CQS New City High Yield Fund

A copy of the Company's Annual Report will shortly be available on the Company's website (https://ncim.co.uk/cqs-new-city-high-yield-fund-ltd), on the National Storage Mechanism (https://data.fca.org.uk/#/nsm/nationalstoragemechanism) and will also be provided to those shareholders who have requested a printed or electronic copy

 

CQS NEW CITY HIGH YIELD FUND LIMITED

Annual Results Announcement

for the year ended 30 June 2021

 

 

 

Total Return*		Year to 30 June 2021	Year to 30 June 2020
Net asset value		21.38%	(6.22%)
Ordinary share price		26.31%	(14.14%)
Capital Values		30 June 2021	30 June 2020	% change
Total assets less current liabilities (with the exception of the bank loan facility)		£267.2m	£236.7m	12.89%
Net asset value per ordinary share		52.62p	47.52p	10.74%
Share price (bid)1		54.80p	47.40p	15.61%
Revenue and Dividends		30 June 2021	30 June 2020	% change
Revenue earnings per ordinary share*		4.18p	4.59p	(8.97%)
Annual dividends per ordinary share*		4.47p	4.46p	0.22%
Dividend cover*		0.94x	1.03x	(9.17%)
Revenue reserve per ordinary share (after recognition of annual dividends)*		3.78p	4.15p
Dividend yield*		8.16%	9.41%
Premium/(discount)*		4.14%	(0.25%)
Gearing*		9.45%	13.68%
Ongoing charges ratio*		1.25%	1.19%
Dividend History	Rate	xd date	Record date	Payment date
First interim 2021	1.00p	22 October 2020	23 October 2020	30 November 2020
Second interim 2021	1.00p	28 January 2021	29 January 2021	26 February 2021
Third interim 2021	1.00p	29 April 2021	30 April 2021	28 May 2021
Fourth interim 2021	1.47p	29 July 2021	30 July 2021	31 August 2021
Annual dividend per ordinary share	4.47p
First interim 2020	1.00p	24 October 2019	25 October 2019	29 November 2019
Second interim 2020	1.00p	23 January 2020	24 January 2020	28 February 2020
Third interim 2020	1.00p	23 April 2020	24 April 2020	29 May 2020
Fourth interim 2020	1.46p	23 July 2020	24 July 2020	28 August 2020
Annual dividend per ordinary share	4.46p

 

¹ Source: Bloomberg

 

* A description of the Alternative Performance Measures used above and information on how they are calculated can be found below.

 

 

Statement from the Chair

 

Highlights

· Net asset value total return of 21.38%

· Ordinary share price total return of 26.31%

· Dividend yield of 8.16%, based on dividends at an annualised rate of 4.47 pence and a share price of 54.80 pence as at 30 June 2021

· Ordinary share price trading at a premium of 4.14% as at 30 June 2021

· £6.4m of equity raised during the year to 30 June 2021

 

Investment and Share Price Performance

When I last wrote to Shareholders in February 2021 I reported that there had been a welcome recovery in the Company's fortunes since the onset of the COVID-19 pandemic wreaked havoc on the markets. This recovery has continued into the second half of the Company's financial year and the full year performance numbers show a 21.38% total return from the net asset value and, thanks to a recovery in the price premium, a 26.31% total share price return. The premium stood at 4.14% as at 30 June 2021, up from approximately parity (0%) at the beginning of the financial year.

The ongoing COVID-19 pandemic as well as political issues such as Brexit and the US election have been a turbulent environment for your Investment Manager to operate in. However, Ian ("Franco") Francis has kept faith in his underlying philosophy and stock selection as well as trying to take advantage of market dislocations. The results for a portfolio investing mainly in fixed interest securities are, I believe, impressive and the Investment Manager's review below provides more details.

Earnings and Dividends

The Company's revenue earnings per ordinary share were 4.18 pence for the financial year, 8.9% lower than the 4.59 pence earned last year. The decrease in earnings happened as a result of a few missed coupons/dividends such as Matalan Finance and Rea Holdings (which may be recouped later) and because the environment for refinancing at cheaper levels was favourable which meant the number of bonds that were redeemed early ('called') was greater than we anticipated and finding replacement bonds with the same level of payouts is getting harder. The latter is something the Board is monitoring closely.

The Company declared three interim dividends of 1.00 pence in respect of the period and one interim dividend of 1.47 pence since the year end. The aggregate payment of 4.47 pence per share represents a 0.22% increase on the 4.46 pence paid last year. The Board recognises the importance of the relatively high dividend to Shareholders and, as flagged in previous reports, decided to utilise 0.29 pence per share of our 4.15 pence per share (6.99%) revenue reserves to cover the shortfall of earnings. The Board also decided to increase this year's dividend, albeit marginally, to maintain the Company's record of annual increases which has been unbroken since 2007.

Looking forward, the Board expects to pay similar dividends in the current financial year to last, probably drawing modestly on our healthy reserves again. The Board believes that this policy is supported by our Shareholders whom we consult regularly and we envisage continuing in this way in the near future, utilising one of the advantages of being a closed-ended fund.    

Gearing

In December 2020 the Company renewed its Scotiabank loan facility with a one year £35m facility at a current all-in rate of 1.387%. £33m was drawn down at 30 June 2021 and the Company had an effective gearing rate of 9.45%. As I have shared in previous reports, the Board believes that a modest but meaningful amount of gearing (another notable advantage of closed-ended funds compared to open-ended) is desirable and expects to maintain approximately this level of gearing during the next financial year.

Share Issuance

For most of the year to 30 June 2021 the market attached a premium rating to your Company's shares, allowing us to issue new shares in a gradual manner and only when your Investment Manager was confident he could invest the additional funds favourably. £6.4m was raised from new and existing Shareholders during the review period, with 12.2m ordinary shares issued from the block listing facility. As well as a modest increase in net asset value from any issue of shares, the Board expects that over time existing Shareholders will benefit from lower ongoing charges and greater liquidity in the Company's shares, all other things being equal.

COVID-19

In last year's annual report, I made this statement in respect of COVID-19:

The Board has been working closely with CQS (UK) LLP (The "Investment Manager") and the Company's key suppliers to minimise the risk the virus poses to the health and wellbeing of all those working on the management and administration of the Company. We have received regular updates to ensure that normal operations of the Company are continuing to work effectively and that there are no unforeseen risks to the Company's finances. I am pleased that the business continuity plans put in place have worked well and that we have been able to continue working effectively throughout the period of lockdown. 

One year on and this statement holds true. Board and other meetings have been held virtually and our key suppliers continue to support the company to a high standard. 

Environmental, Social and Governance ("ESG") Statement

The Board's intention is to invest responsibly and to consider the Company's broader impact on society and the environment. We believe the integration of ESG factors in the investment process is consistent with delivering sustainable attractive returns for Shareholders through deeper, more informed investment decisions. The Board has reviewed and agreed the ESG approach adopted by CQS and a summary of this is set out in the Company's Annual Financial Report and Financial Statements.

Notice of Annual General Meeting

The notice of the Annual General Meeting to be held at 11.00 a.m. at IFC1, The Esplanade, St. Helier, Jersey, JE1 4BP on 2 December 2021, including the proposed resolutions, will be included in the Company's Annual Financial Report and Financial Statements. We hope to be able to welcome shareholders to attend the meeting in person but the possibility of a closed meeting remains should local government guidance at that time suggest it necessary. The Board considers that the passing of the resolutions to be proposed at the Annual General Meeting is in the best interests of the Company and its Shareholders as a whole and is most likely to promote the success of the Company for the benefit of the Shareholders as a whole. The Board unanimously recommends that all Shareholders vote in favour of those resolutions.

Outlook

COVID-19 continues to impact all aspects of our lives and will do so for some time to come. Nevertheless, attractive investment opportunities in the universe from which we select our holdings continue to present themselves allowing your Investment Manager to run the Company's investment portfolio effectively. 

Arguably the key economic debate at present is whether or not current price pressures are temporary and we are still, at least in the medium term, in a low inflationary environment. If inflation does become more persistent,  your portfolio is likely to be less impacted than some other fixed interest portfolios because the average life of the bonds held is quite short which reduces price sensitivity to interest rates. Moreover, we have a small portion of the portfolio invested in equities (around 15%) which may give us a little inflation protection should it be needed. Credit risk - the risk that our bond issuers default on interest or final redemption payments - has always been our main focus and therefore the rigorous analysis carried out by CQS on individual bonds has been vital to the success of the portfolio. Once again, I see no reason why this should change.

What does this mean for your Company's future? I expect that Shareholders will continue to be rewarded with attractive dividend payments and, notwithstanding shorter term ups and downs, a real return over the years ahead.

Caroline Hitch

Chair

16 September 2021

 

Investment Manager's Review

 

Introduction

I am pleased to be able to report to Shareholders that your fund has enjoyed a good year of recovery from the lows we saw in April 2020. Although the financial news agenda in the economies we invest in remains dominated by COVID-19 issues, the underlying portfolio holdings have risen during the year under review. We have not seen huge monthly increases but rather a steady month on month gentle recovery in prices which nevertheless has meant that the total net asset value return for the year to 30 June 2021 is 21.4%

Market and economic review

The first half of our financial year featured the twin spectacles of Brexit and the US election as well as Western economies lurching between opening (remember "eat out to help out"!)  and locking back down again. The only positives appeared to be stock markets looking ahead and the vaccine news announced towards the end of 2020.

As we entered 2021 and we started to see a way out of lockdown the UK economy signalled that it was ready for a post lockdown recovery, with business activity expanding and a rise in new orders being seen. The UK economy this year is all about how much of the mothballed spare capacity and furloughed workforce can come back on stream and how quickly the demand side recovers. The other major difference is that we now risk inflation rapidly increasing due to supply side shortages and commodity price inflation pushing prices higher, rather than the healthier demand led inflation, which signals a strong economy. The services side of the economy is also showing strength, with demands for restaurants, hotels and leisure for staycations in full flow. Forecasters are predicting that this strong growth will persist along with higher inflationary pressure, the latter will be the worrying factor later in the year.

