely that loans and CLOs will be able to repeat the
stellar performance experience in 2011. However, as explained
above, the Company believes that there remains significant relative
value in CLOs versus loans and high yield bonds. The Company should
also benefit from any increases in interest rates as all of its
investments are Libor based and a higher Libor rate should result
in a more than proportional increase in income available for
distribution. Note 11 in the financial statements details this
sensitivity.
The Investment Manager believes that the Company is well
positioned to take advantage of this opportunity based on its
diversified portfolio across 54 CLO investments (underlying
exposure to over 1,800 secured loans) and the risk profile of the
Company (58% of NAV invested in CLO debt tranches with original
ratings of BB to AA and all CLO subordinated investments in full
compliance of any test and making current distributions).
INVESTMENT MANAGER'S REVIEW (continued)
For the year ended 31 December 2010
Outlook for 2011 (continued)
The Investment Manager will continue to focus on relative value
opportunities in the market in order to generate attractive risk
adjusted returns for the Company. The Investment Manager will aim
to identify opportunities to acquire assets directly from holders,
expanding the Company's universe of potential investments. The
Manager is also in frequent contact with managers and underwriters
who have the potential to access attractive primary
investments.
GSO Capital Partners International LLP
14 April 2011
DIRECTORS' REPORT
Principal activities
The Company was incorporated on 20 February 2006 as a
closed-ended limited liability investment company under the laws of
Ireland and is authorised by the Central Bank of Ireland ("Central
Bank"). The Company continues to be registered and domiciled in
Ireland and the Company's shares are listed on the London Stock
Exchange.
Investment objective
The Company's investment objective is to produce attractive and
stable returns, with low volatility compared to equity markets, by
investing in a diversified portfolio of senior notes of
collateralised loan obligations or "CLOs" collateralised by senior
secured bank loans and equity and mezzanine tranches of CLOs. CLOs
are debt securities backed by a diversified pool of underlying
assets. The CLO uses the cash flows from this portfolio of assets
to back the issuance of multiple classes of rated debt securities
which, together with the Equity Notes, are used to fund the
purchase of the underlying assets.
Investment policy
The Company invests in cash flow CLO transactions, managed by
portfolio managers with proven track records. It seeks to achieve
diversification across asset class, geography, manager, and
maturity profile. Each CLO investment is collateralised by a
diverse pool of fixed income assets, which may include:
-- senior secured bank loans;
-- investment grade loans;
-- project finance debt;
-- asset-backed securities or other asset-backed
obligations;
-- mortgage-backed securities; and/or
-- debt securities issued by other CLOs.
The Company may also invest in other collective investments
schemes for the purposes of gaining exposure to the types of CLO
transactions described above or otherwise to pursue the investment
objective and policy of the Company.
The Company seeks to have minimal exposure to CLOs where the
underlying assets comprise unsecured corporate bonds (investment
grade or otherwise). The Company will limit investment in synthetic
CLO transactions, at the time of investment, to 25% of the net
asset value. It is intended that the Company's investments comprise
equity and mezzanine tranches in actively managed CLOs, with a
variety of portfolio managers. The Company may also invest in
senior tranches of leveraged loan CLOs where attractive
opportunities can be identified such may include investments in
senior tranches of CLOs in respect of which the collateral consists
of fee streams due to portfolio managers from underlying leverage
loans CLOs. The Company may invest in new issue CLO transactions in
the primary market and transactions in the secondary market where
attractive opportunities can be identified.
The Company's portfolio of CLO investments is actively managed
to minimise default risk and potential loss through comprehensive
credit analysis performed by the Investment Manager's experienced
credit research team and use of the Investment Manager's
proprietary risk management systems. Achieving efficient diversity
is central to the Company's investment objective. Each CLO
investment is assessed with a view to providing diversification in
terms of underlying assets, issuer, sector, geography and maturity
profile.
The Company invests in a minimum of 20 separate transactions
with a maximum exposure per investment, at the time of investment,
of 20% of the net asset value. The Company also limits its exposure
to transactions managed by the same portfolio manager to 15% of the
net asset value, at the time of investment. However, if the
portfolio manager is an affiliate of the Investment Manager, this
limit is increased to 60% of the net asset value, at the time of
investment. The Investment Manager analyses all transactions at the
underlying portfolio level, identifying any concentration in terms
of issuer, sector, geography and maturity profile. The Investment
Manager's analysis also takes into consideration the correlation
among different underlying securities to avoid concentrations of
risk.
There is no restriction as to the geographical composition of
the underlying portfolios, but it is currently weighted towards the
United States.
DIRECTORS' REPORT (continued)
Investment policy (continued)
The Company changed functional and presentational currency from
Euro to US$ with effect from 14 July 2010. The Company invests in
underlying assets which are predominantly US$ and Euro denominated.
The functional and presentational currency of the Company is the
US$. The Company therefore has an exposure to changes in the
exchange rate between the Euro and the US$ which, if unhedged,
could have the potential to have a significant effect on returns.
In addition, the Euro class is denominated in Euro. The Directors
believe that it is in the best interests of shareholders for the
Company to engage consistently in currency hedging solely to reduce
the risk of currency fluctuations and the volatility of returns
which may result from such currency exposure. This involves
hedging, at the level of the Company, the Euro assets to US$, and
at the class level, the US$ exposure of the Euro class back to
Euro, through the use of rolling forward foreign exchange
transactions. The Company only uses hedging techniques for the
purposes of efficient portfolio management in accordance with the
requirements of the Central Bank and has no intention of using the
currency hedging facility for the purposes of currency speculation
for its own account.
Investment restrictions
In accordance with the requirements of the UK Listing Authority
and the Central Bank, the Company has adopted the following
additional investment restrictions:
-- distributable income will be principally derived from
investment activity;
-- the Company will not conduct a trading activity;
-- a maximum of 20% of the value of the net asset value of the
Company may be invested in the securities of any one issuer
(Related companies within a group of companies shall be deemed to
be one issuer);
-- a maximum of 15% of the value of the net asset value of the
Company may be invested in other listed investment companies;
-- the Company will not take legal or management control of the
issuers of the underlying investments, nor shall the Company
acquire any shares carrying voting rights which would enable it to
exercise significant influence over the management of an issuing
body;
-- no more than 20% of the net asset value of the Company may be
kept on cash deposit with any one institution;
-- the Company may not invest more than 20% of its net asset
value in other collective investment schemes, of which no more than
20% of its net asset value may be invested in other open-ended
collective investment schemes; no more than 10% of its net asset
value may be invested in closed-ended collective investment
schemes; no more than 10% of its net asset value may be invested in
funds of funds; no more than 10% of its net asset value may be
invested in unregulated collective investment schemes; no issue or
purchase commission may be charged to the Company where investments
are made in collective investment schemes managed by the Investment
Manager or by an associated or related company of the Investment
Manager and where the Investment Manager receives a commission by
virtue of an investment in a collective investment scheme, this
commission must be paid into the Company;
-- for the purposes of the above limits, related entities (where
50% or more of the voting rights or paid up capital of one entity
are held or owned directly or indirectly by another entity) are
regarded as a single issuer;
-- the Company shall not invest in real estate or directly in
physical commodities;
-- dividends will not be paid unless they are covered by net
income received from, and/or net realised and unrealised capital
gains deriving from, the Company's investments;
-- the distribution policy of the Company changed during the
year to allow the Company to make distributions out of realised and
unrealised capital gains net of realised and unrealised capital
losses. Prior to the change, the Company was not permitted to make
distributions out of net realised and unrealised capital gains.
-- the investment objective of the Company may not be altered
without the prior written approval of all Shareholders or a special
resolution of shareholders in general meeting;
-- any material change to the investment policy of the Company
may only be made with the prior approval, by special resolution, of
holders of shares;
DIRECTORS' REPORT (continued)
Investment policy (continued)
Investment restrictions (continued)
-- the Company may borrow up to 25% of its net asset value from
time to time for short term or temporary liquidity purposes and may
grant collateral to secure borrowings. The Company will not have
any long-term or structural borrowings;
-- the Company may hedge corporate credit risk through the use
of short sales, credit default swaps, options and other methods
where the underlying assets relate to single issuers for the
broader indices and may thereby be leveraged up to a total limit of
10% of its net asset value; and
-- the Company may not acquire more than 20% of any class of
security issued by any single issuer. This restriction does not
apply to debt securities.
Any change in the above investment restrictions shall be subject
to the prior approval of the Central Bank.
The above limits apply at the time of the purchase of the
investment. If these limits are exceeded for reasons beyond the
control of the Company, the Company shall adopt as a priority for
its sales transactions the remedying of the position taking account
of the interests of the shareholders. In the event of any breach of
these investment restrictions, the Board of Directors ("the Board")
will as soon as practicable make an announcement on a Regulatory
Information Service provider and subsequently write to
shareholders, if appropriate.
Review of development of the business and future
developments
A detailed review of the business and future developments of the
Company is included in the Investment Manager's Report.
Results for the year and state of affairs
The financial position and results for the period are set out in
the Statement of Financial Position on page 30 and in the Statement
of Comprehensive Income on page 31.
The profit for the year attributable to participating
shareholders amounted to US$ 51,354,472. The Directors declared an
interim distribution of EUR0.01 per share (US$0.0145 per US$ share)
for the quarter ended 31 December 2009, which was paid on 29
January 2010, an interim distribution of EUR0.0091 per share
(US$0.0124 per US$ share) for the quarter ended 31 March 2010 which
was paid on 30 April 2010, an interim distribution of EUR0.014 per
share (US$0.0178 per US$ share) for the quarter ended 30 June 2010
which was paid on 30 July 2010, an interim distribution of
EUR0.0161 per share (US$0.021 per US$ share) for the quarter ended
24 September 2010 which was paid on 15 October 2010 and an interim
distribution of EUR0.0157 per share (US$0.021 per US$ share) for
the quarter ended 31 December 2009, which is payable on 31 January
2011.
The fundamental performance of the underlying portfolios has
been strong and, as a result, the Company was able to declare
dividends of US$7.22c per US$ Share and EUR5.49c per EUR Share over
the four quarters in 2010. The valuation of the Company's assets
has been affected by the volatility and dislocation of the broader
markets. The Board believes that the Company is well positioned to
take advantage of this market opportunity.
In January 2010, the Company disposed of a portion of its
holding in Gale Force 4. This disposal resulted in the reduction of
its holding in the equity/mezzanine tranche of Gale Force 4 to
below 50% and as a result, Gale Force 4 will no longer be
consolidated.
Transactions involving Directors
Please refer to note 4 and note 9 for details of transactions
involving Directors.
DIRECTORS' REPORT (continued)
Events since year end
On 5 January 2011 the Company announced that, effective as of
midnight (Irish time) on 31 December 2010, the following changes
have been made affecting the Company: 1) the administrator, and
company secretary Northern Trust International Fund Administration
Services (Ireland) Limited, has been replaced by State Street Fund
Services (Ireland) Limited; and 2) the custodian, Northern Trust
Fiduciary Services (Ireland) Limited, has been replaced by State
Street Custodial Services (Ireland) Limited.
Effective as of midnight (Irish time) on 31 December 2010, the
Company's registered office was changed to 78 Sir John Rogerson's
Quay, Dublin 2, Ireland.
On 24 January 2011, in connection with the placing of shares
detailed in the prospectus published on 10 December 2010, the
Company announced that it had raised a further US$17.4 million
through a placing of a total of 22,384,574 US$ shares ("the Placing
Shares") at a price of US$ 0.7754 per Placing Share, minus
expenses. The Placing Shares were admitted to the Official List and
to trading on the London Stock Exchange's market for listed
securities on 26 January 2011.
On 14 April, the Board declared a $0.0225 dividend for the USD
share class and an identical Euro equivalent dividend for the Euro
share class.
No other events have occurred in respect of the Company
subsequent to the period end that may be deemed relevant to the
accuracy of these financial statements.
Directors
The names of the persons who were Directors at any time during
the year are set out on page 1. All of the Directors are
independent. No Director has a service contract with the Company,
nor are any such contracts proposed.
Directors' & Company Secretary's interests
The Directors and Company Secretary (including family interests)
do not have any shareholdings in the Company as at 31 December
2010.
Management arrangements
During the year, the Company had an agreement with GSO Capital
Partners International LLP ("GSO") for the provision of investment
management services. The management fees and fees payable are
disclosed in note 4. After due consideration of the investment
experience, resources and reputation of GSO as a whole, it is the
opinion of the Directors that the continuing appointment of GSO on
the terms agreed is in the interest of shareholders as a whole.
The investment management agreement may be terminated on 6
months' notice by either party and may also be terminated by either
party with immediate effect on the occurrence of certain events,
including: (i) if an order has been made or an effective resolution
passed for liquidation of the other party; (ii) if a receiver or
similar officer has been appointed in respect of the other party or
its assets or the other party becomes subject to an administration
order; (iii) if the other party enters into an arrangement with its
creditors or any of them or the other party is or is deemed to be
unable to pay its debts; (iv) if the other party ceases or
threatens to cease to carry on its business or threatens to make
any material alteration to the nature of its business as carried
out on the date of the investment management agreement; or (v) if
the other party commits a material breach of its obligations under
the investment management agreement and such breach (if capable of
being remedied) is not remedied within 28 days of receiving notice
of the breach. The duration of the Investment Manager's appointment
has not been fixed.
DIRECTORS' REPORT (continued)
Books of account
The Directors are responsible for ensuring that proper books of
account, as outlined in Section 202 of the Companies Act, 1990, are
kept by the Company. To achieve this, the Directors have employed a
service organisation, Northern Trust International Fund
Administration Services (Ireland) Limited (the "Administrator").
The books of account are maintained at the Company's registered
offices at Georges Court, 54-62 Townsend Street, Dublin 2, Ireland.
Please refer to note 19 for details of the post year end change in
registered office.
Principal risks, uncertainties, risk management objectives and
policies
The Company's investment objective is to produce attractive and
stable returns with a low volatility compared to equity markets, by
investing in a diversified portfolio of senior notes of
collateralised loan obligations ("CLOs") collateralised by senior
secured bank loans and equity and mezzanine tranches of CLOs.
Investment in the Company carries with it a degree of risk
including, but not limited to, business risks and the risks
associated with financial instruments referred to in Note 11 of
these financial statements. The primary business risk is the risk
that the Company may not achieve its investment objective. Meeting
that objective is a target but the existence of such an objective
should not be considered as an assurance or guarantee that it can
or will be met.
Corporate governance
Introduction
The Company is subject to and complies with Irish statute
comprising the Companies Acts 1963 to 2009 and with the Listing
Rules of the UK Listing Authority.
The Listing Rules of the UK Listing Authority requires the
Company to apply the main principles of the Combined Code on
Corporate Governance (the "Code") and to report to shareholders on
how it has done so.
The Board considers that the Company has complied with the main
provisions contained in the Code throughout this accounting period
and that it complies with corporate governance requirements in
Ireland. The following statement describes how the relevant
principles of governance are applied to the Company.
The Board
The Board currently consists of six non-executive Directors, all
of whom are independent of the Investment Manager. The Board
accepts collective responsibility for the decisions of the Board.