The Eurozone also saw a surge in the demand for goods and services, which was at its steepest for 15 years with the lockdown restrictions being eased to their lowest since October last year. This has had a particularly positive effect on service sector activity and close to record growth in the manufacturing sector, but employers are still having difficulty filling vacancies and experiencing record supply chain delays. The imbalance between supply and demand is pushing inflationary pressures sharply upwards, and how long this lasts is crucial to the long term stability of economies. Much like the UK, Europe is hoping for the supply of raw materials to come back in line with demand in short order.

In the US, the story is very similar to that of the UK and Europe with output expanding rapidly, supply chain disruption leading to soaring costs and backlogs of orders rising at the fastest rate on record. Again, there is mention that companies are unable to hire sufficient staff, this may be because employees are being pickier as to what jobs they want to do, or that they are making the most of federal and local government payments until they run out in July. Hence, the backlog of work as firms fail to meet demand. We wait to see how this pans out when the subsidies cease.

Portfolio Review

We have continued to maintain a diversified portfolio across a range of sectors and have a good proportion of the portfolio in non-sterling currencies. Turnover within the portfolio has remained low; we tend to have a buy and hold strategy for most of our fixed interest securities with most turnover coming from when we see portfolio investments redeem their bonds either at their scheduled repayment date or earlier if the opportunity arose. A good example of this would be Punch Taverns 7.75% 2025 bonds which was one of our largest positions and was recently called and repaid at par by the company.

Three of the new holdings in the top ten over the year are in positions that we have held for some time; namely One Savings Bank FRN, Raven Russia preference shares and Bracken Midco 8.875% 2023. The new holding in the top ten is Boparan Finance 7.625% 2025 which is a subsidiary of the 2 Sisters Food Group, one of the UK's largest diversified food manufacturers.

I mentioned in last year's report that the most notable investment negatively affected by COVID-19 issues was Matalan Finance where the company was badly affected by the lockdown and its bond price fell to 41 as at the end of June 2020. We believe that this security will recover, have remained holders throughout the year and have seen the bond price recover to 60 at our year end.

During the year we have also looked to take advantage of companies where we believed that their debt prices were undervalued; one example of this would be the French supermarket group Casino Guichard 3.992% Perpetual where we started buying last Autumn at around the 35/40 level and have been recently selling at 70.

The revenue account has seen earnings per share of 4.18p come in below our total dividend of 4.47p for the year. In past years we have been able to put significant sums into revenue reserves and we have modestly utilised these this year to ensure that the dividend is paid to shareholders. In my regular discussions with Shareholders, revenue and dividends are topics of crucial importance and the ability of any portfolio company to pay its coupon or expected dividend is one of the major indicators we follow.

Outlook

The future as always is difficult to predict. We have inflation rising and spreading from financial assets into the real economy, the prospect of tapering in the United States sooner rather than later, and in Europe the winding down of quantitative easing also looking near the top of the agenda as inflation levels are worrying Germany and France. We would expect to see larger issuance of debt by corporates spurred on by their investment bank advisors to lock in to the low rates whilst they last. For the UK economy a lot depends on the hope that inflation is a short lived entity and the shortage of staff in various industries is fulfilled by the unfortunate employees being made redundant when furlough is ceased, but there is definitely a danger that many will not want to work for the same remuneration they did previously. Finally supply chains need to improve quickly as scarcity of product itself is leading to upward pressure on input and output prices. The next twelve months will hopefully see markets and economies coming more into line with each other, but there is a definite risk that this is not a smooth ride for either.

I will be working as usual over the forthcoming months to look after your portfolio and ensure that it is in the best possible position to stand against whatever lies ahead.

 

 

 

Ian "Franco" Francis

New City Investment Managers

16 September 2021

 

Classification of Investment Portfolio

As at 30 June

 

By Currency	2021 Total investments %	2020 Total investments %
Sterling	68	73
US dollar	22	19
Euro	9	7
Norwegian krone	1	1
Total investments	100	100
By Asset Class	2021 Total investments %	2020 Total investments %
Bonds	84	82
Equity shares	15	13
Convertible Bonds	1	5
Total investments	100	100
By Quotation	2021 Total investments %	2020 Total investments %
Listed/Quoted on a stock exchange	99.75	96.2
Prices via direct broker quotes	0.25	3.8
Total investments	100.0	100.0

 

	2021 Total investments %	2020 Total investments %
Financials	45.0	48.6
Energy	16.5	14.6
Industrials	10.4	9.4
Consumer Discretionary	6.0	7.5
Consumer Staples	8.2	7.1
Real Estate	6.9	6.2
Materials	4.1	4.4
Information Technology	2.9	2.2
Total Investments	100.0	100.0

 

Investment Portfolio

As at 30 June 2021

Company	Sector	Valuation £'000	Total Investments %
Virgin Money FRN PERP	Financials	13,765	5.3
Galaxy Finco Ltd 9.25% 31/07/2027	Financials	12,133	4.7
Shawbrook Group 31/12/2059 FRN	Financials	10,793	4.2
Onesavings Bank 31/12/2059 FRN	Financials	10,154	3.9
Boparan Finance 7.625% 30/11/2025	Consumer Staples	9,278	3.6
Aggregated Micro 8% 17/10/2036	Energy	8,838	3.4
Raven Russia 12% 31/12/2059	Real Estate	8,757	3.4
Just Group Plc 8.125% 26/10/2029	Financials	8,501	3.3
Co-Operative Fin 25/04/2029 FRN	Financials	8,466	3.3
Bracken Midco 8.875% 15/10/2023	Financials	7,703	3.0
Top ten investments		98,388	38.1
Just Group Plc 31/12/2059 FRN	Financials	6,675	2.6
American Tanker 7.75% 02/07/2025	Industrials	6,349	2.5
Rea Finance 8.75% 31/08/2025	Consumer Staples	6,318	2.5
Stonegate Pub 8.25% 31/07/2025	Consumer Discretionary	6,271	2.4
Algeco Fin 2 10% 15/08/2023	Industrials	5,268	2.0
VPC Specialty Lending Invest	Financials	5,040	2.0
Euronav Lux 7.5% 31/05/2022	Energy	4,664	1.8
Azerion Holdings 7.25% 28/04/2024	Information Technology	4,587	1.8
Matalan Finance 9.5% 31/01/2024	Consumer Discretionary	4,543	1.8
Virgin Money 31/12/2049	Financials	4,401	1.7
Top twenty investments		152,504	59.2
Welltec A/S 9.5% 01/12/2022	Energy	4,185	1.6
Deutsche Bank AG 30/05/2049 FRN	Financials	4,151	1.6
Euronav NV	Energy	4,092	1.6
Barclays Plc 29/12/2049 FRN	Financials	3,753	1.5
Bombardier Inc 7.5% 15/03/2025	Industrials	3,673	1.4
Lloyds Banking 29/12/2049 FRN	Financials	3,532	1.4
Hawk Debtco Ltd 10.5% 22/12/2024	Industrials	3,494	1.4
Rea Holdings Plc PREF	Consumer Staples	3,388	1.3
Enquest Plc 7% 15/10/2023	Energy	3,371	1.3
Diversified Energy Co Plc	Energy	3,205	1.2
Top thirty investments		189,348	73.5
Shamaran 12% 05/07/2023	Energy	3,172	1.2
Channel Islands Property Fund	Financials	3,000	1.2
RM Secured Direct Lending Plc	Financials	2,816	1.1
Tizir Ltd 9.5% 19/07/2022	Materials	2,661	1.0
Coburn Resources 12% 20/03/2026	Materials	2,641	1.0
SB Holdco Plc 13/07/2022 FRN	Consumer Discretionary	2,597	1.0
First Quantum 7.5% 01/04/2025	Materials	2,556	1.0
Yew Grove REIT plc	Real Estate	2,498	1.0
HDL Debenture 10.375% 31/07/2023	Financials	2,352	0.9
Lloyds Banking 29/12/2049 FRN	Financials	2,143	0.8
Top forty investments		215,784	83.7
Borealis Finance 7.5% 16/11/2023	Industrials	2,085	0.8
Doric Nimrod Air Three Ltd	Industrials	1,924	0.8
Oaknorth Bank 01/06/2028 FRN	Financials	1,900	0.8
AEW UK REIT plc	Real Estate	1,862	0.7
Arrow Bidco Llc 9.5% 15/03/2024	Consumer Discretionary	1,838	0.7
Siccar Point Energy 9% 04/03/2026	Energy	1,762	0.7
Independent Oil 20/09/2024 FRN	Energy	1,623	0.7
NewRiver REIT plc	Real Estate	1,609	0.6
Hurricane Energy 7.5% 24/07/2022	Energy	1,560	0.6
Gran Colombia 8.25% 30/04/2024	Materials	1,522	0.6
Top fifty investments		233,469	90.7
Casino Guichard 31/01/2049 FRN	Industrials	1,518	0.6
Petrotal Corp 12% 16/02/2024	Energy	1,493	0.6
Otiga Grp As 08/07/2022 SR	Consumer Staples	1,431	0.6
Secured Income Fund Plc	Financials	1,283	0.5
Kent Global Plc 10% 28/06/2026	Energy	1,277	0.5
Regional REIT Ltd	Real Estate	1,274	0.5
Palace Capital Plc	Real Estate	1,260	0.5
Navig Topco Holding 12% 03/05/2023	Industrials	1,196	0.4
Altice Financing 7.5% 15/05/2026	Information Technology	1,132	0.4
Gaming Innovation 11/06/2024 FRN	Information Technology	1,110	0.4
Top sixty investments		246,443	95.7
Tufton Oceanic Assets Ltd	Financials	1,107	0.5
House Of HR 7.5% 15/01/2027	Industrials	1,096	0.4
Just Group Plc	Financials	932	0.4
Harbour Energy Plc	Energy	900	0.3
Navigator Holdings 8% 10/09/2025	Energy	757	0.3
Croma Security Solutions Group	Information Technology	700	0.3
Nt Rig Holdco 12% 20/12/2021	Financials	633	0.2
R.E.A Holdings Plc 7.5% 30/06/2022	Consumer Staples	622	0.2
Hoist Finance AB 31/12/2060 FRN	Financials	578	0.2
Downing Renewables & Infrastructure	Real Estate	495	0.2
Top seventy investments		254,263	98.7
Other investments (18)		3,204	1.3
Total investments		257,467	100.0