The Board scheduled 4 board meetings during the year ended 31
December 2010 and between these formal meetings there was regular
contact between the Board and the Investment Manager, the Company
Secretary and the Company's broker. The Directors are kept fully
informed of investment and financial controls and other matters
that are relevant to the business of the Company and should be
brought to the attention of the Directors. The Directors, where
necessary in the furtherance of their duties, have access to
independent professional advice at the expense of the Company.
The attendance record of Directors is set out below:
Board Meetings Audit Committee
Number of Meetings* 4 3
Meetings attended:
Werner Schwanberg 4 N/A
Claudio Albanese 4 N/A
Fergus Sheridan 4 3
Adrian Waters 4 2
Edward D'Alelio 4 N/A
Nicholas Moss 4 3
* In addition to the scheduled quarterly Board meetings the
Board, or committees thereof, held 10 ad hoc meetings to deal with
matters of an administrative nature. These meetings were attended
by the Directors who were available at the time.
DIRECTORS' REPORT (continued)
Corporate governance (continued)
The Board (continued)
The Board has a breadth of experience relevant to the Company
and the Directors believe that any changes to the Board's
composition can be managed without undue disruption. With any new
Director appointment to the Board, consideration will be given as
to whether an induction process is appropriate and upon any such
appointment the new Director would be available to meet
shareholders upon request. The Board considers agenda items laid
out in the notice and agenda which are formally circulated to the
Board in advance of the meeting as part of the board papers and
therefore Directors may request any agenda items to be added that
they consider appropriate for Board discussion. Additionally, each
Director is required to inform the Board of any potential or actual
conflicts of interest prior to Board discussion.
The primary focus at Board Meetings is a review of investment
performance and associated matters such as asset allocation, as
well as marketing/investor relations, risk management, general
administration and compliance, peer group information and industry
issues. The Board evaluates its performance and considers the
tenure of each Director on an annual basis and believes that the
mix of skills, experience, ages and length of service are
appropriate to the requirements of the Company.
Directors' duties and responsibilities
The duties and responsibilities of the Directors cover the
following areas:
-- statutory obligations and public disclosure;
-- strategic matters and financial reporting;
-- oversight of management and personnel matters;
-- risk assessment and management, including reporting,
monitoring, governance and control; and
-- other matters having a material effect on the Company.
Nomination/remuneration committees
There were no nomination and remuneration committees in the year
ended 31 December 2010 as they are not considered appropriate at
the present time.
Audit committee
An audit committee has been established consisting of Fergus
Sheridan, Nicholas Moss and Adrian Waters. The audit committee
examines the effectiveness of the Company's internal control
systems, the annual report and financial statements and interim
report, the auditor's remuneration and engagement, as well as the
auditor's independence and any non-audit services provided by them.
The audit committee receives information from the Company Secretary
and the compliance department of the Administrator and the external
auditors. The audit committee met 3 times in the year ended 31
December 2010 to review the annual accounts, interim accounts,
audit timetable and other risk management and governance
matters.
Internal controls
The Board is ultimately responsible for the Company's system of
internal control and for reviewing its effectiveness. The Board
confirms that there is an ongoing process for identifying,
evaluating and managing the significant risks faced by the
Company.
DIRECTORS' REPORT (continued)
Corporate governance (continued)
Internal controls (continued)
This process has been in place for the year under review and up
to the date of approval of this Annual Report and Financial
Statements and is reviewed by the Board and accords with
appropriate corporate governance codes. The Board has reviewed the
effectiveness of the system of internal control. In particular, it
has reviewed and updated the process for identifying and evaluating
the significant risks affecting the Company and the policies by
which these risks are managed.
As there is delegation of daily operational activity, described
below, the Company has no direct internal audit function. The
internal control systems are designed to meet the Company's
particular needs and the risks to which it is exposed. Accordingly,
the internal control systems are designed to manage rather than
eliminate the risk of failure to achieve business objectives and by
their nature can only provide reasonable and not absolute assurance
against misstatement and loss.
The Board has delegated the responsibility for the management of
the Company's investment portfolio, the provision of custody
services and the administration, registrar and corporate
secretarial functions including the independent calculation of the
Company's net asset value and the production of the Annual Report
and Financial Statements which are independently audited. Whilst
the Board delegates responsibility, it retains accountability for
the functions it delegates and is responsible for the systems of
internal control. Formal contractual agreements have been put in
place between the Company and providers of these services.
Compliance reports are provided on a quarterly basis from the
Administrator.
Corporate responsibility
The Company's business is concerned with investment. It
considers the ongoing concerns of investors by open and regular
dialogue with and through the appointed Investment Manager and the
Company's broker.
The Company keeps abreast of regulatory and statutory changes
and takes appropriate action.
The Company does not have any employees.
Going concern
After making enquiries and given the nature of the Company and
its investments, the Directors are satisfied that it is appropriate
to continue to adopt the going concern basis in preparing the
Financial Statements and after due consideration, the Directors
consider that the Company is able to continue in the foreseeable
future.
Relations with shareholders
The Investment Manager and the Company's broker maintain a
regular dialogue with institutional shareholders, the feedback from
which is reported to the Board. In addition, Board members will be
available to respond to shareholders' questions at the annual
general meeting.
The Board monitors the trading activity and shareholder profile
on a regular basis. Shareholder sentiment is also ascertained by
the careful monitoring of the discount/premium at which each class
of shares is traded in the market against the net asset value per
share when compared to the discounts/premiums experienced by the
Company's peer group.
The Company reports formally to shareholders twice a year and a
proxy voting card is sent to shareholders with the annual report
and financial statements. Additionally, the Interim Management
Statements and the current information provided to shareholders on
an ongoing basis through the Company's website and the Investment
Manager's monthly report assist in keeping shareholders informed.
The Registrar monitors the voting of shareholders and proxy voting
is taken into consideration when votes are cast at the annual
general meeting. Shareholders may contact the Directors via the
Company Secretary.
Compliance with the Combined Code
Throughout the year ended 31 December 2010, the Company has
complied with the Combined Code on Corporate Governments 2008, with
the following exceptions:
A.3 - This provision is not fully complied with as it calls for
a balance of executive and non-executive Directors and the Company
only has non-executive Directors. However the Directors have a
broad range of experience and are deemed to be independent from the
management team of the Company's Investment Manager.
DIRECTORS' REPORT (continued)
Corporate governance (continued)
Compliance with the Combined Code (continued)
A.4.1 - There was no nomination committee in the year ended 31
December 2010 as it was not considered appropriate at the present
time.
A.7.2 - This provision is complied with save that all of the
Directors are appointed for a term which expires when either the
Director is (i) removed or vacates office; (ii) resigns, or (iii)
terminates his appointment.
B.2.1 - This provision of having a Remuneration Committee is not
complied with as there are no executive Directors of the
Company.
D.1.2 - This provision is not strictly complied with as it is
the management team of the Investment Manager who has most regular
contact with Shareholders on behalf of the board. All comments
received from such Shareholders are fed back to the Board both from
the Investment Manager and the Company's brokers. When necessary,
Directors attend the Annual General Meeting, with the Chairman and
the Directors in particular, being available to communicate with
Shareholders.
Additional corporate governance disclosures under Irish company
law
The Board is ultimately responsible for overseeing the
establishment and maintenance of adequate internal control and risk
management systems of the Company in relation to the financial
reporting process. As the Company has no employees and all
Directors serve in a non-executive capacity, all functions
including the preparation of the financial statements have been
outsourced. The Company has appointed Northern Trust International
Fund Administration Services (Ireland) Limited as its Administrator
consistent with the regulatory framework applicable to investment
fund companies such as the Company. The Administrator has
functional responsibility for the preparation of the Company's
interim and annual financial statements and the maintenance of its
books and records. On appointing the Administrator the Board noted
that it was regulated by the Central Bank and, in the Board's
opinion, had significant experience as an administrator. The Board
also noted the independence of the Administrator from the Company's
Investment Manager. Subject to the supervision of the Board, the
appointment of the Administrator is intended to manage rather than
eliminate the risk of failure to achieve the Company's financial
reporting objectives and can only provide reasonable and not
absolute assurance against material misstatement or loss.
The Board and audit committee evaluates and discusses
significant accounting and reporting issues as the need arises. The
Board and audit committee reviews the financial statements prior to
their approval, though it should be noted that such review does not
include verification of information in the financial statements to
source documents. The annual financial statements are subject to
independent audit.
Responsibility statement
The Directors are responsible for preparing the Director's
Report and the Company's financial statements, in accordance with
applicable law and regulations.
Company law requires the Directors to prepare the Companys
financial statements for each financial year. Under that law the
Directors have elected to prepare the financial statements in
accordance with IFRSs as adopted by the EU, to present fairly the
financial position and performance of the Company.
The Company's financial statements are required by law and IFRSs
as adopted by the EU to present fairly the financial position and
performance of the Company. The Companies Acts, 1963 to 2009
provide in relation to such financial statements that references in
the relevant parts of these Acts to financial statements giving a
true and fair view are references to their achieving a fair
presentation.
In preparing the financial statements, the Directors are
required to:
-- select suitable accounting policies and then apply them
consistently;
-- make judgments and estimates that are reasonable and
prudent;
DIRECTORS' REPORT (continued)
Responsibility statement (continued)
-- state that the financial statements comply with IFRSs as
adopted by the EU; and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
Under applicable law and the requirements of the Listing Rules
issued by the London Stock Exchange, the Directors are also
responsible for preparing a Directors' Report and reports relating
to Directors' remuneration and corporate governance that comply
with that law and those Rules. In particular, in accordance with
the Transparency (Directive 2004/109/EC) Regulations 2007 (the
Transparency Regulations), the Directors are required to include in
their report a fair review of the business and a description of the
principal risks and uncertainties facing the Company and a
responsibility statement relating to these and other matters,
included below.
The Directors are responsible for keeping proper books of
account 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 Acts 1963 to
2009. They are also responsible for safeguarding the assets of the
Company. They have general responsibility for taking such steps as
are reasonably open to them to prevent and detect fraud and other
irregularities.
Responsibility Statement, in accordance with Transparency
Regulation
Each of the Directors, whose names and functions are listed on
page 1 confirm that, to the best of that Director's knowledge and
belief;
-- the Financial Statements, prepared in accordance with IFRSs
as adopted by the EU, give a true and fair view of the assets,
liabilities and financial position of the Company at 31 December
2010 and its profits for the year then ended; and
-- the Directors' report contained in the Annual 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 they face.
Auditors
The auditors, Ernst & Young, Chartered Accountants, resigned
during 2010 and KPMG, Chartered Accountants replaced them in office
in accordance with Section 160(2) of the Companies Act, 1963. A
resolution for the re-appointment of KPMG will be proposed at the
forthcoming Annual General Meeting.
Material changes to the prospectus
On 22 September 2010 and 10 December 2010, revised Prospectuses
were issued. In these Prospectuses new placings of shares were
announced to be completed on 20 October 2010, 22 November 2010 and
26 January 2011. The distribution policy was also amended to allow
the distribution to be made from net realised and unrealised
capital gains. The Company issued a prospectus on 22 September 2010
in conjunction with this placing. Various disclosures were updated
in this prospectus. In addition, it was clarified in the prospectus
that the collateral underlying the CLOs in which the Company
invests may include collateral consisting of fee streams due to
portfolio managers from underlying leveraged loan CLOs. Various
disclosures were updated in the 10 December 2010 prospectus. In
addition, it was clarified what types of collective investments
schemes the Company may invest in: the Company may invest in
collective investment schemes for the purpose of gaining exposure
to the types of CLO transactions described in the relevant sections
of the investment policy of the Company or otherwise to pursue the
investment objective and policy of the Company.
On behalf of the Board of Directors:
Director Director
14 April 2011
STATEMENT OF CUSTODIAN'S RESPONSIBILITIES AND CUSTODIAN'S REPORT
TO THE SHAREHOLDERS
We have enquired into the conduct of Carador Income Fund Plc
('the Company') for the year ended 31 December 2010, in our
capacity as Custodian to the Company.
This report including the opinion has been prepared for and
solely for the shareholders in the Company, in accordance with the
Central Bank's Non - UCITS Notice 7, and for no other purpose. We
do not, in giving this opinion, accept or assume responsibility for
any other purpose or to any other person to whom this report is
shown.
Responsibilities of the Custodian
Our duties and responsibilities are outlined in the Central
Bank's Non - UCITS Notice 7. One of those duties is to enquire into
the conduct of the Company in each annual accounting period and
report thereon to the shareholders.
Our report shall state whether, in our opinion, the Company has
been managed in that period in accordance with the provisions of
the Company's Memorandum and Articles of Association and the Non -
UCITS Notices. It is the overall responsibility of the Company to
comply with these provisions. If the Company has not so complied,
we, as Custodian, must state why this is the case and outline the
steps which we have taken to rectify the situation.
Basis of Custodian Opinion
The Custodian conducts such reviews as it, in its reasonable
opinion, considers necessary in order to comply with its duties as
outlined in Non - UCITS Notice 7 and to ensure that, in all
material respects, the Company has been managed (i) in accordance
with the limitations imposed on its investment and borrowing powers
by the provisions of its constitutional documentation and the
appropriate regulations and (ii) otherwise in accordance with the
Company's constitutional documentation and the appropriate
regulations.
Opinion
In our opinion, Carador Income Fund Plc has been managed during
the year, in all material respects:
(i) in accordance with the limitations imposed on the investment
and borrowing powers of the Company by the Memorandum and Articles
of Association and by the Central Bank under the powers granted to
it by the Companies Act, 1990 Part XIII; and
(ii) otherwise in accordance with the provisions of the
Memorandum and Articles of Association and the Companies Act, 1990
Part XIII.
Northern Trust Fiduciary Services (Ireland) Limited
Georges Court
54-62 Townsend Street
Dublin 2
Ireland
14 April 2011
INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF CARADOR INCOME
FUND PLC
We have audited the financial statements ("the financial
statements") of Carador Income Fund Plc for the year ended 31
December 2010 which comprise the Statement of Financial Position,
the Statement of Comprehensive Income, the Statement of Changes in
Equity, the Statement of Cash Flows and the related notes. These
financial statements have been prepared under the accounting
policies set out therein.
This report is made solely to the Company's members, as a body,
in accordance with section 193 of the Companies Act, 1990. Our
audit work has been undertaken so that we might state to the
Company's members those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company's members as a body,
for our audit work, for this report, or for the opinions we have
formed.
Respective responsibilities of directors and auditors
The Directors responsibility for preparing the Annual Report and
the financial statements in accordance with applicable law and
International Financial Reporting Standards (IFRSs) as adopted by
the European Union (EU), are set out in the Statement of Directors'
Responsibilities on pages 25 and 26.
Our responsibility is to audit the financial statements in
accordance with the relevant legal and regulatory requirements and
International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial
statements give a true and fair view in accordance with IFRSs as
adopted by the EU, and have been properly prepared in accordance
with the Companies Acts, 1963 to 2009.
We also report to you whether in our opinion proper books of
account have been kept by the Company and whether the information
given in the Directors' report is consistent with the financial
statements. In addition, we state whether we have obtained all the
information and explanations necessary for the purposes of our
audit, and whether the Company's financial statements are in
agreement with the books of account.
We also report to you if, in our opinion, any information
specified by law or the Listing Rules of the London Stock Exchange
regarding Directors' remuneration and Directors' transactions is
not disclosed and, where practicable, include such information in
our report.
We review whether the Corporate Governance Statement reflects
the Company's compliance with the provisions of the Combined Code
2008 as issued by the Financial Reporting Council specified for our
review by the Listing Rules of the London Stock Exchange, and we
report if it does not. We are not required to consider whether the
Board's statements on internal controls cover all risks and
controls, or form an opinion on the effectiveness of the Company's
corporate governance procedures or its risk and control
procedures.
We read the other information contained in the Annual Report,
and consider whether it is consistent with the audited financial
statements. The other information comprises only the Chairman's
Report, the Directors' Report, the Custodian's Report and the
Investment Manager's Report. We consider the implications for our
report if we become aware of any apparent misstatements or material
inconsistencies with the financial statements. Our responsibilities
do not extend to any other information.
INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF CARADOR INCOME
FUND PLC (continued)
Basis of audit opinion
We conducted our audit in accordance with International
Standards on Auditing (UK and Ireland) issued by the Auditing
Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial
statements.
It also includes an assessment of the significant estimates and
judgments made by the Directors in the preparation of the financial
statements, and of whether the accounting policies are appropriate
to the Company's circumstances, consistently applied and adequately
disclosed.
We planned and performed our audit so as to obtain all the
information and explanations which we considered necessary in order
to provide us with sufficient evidence to give reasonable assurance
that the financial statements are free from material misstatement,
whether caused by fraud or other irregularity or error. In forming
our opinion we also evaluated the overall adequacy of the
presentation of information in the financial statements.
Opinion
In our opinion:
-- the financial statements give a true and fair view, in
accordance with IFRSs as adopted by the EU, of the state of the
Company's affairs as at 31 December 2010 and its profit for the
year then ended; and
-- the financial statements have been properly prepared in
accordance with the Companies Acts, 1963 to 2009.
We have obtained all the information and explanations we
considered necessary for the purposes of our audit. In our opinion,
proper books of account have been kept by the Company. The
financial statements are in agreement with the books of
account.
In our opinion, the information given in the Directors' report
is consistent with the financial statements.
KPMG
Chartered Accountants
Registered Auditor
1 Harbourmaster Place
IFSC
Dublin1
Ireland
14 April 2011
STATEMENT OF FINANCIAL POSITION
As at 31 December 2010
31 December 31 December
2009 2010
US$ Notes US$
Assets
11,899,451 Cash and cash equivalents 5 7,065,553
1,304,730 Balances due from brokers 11 500,000
1,723,040 Interest receivable 2 3,601,415
50,500 Securities sold receivable -
573,469 Derivative financial instruments 10 68,231
Financial assets designated
at fair value through profit 3,
57,778,260 or loss 11 153,621,291
Investment in subsidiary designated
at fair value through profit 3,
11,277,031 or loss 17 -
------------ ----------------------------------------- ------ ------------
84,606,481 Total Assets 164,856,490
Liabilities
- Distribution payable 15 4,370,151
656,872 Expenses payable 4 4,435,552
586,182 Derivative financial instruments 10 96,672
1,243,054 Total Liabilities 8,902,375
------------ ----------------------------------------- ------ ------------
Net Assets attributable to participating
83,363,427 equity shareholders 155,954,115
------------ ----------------------------------------- ------ ------------
Net Asset Value per participating
EUR 0.4149 EUR share EUR 0.5677
US$ 0.5953 Net Asset Value per participating US$ 0.7489
US$ share
------------ ----------------------------------------- ------ ------------
These financial statements were authorised and approved for
issue by the Directors on 14 April 2011 and signed on their behalf
by:
Director Director
The accompanying notes form an integral part of the financial
statements.
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2010
31 December 31 December
2009 2010
US$ Notes US$
------------- --------------------------------------- ------ ------------
1,386,942 Dividend income 2 152,218
10,395,264 Interest income 2 14,416,285
Net (loss)/gain on derivative
(1,875,435) financial instruments 2 74,396
1,625,855 Net gain on foreign exchange 2 121,116
Net (loss)/gain on financial
assets designated at fair value
(11,208,654) through profit or loss 2,3 43,052,174
323,972 Total revenue 57,816,189
------------- --------------------------------------- ------ ------------
- Performance fees 4 (4,006,412)
(947,864) Investment management fees 4 (1,263,623)
(34,138) Custodian fees 4 (38,802)
(108,440) Administration fees 4 (106,759)
(268,904) Directors' fees 4 (240,882)
(260,742) Audit and tax fees 4 (249,192)
(713,049) Operating expenses 4 (556,047)
(2,333,137) Total operating expenses (6,461,717)
------------- --------------------------------------- ------ ------------
(Loss) / profit for the year
all attributable to the participating
(2,009,165) equity shareholders 51,354,472
------------- --------------------------------------- ------ ------------
Gain/(loss) on foreign currency
2,598,651 translation 2 (7,788,332)
Other Comprehensive Income
2,598,651 for the year (7,788,332)
------------- --------------------------------------- ------ ------------
Total Comprehensive Income
for the year all attributable
589,486 to participating equity shareholders 43,566,140
------------- --------------------------------------- ------ ------------
Earnings per share
(US$0.01) Basic and diluted earnings 13 US$0.33
per share
These financial statements were authorised and approved for
issue by the Directors on 14 April 2011 and signed on their behalf
by:
Director Director
The accompanying notes form an integral part of the financial
statements.
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2010
Notes Total
US$
At 31 December 2008 90,705,409
------------------------------------------- ------ -------------
Transactions with participating equity
shareholders
Issue of participating shares 6 675,173
Redemption of participating shares 6 (673,585)
Distributions to participating equity
shareholders (7,933,056)
Total transactions with participating
equity shareholders (7,931,468)
Loss for the year all attributable to
participating equity shareholders (2,009,165)
Other Comprehensive Income 2 2,598,651
------
Total Comprehensive Income for the year
all attributable to participating equity
shareholders 589,486
------------------------------------------- ------ -------------
At 31 December 2009 83,363,427
------------------------------------------- ------ -------------
Transactions with participating equity
shareholders
Issue of participating shares 6 68,265,313
Redemption of participating shares 6 (25,612,458)
Distributions to participating equity
shareholders (13,628,307)
Total transactions with participating
equity shareholders 29,024,548
Profit for the year all attributable to
participating equity shareholders 51,354,472
Other Comprehensive Income 2 (7,788,332)
------
Total Comprehensive Income for the year
all attributable to participating equity
shareholders 43,566,140
------------------------------------------- ------ -------------
At 31 December 2010 155,954,115
------------------------------------------- ------ -------------
The accompanying notes form an integral part of the financial
statements.
STATEMENT OF CASH FLOWS
For the year ended 31 December 2010
31 December 31 December
2009 2010
US$ US$
-------------- ------------------------------------- -------------
Cash flows from operating activities
(Loss) / profit for the year all
attributable to the participating
(2,009,165) equity shareholders 51,354,472
Adjustments for non cash items
and working capital:
(2,188,855) (Decrease)/increase in creditors 3,778,680
(218,363) Increase in debtors (1,073,645)
Net unrealised gain on financial
assets and derivatives at fair
(4,833,111) value (54,047,795)
Net realised loss on disposal of
12,888,253 financial assets at fair value 10,890,142
-------------- ------------------------------------- -------------
Net cash inflow from operating
3,638,759 activities 10,901,854
-------------- ------------------------------------- -------------
Cash flows from/(used in) investing
activities
(36,797,773) Purchase of investments (84,235,822)
52,764,407 Disposal and paydowns of investments 35,105,371
-------------- ------------------------------------- -------------
Net cash inflow/(outflow) from/(used
15,966,634 in) investing activities (49,130,451)
-------------- ------------------------------------- -------------
Cash flows (used in)/from financing
activities
1,588 Issue of shares* 42,652,855
Distributions to participating
(7,933,056) equity shareholders (9,258,156)
-------------- ------------------------------------- -------------
Net cash (outflow)/inflow (used
(7,931,468) in)/from financing activities (33,394,699)
-------------- ------------------------------------- -------------
Net increase/(decrease) in cash
11,673,925 and cash equivalents (4,833,898)
Cash and cash equivalents at the
225,526 beginning of the year 11,899,451
-------------- ------------------------------------- -------------
Cash and cash equivalents at the
11,899,451 end of the year 7,065,553
-------------- ------------------------------------- -------------
* Issue of shares excludes non-cash switches between
the share classes of US$25,612,458 (2009: US$ 673,585).
The accompanying notes form an integral part of the financial
statements.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2010
1. GENERAL
Carador Income Fund plc (the "Company") is a closed-ended
limited liability investment company domiciled and incorporated
under the laws of Ireland with variable capital pursuant to the
Companies Acts, 1963 to 2009 of Ireland. It was incorporated on 20
February 2006 under registration number 415764. The Company was
authorised by the Central Bank pursuant to Part XIII of the
Companies Act, 1990.
The Company's share capital consists entirely of shares of no
par value. The Company's initial share capital was denominated in
Euro. The Euro denominated shares were admitted to the Official
List and began trading on the London Stock Exchange on 12 April
2006. The Company issued a US Dollar denominated share class at the
time of the amalgamation of its wholly-owned subsidiary, Carador
Guernsey Limited, with Abingdon Investment Limited on 9 December
2008. The US$ denominated shares were admitted to the Official List
and began trading on the London Stock Exchange on 9 December 2008.
On 20 October 2010 and 22 November 2010 the Company had two further
issuances of shares dominated in US$. The Company may issue one or
more additional classes of shares on prior notice to and clearance
by the Central Bank.
The Company's investment objective is to produce attractive and
stable returns, with low volatility compared to equity markets, by
investing in a diversified portfolio of senior notes of
collateralised debt obligations collateralised by senior secured
bank loans and equity and mezzanine tranches of collateralised debt
obligations.
2. SIGNIFICANT ACCOUNTING POLICIES
2a. Statement of compliance
The financial statements are prepared in accordance with
International Financial Reporting Standards ("IFRS") as issued by
the International Accounting Standards Board ("IASB") and adopted
by the European Union and Irish Company Law.
2b. Basis of preparation
In January 2010, the Company disposed of a portion of its
holding in Gale Force 4. This disposal resulted in the reduction of
its holding in the equity tranche of Gale Force 4 to below 50% and
as a result, Gale Force 4 is no longer consolidated. Accordingly,
as the Company has no other subsidiaries, these financial
statements are prepared on a company only basis, with prior year
comparatives presented on a similar company only basis.
The financial statements have been prepared on a historical cost
basis, except for financial instruments classified at fair value
through profit or loss that have been measured at fair value.
The financial statements for the current year are presented in
US Dollars as a result of the change in functional currency during
2010, as explained more fully in note 2k below.
In the prior year financial statements the participating issued
shares were presented as liabilities in the Statement of Financial
Position. In the current year financial statements, these
participating shares are presented as equity instruments as the
Directors are of the view that this revised presentation, based on
the terms and conditions of these instruments, results in the
Company providing more relevant and meaningful information about
the effects of the Company's participating share issuances and
related distributions. This change has no impact on the net asset
value attributable to the holders of equity participating
shares.
The above change has been applied retrospectively in these
financial statements as if this change has always been applied.
2c. Changes in accounting policies and disclosures
There were no changes in accounting policies of the Company
during the year.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
2d. Interest and dividend income and interest expense
Income receivable and payable from interest bearing financial
instruments at fair value through profit and loss is recognised
separately through profit or loss in the statement of comprehensive
income on an effective interest rate yield basis. Dividend income
is recognised through profit and loss on an ex-dividend basis.
Dividend income is shown gross of any non-recoverable withholding
taxes, which is disclosed separately in the statement of
comprehensive income.
2e. Participating equity shares
In the prior year financial statements the participating shares
were presented as debt instruments. In the current year financial
statements these shares have been presented as equity instruments,
further details of which are set out at 2b above.
The proceeds from the issue of participating shares are
recognised in the statement of changes in equity net of the
incremental issuance costs.
2f. Fees and charges
Expenses are charged through profit or loss in the statement of
comprehensive income on an accruals basis.
2g. Cash and cash equivalents
Cash comprises current deposits with banks. Cash equivalents are
short-term, highly liquid investments that are readily convertible
to known amounts of cash, are subject to an insignificant risk of
changes in value, and are held for the purpose of meeting
short-term cash commitments rather than for investments or other
purposes.
2h. Net realised gains or losses on investments at fair value
through profit or loss
Realised gains or losses on investments pertain to gains or
losses on disposal of investments at fair value through profit or
loss calculated on a weighted average cost basis and gains or
losses on settlement of derivative financial instruments. The
realised gains/losses are calculated as the difference between the
disposal proceeds and the original purchase cost.
2i. Net unrealised gains or losses on investments at fair value
through profit or loss
Net unrealised gains or losses on investments at fair value
through profit or loss pertain to the fair value movement, which is
calculated as described in Note 2j (iii). The returns received on
the Company's investments in CLOs carried at fair value through
profit or loss are allocated between interest income and principal
based on the expected return on an individual investment. Also
included within this caption are the unrealised gains or losses on
derivative financial instruments, which are calculated as described
in Note 2j (i).
2j. Financial instruments at fair value
(i) Classification
The Company classifies its financial assets and financial
liabilities into categories in accordance with IAS 39 Financial
Instruments: Recognition and Measurement.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
2j. Financial instruments at fair value (continued)
(i) Classification (continued)
The category of financial assets and financial liabilities at
fair value through profit or loss comprises:
Financial assets and financial liabilities designated at fair
value through profit and loss
Financial assets, including investments in subsidiaries,
classified in this category are designated by management on initial
recognition as part of a group of financial assets and liabilities
which are managed and their performance evaluated on a fair value
basis, in accordance with a documented investment strategy. The
term "financial assets designated at fair value through profit or
loss" includes investments in collateralised loan obligations.
Financial instruments held for trading
Derivatives are categorised as held for trading, as the Company
does not designate any derivatives as hedges for hedge accounting
purposes as described under IAS 39. Derivatives include forward
currency contracts. Derivatives are recorded at fair value. Changes
in the fair value of derivatives are recorded in 'Net gain/(loss)
on derivative financial instruments'.
(ii) Initialmeasurement
Financial assets and financial liabilities are measured
initially at fair value, being the transaction price, on the trade
date. Transaction costs on these financial assets are expensed
immediately.
(iii) Subsequent measurement
After initial measurement, the Company measures financial
instruments which are classified at fair value through profit or
loss at their fair values. Changes in fair value are recorded
within 'Net gain/(loss) on financial assets designated at fair
value through profit or loss'. Fair value is the amount for which
an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm's length transaction.
The following sources have been used to obtain fair value for
the financial assets and liabilities of the Company:
1. where quoted market prices are available for the financial
assets and liabilities these are used to determine fair value of
the respective financial instrument;
2. where the market for a financial instrument is not an active
market the fair value on subsequent measurement is obtained through
broker quotes or through the use of pricing services; and
3. where the fair value cannot be determined by reference to
observable market quotes or broker quotes the entity estimates fair
value through the use of a discounted cash flow model. There are a
number of assumptions applied in determining the fair values of the
financial assets whose fair value is estimated through the use of
the discounted cash flow model.
(iv) Offsetting financial instruments
Financial assets and liabilities are offset and the net amount
reported in the statement of financial position where there is a
legally enforceable right to offset the recognised amounts and
there is an intention to settle on a net basis, or realise the
assets and settle the liability simultaneously.