 

Notes:
CV - Convertible Bond	PREF - Preference Shares
FRN - Floating Rate Note	REIT - Real Estate Investment Trust
PERP - Perpetual

 

Ten Largest Holdings

	Valuation 30 June 2020 £'000	Purchases £'000	Sales £'000	Revaluation gain/(loss) £'000	Valuation 30 June 2021 £'000
Virgin Money FRN PERP A British banking company concentrating on UK Retail and SME regional banking services.	9,945	1,373	-	2,447	13,765
Galaxy Finco Ltd  9.25% 31/07/2027 A specialist provider of warranties for consumer electric products.	10,916	-	-	1,217	12,133
Shawbrook Group 7.875% FRN PERP A British multinational banking and financial services company.	7,556	440	-	2,797	10,793
OneSavings Bank Plc 9.125% FRN PERP A British banking company specialising in residential, buy to let and commercial mortgages.	5,359	3,790	-	1,005	10,154
Boparan Finance 7.625% 30/11/2025 The Company was formed  for the purpose of issuing debt securities  to repay existing credit facilities, refinance indebtedness, and for acquisition purposes.	-	10,029	-	(751)	9,278
Aggregated Micro 8% 17/10/2036 A British company using small scale, established technologies to convert wood and waste into energy in the form of heat and electricity.	7,081	1,469	-	288	8,838
Raven Russia 12% 31/12/2059 A property investment company specialising in commercial property in Russia.	4,513	3,820	-	424	8,757
Just Group plc 8.125% 26/10/2029 A British company specialising in retirement products and services.	6,597	-	-	1,904	8,501
Co-Operative Finance 25/04/2029 FRN A retail and commercial bank in the United Kingdom	6,686	746	-	1,034	8,466
Bracken Midco 8.875% 15/10/2023 A special purpose entity formed for issuing debt securities to repay existing credit facilities, refinance indebtedness, and for acquisition purposes.	4,465	2,031	-	1,207	7,703
	63,118	23,698	-	11,572	98,388

 

 

 

 

 

 

 

 

 

Strategic Review

 

Introduction

This review is part of a Strategic Report being presented by the Company and is designed to provide information primarily about the Company's business and results for the year ended 30 June 2021. It should be read in conjunction with the Statement from the Chair and the Investment Manager's Review above, which give a detailed review of the investment activities for the year and look to the future.

 

Principal Activity and Status

The Company is a closed-ended investment company and was incorporated with limited liability in Jersey under the Companies (Jersey) Law 1991 on 17 January 2007, with registered number 95691. In addition, the Company constitutes and is regulated as a collective investment fund under the Collective Investment Funds (Jersey) Law 1988 ("the Law").

 

The Company's ordinary shares are listed on the Official List of the UK Listing Authority and admitted to trading on the Main Market of the London Stock Exchange.

 

Purpose and Strategy

The Company's purpose is stated on the inside front cover of this report.

 

Investment Policy

The Company invests predominantly in fixed income securities, including, but not limited to, preference shares, loan stocks, corporate bonds (convertible and/or redeemable) and government stocks. The Company also invests in equities and other income yielding securities.

 

Exposure to higher yielding securities may also be obtained by investing in other closed-ended investment companies and open-ended collective investment schemes.

 

There are no defined limits on securities and accordingly the Company may invest up to 100% of total assets in any particular type of security.

 

There are no defined limits on countries, size or sectors, therefore the Company may invest in companies regardless of country, size or sector and, accordingly, the Company's portfolio is constructed without reference to the composition of any stock market index or benchmark.

 

The Company may, but is not obliged to, invest in derivatives, financial instruments, money market instruments and currencies for the purpose of efficient portfolio management. The Company may acquire securities that are unlisted or unquoted at the time of investment but which are about to be convertible, at the option of the Company, into securities which are listed or traded on a stock exchange. The Company may continue to hold securities that cease to be listed or traded if the Investment Manager considers this appropriate. The Board has established a maximum investment limit in this regard of 10% (calculated at the time of any relevant investment) of the Company's total assets. In addition, the Company may invest up to 10% (calculated at the time of any relevant investment) of its total assets in other securities that are neither listed nor traded at the time of investment.

 

The Company will not invest more than 10% (calculated at the time of any relevant investment) of its total assets in other collective investment undertakings (open-ended or closed-ended).

 

The Company may not invest more than 7.5% of its total investments in the same investee company and that this be limited to no more than 3 investee companies with a maximum investment limit of 5% thereafter. In addition, there is a maximum investment limit whereby, at the time of investment, the Company may not invest more than 5% of its total investments in any one security.

 

The Company uses gearing and the Board has set a current limit that gearing will not exceed 25% of Shareholders' funds at the time of borrowing. This limit is reviewed from time to time by the Board.

 

 

 

The Investment Manager expects that the Company's assets will normally be fully invested. However, during periods in which changes in economic circumstances, market conditions or other factors so warrant, the Company may reduce its exposure to securities and increase its positions in cash, money market instruments and derivative instruments in order to seek protection from stock market falls or volatility.

 

Investment Approach

Investments are typically made in securities which the Investment Manager has identified as undervalued by the market and which it believes will generate above average income returns relative to their risk, thereby also generating the scope for capital appreciation. In particular, the Investment Manager seeks to generate capital growth by exploiting the opportunities presented by the fluctuating yield base of the market and from redemptions, conversions, reconstructions and take-overs.

 

Performance Measurement and Key Performance Indicators (KPIs)

The Board uses a number of performance measures to monitor and assess the Company's success in meeting its objectives and to measure its progress and performance. The key performance indicators are as follows:

 

·      Dividend Yield and Dividend Cover

It is intended that the Company will pay four quarterly dividends each year and accordingly the Board reviews the Company's dividend yield and dividend cover on a quarterly basis. For the year ended 30 June 2021, the Company's dividend yield was 8.16% (30 June 2020: 9.41%) based upon a share price of 54.80 pence (bid price) as at 30 June 2021 (30 June 2020: 47.40 pence) and its dividend cover was 0.94x (30 June 2020: 1.03x).

 

·      Revenue Earnings and Dividends per share

The Company has opted to follow the AIC's Statement of Recommended Practice: Financial Statements of Investment Trusts and Venture Capital Trusts (the "AIC SORP") and, in accordance with the provisions of the AIC SORP, distinguishes its profits derived from revenue and capital items. The Company declares and pays its dividend out of only the revenue profits of the Company. The revenue earnings, whether generated this year or in previous years and held in revenue reserves, represent the total available funds that the Directors are able to make a dividend payment from. The Board reviews revenue forecasts on a quarterly basis in order to determine the quarterly dividend. In respect of the current financial year, the Company declared dividends of 4.47 pence per ordinary share out of revenue earnings per share of 4.18 pence per share.

 

·      Ongoing Charges

The ongoing charges ratio represents the Company's management fee and all other operating expenses incurred by the Company expressed as a percentage of the average Shareholders' funds over the year. The Board regularly reviews the ongoing charges and monitors all Company expenses. The ongoing charges ratio for the year ended 30 June 2021 was 1.25% (2020: 1.19%).

 

The Board measures the Company's performance by reviewing the KPIs against their expectations of performance from their knowledge of the industry sector.

 

These KPIs fall within the definition of 'Alternative Performance Measures' (APMs) under guidance issued by the European Securities and Markets Authority. Additional information explaining how these are calculated is set out in the Glossary.

 

Going Concern

The Company does not have a fixed winding-up date and, therefore, unless Shareholders vote to wind-up the Company, Shareholders will only be able to realise their investment through the secondary market.

 

At each Annual General Meeting of the Company, Shareholders are given the opportunity to vote on an ordinary resolution to continue the Company as an investment company. If any such resolution is not passed, the Board will put forward proposals at an extraordinary general meeting to liquidate or otherwise reconstruct or reorganise the Company. Given the performance of the Company, input from the Company's major Shareholders and its broker, the Board considers it likely that Shareholders will vote in favour of continuation at the forthcoming Annual General Meeting.

 

The Company's existing loan facility as detailed below is due to expire on 18 December 2021 after which it is anticipated the Company will take out a new facility on comparable terms. After making enquiries of the Investment Manager, and having considered the Company's investment objective, nature of the investment portfolio, loan facility, expenditure projections and impact of COVID-19 on the Company, the Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors continue to adopt the going concern basis in preparing the financial statements, notwithstanding that the Company is subject to an annual continuation vote as described above. 

 

 

 

 

 

Social, Community, Human Rights, Employee Responsibilities and Environmental Policy

The Directors recognise that their first duty is to act in the best financial interests of the Company's Shareholders and to achieve good financial returns against acceptable levels of risk, in accordance with the objectives of the Company.

In asking the Company's Investment Manager to deliver against these objectives, they have also requested that the Investment Manager take into account the broader social, ethical and environmental issues of companies within the Company's portfolio, acknowledging that companies failing to manage these issues adequately run a long term risk to the sustainability of their businesses.

 

Greenhouse Gas Emissions

As the Company is a closed-ended investment company, which has no employees, its own impact on the environment is minimal and therefore the Company has no Greenhouse Gas Emissions to report from its operations for the year ended 30 June 2021 and prior year, nor does it have responsibility for any other emissions producing sources (including those within the underlying investment portfolio).