(v) Derecognition
The Company derecognises a financial asset when the contractual
rights to the cash flows from the financial asset expire or it
transfers the financial asset and the transfer qualifies for
derecognition in accordance with IAS 39. The Company derecognises a
financial liability when the obligation specified in the contract
is discharged, cancelled or expires.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
2k. Foreign currency
On 14 July 2010, the functional currency of the Company was
changed from Euro to US Dollars. The functional currency of the
Company is US Dollars as the Directors have determined that this
reflects the Company's primary economic environment following the
share issuances. The presentation currency of the Company was also
changed to US Dollars to align it to the new functional
currency.
Transactions in foreign currencies are translated at the foreign
currency exchange rate to the functional currency at rate ruling at
the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are translated to US Dollars
(previously Euro) at the foreign currency closing exchange rate
ruling at the statement of financial position date. Foreign
currency exchange differences relating to investments at fair value
through profit or loss are included in "Net gain/loss on financial
assets designated at fair value through profit or loss". All other
foreign currency exchange differences relating to monetary items,
including cash, are presented through profit and loss in the
statement of comprehensive income.
For the purpose of presenting the financial statements of the
Company, the prior year and up to 14 July 2010, presentation of the
year financial information (for the time when Euro was the
functional currency) is re-translated into the US Dollars as
follows:
-- The Statements of Financial Position were translated to US
Dollar at the exchange rate ruling at reporting year end dates;
-- The Statement of Comprehensive Income, proceeds from
Participating Shares issued, amount paid on Participating Shares
and Statement of Cash Flows were translated at the US Dollar
average rates where those rates represent a reasonable
approximation to actual rates; and
-- The Statement of Financial Position at the date of change of
functional was translated to US Dollar at the exchange rate ruling
at that date.
2l. Taxation
Under current law and Irish practice the Company qualifies as an
investment undertaking under Section 739B of the Taxes
Consolidation Act 1997 and is not therefore chargeable to Irish tax
on its relevant income or relevant gains. No stamp, transfer or
registration tax is payable in Ireland on the issue, redemption or
transfer of shares in the Company. Distributions and interest on
securities issued in countries other than Ireland may be subject to
taxes including withholding taxes imposed by such countries. The
Company may not be able to benefit from a reduction in the rate of
withholding tax by virtue of the double taxation agreement in
operation between Ireland and the other countries. The Company may
not therefore be able to reclaim withholding tax suffered by it in
particular countries.
To the extent that a chargeable event arises in respect of a
shareholder, the Company may be required to deduct tax in
connection with that chargeable event and pay the tax to the Irish
Revenue Commissioners. A chargeable event can include payments to
shareholders, appropriation, cancellation, redemption, repurchase
or transfer of shares, or a deemed disposal of shares every 8 years
beginning from the date of acquisition of those shares. Certain
exemptions can apply. To the extent that Shareholders have
appropriate tax declarations in place with the Company there may be
no requirement to deduct tax.
2m. Distributions
Distributions paid to the holders of participating shares are
recorded through the Statement of Changes in Equity when they are
declared to shareholders.
2n. Loans and Receivables
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market, and they are carried at amortised cost. The Company
includes in this category amounts receivable from brokers. The
amortised cost of a financial asset or liability is the amount at
which the instrument is measured at initial recognition (its fair
value) adjusted for initial direct costs, minus principle
repayments, plus or minus the cumulative amortisation using
effective interest method of any difference between the initial
amount recognised and the maturity amount, minus, in the case of
assets, any reduction for impairment.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
2o. Operating segments
An operating segment is a component of the Company that engages
in business activities from which it may earn revenues and incur
expenses, whose operating results are regularly reviewed by the
Company's chief operating decision maker and for which discrete
financial information is available.
In considering the segments of the Company, the Company has
considered the information reviewed by the Investment Manager and
the Directors being the Company's chief operating decision makers.
In making decisions on allocating resources and reviewing
performance of the Company the Investment Manager and the Directors
view the Company as whole, hence no separate operating segments
have been identified.
2p. Significant accounting judgments and estimates
The preparation of the financial statements requires management
to make judgements, estimates and assumptions that effect the
application of accounting policies and the reported amounts of
assets, liabilities, income and expenses. Actual results may differ
from these estimates.
When the fair value of financial assets and financial
liabilities recorded in the statement of financial position cannot
be derived from active market quotations or other observable
inputs, they are determined using valuation techniques including
the use of discounted cash flow models. The inputs to these models
are taken from observable markets where possible but where this in
not feasible, a degree of judgment is required in establishing fair
values. The judgments include considerations of liquidity and model
inputs such as credit risk, correlation and volatility. Changes in
assumptions relating to these factors could affect the reported
fair value of financial instruments. The models are calibrated
regularly and tested for validity using prices from any observable
current market transactions in the same instrument or based on
observable market data. The key assumptions applied are base
discount rate 40% (31 December 2009: 36.69%), default rate (long
term annual rate of 3% (31 December 2009: 2%)) and severity loss
30% (31 December 2009: 30%). The most significant of these is the
base discount rate which is adjusted to reflect the credit risk of
the respective financial instruments. Adjustments are made, among
others, in respect of the overcollaterisation cushion, the weighted
average rating factor and weighted average spread.
2q. New Standards and interpretations not adopted
A number of new standards, amendments to standards and
interpretations are effective for annual periods beginning after 1
January 2010, and have not been applied in preparing these
financial statements. None of these are expected to have a
significant effect on the measurement of the amounts recognised in
the financial statements of the Company. However, IFRS 9 (Financial
Instruments) issued in November 2009 (IFRS 9 (2009)) will change
the classification of financial assets and liabilities. The
standard is not expected to have an impact on the measurement basis
and classification of the financial assets since the majority of
the Fund's financial assets are measured at fair value through
profit or loss.
The standard is effective for annual periods beginning on or
after 1 January 2013 subject to EU endorsement. Earlier application
is permitted. The Company does not plan to adopt this standard
early.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
3. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR
LOSS
As described in the accounting policies note, the Company has
financial assets designated at fair value through profit or loss
and derivative financial instruments held for trading. The
following table shows financial instruments recognised at fair
value, analysed between those whose fair value is based on:
- Level 1: quoted prices (unadjusted) in active markets for
identical assets or liabilities;
- Level 2: inputs other that quoted prices included in Level 1
that are observable for the asset or liability, either directly (as
prices) or indirectly (derived from prices); and
- Level 3: inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
31 December 2010
---------------------------------------------
Level Level Level
1 2 3 Total
------- ------------ -------- ------------
US$ US$ US$ US$
Financial assets at fair
value through profit or
loss
Financial assets held
for trading
Derivative financial
assets - forward
currency contracts - 68,231 - 68,231
Financial assets
designated at fair value
through profit or loss
Collateralised loan
obligations - 152,976,578 644,713 153,621,291
Equities - - - -
Money market funds - - - -
- 153,044,809 644,713 153,689,522
======================================= ============ ======== ============
Financial liabilities at
fair value through
profit or loss
Financial liabilities
held for trading
Derivative financial
liabilities - forward
currency contracts - (96,672) - (96,672)
- (96,672) - (96,672)
======================================= ============ ======== ============
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
3. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS
(continued)
31 December 2009
--------------------------------------------------
Level Level Level
1 2 3 Total
----------- ----------- ----------- -----------
US$ US$ US$ US$
Financial
assets at fair
value through
profit or loss
Financial
assets held for
trading
Derivative
financial
assets -
forward
currency
contracts - 573,469 - 573,469
Financial
assets
designated at
fair value
through profit
or loss
Collateralised
loan
obligations * - 13,276,591 44,699,747 57,976,338
Equities - - 389,018 389,018
Money market
funds 10,689,935 - - 10,689,935
10,689,935 13,850,060 45,088,765 69,628,760
=========== =========== =========== ===========
Financial
liabilities at
fair value
through profit
or loss
Financial
liabilities
held for
trading
Derivative
financial
liabilities -
forward
currency
contracts - (586,182) - (586,182)
- (586,182) - (586,182)
=========== =========== =========== ===========
* Collateral loan obligations contain the investment in the
subsidiary, Gale Force IV, of US$11,277,031 (sold in 2010).
When fair values of listed equity and debt securities as well as
publicly traded derivatives at the reporting date are based on
quoted market prices or binding dealer price quotations (bid price
for long positions and ask price for short positions), without any
deduction for transaction costs, the instruments are included
within Level 1 of the hierarchy.
For Level 2 collaterised loan obligations, fair value is
determined using independent broker quotes. Where there is
independent confirmation of those prices from the independent
broker but it can be verified that the valuation is based on
observable inputs, the investments fall into Level 2. If it cannot
be verified that the valuation is based significantly on observable
inputs, then the investment fall into Level 3.
The determination of what constitutes observable requires
significant judgement by the Company. The Company considers
observable data to be that market data that is readily available,
regularly distributed or updated, reliable, not proprietary, and
provided by independent sources that are actively involved in the
relevant market.
For derivative valuations the Company uses widely recognised
valuation models. For these financial instruments, inputs into
models are market observable and are therefore included within
Level 2.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
3. FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS
(continued)
Instruments included in Level 3 include those for which there
are significant unobservable inputs used in arriving at the
valuation. In valuing such instruments the Company uses a valuation
model which is accepted in the industry. Some of the inputs to that
model may not be market observable and are therefore estimated
based on assumptions. The model is calibrated to reflect
performance of the investment in terms of over-collateralisation
tests, weighted average spread of the underlying portfolio,
weighted average rating factor of the underlying portfolio and
manager quality.
Transfers between Level 1 and 2
There were no transfers between Level 1 and Level 2 during the
year.
Level 3 reconciliation
The following table shows a reconciliation of all movements in
the fair value of financial instruments categorised within Level 3
between the beginning and the end of reporting year.
Total
(losses) Transfers
recorded to At 31
At in profit Level December
1 January or loss Purchases Sales 2 2010
US$ US$ US$ US$ US$ US$
----------- ------------- ---------- ------------ ------------- -----------
Financial
Assets
Financial assets designated at fair value through
profit or loss:
Collateralised
loan
obligations 44,699,747 (166,051) - - (43,888,983) 644,713
Equities 389,018 - - - (389,018) -
----------- ------------- ---------- ------------ ------------- -----------
Total Level
3 Financial
Assets 45,088,765 (166,051) - - (44,278,001) 644,713
=========== ============= ========== ============ ============= ===========
Total
(losses) Transfers
At recorded to At 31
1 January in profit Level December
2009 or loss Purchases Sales 2 2009
US$ US$ US$ US$ US$ US$
----------- ------------- ---------- ------------ ------------- -----------
Financial
Assets
Financial assets designated at fair value through
profit or loss:
Collateralised
loan
obligations 66,096,749 (11,891,294) - (9,505,708) - 44,699,747
Equities 548,547 (159,529) - - - 389,018
Total Level
3 Financial
Assets 66,645,296 (12,050,823) - (9,505,708) - 45,088,765
----------- ------------- ---------- ------------ ------------- -----------
Collaterised loan obligations with a carrying amount of
US$44,278,001 were transferred from Level 3 to Level 2 due to an
improvement on market conditions and increase in market
liquidity.
In relation to the Company's Level 3 investments, assuming
everything remained equal but the discount rate was changed by 3%
then the fair value of the Level 3 investments would change by
US$0.1 million (2009: US$ 0.9 million).
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
4. FEES
The Investment Manager was entitled to receive a management fee
from the Company of 1.5% per annum of the net asset value of the
Company, calculated and payable monthly in arrears. The base
management fee will be reduced to take into account any fees
received by the Investment Manager or any of its associates or
affiliates as a result of managing any CLO that the Company invests
in, if such investment is or has been made in the primary market
(i.e. the market in which investors have the first opportunity to
buy a new security).
In addition, the Investment Manager is entitled to a performance
fee in respect of each share class equivalent to 13% of the amount
by which the value of the financial year end net asset value per
share of a class plus distributions per share of that class paid in
the period exceeds the value of the net asset value per share of
that class, as increased by 12 month Euribor plus 2%, as at the
following point in time:
(i) if a performance fee has previously been paid, the net asset
value per share of that class as at the end of the most recent
previous completed accounting period or, if greater, the net asset
value per share of that class as at the end of the previous
completed accounting reference period in respect of which a
performance fee was paid; or
(ii) if no performance fee has been paid, the opening net asset
value per share of that class as at the effective date of the
amalgamation of the Company and Abingdon Investment Limited (a
wholly owned subsidiary of the Company, effective 9 December
2008).
The Company also reimburses the Investment Manager for all
out-of pocket expenses reasonably incurred in the performance of
its duties.
The Custodian is entitled to receive an annual fee from the
Company of 0.04% of the net asset value of the Company paid monthly
in arrears, subject to an aggregate minimum monthly fee payable by
the Company to the Custodian (and the Administrator) of
EUR8,500.
The Administrator is entitled to receive an annual fee of 0.08%
of the net asset value of the Company on the first EUR75 million of
the Company's net assets, 0.07% of the net asset value on the next
EUR75 million of the Company's net assets and 0.06% thereafter,
accrued and paid monthly in arrears, subject to an aggregate
minimum monthly fee payable by the Company to the Administrator
(and the Custodian) of EUR8,500.
During the year ended 31 December 2010 the Company incurred
Performance, Investment Manager, Custodian and Administration fees
of US$4,006,412 (31 December 2009: US$ Nil), US$1,263,623 (31
December 2009: US$947,864), US$38,802 (31 December 2009: US$34,138)
and US$106,759 (31 December 2009: US$108,440) respectively. Of
these US$4,006,412 (31 December 2009: US$ Nil), US$ 175,545 (31
December 2009: US$167,755), US$5,436 (31 December 2009: US$5,849)
and US$10,443 (31 December 2009: US$19,009) was outstanding at year
end.
The Directors are entitled to a fee in remuneration for their
services at a rate to be determined from time to time by the
Directors and disclosed in the financial statements. During the
year ended 31 December 2010 the Company paid Directors fees of
US$240,882 (31 December 2009: US$268,904), of which US$68,812 (31
December 2009: US$ Nil) was outstanding at the year end.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
4. FEES (continued)
The Company incurred the following assurance and tax fees during
the year of which US$146,095 (31 December 2009: US$269,088) was
outstanding at the year end.
Year ended Year ended
31 December
31 December 2010 2009
US$ US$
Audit of individual
accounts 146,095 260,742
Other assurance
services 4,893* -
Tax advisory services 98,204* -
249,192 260,742
================= ============
*The above amounts were not paid to the statutory auditors.
During the year ended 31 December 2010 the Company incurred
other operating expenses of US$556,047 (31 December 2009:
US$713,049) of which US$22,809 (31 December 2009: US$195,171) was
outstanding at year end.
5. CASH BALANCES
Company cash balances are held with the Northern Trust
Company.
6. PARTICIPATING SHARES
Participating Shares
The authorised share capital of the Company shall not be less
than the currency equivalent of EUR2 and the maximum issued share
capital shall not be more than the currency equivalent of EUR500
billion divided into a specified number of shares of no par value.
The issued share capital consists of 13,914,839 Euro shares (31
December 2009: 55,282,169) and 194,146,304 US Dollar shares (31
December 2008: 84,764,307). The Company has allotted two subscriber
shares, of EUR1 each. These shares do not participate in the
profits of the Company. Switches of shares between the classes are
permitted on a quarterly basis. The EUR and US Dollar class shares
both participate in the profits of the Company and have equal
voting rights. Shareholders of each class shall have one vote in
respect of each whole share held.
US Dollar
EUR shares shares
Issued share (no. of shares)
Balance at 31 December 2009 52,282,169 84,764,307
Switches during the year (41,367,330) 43,762,157
Issue during the year - 65,619,840
------------- ------------
Balance at 31 December 2010 13,914,839 194,146,304
============= ============
US Dollar
EUR shares shares
Issued share (no. of shares)
Balance at 31 December 2008 56,184,881 83,799,318
Switches during the year (902,712) 964,989
Issue during the year - -
Balance at 31 December 2009 55,282,169 84,764,307
============= ============
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
6. PARTICIPATING SHARES (continued)
Capital management
The Company is closed ended. Subject to the approval of
shareholders by way of special resolution, the Company may redeem
all shares on the expiry of its 15 year limited life (see note
11c).
The Company has no externally imposed capital requirements.
The Company's objectives for managing capital are:
- to invest the capital in investments meeting the description,
risk exposure and expected return indicated in its prospectus;
- to achieve consistent returns while safeguarding capital by
investing in accordance with its investment policy or holding
cash;
- to maintain sufficient liquidity to meet the expenses of the
Company and to meet distribution commitments; and
- to maintain sufficient size to make the operation of the
Company cost-efficient.
7. SOFT COMMISSIONS
There are no agreements for the provision of any services by
means of soft commission.
8. OFF BALANCE SHEET ARRANGEMENTS
There are no off balance sheet arrangements during the year. At
31 December 2010 the fair value of investments is approximately
US$153,621,291 (2009: US$69,055,291). These investments are
non-recourse securities with no contingent liabilities where the
Company's maximum loss exposure is capped at the current carrying
value.
9. RELATED PARTY TRANSACTIONS AND KEY MANAGEMENT PERSONNEL
Fees incurred to GSO Capital Partners International LLP (the
investment manager) amounted to US$5,270,035 (31 December 2009:
US$947,864) of which US$4,181,957 (31 December 2009: US$167,755)
was outstanding at the year end. No Director, nor the Company
Secretary, had any beneficial interest in the shares of the Company
during the year ended 31 December 2010 or during the year ended 31
December 2009.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
9. RELATED PARTY TRANSACTIONS AND KEY MANAGEMENT PERSONNEL
(continued)
At 31(st) December 2010 Miguel Ramos Fuentenebro, the employee
of the investment manager who manages the Carador portfolio, had a
holding of 365,444 US Dollar Shares, representing 0.19% of the US
Dollar Class, and 639,729 Euro Shares, representing 4.60% of the
Euro Class.
At 31(st) December 2010 GSO Capital Partners Employee Side by
Side Fund LLC has a holding of 12,524,424 US Dollar Shares,
representing 6.45% of the total US Dollar Class. Together these
holdings represent in aggregate approximately 6.3% of the issued
Shares of the Company.
During the year ended 31 December 2010 the Company paid
Directors fees of US$240,882 (31 December 2009: US$268,904), of
which US$68,812 (31 December 2009: US$ Nil) was outstanding at the
year end. The listing of the members of the Board of Directors is
shown on page 1. The Directors did not hold any shares in the
Company during or as at the end of the financial year.
The following Directors fees were paid during the year:
Year ended Year ended
31 December 31 December
2010 2009
US$ US$
Werner Schwanberg 64,042 56,108
Claudio Albanese 17,789 51,247
Adrian Waters 58,272 35,584
Fergus Sheridan 39,909 52,439
Edward D'Alelio 43,081 37,303
Nicholas Moss 17,789 36,223
240,882 268,904
============ ============
GSO Capital Partners Employee Side by Side Fund LLC, employees
of the investment manager and Miguel Ramos Fuentenebro announced on
13 May 2010 that they had acquired a total of 1,179,932 US Dollar
Shares and 550,000 Euro Shares validly tendered by Shareholders
under a tender offer from them, representing approximately 1.2 per
cent of the issued Shares of the Company.
The Company may invest in other entities and transactions that
are managed directly or indirectly by the Investment Manager or any
of its affiliates as listed below:
CLO Investments managed by GSO and affiliates
Investment Investment Manager
Callidus IV-A D GSO / Blackstone Debt Funds Management LLC
Callidus V-X D GSO / Blackstone Debt Funds Management LLC
Callidus V-X INC GSO / Blackstone Debt Funds Management LLC
Callidus VI-X D GSO / Blackstone Debt Funds Management LLC
Gale Force 2 CLO EQUITY GSO / Blackstone Debt Funds Management
LLC
Gale Force 2 CLO E GSO / Blackstone Debt Funds Management
LLC
Gale Force 3 CLO D GSO / Blackstone Debt Funds Management
LLC
Gale Force 3 CLO E GSO / Blackstone Debt Funds Management
LLC
Gale Force 3 CLO PREF GSO / Blackstone Debt Funds Management
LLC
Gale Force 4 CLO E GSO / Blackstone Debt Funds Management
LLC
Gale Force 4 CLO INCOME GSO / Blackstone Debt Funds Management
LLC
Green Park CDO E Blackstone Debt Advisors
Hyde Park CDO B.V. E Blackstone Debt Advisors
Inwood Park CDO SUBORD Blackstone Debt Advisors
Prospect Park CDO SUBORD Blackstone Debt Advisors
Regents Park 1A F Blackstone Debt Advisors
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
10. FINANCIAL DERIVATIVE INSTRUMENTS
The Company invests in underlying assets which are predominantly
US Dollar and Euro denominated. The functional and presentational
currency of the Company is US Dollar. The Company therefore has an
economic exposure to changes in the exchange rate between Euro and
the US Dollar which, if unhedged, has the potential to have a
significant effect on returns. In addition, the Euro class is
denominated in Euro. The Directors believe that it is in the best
interests of shareholders for the Company to engage consistently in
currency hedging solely to reduce the risk of currency fluctuations
and the volatility of returns which may result from such currency
exposure. This involves hedging, at the level of the Company, the
Euro assets to US Dollar, and, at a class level, the US Dollar
exposure to the Euro class back to Euro, through the use of rolling
forward foreign exchange transactions.
The Company utilised currency contracts for the purposes of
efficient portfolio management during the year ended 31 December
2010. Details of the contracts open at year end are disclosed in
Note 11. Unrealised gains/(losses) resulting from these contracts
are disclosed below. The fair value of forward foreign exchange
contracts is calculated using valuation techniques based on
observable market data.
31 December 31 December
2010 2009
US$ US$
Financial assets held for trading:
- derivative financial instruments 68,231 573,469
Financial liabilities held
for trading:
- derivative financial instruments (96,672) (586,182)
Total financial assets and
liabilities held for trading (28,441) (12,713)
============ ============
11. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
Introduction
Risk is inherent in the Company's activities but it is managed
through a process of ongoing identification, measurement and
monitoring, subject to risks limits and other controls. The process
of risk management is critical to the Company's continuing
profitability. The Company is exposed to market risk (which
includes currency risk, interest rate risk and other price risk),
and credit risk arising from the financial instruments it holds.
Given the Company's permanent capital structure as a closed-ended
fund, it is not exposed to redemption risk. However the financial
instruments include investments in collateralised debt obligations
and derivative contracts traded over-the-counter which are not
traded in an organised public market and which may be illiquid. As
a result, the Company may not be able to promptly liquidate some of
its investments in these instruments at an amount close to its fair
value in order to meet its liquidity requirements or to respond to
specific events such as deterioration in the credit worthiness of
any particular issuer. It may be impossible to assess the exposure
to risk in such circumstances.
Risk management structure
The Board of Directors is ultimately responsible for identifying
and controlling risks. The Investment Manager also carries out
ongoing monitoring of risks. As a result, there are separate bodies
for managing and monitoring risks at the Company.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
11. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)
Risk measurement and reporting system
The Company's risks are measured using a method which reflects
both the expected loss likely to arise in normal circumstances and
unexpected losses, which are an estimate of the ultimate actual
loss based on models. The models makes use of the probabilities
derived from historical experience, adjusted to reflect the
economic environment.
Monitoring and controlling risks is primarily performed based on
limits established by the Board. These limits reflect the business
strategy and market environment of the Company as well as the level
of risk that the Company is willing to accept. In addition, the
Company monitors and measures the overall risk bearing capacity in
relation to the aggregate risk exposure across risks type and
activities.
Risk mitigation
The Company has investment guidelines that set out its overall
business strategies, its tolerance for risk and its general risk
management philosophy and has established processes to monitor and
control economic hedging transactions in a timely and accurate
manner. The Company uses derivatives and other instruments only in
connection with its risk management activities, but not for trading
purposes.
Excessive risk concentration
Concentration arises when a number of counterparties are engaged
in similar business activities, or activities in the same
geographic region, or have similar economic features that would
cause their ability to meet contractual obligations to be similarly
affected by changes in economic, political or other conditions.
Concentration indicates the relative sensitivity of the Company's
performance to developments affecting a particular issuer, manager,
asset class or geographical location.
In order to avoid excessive concentration of risk, the Company's
policies and procedures include specific guidelines to focus on
maintaining a diversified portfolio. Identified concentration of
credit risks are controlled and managed accordingly.
Carador's investment guidelines specify, among others, that the
Company must invest in a minimum of 20 separate transactions, with
a maximum exposure per investment, at the time of investment, of
20% of the net asset value. The Company also limits its exposure to
transactions managed by the same portfolio manager to 15% of the
net asset value, at the time of investment. However, if the
portfolio manager is an affiliate of the Investment Manager, this
limit is increased to 60% of the net asset value, at the time of
investment.
The concentration risk at 31 December 2010 and 31 December 2009
is disclosed within credit risk note 11(b). Please see further
details of exposures to risk and concentrations as outlined in the
Investment manager report.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
11. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)
(a) Market risk
Market risk is the risk that the fair value or future cash flows
of a financial instrument will fluctuate because of changes in
market prices and includes interest rate risk, foreign currency
risk and other price risks, such as index price risk. The Company
uses derivative instruments to hedge the investment portfolio
against currency risk.
The Company's investments are in collateralised loan obligations
vehicles. The CLO vehicles typically have no significant assets
other than the loans as collateral. Accordingly, payments on the
CLO securities are payable solely from the cash flows from the
collateral, net of all management fees and other expenses. Payments
to the Company as a holder of equity notes and/or mezzanine notes,
CLO vehicles are met only after payments due on the senior notes
(and, where appropriate, the mezzanine notes) have been made in
full.
The following table shows the securities held by the Company
which are susceptible to market risk arising from uncertainties
about interest rates, foreign currency fluctuation and future
prices of the instruments.
31 December 31 December
2010 2009
US$ US$
Financial assets designated
at fair value through profit
or loss 153,621,291 57,778,260
Investments in subsidiaries
designated at fair value through
profit or loss - 11,277,031
Derivative financial instruments
- assets 68,231 573,469
Derivative financial instruments
- liabilities (96,672) (586,182)
(i) Interest rate risk
The majority of the Company's financial assets are equity and
mezzanine tranches of cash flow CLOs. The Company's investments
have some exposure to interest rate risk but this is limited to
floating Libor-based exposure for the CLO's assets.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
11. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)
(a) Market risk
(i) Interest rate risk (continued)
The following table shows the Director's best estimate of the
sensitivity of the portfolio to stressed changes in interest rates,
with all other variables held constant. The table assumes parallel
shifts in the respective forward yield curves.
31 December
31 December 2010 2009
effect on net effect on net
Possible assets assets
and profit or and profit
reasonable loss or loss
change in rate US$ US$
-1% (4,091,101) (1,641,537)
1% 4,595,674 1,921,305
The following table shows the portfolio profile at 31 December
2010.
31 December 31 December
2010 2009
% %
Investments related to floating
rate notes 97% 100%
Investments related to fixed
rate notes 3% -
Financial assets designated
at fair value through profit
or loss 100% 100%
--------------------------------- ------------ ------------
(ii) Currency risk
The Company's investments are denominated in Euro and US Dollar
(the latter being the functional currency of the Company). It is
therefore exposed to currency risk, as the value of the securities
denominated in other currencies than the US Dollar will fluctuate
due to changes in exchange rates. This exposure is mitigated by the
use of monthly rolling forward currency contracts as hedges.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
11. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)
(a) Market risk (continued)
(ii) Currency risk (continued)
The tables below indicate the currencies to which the Company
had significant exposure at 31 December 2010 on its trading
monetary assets and liabilities. The analysis discloses the
Directors' best estimates of the effect of a reasonably possible
movement of the currency rate against the dollar with all other
variables held constant on the profit and loss account. A negative
amount in the table reflects a potential net reduction in profit
and loss or net assets, while a positive amount reflects a net
potential increase.
31 31
December December
Possible 2010 2009
change 31 effect on effect on
in December net assets 31 December net assets
exchange 2010 net and profit 2009 net and profit
rate exposure or loss exposure or loss
US$ US$ US$ US$
Euro/US (+/-) (+/-)
Dollar* +/-5% 181,109 2,551 (18,863,533) 284,177
The Company's total net exposure in foreign currency exchange
rates at the statement of financial position date was as
follows:
31 December 31 December
2010 2009
US$ US$
Total Investments
Euro/US Dollar * 16,146,675 55,510,675
Total Investments 16,146,675 55,510,675
============= =============
Participating shares **
Euro/US Dollar * (11,494,110) (72,397,760)
Total Participating shares (11,494,110) (72,397,760)
============= =============
Derivative financial instruments
for assets (15,164,473) (46,574,401)
Derivative financial instruments
for participating shares 10,693,017 44,597,953
Net exposure 181,109 (18,863,533)
============= =============
* As a result of the Company changing functional currency during
the year, the foreign currency exposure changed from US Dollars to
Euro.
** Includes Euro share class for 2010 and US Dollar share class
for 2009.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
11. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)
(a) Market risk (continued)
(ii) Currency risk (continued)
The Company's policy is to enter to monthly currency hedging
transactions to mitigate currency risk. At 31 December 2010 and 31
December 2009 the Company had open forward positions in the
following contracts:
Unrealised
Contract Contract Maturity Ccy Ccy Gain/(Loss)
date price date Buy Amount Sell Amount US$
31/12/2010 0.7454 31/01/2011 US$ 15,164,473 EUR 11,376,199 (96,672)
31/12/2010 0.7454 31/01/2011 EUR 8,021,768 US$ 10,693,017 68,231
Unrealised
Contract Contract Maturity Ccy Ccy Gain/(Loss)
date price date Buy Amount Sell Amount US$
31/12/2009 1.4347 29/01/10 EUR 32,253,740 US$ 46,574,401 (299,445)
31/12/2009 1.4347 29/01/10 EUR 30,885,009 US$ 44,597,953 (286,737)
31/12/2009 1.4347 29/01/10 US$ 44,597,953 EUR 30,885,009 286,738
31/12/2009 1.4347 29/01/10 US$ 44,597,953 EUR 30,885,009 286,731
The primary purpose of the Company's foreign currency economic
hedging activities is to protect against the economic volatility
associated with investments denominated in foreign currencies and
non-base currency denominated shares. The Company primarily
utilises forward exchange contracts to economically hedge foreign
currency denominated financial assets and participating shares.