 

However, the Board recognises its impact on the environment, including greenhouse gas emissions, through the underlying portfolio companies which it invests in. The Board has requested that ESG factors are incorporated into the Company's investment strategy as further detailed on page 17 of the Company's Annual Financial Report and Financial Statements.

 

Modern slavery

The Company would not fall into the scope of the UK Modern Slavery Act 2015 (as the Company does not have any turnover derived from goods and services) if it was incorporated in the UK. Furthermore, as a closed-ended investment company, the Company has a non-complex structure, no employees and its supply chain is considered to be low risk given that suppliers are typically professional advisers based in either the Channel Islands or the UK. Based on these factors, the Board determined that it is not necessary for the Company to make a slavery and human trafficking statement.

 

By Order of the Board

 

Caroline Hitch

Chair

16 September 2021

 

Statement of Directors' Responsibilities in respect of the Annual Report and Financial Statements

 

The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the EU and applicable law.

 

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing these financial statements, the Directors are required to:

 

·      select suitable accounting policies and then apply them consistently;

·      make judgements and estimates that are reasonable, relevant and reliable;

·      state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements;

·      assess the Company's ability to continue as a going concern, disclosing, as applicable, matters relating to going concern; and

·      use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with Companies (Jersey) Law, 1991. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. The financial statements are published on the www.ncim.co.uk website, which is a website maintained by the Company's Investment Manager. Legislation in Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

Responsibility statement of the Directors in respect of the annual financial report

We confirm that to the best of our knowledge:

 

·      the financial statements, prepared in accordance with IFRS as adopted by the EU, give a true and fair and balanced view of the assets, liabilities, financial position and profit or loss of the Company; and

 

·      the Strategic Report and Directors' report include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that the Company faces.

 

We consider the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's position and performance, business model and strategy.

 

On behalf of the Board

 

 

Caroline Hitch

Chair

16 September 2021

 

		Year ended 30 June 2021			Year ended 30 June 2020
	Notes	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Net capital gains/(losses)
Gains/(losses) on financial assets designated at fair value	9	-	23,913	23,913	-	(33,398)	(33,398)
Foreign exchange loss*		-	(36)	(36)	-	(97)	(97)
Revenue
Investment income	2	21,151	-	21,151	22,625	-	22,625
Total Income		21,151	23,877	45,028	22,625	(33,495)	(10,870)
Expenses
Investment management fee	3	(1,456)	(485)	(1,941)	(1,477)	(492)	(1,969)
Other expenses	4	(800)	(14)	(814)	(745)	(40)	(785)
Total expenses		(2,256)	(499)	(2,755)	(2,222)	(532)	(2,754)
Profit/(loss) before finance costs and taxation		18,895	23,378	42,273	20,403	(34,027)	(13,624)
Finance income/(costs)
Interest income		-	-	-	12	-	12
Interest expense	5	(326)	(107)	(433)	(418)	(139)	(557)
Profit/(loss) before taxation		18,569	23,271	41,840	19,997	(34,166)	(14,169)
Irrecoverable withholding tax	6	(267)	-	(267)	(331)	-	(331)
Profit/(loss) after taxation and total comprehensive income/(loss)		18,302	23,271	41,573	19,666	(34,166)	(14,500)
Basic and diluted earnings per ordinary share (pence)	8	4.18	5.32	9.50	4.59	(7.98)	(3.39)

 

* Excludes foreign exchange gains and losses on financial assets designated through profit and loss which are presented within gains/(losses) on financial assets designated at fair value.

 

The total column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with IFRS as adopted by the EU (refer to note 1). The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies.

 

There is no other comprehensive income as all income is recorded in the Statement of Comprehensive Income above.

 

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

 

No operations were acquired or discontinued in the year.

 

The accompanying notes below are an integral part of these financial statements.

 

Statement of Financial Position

As at 30 June 2021

 

	Notes	As at 30 June 2021 £'000	As at 30 June 2020 £'000
Non-current assets
Financial assets designated at fair value through profit or loss	9	257,467	230,741
Current assets
Debtors and other receivables	10	3,585	9,882
Cash and cash equivalents		11,427	2,853
		15,012	12,735
Total assets		272,479	243,476
Current liabilities
Bank loan	11	(33,000)	(31,000)
Creditors and other payables	12	(5,301)	(6,797)
Total liabilities		(38,301)	(37,797)
Net asset value		234,178	205,679
Stated capital and reserves
Stated capital account	13	203,416	197,037
Special distributable reserve		50,385	50,385
Capital reserve		(36,454)	(59,725)
Revenue reserve		16,831	17,982
Equity Shareholders' funds		234,178	205,679
Net asset value per ordinary share (pence)	15	52.62p	47.52p

 

The financial statements below were approved by the Board of Directors and authorised for issue on 16 September 2021 and were signed on its behalf by:

 

Caroline Hitch

Chair

 

The accompanying notes below are an integral part of these financial statements.

 

Statement of Changes in Equity

For the year ended 30 June 2021

 

	Notes	Stated capital account* £'000	Special distributable reserve‡ £'000	Capital reserve*   £'000	Revenue reserve†   £'000	Total     £'000
At 1 July 2020		197,037	50,385	(59,725)	17,982	205,679
Total comprehensive  income for the year:
Profit for the year		-	-	23,271	18,302	41,573
Transactions with owners recognised directly in equity:
Dividends paid	7	-	-	-	(19,453)	(19,453)
Net proceeds from issue of shares	13	6,379	-	-	-	6,379
At 30 June 2021		203,416	50,385	(36,454)	16,831	234,178

 

For the year ended 30 June 2020

	Notes	Stated capital account* £'000	Special distributable reserve‡ £'000	Capital reserve*   £'000	Revenue reserve†   £'000	Total     £'000
At 1 July 2019		191,007	50,385	(25,559)	17,294	233,127
Total comprehensive (loss)/ income for the year:
(Loss)/profit for the year		-	-	(34,166)	19,666	(14,500)
Transactions with owners recognised directly in equity:
Dividends paid	7	-	-	-	(18,978)	(18,978)
Net proceeds from issue of shares		6,030	-	-	-	6,030
At 30 June 2020		197,037	50,385	(59,725)	17,982	205,679

 

 * Following a change in Jersey Company Law effective 27 June 2008, dividends can be paid out of any capital account of the Company subject to certain solvency restrictions. However, it is the Company's policy to account for revenue items and pay dividends, drawing where necessary from a separate revenue reserve.

 

‡ The balance on the special distributable reserve of £50,385,000 (2020: £50,385,000) is treated as distributable profits available to be used for all purposes permitted by Jersey Company Law including the buying back of ordinary shares, the payment of dividends and the payment of preliminary expenses.

 

† The balance on the revenue reserve of £16,831,000 (2020: £17,982,000) is available for paying dividends.

 

The accompanying notes below are an integral part of these financial statements.

 

Cash Flow Statement  

For the year ended 30 June 2021

 

	Notes	Year ended 30 June 2021 £'000	Year ended 30 June 2020 £'000
Operating activities
Profit/(loss) before finance income/(cost) and taxation1		42,273	(13,624)
Adjustments to reconcile profit/(loss) before tax to net cash flows:
Realised loss on financial assets designated at fair value through profit or loss.	9	11,575	2,766
Unrealised (gains)/losses on financial assets designated at fair value through profit or loss	9	(35,489)	30,632
Effective interest adjustment	9	(232)	(162)
Foreign exchange loss		36	97
Purchase of financial assets designated at fair value through profit or loss2		(70,415)	(86,268)
Proceeds from sale of financial assets designated at fair value through profit or loss3		73,280	73,197
Changes in working capital
Decrease in other receivables		51	824
(Decrease)/increase in other payables		(422)	478
Irrecoverable withholding tax paid		(267)	(331)
Net cash inflow from operating activities		20,390	7,609
Financing activities
Dividends paid	7	(19,453)	(18,978)
Drawdown of bank loan	11	2,000	3,000
Finance costs		(431)	(548)
Net proceeds from issuance of ordinary shares4	13	6,104	6,030
Net cash outflow from financing		(11,780)	(10,496)
Increase/(decrease) in cash and cash equivalents		8,610	(2,887)
Cash and cash equivalents at the start of the year		2,853	5,837
Exchange loss		(36)	(97)
Cash and cash equivalents at the end of the year		11,427	2,853

 

¹ - Included within profit/(loss) before finance income/(cost) before taxation is dividend income of £2,934,000 (30 June 2020: £2,668,000) and interest income of £18,217,000 (30 June 2020: £19,957,000).

² - Amounts due to brokers as at 30 June 2021 relating to purchases of financial assets designated at fair value through profit amounted to £4,980,000 (30 June 2020: £6,059,000).

³ - Amounts due from brokers as at 30 June 2021 relating to sales of financial assets designated at fair value through profit amounted to £0 (30 June 2020: £6,520,000).

⁴ - Amounts due on new share issuance not yet received as at 30 June 2021 amounted to £275,000 (30 June 2020: £0).

 

The accompanying notes below are an integral part of these financial statements.

 

Notes to the Financial Statements

 

1 Accounting Policies

(a) Basis of accounting

These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union and in accordance with the guidance set out in the Statement of Recommended Practice ("SORP"): Financial Statements of Investment Trust Companies and Venture Capital Trusts issued by the AIC in November 2014 and updated most recently in October 2019 with consequential amendments. Notwithstanding that CQS New City High Yield Fund Limited (the "Company") is not an investment trust company, given the purpose of the Company and certain similar characteristics, the Company has chosen to follow the guidance set out in the SORP where it is consistent with the requirements of IFRS.

 

The functional and reporting currency of the Company is pound sterling because that is the primary economic environment in which the Company operates. The notes and financial statements are presented in pound sterling and are rounded to the nearest thousand except where otherwise indicated.