Increases or decreases in the Company's foreign currency
denominated financial assets and participating shares are largely
offset by gains and losses on the economic hedging instruments. The
Company does not use foreign currency forward exchange contracts or
purchased currency options for trading purposes.
(iii) Index price risk
Index price risk is the risk that the fair value of the
portfolio changes as the result of changes in the levels of fixed
income and credit indices. Specifically, it is the Company's
portfolio of CLOs that may be affected by index price risk.
The Directors' best estimate of the effect on the Company's net
assets and profit and loss due to a reasonably possible change in
standard fixed income credit indices, with all other variable held
constant is as follows.**
Effect on Effect on
Change in net assets net assets
Change price (%) and profit Change in and profit
in market 31 or loss 31 price (%) or loss 31
Market index December December 31 December December
indices* (%) 2010 2010 2009 2009
----------- ----------- ----------- ----------- ------------ ------------
US$ US$
iTraxx
LEVX +10% 1.44 2,353,855 0.66% 546,292
CDX LCDX +10% 17.16% 28,125,152 6.10% 5,025,863
iTraxx
Europe +10% 2.50% 4,097,092 0.46% 378,268
CDX NA
IG +10% 5.00% 8,194,184 1.33% 1,095,742
* Market indices are
outlined in glossary
of terms.
** In practice the actual trading results may
differ from the sensitivity analysis and the difference
could be material.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
11. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)
(a) Market risk (continued)
(iii) Index price risk (continued)
The table below contains the inputs that have been used for the
Index price risk analysis table.
% of % of
Estimated portfolio Estimated portfolio
Change
in
market Sensitivity to apply Sensitivity to apply
31 31
Market indices index 31 December December 31 December December
* (%) 2010 2010 2009 2009
iTraxx
LEVX +10% 1.50 10% 1.50 4%
CDX
LCDX +10% 2.00 86% 1.50 41%
iTraxx
Europe +10% 0.25 100% 0.50 10%
CDX NA
IG +10% 0.50 100% 0.50 27%
* Market indices are outlined
in glossary of terms.
The definition for each of the columns is the following:
- market indices: relevant market indices to stress;
- change in market index: stress applied;
- estimated sensitivity: the investment manager's view on the
"beta" between the Company's investments and the index; and
- % of portfolio to apply: based on asset allocation of the
Company and the market indices.
In order to arrive at "Change in price" in the table on the
previous page, the "Change in market index" was multiplied by
"Estimated sensitivity" and "Percentage of portfolio to apply".
Concentration of index price risk
The table below analyses the Company's concentration of index
price risk by subsector in the secured loan asset class.
31 December 31 December
2010 2009
By asset class: US$ US$
Broadly syndicated sub-investment
grade secured loans - Europe 15,342,982 15,329,485
Broadly syndicated sub-investment
grade secured loans - North America 137,292,936 42,380,102
Middle market secured loans -
North America 985,373 655,769
Other - Europe - 10,689,935
153,621,291 69,055,291
============ ============
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
11. RISK ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)
(a) Market risk (continued)
(iii) Index price risk (continued)
The table below analyses the Company's concentration of market
price risk by geographical area.
31 December 31 December
2010 2009
US$ US$
Europe 15,342,982 26,019,420
North America 138,278,309 43,035,871
153,621,291 69,055,291
============ ============
(b) Credit risk
Credit risk is the risk that one party to a financial instrument
will cause a financial loss for the other party by failing to
discharge an obligation. It is the Company's policy to enter into
financial instruments with a range of reputable counterparties.
Therefore, the Company does not expect to incur material credit
losses on its financial instruments.
The table below analyses the Company's maximum credit exposure
to credit risk for the components of the statement of financial
position, including derivative financial instruments.
31 December 31 December
2010 2009
US$ US$
Cash and cash equivalents 7,065,553 11,899,451
Balances due from brokers 500,000 1,304,730
Financial assets designated
at fair value through profit
or loss 153,621,291 57,778,260
Investments in subsidiary designated
at fair value through profit
or loss - 11,277,031
Derivative financial instruments 68,231 573,469
Interest receivable 3,601,415 1,723,040
Securities sold receivable - 50,500
164,856,490 84,606,481
============ ============
The cash and substantially all of the assets of the Company are
held by its custodian, Northern Trust Fiduciary Services (Ireland)
Limited. Bankruptcy or insolvency of the custodian may cause the
Company's rights with respect to securities held by the custodian
to be delayed or limited. The Company monitors its risk by
monitoring the credit quality and financial positions of the
custodian. The custodian is a wholly owned subsidiary of Northern
Trust Corporation. As at 31 December 2010, Northern Trust
Corporation had a Long Term Rating from Standard and Poor's of AA-
denoting a strong capacity to repay interest and principal. The
derivative financial instruments and assets due from brokers are
with JP Morgan who has a credit rating of AA- at 31 December 2010.
Please refer to note 19 for details of the post year end change in
registered office.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
11. RISK ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)
(b) Credit risk (continued)
The Company also quantifies the exposure to the credit risk of
all financial assets based on the country of registration:
31 December 31 December
2010 2009
US$ US$
Cayman Islands 90,379,901 38,413,695
United States 51,294,185 9,063,980
Ireland 3,594,228 13,190,622
Netherlands 8,352,977 8,386,994
153,621,291 69,055,291
============ ============
The table below summarises the Company's portfolio
concentrations as of 31 December 2010 and 31 December 2009.
Maximum portfolio
holdings of Average portfolio
a single asset holdings
% of total % of total
portfolio portfolio
31 December 2010 8.81% 1.92%
31 December 2009 13.53% 2.07%
The below table summarises the portfolio by asset class and
ratings of the portfolio as of 31 December 2010 and 31 December
2009.
31 December 31 December
2010 2009
By asset class: US$ US$
Senior CLO 11,518,401 28,015,371
Mezzanine CLO 82,929,029 4,085,575
Subordinated CLO 59,173,861 26,264,410
Money Market Fund - 10,689,935
153,621,291 69,055,291
============ ==============
Senior investments were originally rated AAA/AA CLO notes,
mezzanine investments were originally rated A/BBB/BB and equity
notes were Non Rated ("NR").
The Company's portfolio is partly invested in the equity
tranches of cash flow collateralised loan obligations which is
subject to potential non-payment and is by definition, not rated
securities. The Company assesses the quality of non-rated assets
based on a fundamental analysis of the underlying loans in the
respective portfolios and the effect of the liabilities and terms
and conditions determined in the relevant CLO document in the
expected cash flow allocation to the non-rated tranche.
For additional credit risk information please see largest sector
exposures, portfolio risk by seniority and top underlying loan
level exposures from pages 12 to 14 of the investment managers'
report.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
11. RISK ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)
(b) Credit risk (continued)
With the exception of investments in senior and mezzanine CLO
notes, the Company will typically be in a first loss or
subordinated position with respect to realised losses on the
collateral of each investment. The leveraged nature of the equity
notes and the mezzanine notes, in particular, magnifies the adverse
impact of collateral defaults.
The Company may be adversely impacted by an increase in its
credit exposure related to investing and other activities. The
Company is exposed to the potential for credit related losses that
can occur as a result of an individual, counterparty or issuer
being unable or unwilling to honour its contractual obligations.
These credit exposures exist within financing relationships,
commitments, derivatives and other transactions. These exposures
may arise, for example, from a decline in the financial condition
of a counterparty, from entering into swap or other derivative
contracts under which counterparties have obligations to make
payments to us, from a decrease in the value of securities of third
parties that the Company holds as collateral, or from extending
credit through guarantees or other arrangements. As the Company's
credit exposure increases, it could have an adverse effect on the
Company's business and profitability if material unexpected credit
losses occur.
(c) Liquidity risk
Liquidity risk is defined as the risk that the Company may not
be able to settle or meet its obligations on time or at a
reasonable price.
The Company does not currently use leverage and as a result it
has no financing subject to margin calls which may force the
Company to liquidate assets. The Company's unleveraged capital
structure reflects the long-term investment strategy and matches
the illiquidity of the underlying investments.
The Company has been established with an initial 15 year life.
At the annual general meeting in 2021, the Directors will be
obliged to put a special resolution to the shareholders for the
winding-up of the Company. The Directors may be relieved of the
need to wind up the Company if the special resolution of
shareholders is not carried.
Given the Company's permanent capital structure as a
closed-ended fund, it is not exposed to redemption risk. However
the Company's financial instruments include investments in
collateralised debt obligations and derivative contracts traded
over-the-counter which are not traded in an organised public market
and which may be illiquid. As a result, the Company may not be able
to promptly liquidate some of its investments in these instruments
at an amount close to its fair value in order to meet its liquidity
requirements or to respond to specific events such as deterioration
in the credit worthiness of any particular issuer. It may be
impossible to assess the exposure to risk in such
circumstances.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
11. RISK ASSOCIATED WITH FINANCIAL INSTRUMENTS (continued)
(c) Liquidity risk (continued)
The table below analyses the Company's financial liabilities
into relevant maturity grouping based on remaining period at the
statement of financial position date to the contractual maturity
date. The amounts in the table are the contractual cash flows.
Balances due within 12 months equal their statement of financial
position carrying balance, as the impact of discounting is not
significant.
Due
between
Due Due 3 and Due
on within 12 after
Demand 3 months months 12 months Total
US$ US$ US$ US$ US$
Financial
liabilities as at
31 December 2010
Derivative
financial
instruments -
settled net - 96,672 - - 96,672
Expenses and
distribution
payable - 8,805,703 - - 8,805,703
- 8,902,375 - - 8,902,375
============================= ========== ========= =========== ==========
Due
between Due
Due Due 3 and after
on within 12 12
Demand 3 months months months Total
US$ US$ US$ US$ US$
Financial
liabilities as at
31 December 2009
Derivative
financial
instruments -
settled net - 586,182 - - 586,182
Expenses and
distribution
payable - 656,872 - - 656,872
- 1,243,054 - - 1,243,054
============================= ========== ========= =========== ==========
(d) Balances due from brokers
The following table details the financial assets pledged as
collateral for derivatives:
31 December 31 December
2010 2009
US$ US$
Balances due from brokers 500,000 1,304,730
Cash collateral is held with JP Morgan and it is used to cover
any mark to market margin requirements. The interest on collateral
is paid by JP Morgan periodically.
12. STOCKLENDING
The Company did not enter into any stocklending transactions
during the year to which these financial statements relate.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
13. EARNINGS PER SHARE
As a result of the change in the assessment stated in note 2b,
the EPS calculation has changed. The EPS is now calculated by
dividing the profit / (loss) for the year attributable to the
participating shareholders by the weighted average number of shares
outstanding in the year. In the prior year the EPS was calculated
by dividing the profit / (loss) for the year attributable to the
participating shareholders less the distributions made in the year
by the weighted average number of shares outstanding in the year.
The Directors consider the new measure of EPS is a more meaningful
measure of EPS for this closed ended Company.
Basic and diluted earnings per share are identical as there are
no diluted instruments issued by the Company.
Year ended Year ended
31 December 31 December
2010 2009
US$ US$
(Loss) / profit for the
year attributable to the
participating shareholders 51,354,472 (2,009,165)
Number of ordinary shares
for basic and diluted earnings
per share 153,303,552 140,021,054
Basic and diluted earnings
per share 0.33 (0.01)
--------------------------------- ------------ ------------
The Director's consider the key performance indicators for the
Company are the Net Asset Value, Net Asset Value per share and the
annual dividends.
14. SEGMENTAL REPORTING
Under IFRS 8, the primary segment has been identified as the
business segment. The Company has only one business segment, which
is its investments in collaterised loan obligations.
North
Europe America Total
US$ US$ US$
31 December 2010
Dividend income - 152,218 152,218
Interest income 2,033,162 12,383,123 14,416,285
Net gain on financial assets
designated at fair value 12,284,497 30,767,677 43,052,174
31 December 2009
Dividend income - 1,386,942 1,386,942
Interest income 1,030,522 9,364,742 10,395,264
Net (loss) on financial
assets designated at fair
value (24,610,085) 13,401,431 (11,208,654)
The above analysis is based on the returns by geographical
area.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
15. DISTRIBUTIONS
The Board declared the following distributions during the
year:
Period ended 31 December 2009
EUR0.01 per Euro Share
US$ 0.0145 per US Dollar Share
The Board declared on the 13 January 2010 the above dividend.
This distribution was paid on 29 January 2010 to shareholders on
the share register as at the close of business on 22 January
2010.
Period ended 31 March 2010
EUR0.0091 per Euro Share
US$ 0.0124 per US Dollar Share
This distribution was paid on 30 April 2010 to shareholders on
the share register as at the close of business on 23 April
2010.
Period ended 30 June 2010
EUR0.014 per Euro Share
US$ 0.0178 per US Dollar Share
This distribution was paid on 30 July 2010 to shareholders on
the share register as at the close of business on 23 July 2010.
Period ended 24 September 2010
EUR0.0161 per Euro Share
US$ 0.021 per US Dollar Share
This distribution was paid on 15 October 2010 to shareholders on
the share register as at the close of business on 24 September
2010.
Period ended 29 December 2010
EUR0.0157 per Euro Share
US$ 0.021 per US Dollar Share
The Board declared on the 7 December 2010 the above dividend.
This distribution was paid on 31 January 2011 to shareholders on
the share register as at the close of business on 31 December
2010.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
16. SHARE REPURCHASE AGREEMENT
During the year Carador entered into a share repurchase
agreement with the Royal Bank of Scotland N.V. London Branch, as
advisor and corporate broker of Company ("RBS"), allowing RBS to
purchase some of the shares of the Company from time to time at its
absolute discretion on the following conditions:
The aggregate amount of shares acquired on behalf of the Company
in connection with the program shall not exceed EUR2 million.
The maximum price per share payable by RBS may not exceed the
higher of:
i. 105% of the average of the official closing middle market
prices for the five business days before the day on which the
purchase is made;
ii. That stipulated in Article 5(1) of Commission Regulation
(EC) 2273/2003 (Buy-back and Stabilisation Regulations); and
iii. The maximum prices per Share payable by RBS may not exceed
80% of the last published net asset value per shares.
The maximum number of share may not exceed the higher of:
i. The aggregate number of Shares (of either class) to be
acquired on behalf of the Company in connection with the Programme
shall not exceed 5 million Shares;
ii. The aggregate value of shares (of either class) to be
acquired on behalf of the Company in connection with the Programme
on a daily basis shall not exceed EUR100,000; and
iii. The aggregate value of shares (of either class) to be
acquired on behalf of the Company in connection with the Programme
on a rolling ten business day basis shall not exceed
EUR250,000.
At the 31 December 2010 no shares had been repurchased under the
share repurchase agreement.
17. DISPOSAL OF SUBSIDIARY
In January 2010 the Company disposed of 24.2% of the outstanding
nominal of Gale Force 4. This reduced the Company's holding from
71% at 31 December 2009 to 46.8% of the outstanding nominals. As a
result of this reduction in the holding of Gale Force 4, Gale Force
4 will no longer be consolidated in the financial statements of the
Company as explained in Note 2b, the Company now only prepares
individual financial statements. The disposal resulted in proceeds
being received of US$ 3,928,279 and a realised gain for the Company
of US$ 214,514.