 

The financial statements have been prepared on the historical cost basis, except that investments are stated at fair value and categorised as financial assets at fair value through profit or loss.

 

Going concern

At each Annual General Meeting of the Company, Shareholders are given the opportunity to vote on an ordinary resolution to continue the Company as an investment company. If any such resolution is not passed, the Board will put forward proposals at an extraordinary general meeting to liquidate or otherwise reconstruct or reorganise the Company. Given the performance of the Company, input from the Company's major Shareholders and its broker, the Board considers it likely that Shareholders will vote in favour of continuation at the forthcoming Annual General Meeting.

 

The Company's existing loan facility as detailed below is due to expire on 18 December 2021 after which it is anticipated the Company will take out a new facility on comparable terms. After making enquiries of the Investment Manager, and having considered the Company's investment objective, nature of the investment portfolio, loan facility, expenditure projections and impact of COVID-19 on the Company, the Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors continue to adopt the going concern basis in preparing the financial statements, notwithstanding that the Company is subject to an annual continuation vote as described above. 

 

Accounting Developments

Standards and amendments to existing standards effective in current year:

 

Definition of Material (Amendments to IAS 1 and IAS 8)

The International Accounting Standards Board has redefined its definition of material, issued practical guidance on applying the concept of materiality and issued proposals focused on the application of materiality to disclosure of other accounting policies. 

 

During the period, a number of other new standards, amendments and interpretations became applicable for the current reporting period which are not relevant to the Company's operations.

 

Standards and amendments becoming effective in future periods:

 

Interest Rate Benchmark Reform - Phase 2

These amendments address issues that might affect financial reporting as a result of the reform of an interest rate benchmark, including the effects of changes to contractual cash flows or hedging relationships arising from the replacement of an interest rate benchmark with an alternative benchmark rate. The amendments provide practical relief from certain requirements in IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 relating to changes in the basis for determining contractual cash flows of financial assets, financial liabilities and lease liabilities; and hedge accounting (no impact).

 

Change in basis for determining cash flows

The amendments will require an entity to account for a change in the basis for determining the contractual cash flows of a financial asset or financial liability that is required by interest rate benchmark reform by updating the effective interest rate of the financial asset or financial liability.

 

At 30 June 2021, the Company held £51.6m floating rate investment securities that will be subject to IBOR reforms. The majority of these positions reference LIBOR and the Company expects them, and other IBORs, to be replaced by SONIA near the end of 2021, or other risk-free rates, as applicable. The Company expects there will not be a significant modification gain or loss that will arise as a result of applying the amendments to these changes.

 

Disclosure

The amendments will require the Company to disclose additional information about the entity's exposure to risks arising from interest rate benchmark reform and related risk management activities.

 

Transition

The Company plans to apply the amendments from 1 July 2021. Application will not impact amounts reported for year ended 30 June 2021 or prior periods.

 

Other than the above, the new and amended standards not yet effective are not expected to have a significant impact on the Company's financial statements.

 

Critical accounting estimates and judgements

The preparation of the financial statements necessarily requires the exercise of judgement both in application of accounting policies which are set out below and in the selection of assumptions used in the calculation of estimates. These estimates and judgements are reviewed on an ongoing basis and are continually evaluated based on historical experience and other factors. However, actual results may differ from these estimates.

 

The valuation of financial assets involves estimation and judgements. The major part of the Company's financial assets is its financial assets held at fair value through profit or loss which is valued by reference to listed and quoted bid prices, however some of these financial assets are thinly traded. Such financial assets are best valued by reference to current market price quotes provided by independent brokers. The Directors may overlay such prices with situation specific adjustments including (a) taking a second independent opinion on a specific investment, or (ii) reducing the value to a net present value, to reflect the likely time to be taken to realise a stock which the Company is actively looking to sell. The outturn is reflected in the valuations of investments as set out in note 22 to the financial statements.

 

Financial assets which are not listed or where trading in the securities of an investee company is suspended are valued at the Board's estimate of fair value in accordance with International Private Equity and Venture Capital (IPEV) valuation guidance. Unquoted financial assets are valued by the Directors on the basis of all the information available to them at the time of valuation. This includes a review of the financial and trading information of the investee company, covenant compliance, ability to pay the interest due and cash held. For convertible bonds this also includes consideration of their discounted cash flows and underlying equity value based on information provided by the Investment Manager.

 

As outlined above, the Directors have applied judgement and determined that the Company's presentation and functional currency is pound sterling.

 

There were no other significant accounting estimates or significant judgements in the current or previous year.

 

A summary of the principal accounting policies which have been applied to all periods presented in these financial statements is set out below.

 

(b) Financial assets

Financial assets which comprise equity shares, convertible bonds and fixed income securities, are classified as held at fair value through profit or loss as the Company's business model is not to hold these financial assets for the sole purposes of collecting contractual cash flows. In making this assessment, the Directors have given regard to the investment strategy of the Company, the fact that the performance of the portfolio is evaluated on a fair value basis and the fact that the Investment Manager is remunerated on a percentage of total assets.

Purchases or sales of financial assets are recognised/derecognised on the date the Company trades the investments. On initial recognition investments are measured at fair value and classified as fair value through profit or loss with any subsequent gain or loss, including any gain or loss arising from a change in exchange rates, recognised in the Statement of Comprehensive Income.

 

Financial assets held at fair value through profit or loss are valued in accordance with the policies described in the critical accounting estimates and judgements section above.

 

Financial assets also include the Company's cash and cash equivalents (comprising of cash held in current accounts and overdraft balances) and debtors and other receivables which are held at amortised cost using effective interest rate, less any impairment.

 

(c) Financial liabilities

Financial liabilities include amounts due to brokers, bank loan, interest on bank loan and other creditors which are held at amortised cost using the effective interest rate method. Financial liabilities are recognised initially at fair value, net of transaction costs incurred and are subsequently carried at amortised cost using the effective interest rate method. Financial liabilities are derecognised when the obligation specified in the contract is discharged, cancelled or expires.

 

(d) Income

Dividends receivable on equity shares (including preference shares) are recognised as income on the date that the related investments are marked ex-dividend. Dividends receivable on equity shares where no ex-dividend date is quoted are recognised as income when the Company's right to receive payment is established.

 

Dividends from overseas companies are shown gross of any non-recoverable withholding taxes which are disclosed separately in the Statement of Comprehensive Income.

 

Fixed returns on non-equity shares and debt securities (including preference shares) are recognised on a time apportioned basis so as to reflect the effective interest rate on those instruments. Other returns on non-equity shares are recognised when the right to the return is established.

 

Income from deposit interest is recognised on an accruals basis.

 

Where the Company has elected to receive its dividends in the form of additional shares rather than cash, an amount equal to the cash dividend is recognised as income. Any excess in the value of the shares received over the amount of the cash dividend is recognised in the capital reserve.

 

(e) Expenses, including finance charges

All expenses are accounted for on an accruals basis. Expenses are charged through the revenue account except as follows:

 

-    expenses which are incidental to the acquisition of an investment are charged to the capital account;

-    expenses which are incidental to the disposal of an investment charged to the capital account;

-    the Company charges 25% of investment management fees and interest costs to capital, in line with the Board's expected long term return in the form of capital gains and income respectively from the investment portfolio of the Company. For further details refer to notes 3 and 5; and

-    expenses incurred in connection with the maintenance or enhancement of the value of the investments or for the long term benefit of the Company are charged to capital.

 

(f) Foreign currencies

Transactions denominated in foreign currencies are recorded in the functional currency at actual exchange rates at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the period end are reported in sterling at the rates of exchange prevailing at the period end. Exchange gains and losses on investments held at fair value through profit or loss are included in 'Gains or losses on investments held at fair value through profit or loss'. Exchange gains and losses on other balances are disclosed separately in the Statement of Comprehensive Income.

 

(g) Reserves

(a) Capital reserve. Following a change in Jersey Company law effective 27 June 2008, dividends can be paid out of any capital account of the Company subject to certain solvency restrictions. It is the Company's policy however to account for revenue items and pay dividends through a separate revenue reserve. The following are accounted for in the capital reserve:

-    gains and losses on the realisation of investments;

-    realised and unrealised exchange differences of a capital nature;

-    expenses and finance costs charged in accordance with the policies above; and

-    increases and decreases in the valuation of investments held at the period end.

 

(b) Special distributable reserve. This reserve is treated as distributable profits available to be used for all purposes permitted by Jersey company law including the buying back of ordinary shares, the payment of dividends (see note 7) and the payment of preliminary expenses.

 

(c) Revenue reserve. The net profit/(loss) and total comprehensive income/(loss) arising in the revenue column of the Statement of Comprehensive Income is added to or deducted from this reserve and is available for paying dividends.

 

(h) Treasury shares

When the Company purchases its ordinary shares to be held in treasury, the amount of the consideration paid, which includes directly attributable costs is recognised as a deduction from the stated capital account. When these shares are sold subsequently, the amount received is recognised as an increase in equity, and the resulting surplus or deficit on the transaction is transferred to or from the stated capital account.

 

(i) Segmental information

The Company, holds a wide variety of different investments in a wide range of issues locating in different geographies and operating in different sectors. However, resources are allocated and the business is managed by the chief operating decision-makers, the directors, on an aggregated basis. Strategic and financial management decisions are determined centrally by the Directors and, on this basis, the Company operates as a single investment management business and no segmental reporting is provided.

 

2 Income

	2021 £'000	2020 £'000
Income from investments*
Dividend income	2,934	2,668
Interest on fixed interest securities†	18,217	19,957
Total income	21,151	22,625
Income from investments
Listed/Quoted on a stock exchange	21,151	21,657
Prices via direct broker quotes	-	968
	21,151	22,625

 

*All investment income arises on financial assets valued at fair value through profit or loss.

†Fixed interest securities include both fixed and floating rate securities.