18. EVENTS DURING THE PERIOD
In January 2010, the Company disposed of a portion of its
holding in Gale Force 4. This disposal resulted in the reduction of
its holding in the equity/mezzanine tranche of Gale Force 4 to
below 50% and as a result Gale Force 4 will no longer be
consolidated.
On 12 February 2010, the Company issued a circular to
shareholders in order to provide an update on the Investment
Manager's implementation of the Company's investment strategy and
to notify shareholders of the implementation of a share repurchase
programme by the Company. GSO Capital Partners Employee Side by
Side Fund LLC and Miguel Ramos Fuentenebro announced on 13 May 2010
that they had accepted a total of 1,179,932 US Dollar Shares and
550,000 Euro Shares validly tendered by Shareholders under a tender
offer, representing approximately 1.2 per cent of the issued Shares
of the Company.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
18. EVENTS DURING THE PERIOD (continued)
At the annual general meeting of the Company held on 30 June
2010, shareholders approved the following items of special
business:
(i) the change of name of the Company to Carador Income Fund
plc;
(ii) the amendment of the Articles of Association to change the
distribution policy of the Company to permit distributions to be
made out of realised and unrealised capital gains net of realised
and unrealised capital losses;
(iii) the amendment of the Articles of Association to adopt
pre-emption rights for shareholders in accordance with the
requirements of the United Kingdom Listed Authority (UKLA) and to
disapply such rights in relation to 200 million shares for a period
concluding the earlier of immediately prior to the AGM of the
Company to be held in 2011 or 31 December 2011; and
(iv) the amendment of the Articles of Association to introduce
the ability of the Company to charge fees and expenses to
capital.
The effective date of the changes other than the change of the
name of the Company (30 June 2010) was 14 July 2010.
Separately, the functional and presentation currency of the
Company has been changed from Euro to US Dollars, effective 14 July
2010. Further details of this, and the changes summarized above,
are contained in an information memorandum issued by the Company on
14 July 2010.
At the board meeting held on 18 August 2010, it was resolved to
increase the maximum aggregate of the remuneration to be paid to,
and the benefits in kind to be granted to, the Directors by the
Company (the "Directors' remuneration") for the financial year
ending 31 December 2010 by 10 per cent. to EUR214,500 (excluding
taxes and withholdings).
The Company announced on 20 October 2010 that it had raised
approximately US$33million through a placing of a total of
50,636,650 US Dollar Shares, net of expenses. These Shares were
admitted to the Official List and to trading on the London Stock
Exchange on 21 October 2010. The Company issued a prospectus on 22
September 2010 in conjunction with this placing. Various
disclosures were updated in this prospectus. In addition, it was
clarified in the prospectus that the collateral underlying the CLOs
in which the Company invests may include collateral consisting of
fee streams due to portfolio managers from underlying leveraged
loan CLOs.
The Company announced on 22 November 2010 that it had raised
approximately US$10million through a placing of a total of
14,983,190 US Dollar Shares, net of expenses. These Shares were
admitted to the Official List and to trading on the London Stock
Exchange on 24 November 2010.
The Company changed the distribution policy during the year to
allow the Company to make distributions out of realised and
unrealised capital gains net of realised and unrealised capital
losses. Previously the Company was only able to make distributions
out of income and not out of net realised and unrealised gains and
losses.
NOTES TO THE FINANCIAL STATEMENTS (continued)
For the year ended 31 December 2010
19. SUBSEQUENT EVENTS
On 5 January 2011 the Company announced that effective as of
midnight (Irish time) on 31 December 2010, the following changes
have been made to the Company: 1) the administrator and company
secretary, Northern Trust International Fund Administration
Services (Ireland) Limited, was replaced by State Street Fund
Services (Ireland) Limited; and 2) the custodian, Northern Trust
Fiduciary Services (Ireland) Limited, was replaced by State Street
Custodial Services (Ireland) Limited.
Effective as of midnight (Irish time) on 31 December 2010, the
Company's registered office was changed to 78 Sir John Rogerson's
Quay, Dublin 2, Ireland.
On 24 January 2011, in connection with the placing of shares
detailed in the prospectus published on 10 December 2010, the
Company announced that it had raised a further US$17.4 million
through a placing of a total of 22,384,574 US Dollar shares ("the
Placing Shares") at a price of US$ 0.7754 per Placing Share, minus
expenses. The Placing Shares were admitted to the Official List and
to trading on the London Stock Exchange's market for listed
securities on 26 January 2011. Various disclosures were updated in
the 10 December 2010 prospectus. In addition, it was clarified what
types of collective investments schemes the Company may invest in:
the Company may invest in collective investment schemes for the
purpose of gaining exposure to the types of CLO transactions
described in the relevant sections of the investment policy of the
Company or otherwise to pursue the investment objective and policy
of the Company.
On 14 April, the Board declared a $0.0225 dividend for the USD
share class and an identical Euro equivalent dividend for the Euro
share class.
On 28 January 2011, the Company announced the appointment of
Singer Capital Markets Limited as joint financial advisor and joint
broker to the Company with immediate effect.
No other events have occurred in respect of the Company
subsequent to the period end that may be deemed relevant to the
accuracy of these financial statements.
20. APPROVAL OF THE FINANCIAL STATEMENTS
The financial statements were approved and authorised for issue
by the Directors on 14 April 2011.
GLOSSARY OF TERMS (1)
Amend-To-Extend
This technique allows an issuer to push out part of its loan
maturities through an amendment, rather than a full-out
refinancing. The new debt is pari passu with the existing loan. But
because it matures later it carries a higher rate, and, in some
cases, more attractive terms.
Arbitrage CDO
A CDO in which the arranger sets out to acquire exposures to
take advantage of the difference between spreads on the underlying
portfolio and spreads on the CDO liabilities. CLOs are
special-purpose vehicles set up to hold and manage pools of
leveraged loans. The special-purpose vehicle is financed with
several tranches of debt (typically a 'AAA' rated tranche, a 'AA'
tranche, a 'BBB' tranche, and a 'BB' tranche) that have rights to
the collateral and payment stream in descending order. In addition,
there is an equity tranche, but the equity tranche is usually not
rated. CLOs are created as arbitrage vehicles that generate equity
returns through leverage. CLOs are usually rated by two of the
three major ratings agencies and impose a series of covenant tests
on collateral managers, including minimum rating, industry
diversification, and maximum default basket.
Balance sheet CDO
A CDO in which an issuing bank sells exposures that are already
on its balance sheet. The first synthetic CDOs, issued in the late
1990s, were balance sheet transactions, designed to reduce banks'
regulatory capital charge on loans on their books.
Bespoke CDO
A synthetic CDO in which the investor chooses the names in the
reference portfolio, the attachment and detachment points, and
other details. The term bespoke is sometimes used to contrast
single tranche CDOs with full capital structure deals. More
commonly, the term is used to distinguish synthetic CDO tranches
from index tranches which use standard portfolios.
Bids-wanted-in-competition (BWIC)
A list of positions on which a counterparty seeks competitive
bids in the hope of achieving the best possible price.
CLOs
CLOs are structured vehicles that issue different tranches of
liabilities collaterised by senior secured bank loans
CDX LCDX
Index consists of 100 reference entities, referencing 1st lien
loans listed on the Markit Syndicated Secured List.
CDX NA IG
Index composed of one hundred twenty five (125) investment grade
entities domiciled in North America. Calculated by Markit.
CLO Coverage Tests
The coverage tests in a CLO will include an interest coverage
test and an overcollateralization test with respect to each Class
of Rated Notes. The Coverage Tests will be used primarily to
determine whether and to what extent Interest Proceeds may be used
to pay interest on any Deferrable Class and distribution on the
Subordinated Securities and certain expenses, and whether Principal
Proceeds may be reinvested in Collateral Obligations, or whether
Principal Proceeds, Interest Proceeds and funds which would
otherwise be used to pay interest on any Deferrable Class and
distributions on the Subordinated Securities, and to pay certain
expenses must instead be used to pay principal on the Rated Notes,
to the extent necessary to cause the Coverage Tests to be met.
Combined Code
The Combined Code refers to the Combined Code of Corporate
Governance June 2008 issued by the Financial Reporting Council.
Covenants
Loan agreements have a series of restrictions that dictate, to
varying degrees, how borrowers can operate and carry themselves
financially. The three primary types of loan covenants are
affirmative, negative, and financial.
( )
(1) Source: S&P "A guide to the Loan Market" Creditflux
GLOSSARY OF TERMS (continued)
Covenants (continued)
Affirmative covenants state what action the borrower must take
to be in compliance with the loan, such as that it must maintain
insurance.
Negative covenants limit the borrower's activities in some way,
such as regarding new investments. Negative covenants, which are
highly structured and customized to a borrower's specific
condition, can limit the type and amount of investments, new debt,
liens, asset sales, acquisitions, and guarantees.
Financial covenants enforce minimum financial performance
measures against the borrower, such as that he must maintain a
higher level of current assets than of current liabilities. The
presence of these maintenance covenants-so called because the
issuer must maintain quarterly compliance or suffer a technical
default on the loan agreement-is a critical difference between
loans and bonds. In general, there are five types of financial
covenants- coverage, leverage, current ratio, tangible net worth,
and maximum capital expenditures.
Covenant-Lite Loan
Covenant-lite loans are really just another type of syndicated
loan facility. At the most basic level, covenant-lite loans are
loans that have bond-like financial incurrence covenants rather
than traditional maintenance covenants that are normally part and
parcel of a loan agreement.
DIP Loans
Debtor-in-possession (DIP) loans are made to bankrupt entities.
These loans constitute super-priority claims in the bankruptcy
distribution scheme, and thus sit ahead of all prepretition claims.
Many DIPs are further secured by priming liens on the debtor's
collateral.
Discounted Obligation
It means a loan which has been purchased at a price which is
less than 85% (in most CLOs).
Distressed exchanges
Is a negotiated tender in which classholders will swap their
existing paper for a new series of bond that typically have a lower
principal amount and, often, a lower yield. In exchange the
bondholders might receive stepped-up treatment, going from
subordinated to senior, say, or from unsecured to second-lien.
Standard & Poor's consider these programs a default and, in
fact, the holders are agreeing to take a principal haircut in order
to allow the company to remain solvent and improve their ultimate
recovery prospects. This technique is used frequently in the bond
market but rarely for first-lien loans.
Equity cures
These provisions allow issuers to fix a covenant violation by
making an equity contribution. These provisions are generally found
in private equity backed deals. The equity cure is a right, not an
obligation.
Exit Loans
These are loans that finance an issuer's emergence from
bankruptcy. Typically, the loans are prenegotiated and are part of
the company's reorganization plan.
Institutional Term Loan
An institutional term loan (B-term, C-term, or D-term loans) is
a term loan facility carved out for nonbank, institutional
investors. These loans came into broad usage during the mid-1990s
as the institutional loan investor base grew.
Interest coverage test (IC test)
In a cashflow CDO, a measure to protect senior note holders in
the event of a reduction in the cashflows produced by the portfolio
collateral. If a deal starts to fail its IC test, cashflows are
diverted from more junior classes of notes to pay down the
liabilities in order of seniority until the deal is back in
compliance with the test. The IC test is passed if the interest
coverage ratio exceeds a predefined level. The IC ratio is
calculated as the proceeds from interest payments on the collateral
over a given period divided by the interest payments due on the
deal's notes over the same period.
GLOSSARY OF TERMS (continued)
Institutional debt
Institutional debt consists of term loans structured
specifically for institutional investors, although there are also
some banks that buy institutional term loans. These tranches
include first- and second lien loans, as well as prefunded
letters of credit. Traditionally, institutional tranches were
referred to as TLbs because they were bullet payments and lined up
behind TLas.
iTraxx LEVX
Index consists of 35 equally weighted European reference
entities, referencing 1st lien loans. Calculated by Markit.
iTraxx Europe
Index composed of one hundred twenty five (125) investment grade
entities domiciled in Europe. Calculated by Markit.
LCDS
Loan credit default swaps (LCDS) are standard derivatives that
have secured loans as reference instruments. The seller is paid a
spread in exchange for agreeing to buy at par, or a pre-negotiated
price, a loan if that loan defaults.
LCDX
Introduced in 2007, the LCDX is an index of 100 LCDS obligations
that participants can trade. The index provides a straightforward
way for participants to take long or short positions on a broad
basket of loans, as well as hedge their exposure to the market.
Markit Partners administers the LCDX. According to the primer
posted by Markit, "the two events that would trigger a payout from
the buyer (protection seller) of the index are bankruptcy or
failure to pay a scheduled payment on any debt (after a grace
period), for any of the constituents of the index."
LIBOR floors
As the name implies, LIBOR floors put a floor under the base
rate for loans. If a loan has a 3% LIBOR floor and three-month
LIBOR falls below this level, the base rate for any resets default
to 3%.
Leveraged loans
Standard & Poor's LCD definition includes loans rated 'BB+'
or lower or if not rated or rated 'BBB-' or higher a loan that has
(1) a spread of LIBOR +125 or higher and (2) is secured by a first
or second lien.
Managed CDO
A CDO in which a portfolio manager is appointed and paid a fee
to make changes to the collateral or reference portfolio during the
life of the transaction. The life of a managed deal can be divided
into three phases. The first is the ramp-up, lasting up to a year,
during which the manager invests the proceeds of the sale of the
CDO's securities. Second is the reinvestment period, where the
manager actively manages the CDO collateral, reinvesting cashflows
as well as buying and selling assets. In the final period the
collateral matures or is sold and the investors are repaid.
Middle market
In the leveraged loan market, an issuer with no more than $50
million of EBITDA.
Participation
A participation is an agreement between an existing lender and a
participant. As the name implies, it means the buyer is taking a
participating interest in the existing lender's commitment. The
lender remains the official holder of the loan, with the
participant owning the rights to the amount purchased.
Prime Funds
Prime funds are mutual funds that invest in leveraged loans.
Prime funds were first introduced in the late 1980s. Most of the
original prime funds were continuously offered funds with quarterly
tender periods. Managers then rolled true closed-end,
exchange-traded funds in the early 1990s.
Pro rata debt
Pro rata debt consists of the revolving credit and amortizing
term loan (TLa), which are packaged together and, usually,
syndicated to banks. Arrangers historically syndicated revolving
credit and TLas on a pro rata basis to banks and finance
companies.
GLOSSARY OF TERMS (Continued)
Original issue discounts (OID)
The OID, the discount from par at loan, is offered in the new
issue market as a spread enhancement.
Overcollateralisation test (OC test)
Most cashflow CDOs include measures to protect senior note
holders in the event of deterioration in the par value of the
collateral portfolio. This is known as an overcollateralisation
(OC) test or par coverage test. If a deal starts to fail its OC
test, cashflows are diverted from more junior classes of notes to
pay down the liabilities in order of seniority until the deal is
back in compliance with the test. The OC test is passed if the
overcollateralisation ratio exceeds a predefined level.
The OC ratio is the par value of the portfolio collateral
divided by the par value of the deal's liabilities. Therefore,
paying down the most senior notes should increase the OC ratio by
decreasing the size of the deal's liabilities. A deteriorating OC
ratio usually indicates a decline in the credit quality of the
portfolio. The par value of the portfolio will decline if there are
defaults in the portfolio.
In most cashflow CDOs, discounted assets and the downgrade of a
portfolio asset to a distressed rating (such as triple C, see
"Excess CCC obligations") will also reduce the par value of the
portfolio if the percentage of CCC rated obligations exceed a
certain threshold.