 

3 Investment Management Fee

	2021 Revenue £'000	2021 Capital £'000	2021 Total £'000	2020 Revenue £'000	2020 Capital £'000	2020 Total £'000
Investment management fee	1,456	485	1,941	1,477	492	1,969

 

The Company's investment manager is CQS (UK) LLP ("CQS").

 

As per the Investment Management Agreement dated 18 September 2019, the management fee is charged at a rate of 0.80% per annum on the Company's total assets (being total assets less current liabilities (other than bank borrowings and ignoring any taxation which is or may be payable by the Company)) up to £200 million, 0.70% per annum of total assets in excess of £200 million and up to and including £300 million and 0.60% per annum thereafter. The management fee is paid monthly in arrears.

                                                                                                           

The contract between the Company and CQS (UK) LLP may be terminated by either party giving not less than 12 months' notice of termination.    

 

During the year ended 30 June 2021, investment management fees of £1,941,000 were incurred (year ended 30 June 2020: £1,969,000), of which £168,000 was payable at the period end (year ended 30 June 2020: £602,000). Investment management fees have been allocated 75% to revenue and 25% to capital.                                                    

 

4 Other Expenses

	2021 Revenue £'000	2021 Capital £'000	2021 Total £'000	2020 Revenue £'000	2020 Capital £'000	2020 Total £'000
Secretarial and administration fees	202	-	202	202	-	202
Directors' fees	157	-	157	157	-	157
Auditors' remuneration for:
- audit services	40	-	40	45	-	45
Broker fees	30	-	30	29	-	29
Printing	20	-	20	10	-	10
Bank and custody charges	84	-	84	56	-	56
Registrars' fees	34	-	34	34	-	34
Depositary fees	45	-	45	52	-	52
Legal and professional fees	43	-	43	71	-	71
Other	145	14	159	89	40	129
	800	14	814	745	40	785

 

Directors' fees

On 3 June 2021, the Board approved an increased level of remuneration for the Directors from £157,000 (Chair: £40,000; Audit Chair: £34,000 and other directors: £27,500) to £169,000 with annual effect from 1 July 2021 as follows:

 

Chair £42,500

Audit Chair £36,500

Other £30,000

 

No Directors' fees were accrued as at 30 June 2021.

 

Further details are provided in the Directors' Remuneration Report in the Company's Annual Financial Report and Financial Statements.     

                                                                                                                       

No pension contributions were payable in respect of any of the Directors and the Company does not have any employees.

 

Non-audit fees paid to the auditor                                                                                                       

There were no non-audit fees paid to the auditor during the year ended 30 June 2021 (year ended 30 June 2020: £nil).                                                                                                      

5 Interest expense

	2021 Revenue £'000	2021 Capital £'000	2021 Total £'000	2020 Revenue £'000	2020 Capital £'000	2020 Total £'000
Interest expense	326	107	433	418	139	557

 

Interest expense and similar charges have been allocated 25% to capital and 75% to revenue as explained in note 1(e).

 

6 Taxation

The taxation charge for the year is comprised of:

	2021 Revenue £'000	2021 Capital £'000	2021 Total £'000	2020 Revenue £'000	2020 Capital £'000	2020 Total £'000
Irrecoverable withholding tax suffered	267	-	267	331	-	331

 

The taxation on profit differs from the theoretical expense that would apply on the Company's profit before taxation using the applicable tax rate in Jersey of 0% (2020: 0%) as follows:

	2021 £'000	2020 £'000
Profit/(loss) on ordinary activities before taxation	41,840	(14,169)
Theoretical tax expense at 0% (2020: 0%)	-	-
Effects of:
Foreign withholding tax	267	331
Current year revenue tax charge	267	331

 

7 Dividends

	2021 £'000	2020 £'000
Amounts recognised as distributions to equity holders in the year:
Dividends in respect of the year ended 30 June 2020
- Fourth interim dividend of 1.46p (2019: 1.45p) per ordinary share	6,319	6,125
Dividends in respect of the year ended 30 June 2021
- First interim dividend of 1.00p (2020: 1.00p) per ordinary share	4,359	4,256
- Second interim dividend of 1.00p (2020: 1.00p) per ordinary share	4,383	4,276
- Third interim dividend of 1.00p (2020: 1.00p) per ordinary share	4,392	4,321
	19,453	18,978

 

A fourth interim dividend in respect of the year ended 30 June 2021 of 1.47p per ordinary share was paid on 31 August 2021 to Shareholders on the register on 30 July 2021, having an ex-dividend date of 29 July 2021.

 

In accordance with IFRS, dividends paid to the Company's Shareholders are recognised when they become payable on the ex-dividend date, consequently the fourth interim dividend has not been included as a liability in these financial statements and will be recognised in the period in which it is paid.

 

8 Basic and diluted earnings per Ordinary Share

	2021 Revenue pence	2021 Capital pence	2021 Total pence	2020 Revenue pence	2020 Capital pence	2020 Total pence
Basic and diluted earnings per ordinary share	4.18p	5.32p	9.50p	4.59p	(7.98)p	(3.39)p

 

The revenue earnings per ordinary share is based on the net profit after taxation of £18,302,000 (year ended 30 June 2020: £19,666,000) and the capital return per ordinary share is based on a net capital gain of £23,271,000 (year ended 30 June 2020: a net capital loss of £34,166,000). Both the revenue and capital earnings per share is based on a weighted average of 437,519,666 (year ended 30 June 2020: 428,002,951) ordinary shares in issue throughout the year.                                                                                                                                                                                   

Total earnings per share reflects both revenue earnings and capital returns per ordinary share. The Company has not issued any instruments that could potentially dilute basic earnings per share in the future. Therefore, the Company's basic earnings per share is equivalent to its diluted earnings per share.

 

There have been no transactions involving the Company's ordinary shares between 30 June 2021 and 16 September 2021 other than those disclosed in note 24, which were issued at a premium to the 30 June 2021 NAV.

 

9 Financial assets designated at fair value through profit or loss

All financial assets are valued at fair value through profit or loss. Gains or losses arising from changes in the fair value of investments are included in the Statement of Comprehensive Income.

	2021 £'000	2020 £'000
Listed/Quoted on a stock exchange	256,831	221,877
Prices via direct broker quotes	636	8,864
	257,467	230,741
Equity shares	39,305	31,409
Fixed income securities	216,602	188,849
Convertible bonds	1,560	10,483
	257,467	230,741

 

	2021 £'000	2020 £'000
Opening valuation	230,741	253,034
Purchases at cost	80,009	88,696
Sales proceeds	(77,428)	(77,753)
Realised losses on sales	(11,575)	(2,766)
Effective interest adjustment	232	162
Unrealised gains/(losses)	35,488	(30,632)
Closing valuation	257,467	230,741

 

Losses on investments	2021 £'000	2020 £'000
Realised losses1	(11,575)	(2,766)
Unrealised gains/(losses)2	35,488	(30,632)
Gains/(losses) on investments	23,913	(33,398)

 

¹ Realised losses on financial assets designated at fair value through profit or loss is made up of gains of £2,755,000 and losses of £14,330,000.

² Unrealised losses on financial assets designated at fair value through profit or loss is made up of gains of £47,622,000 and losses of £12,133,000.                                                                                                                                                                                          

10 Debtors and Other Receivables

	2021 £'000	2020 £'000
Amounts due from brokers	-	6,520
Amounts due on new share issuance	275	-
Accrued income	3,302	3,356
Prepayments and other debtors	8	6
	3,585	9,882

 

11 Bank Loan

	2021 £'000	2020 £'000
Bank loan facility- opening balance	31,000	28,000
Drawdowns	2,000	3,000
Bank loan facility - closing balance	33,000	31,000

 

The Company has a short term unsecured loan facility with Scotiabank Europe Plc ("Scotiabank"). The facility is due to expire on 18 December 2021 after which it is anticipated the Company will take out a new facility on comparable terms.

 

On 18 December 2020, the Company drew down a further £2,000,000. As at 30 June 2021, the unsecured loan facility had a limit of £35,000,000 of which £33,000,000 was drawn down at an interest rate of 1.43038%, which is made up of LIBOR of 0.08038% plus a margin rate.

 

In advance of LIBOR ceasing to be published on 31 December 2021, the Company signed an amendment agreement with Scotiabank on 16 September 2021 that changes the benchmark reference rate from LIBOR to SONIA (or similar alternative reference rates for drawdowns in other permitted currencies).

 

The current loan facility was renewed on 18 December 2020 on the same terms as applied to the previous facility that expired on the 18 December 2020. During the year ended 30 June 2021 the covenants of the loan facility have been met. The following are the covenants for the facility held as at 30 June 2021:

 

·   the borrower shall not permit the adjusted asset coverage to be less than 4 to 1

·   the borrower shall not permit the net asset value to be less than £95,000,000 at any time

·   the borrower shall maintain an additional adjusted asset coverage of at least 1.5 to 1 at all times

·   the loan facility is rolled over every three months and can be cancelled at any time

 

For the year ended 30 June 2021 and up until the date of this report, the Company has complied with all covenants of the loan facility.

 

The bank loan facility is a financial liability held at amortised cost.

 

12 Creditors and Other Payables

	2021 £'000	2020 £'000
Amounts due to brokers	4,980	6,059
Interest on bank loan facility	16	13
Other creditors	305	725
	5,301	6,797

 

13 Stated Capital Account

 

Authorised

The authorised share capital of the Company is represented by an unlimited number of ordinary shares of no par value.

 

Allotted, called up and fully-paid

	Number of ordinary shares	Amount received £'000	Share Issue Costs £'000	Share capital £'000
Total as at 1 July 2020	432,851,858			197,037
600,000 ordinary shares of no par value allotted on 28 July 2020 at 50.00p	600,000	300	(2)	298
1,700,000 ordinary shares of no par value allotted on 07 September 2020 at 49.75p	1,700,000	846	(6)	840
750,000 ordinary shares of no par value allotted on 15 September 2020 at 50.00p	750,000	375	(3)	372
400,000 ordinary shares of no par value allotted on 24 November 2020 at 50.00p	400,000	200	(2)	198
800,000 ordinary shares of no par value allotted on 13 January 2021 at 52.50p	800,000	420	(3)	417
600,000 ordinary shares of no par value allotted on 18 January 2021 at 52.40p	600,000	312	(2)	310
650,000 ordinary shares of no par value allotted on 25 January 2021 at 52.60p	650,000	342	(3)	339
850,000 ordinary shares of no par value allotted on 03 February 2021 at 51.60p	850,000	439	(3)	436
1,800,000 ordinary shares of no par value allotted on 05 May 2021 at 54.00p	1,800,000	972	(7)	965
800,000 ordinary shares of no par value allotted on 13 May 2021 at 54.40p	800,000	435	(3)	432
500,000 ordinary shares of no par value allotted on 28 May 2021 at 54.50p	500,000	273	(2)	271
500,000 ordinary shares of no par value allotted on 04 June 2021 at 54.80p	500,000	274	(2)	272
750,000 ordinary shares of no par value allotted on 14 June 2021 at 54.80p	750,000	411	(3)	408
1,000,000 ordinary shares of no par value allotted on 29 June 2021 at 55.00p	1,000,000	550	(4)	546
500,000 ordinary shares of no par value allotted on 30 June 2021 at 55.30p	500,000	277	(2)	275
Total as at 30 June 2021	445,051,858	6,426	(47)	203,416

 

The balance of shares left in Treasury at the year-end was nil (2020: nil shares).

 

On 1 October 2020, a block listing facility for 43,000,000 new shares was approved by the UK Listing Authority. This facility is used for the purposes of satisfying market demand.

 

Since 30 June 2021, a further 10.1m ordinary shares have been issued for consideration of £5.54 million.

 

Because the criteria in paragraphs 16c and 16d of IAS 32 Financial Instruments: Presentation have been met, the stated capital of the Company is classified as equity even though there is an annual continuation vote.

 

Ordinary shares issued are accounted for based on the associated trade date.

 

14 Reserves

The capital of the Company is managed in accordance with its investment policy, in pursuit of its investment objective.

 

On 24 May 2007, the Royal Court of the Island of Jersey confirmed that the amount standing to the credit of the Company's stated capital account be reduced by 75% and was used to create the special distributable reserve in the Company's accounts. This reserve is treated as distributable profits available to be used for all purposes permitted by Jersey company law including the buying back of ordinary shares, the payment of dividends and the payment of preliminary expenses.

 

Capital management policies and procedures

The Board defines capital as financial resources available to the Company. The Company's capital as at 30 June 2021 comprises its stated capital, special distributable reserve, capital reserve and revenue reserve at a total of £234,178,000 (2020: £205,679,000).

 

The Company's capital management objectives are:

 

-  to ensure that the Company will be able to continue as a going concern; and

-  to maximise the capital return to its equity Shareholders through an appropriate balance of equity capital and debt.

 

The Board normally seeks to limit gearing to 25% of Shareholders' funds at any given time. The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes the nature and planned level of gearing, which takes account of the Investment Manager's views on the market, and the extent to which revenue in excess of that which is required to be distributed should be retained. The Company has no externally imposed capital requirements.

 

The capital of the Company is managed in accordance with its investment policy detailed in the Strategic Review section of the Company's Annual Financial Report and Financial Statements

 

15 Net Asset Value per Ordinary Share

The net asset value per ordinary share and the net asset value attributable to the ordinary shares at the year-end calculated in accordance with their entitlements in the Articles of Association were as follows:

 

	2021	2020
Net Asset Value (£'000)	234,178	205,679
Net Asset per share (pence)	52.62p	47.52p

 

NAV per share has been calculated based on the share capital in issue as at year end. The issued share capital as at 30 June 2021 comprised of 445,051,858 ordinary shares (30 June 2020: 432,851,858).

 

16 Financial Instruments

The Company's financial instruments comprise its investment portfolio, cash balances, bank loan and debtors and creditors that arise directly from its operations. As an investment company, the Company holds a portfolio of financial assets and financial liabilities in pursuit of its investment objective. The Company uses flexible borrowings for short term purposes, and to seek to enhance the returns to Shareholders, when considered appropriate by the Investment Manager.

 

Financial assets designated at fair value through profit or loss (see note 9) are held at fair value. For listed securities trading actively, fair value is considered to be equivalent to the most available recent bid price. Where listed securities are not trading actively, independent broker quotes are referenced to estimate fair value. For unlisted securities, fair value is determined by the Board using valuation techniques based on unobservable inputs, mainly using broker quotes. The fair value of other receivables, cash and cash equivalents and other payables is represented by their carrying value in the Statement of Financial Position shown above. These are short term financial assets and liabilities whose carrying value approximate fair value.   

 

The main risks that the Company faces arising from its financial instruments are:

 

(i)   market price risk, being the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices and comprises currency risk, interest rate risk and other price risk;

(ii)   interest rate risk, being the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates;

(iii) foreign currency risk, being the risk that the value of investment holdings, investment purchases, investment sales and income will fluctuate because of movements in currency exchange rates;

(iv) credit risk, being the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company; and

(v) liquidity risk, being the risk that the bank may demand repayment of the loan and/or that the Company may not be able to liquidate quickly its investments.

 

The Company held the following categories of financial instruments as at 30 June 2021 all of which are held at amortised cost, other than financial assets designated at fair value through profit or loss, which are held at fair value. The Directors are of the opinion that for the financial instruments held at amortised cost, the carrying value approximates their fair value.

	2021 £'000	2020 £'000
Financial assets
Financial assets designated at fair value through profit or loss	257,467	230,741
Cash and cash equivalents	11,427	2,853
Amounts due from brokers	-	6,520
Amounts due on new share issuance	275	-
Accrued income	3,302	3,356
Financial liabilities
Amount due to brokers	4,980	6,059
Bank loan	33,000	31,000
Interest on bank loan facility	16	13
Other creditors	305	725

 

17 Market Price Risk

Market price risk (including other price risk) arises mainly from uncertainty about future prices of financial instruments held. It represents the potential loss the Company might suffer through holding market positions in the face of price movements. To mitigate the risk the Board's investment strategy is to select investments for their fundamental value. Stock selection is therefore based on disciplined accounting, market and sector analysis, with the emphasis on long term investments. An appropriate spread of investments is held in the portfolio in order to reduce both the statistical risk and the risk arising from factors specific to a country or sector. The Investment Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to consider investment strategy.

 

Investment and portfolio performance are discussed in the Investment Manager's Review and further information on the investment portfolio is set out above. These section does not form part of the audited financial statements.

 

If the investment portfolio valuation fell 5% at 30 June 2021, the impact on the profit or loss and the net asset value would have been negative £12.9 million (2020: a fall of 5% would have impacted the profit or loss and the net asset value by negative £11.5 million). Due to the effect of gearing, the impact on the net asset value per share would have been a decrease of 5.5% (2020: decrease of 5.6%). If the investment portfolio valuation rose by the same amount, the effect would have been equal and opposite. The calculations are based on the portfolio valuation at the Statement of Financial Position date and is not representative of the period as a whole, and may not be reflective of future market conditions.

 

The Directors believe 5% is a relevant percentage based on average market volatility in recent years.      

           

18 Interest Rate Risk

The Company's financial assets and liabilities, with the exception of cash and cash equivalents (see below), that are subject to interest rate risk are detailed below.

 

	2021	2021	2021	2020	2020	2020
	£'000	Weighted average interest rate (%)	Weighted average period for which the rate is fixed (years)	£'000	Weighted average interest rate (%)	Weighted average period for which the rate is fixed (years)
Financial assets:
Fixed rate instruments & convertible securities	130,814	7.10	4.31	123,926	6.87	4.26
Floating rate notes	78,591	5.97	n/a	64,641	6.68	n/a
Preference shares	12,360	10.89	n/a	13,235	7.13	n/a
Financial liabilities:
Bank Loan	33,000	1.43	n/a	31,000	1.26	n/a

 

Financial assets

Fixed, floating rate and preference share yields, and their prices, are determined by market perception as to the appropriate level of yields given the economic background. Key determinants include economic growth prospects, inflation, the Government's fiscal position, short term interest rates and international market comparisons. The Investment Manager takes all these factors into account when making any investment decisions as well as considering the financial standing of the potential investee company.

 

Interest rates on fixed income instruments are fixed at the time of purchase, as the fixed coupon payments are known, as are the final redemption proceeds. Consequentially, if a fixed income instrument is held until its redemption date, the total return achieved is unaltered from its purchase date. However, over the life of a fixed income instrument the market price at any given time will depend on the market environment at that time. Therefore, a fixed income instrument sold before its redemption date is likely to have a different price to its purchase level and a profit or loss may be incurred.

 

Interest rates on floating rate instruments vary throughout the life of the instrument based on movements in the applicable underlying base rate. Consequentially, the total return achieved on these positions changes throughout the life of position. In addition, over the life of the financial instrument, the market price of such instruments will depend on the market environment at that time. Therefore, a floating rate instrument sold before its redemption date is likely to have a different price to its purchase level and a profit or loss may be incurred.

 

Cash and cash equivalents

When the Company retains cash balances they are held in floating rate deposit accounts. As at 30 June 2021, cash held in sterling was £10,335,000. The benchmark rate which determines the interest payments received on sterling interest bearing cash balances is the UK bank base rate, which was 0.10% at 30 June 2021 (2020: 0.1%). The Company also holds an immaterial amount of cash in a range of other currencies, amounting to £1,092,000.