Second- lien loans
The claims on collateral of second-lien loans are behind those
of first-lien loans. Second-lien loans also typically have less
restrictive covenant packages, in which maintenance covenant levels
are set wide of the first-lien loans.
Special purpose vehicle (SPV)
Also known as special purpose company, a company created for the
sole purpose of acquiring certain assets or derivative exposures
and issuing liabilities that are thereby linked solely to those
assets or exposures. An SPV is designed to be 'bankruptcy remote' -
that is, unlikely to be subject to bankruptcy proceedings. SPVs are
used to issue all kinds of asset-backed securities, as well as cash
CDOs and credit linked notes.
Subordination
The amount of losses a portfolio has to experience before a CDO
tranche suffers any loss.
Term Loan A ("TLa")
An amortizing term loan (A-term loans, or TLa) is a term loan
with a progressive repayment schedule that typically runs six years
or less. These loans are normally syndicated to banks along with
revolving credits as part of a larger syndication.
Voting rights
Amendments or changes to a loan agreement must be approved by a
certain percentage of lenders. Most loan agreements have three
levels of approval: required-lender level, full vote, and
supermajority:
The "required-lenders" level, usually just a simple majority, is
used for approval of nonmaterial amendments and waivers or changes
affecting one facility within a deal.
A full vote of all lenders, including participants, is required
to approve material changes such as RATS (rate, amortization, term,
and security; or collateral) rights, but, as described below, there
are occasions when changes in amortization and collateral may be
approved by a lower percentage of lenders (a supermajority).
A supermajority is typically 67% to 80% of lenders and is
sometimes required for certain material changes such as changes in
amortization (in-term repayments) and release of collateral. Used
periodically in the mid-1990s, these provisions fell out of favor
by the late 1990s.
Waterfall (Priority of payment)
Payments in a CLO may be sequential or pro rata and the scheme
may vary if certain tests are breached. The waterfall incorporates
any overcollateralization ("OC") or interest-coverage ("IC") tests
that divert cash flows to more senior classes upon a breach. There
may also be "reinvestment" OC tests that require proceeds to be set
aside for the purchase of new collateral, rather than the paying
down of liabilities. OC and IC tests may be satisfied first using
either Interest Proceeds or Principal Proceeds. Any relevant fees,
expenses and accounts must be reflected in the waterfall as well.
The waterfall may also change when the Reinvestment Period
ends.
SUMMARY OF KEY FINANCIAL INFORMATION (UNAUDITED)
Period Year Year
Year ended Year ended ended ended ended
31
31 December 31 December December 31 March 31 March
2010 2009 2008 2008 2007
EUR EUR EUR
NAV US$ 155,954,115 US$ 83,363,427 65,253,290 33,953,572 50,752,818
NAV per US$ * US$
share Class US$ 0.7489 0.5699 US$0.6480 N/A N/A
Euro
Class EUR0.5677 * EUR0.4418 EUR0.4662 EUR0.6787 EUR1.0145
Shares at US$
year end Class 194,146,304 84,764,307 56,184,881 N/A N/A
Euro
Class 13,914,839 55,282,169 83,799,318 50,025,000 50,025,000
Interest and dividend EUR EUR EUR
income US$ 14,568,503 US$ 11,782,206 5,119,389 6,134,046 3,192,566
Value of EUR EUR EUR
Investments US$ 153,621,291 US$ 69,055,291 65,347,223 29,496,338 46,931,603
Number of
Investments 54 39 45 36 34
The Company completed an amalgamation with Abingdon Investment
Limited by way of an amalgamation of Carador Guernsey Limited, then
a wholly owned subsidiary of the Company, effective 9 December
2008. A US Dollar class was created on the date of amalgamation, 9
December 2008. The year end of the Company was then changed from 31
March to 31 December with the first new year-end being 31 December
2008.
The year end exchange rate was EUR: US$1.34155 (31 December
2009: 1.43475). The average rate for the year was EUR: US$1.33281
(31 December 2009: 1.39025).
NET ASSET VALUE RECONCILIATION (UNAUDITED)
The net asset value per share which was published by the Company
differs from that presented in these financial statements for the
year ended 31 December 2009 and 31 December 2008. This difference
is due to accruals and a difference in the basis of calculation. As
at 31 December 2010, the Directors have determined that the net
asset value per share published approximated the one presented in
the financial statements.
The Net Asset Value as at 31
December 2009:
EUR Class US$ Class
Net Asset Value per share for
shareholder dealing per valuation 0.44178 0.56986
Adjustment to accruals (0.02690) 0.02540
Net Asset Value per share per
financial statements 0.41488 0.595255
========== ==========
The Net Asset Value as at 31
December 2008:
EUR Class US$ Class
Net Asset Value per share for
shareholder dealing per valuation 0.49190 0.62430
Adjustment to accruals (0.02575) 0.02367
Net Asset Value per share per
financial statements 0.46615 0.64797
========== ==========
UNAUDITED SCHEDULE OF INVESTMENTS
As at 31 December 2010
Nominal Market % of net
Holdings Value US$ asset value
-------------------------- ----------- ----------- ------------
Collateralised debt
obligations
Region of trade
North America
Country of incorporation
Cayman Islands
ACA 0% Bond 2,200,000 1,342,424 0.86
Apidos CDO Bonds 4,000,000 2,750,000 1.76
Ares XI CLO Senior
Notes 5,000,000 3,733,333 2.39
Ares XII CLO Notes 17,392,792 12,885,160 8.26
Bluemountain CLO
III Notes 3,150,000 1,845,375 1.18
Callidus Debt Partners
Fund Bonds 2,000,000 1,710,000 1.10
Callidus Debt Partners
CLO Fund IV 3,000,000 2,191,910 1.41
Callidus Debt Partners
CLO Fund V 2,000,000 1,353,713 0.87
CS Advisors CLO
I Bonds 1,500,000 985,372 0.63
CSAM Funding Bonds 2,800,000 2,471,000 1.58
Denali Capital CLO
VI 2,000,000 1,207,845 0.77
Dryden XIV Euro
Notes 4,687,474 3,395,780 2.18
Eaton Vance CDO
VIII Notes 1,500,000 1,041,714 0.67
Franklin CLO VI 5,277,918 3,769,137 2.42
Gale Force CLO 1,600,000 1,087,200 0.70
Gale Force Bond 2,000,000 1,425,000 0.91
Gale Force III CLO
Notes 4,100,000 2,793,125 1.79
Gale Force IV CLO
Deferrable Notes 12,900,000 9,815,352 6.30
Inwood Park CDO
Notes 1,000,000 587,824 0.38
LCM V Notes 2,500,000 2,035,250 1.31
Lightpoint CLO VII
Notes 4,000,000 2,500,500 1.60
Lightpoint CLO Bonds 2,000,000 1,161,667 0.74
Morningside Park
CLO 2,000,000 1,880,900 1.21
Mtn View Preference 1,000,000 745,277 0.48
Mountain View CLO
II Deferrable Notes 5,000,000 3,162,667 2.03
Octagon Investments 11,500,000 8,157,049 5.24
Octagon Investments
Preference Shares 1,000,000 611,685 0.39
Prospect Park CDO
Notes 3,000,000 1,848,551 1.19
Stanfield Mclaren
Notes 1,902,577 1,285,191 0.82
Symphony CLO IV
Deferrable Notes 1,500,000 1,049,650 0.67
Westbrook CLO 5,160,000 4,160,250 2.67
Westbrook CLO Frn
Secd 5,000,000 3,525,000 2.26
Westbrook CLO Frn
Secd 3,000,000 1,865,000 1.20
90,379,901 57.97
UNAUDITED SCHEDULE OF INVESTMENTS (continued)
As at 31 December 2010
Nominal Market % of net
Holdings Value US$ asset value
-------------------------- ----------- ------------ ------------
Collateralised debt obligations (continued)
United States
Callidus Debt Pt
6 2,000,000 1,453,659 0.93
Celerity CLO I E 1,671,545 1,310,157 0.84
Cmo Venture VII
CDO 2,000,000 1,376,111 0.88
Gale Force 2 CLO
Income Notes 17,000,000 11,547,469 7.41
Gale Force 3 CLO
Income Notes 7,000,000 5,393,864 3.46
Gale Force 4 CLO
Income Notes 19,352,000 13,527,698 8.67
Gale Force II CLO 2,000,000 1,256,859 0.81
Gale Force III CLO 3,571,300 5,574,868 3.57
Kingsland III 2,000,000 1,544,000 0.99
Nylim 2006 2,000,000 1,600,042 1.03
Saturn CLO 2,170,000 1,386,558 0.89
Tiers Beach Str
Synthetic CLO 5,500,000 5,322,900 3.41
51,294,185 32.89
Region of trade
Europe
Country of incorporation
Ireland
Egret Funding CLO 2,000,000 912,254 0.58
RMF Euro CDO III 2,000,000 1,056,337 0.68
RMF Euro CDO IV 2,400,000 1,625,637 1.04
3,594,228 2.30
Netherlands
Base CLO 3,000,000 2,414,790 1.55
Green Park CDO 1,500,000 1,059,489 0.68
Harbourmaster CLO 1,000,000 496,374 0.32
Hyde Park CDO 3,000,000 2,314,174 1.48
Regents Park CDO
V 2,790,000 1,423,438 0.91
Vers I Sub 1,500,000 644,712 0.41
8,352,977 5.35
Total collateralised
debt obligations 153,621,291 98.51
UNAUDITED SCHEDULE OF INVESTMENTS (continued)
As at 31 December 2010
% of
Nominal Market net
Value asset
Holdings US$ value
----------- --------- ----------- --------- ----------- --------- ----------- ------------ -------
Derivative financial
instruments
% of
Contract Contract Maturity Currency Currency Unrealised net
asset
date price date Buy Amount Sell Amount gain/(loss) value
----------- --------- ----------- --------- ----------- --------- ----------- ------------ -------
31/12/2010 0.7454 31/01/2011 US$ 15,164,473 EUR 11,376,199 (96,672) (0.06)
31/12/2010 0.7454 31/01/2011 EUR 8,021,768 US$ 10,693,017 68,231 0.04
(28,441) (0.02)
Total derivative
financial instruments (28,441) (0.02)
Total investments and derivatives
at fair value (December 2009:
82.81%) 153,592,850 98.49
Other assets (December
2009: 17.98%) 11,166,968 7.16
Other liabilities
(December 2009:
(0.79%)) (8,805,703) (5.65)
Total net assets attributable
to holders of participating shareholders 155,954,115 100.00
PORTFOLIO CHANGES - MATERIAL ACQUISITIONS/DISPOSALS
(UNAUDITED)
For the year ended 31 December 2010
Acquisitions
Quantity
Purchased US$ Costs
----------------------------------- ----------- -------------
Ares XII CLO 17,392,792 13,435,932
Octagon Investments 11,500,000 8,666,250
Gale Force III CLO, FRN 3,571,300 4,809,557
Gale Force IV CLO 8,000,000 3,325,520
Franklin CLO VI 5,404,108 3,161,403
Ares XI CLO 5,000,000 3,150,000
Gale Force IV CLO 4,900,000 3,042,880
Westbrook CLO FRN 5,000,000 2,498,209
CSAM Funding 2,800,000 2,224,351
Lightpoint CLO VII 4,000,000 2,160,000
Celerity CLO 3,421,545 2,127,087
Dryden XIV 4,800,000 2,109,363
Lcm V 2,500,000 2,043,750
Morningside Park 2,000,000 1,868,200
Mountain View CLO II 5,000,000 1,858,496
Gale Force III 4,100,000 1,844,360
Hyde Park CDO 3,000,000 1,672,800
Apidos 4,000,000 1,607,512
Base CLO 3,000,000 1,335,000
Callidus Debt Partner CLO Fund
IV 3,000,000 1,276,545
Disposals
Quantity
Sold US$ Proceeds
----------------------------------- ----------- -------------
Blackrock Institutional Euro Fund 54,242 7,456,584
Leopard CLO 5 5,000,000 4,419,028
Gale Force 4 CLO 10,000,000 2,979,600
Foxe Basin CLO 4,800,000 2,765,697
Apidos Quattro CDO 3,000,000 2,436,817
Hyde Park CDO 2,000,000 1,702,327
Mountain View Funding CLO 2,500,000 1,631,480
Celerity CLO 1,750,000 1,069,835
Leopard CLO 5 1,500,000 753,090
Panth III-Xe 2,000,000 582,478
Eurocredit CDO II 1,000,000 236,283
FM Leveraged Cap 3,000,000 166,849
Westbrook CLO 250,000 140,957
Franklin CLO VI 126,190 126,190
Foxe Basin CLO 3,000,000 93,900
Funding MM 2,000,000 764
([1]) Source: Bloomberg.
([2]) Source: Bloomberg, dividends reinvested in security.
([3]) Source: Merrill Lynch, "Global CLOs 2011: Onwards and
Upwards", 2 December 2010.
([4]) Source: S&P Leveraged Commentary and Data, 7 January
2011.
([5]) Source: Distressed Debt Investing.
([6]) Source: RBS, "CLO Market Review", 10 November 2010.
([7]) Source: S&P Leveraged Commentary and Data, 7 January
2011.
([8]) Source: Citigroup, "Structured Credit Outlook 2011",
January 2011.
([9]) Source: Citigroup, "Structured Credit Outlook 2011",
January 2011.
([10]) Source: Spread for the CS High Yield Bond Index: +571
bps. The CS High Yield Index spread is computed for each bond
individually over comparable treasuries at the point on the curve
over the worst call date, then averaged across the index. On
average, this works out to 7-year point over the worst call date,
then averaged across the index. On average, this works out to
7-year point. Applying the 7 year UST/Swap spread (+12 bps), we
obtain a spread over Libor equivalent of +559 bps despite the
historical differences in recovery rates in case of default.
([11]) Source: Moody's Default Study 1920-2009; Average
Corporate Debt Recovery Rates (measured by ultimate recoveries),
1987-2009 measured by issuer-weighted ultimate recoveries. From
1987-2009, the average recovery of Loans was 81.1%.
([12]) Source: Credit Suisse Global Leveraged Finance.
([13]) Source: Standard and Poor's Leveraged Commentary &
Data.
([14]) Source: RBS, "CLO Market Review", 10 November 2010.
([15]) It would take a higher default rate for more seasoned
CLOs. Moreover, because CLO collateral pools are actively managed,
they typically outperform the market with respect to defaults,
according to RBS.
* Forms an integral part of the Financial Statements
(1(6 ) Source: RBS, "CLO Market Review", 10 November 2010.
(17) Note: Based on notional tranche weighted exposure to par
portfolios of CLO investments. Source: trustee reports and
Bloomberg. Source for index data: Credit Suisse.
((18 ) Source: JP Morgan, "US Fixed Income Strategy", 5 November
2010.
((19 ) This discount rate is a function of the credit quality of
the underlying portfolio, the average portfolio spread, the current
value of the relevant overcollateralization test versus its trigger
and the quality of the underlying manager.
(20) Based on average number of shares in 2010, estimated as
165,139,246.
(21) Any reference herein to future distributions is a target
and not a forecast and there can be no guarantee or assurance that
it will be achieved. The actual principal and income in any
particular case will be determined by the cash flows received.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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