 

Financial liabilities

The Company has borrowed in sterling at a variable rate of interest based on the UK bank base rate. If the bank base rate increased by 0.50%, the impact on the profit or loss would have been a loss of £165,000 (2020: £155,000). If the bank base rate had decreased by 0.50%, the impact on the profit or loss would have been equal and opposite. The calculations are based on borrowings as at the respective Statement of Financial Position dates and are not representative of the year as a whole.

 

The Directors believe 0.50% is relevant based on observed interest rate adjustments in recent years.

 

At year end, the Company held bank loans of £33 million from Scotiabank, details of which are contained in note 11.

19 Foreign Currency Risk

The Company invests in overseas securities and may hold foreign currency cash balances which give rise to currency risks. It is not the Company's policy to hedge this risk on a continuing basis but it may do so from time to time.

Foreign currency exposure at 30 June 2021 was as follows:

	2021 Investments £'000	2021 Cash £'000	2021 Accrued Income £'000	2021 Total £'000	2020 Investments £'000	2020 Cash £'000	2020 Accrued Income £'000	2020 Total £'000
Euro	22,083	817	202	23,102	16,514	304	187	17,005
Australian dollar	587	2	-	589	364	4	-	368
US dollar	56,403	238	1,310	57,951	43,854	123	818	44,795
Norwegian krone	1,454	16	34	1,504	1,363	-	38	1,401
Canadian dollar	686	18	4	708	322	4	3	329
Swedish Krona	1,110	0	5	1,115
	82,323	1,091	1,555	84,969	62,417	435	1,046	63,898

 

If the value of sterling had weakened against each of the currencies in the portfolio by 5% (2020: 5%), the impact on the profit or loss and the net asset value would have been positive £4.4 million (2020: positive £3.3 million).                                                                                                                                   

If the value of sterling had strengthened by the same amount the impact on the profit or loss and the net asset value would have been negative £3.9 million (2020: negative £3.0 million).

 

The calculations are based on the portfolio valuation and accrued income balances at the balance sheet date and are not representative of the period as a whole and may not be reflective of future market conditions.    

 

The Directors believe 5% is relevant based on the average market volatility in exchange rates in recent years.

 

20 Credit Risk

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The Investment Manager has in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis. The carrying amounts of financial assets best represents the maximum risk exposure at the balance sheet date.

 

At the reporting date, the Company's financial assets exposed to credit risk amounted to the following:

	2021 £'000	2020 £'000
Fixed income securities	216,602	188,849
Convertible bonds	1,560	10,483
Cash and cash equivalents	11,427	2,853
Amounts due from brokers	-	6,520
Amounts due on new share issuance	275	-
Accrued income	3,302	3,356
	233,166	212,061

 

Credit risk on fixed income securities and convertible bonds instruments is considered to be part of market price. The credit ratings for the fixed income securities held by the Company as at 30 June have been listed below:

Rating of fixed income securities	2021 %	2020 %
BB	-	-
BB-	4.0	2.7
B+	2.7	7.1
B	6.7	13.6
B-	2.7	5.2
CC	-	1.5
CCC	4.0	-
CCC+	4.0	8.6
CCC-	1.3	-
Not rated	74.6	61.3
	100.0	100.0

Source: 2021: S&P, 2020: S&P

 

The percentage above represents the value of fixed income securities of £216,602,000 (2020: £188,489,000) included in the Statement of Financial Position which are exposed to credit and counterparty risk by credit rating.

 

Credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the acceptable credit quality of the brokers used. The Board monitors the quality of service provided by the brokers used to further mitigate this risk.

 

The Company's cash and most of the assets are held by BNP Paribas Securities Services S.C.A. Jersey Branch ("BNPP") and were previously held by HSBC Bank plc ("HSBC"). The Company still holds a residual cash balance with HSBC of £11,000 (2020: £142,000). The rating agency Moody's assigns a rating of A1 to HSBC and A2 to BNPP.

                                                                                                                       

Should the credit quality or the financial position of BNPP or HSBC deteriorate significantly the Investment Manager will move the cash holdings to another bank.                                                                                                                                

There were no contingencies or guarantees outstanding at the balance sheet date.

 

21 Liquidity Risk

The Company's financial instruments include investments in unquoted investments which are not traded in an organised public market and which generally may be illiquid. As a result, the Company may not be able to liquidate these investments at an amount close to their fair value.

 

The Company's listed securities are considered to be readily realisable.

 

At the reporting date, the Company's investments were categorised as follows:

 

	2021 £'000	2020 £'000
Listed/Quoted on a stock exchange	256,831	221,877
Prices via direct broker quotes	636	8,864
Total financial assets	257,467	230,741

 

The Company's liquidity risk is managed on an ongoing basis by the Investment Manager in accordance with policies and procedures in place as described in the Directors' Report. The Company's overall liquidity risks are monitored on a quarterly basis by the Board.

 

The Company maintains sufficient cash, has a short term bank loan facility and readily realisable securities to pay accounts payable and accrued expenses. The Company also maintains sufficient cash and readily realisable securities to meet any demand repayment on its overdraft facility.

 

All the Company's financial liabilities are due in one year or less.

 

22 Fair Value Hierarchy

International Financial Reporting Standard ("IFRS") 13 Fair Value Measurement requires an analysis of investments valued at fair value based on the reliability and significance of information used to measure their fair value. The level is determined by the lowest (that is the least reliable or independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:

·   Level 1 - investments quoted in an active market;

·   Level 2 - investments whose fair value is based directly on observable current market prices or indirectly being derived from market prices;

·   Level 3 - investments whose fair value is determined using a valuation technique based on assumptions that are not supported by observable current market prices or based on observable market data.

 

Transfers in and out of the levels have been deemed to have occurred at the end of the reporting period.

 

Investments valued using stock market active prices are disclosed as Level 1 and this is the case for the quoted equity investments that the Company holds. Securities in Level 2 are priced using evaluated prices from a third party vendor, together with a price comparison made to evaluated secondary and tertiary third party sources, including broker quotes and benchmarks. As a result, these investments are disclosed as Level 2 - recognising that the fair values of these investments are not as visible as quoted investments and their higher inherent pricing risk.

 

Investments included as Level 3 are priced by the investment manager using a valuation technique reviewed by the Board taking into account, where appropriate, latest dealing prices, broker statements, valuation information and other relevant factors.

 

Financial assets at fair value	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Fixed income securities	8,757	207,223	622	216,602
Equity shares	33,793	5,498	14	39,305
Convertible bonds	-	1,560	-	1,560
As at 30 June 2021	42,550	214,281	636	257,467

 

Financial assets at fair value	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Fixed income securities	4,512	175,853	8,484	188,849
Equity shares	31,029	-	380	31,409
Convertible bonds	4,038	6,445	-	10,483
As at 30 June 2020	39,579	182,298	8,864	230,741

 

If the market value of the Level 3 investments fell by 5% (2020: 5%), the impact on the profit or loss and the net asset value would have been negative £0.60 million (2020: negative £0.44 million). If the value of the Level 3 investments rose by the same amount, the effect would have been equal and opposite.

 

IFRS 13 requires disclosure, by class of financial instrument, if the effect of changing one or more input to reasonably possible alternative assumptions would result in a significant change to the fair value measurement. The information used in determination of the fair value of Level 3 investments is chosen with reference to the specific underlying circumstances and position of the investee company. On that basis the Board believes that the impact of changing one or more of the inputs to reasonably possible alternative assumptions would not change the fair value significantly. The following shows a reconciliation from the beginning to the end of the year for fair value measurements in Level 3 of the fair value hierarchy.

 

Level 3 Financial Assets	2021 £'000	2020 £'000
Opening valuation	8,864	10,390
Purchases and corporate actions	-	2,866
Sales	(942)	(1,812)
Unrealised gains/(losses)	9,973	562
Realised losses	(10,436)	(1,632)
Transfers out of Level 3	(7,775)	(1,970)
Transfers into Level 3	952	460
	636	8,864

 

The fair value of Level 3 financial assets has been determined by reference to valuation techniques described in note 1(b) of these financial statements. The Level 3 investments at the year-end are:

 

	2021 £'000		2020 £'000
Aggregated Micro 8% 17/10/2036	-		7,081	(1)
JPI Media Group Senior Notes (Facility B)	-		709	(1)
Fara Holdco Limited NPV	-		161	(1)
JPI Media Group Equity	-		14	(1)
NT Rig Holdco 12% 20/12/2021	-		694	(1)
R.E.A Holdings Plc 7.5% 30/06/2022	622	(1)	-
R.E.A Holdings Plc CW 15/07/2025	14	(2)	205	(2)
	636		8,864

 

(1)   broker quote(s), low liquidity

(2)   Marked to model

 

R.E.A Holdings plc 7.5% 30/06/2022 £622,000 (2020: £693,000) was transferred out of level 2 to level 3 due to low liquidity levels.

 

Aggregated Micro 8% 17/10/2036 £8,837,000 (2020: £7,081,000) was transferred out of level 3 to level 2 due to improved trading volumes and the Company's ability to source a price on a daily basis.    

           

23 Transaction with the Investment Manager and Related Parties

The Board is considered a related party.

 

All transactions with related parties are carried out at an arm's length basis.

 

There are no other transactions with the Board other than aggregated remuneration for services as Directors as disclosed in the Directors' Remuneration Report in the Company's Annual Financial Report and Financial Statements and as set out in note 4. The beneficial interests of the Directors in the shares of the Company are disclosed in the Directors' Report section of the Company's Annual Financial Report and Financial Statements. There are no outstanding balances to the Board at the year end.

 

Details of the fee arrangement with the Investment Manager is disclosed in note 3.

 

24 Subsequent Events

The Board has evaluated subsequent events for the Company through to 16 September 2021, the date the financial statements were available to be issued, and has concluded that the material events listed below do not require adjustment of the financial statements.

 

Share Issues

Following the year end the Company undertook a further six issues of shares issuing, in total, an additional 10,100,000 ordinary shares of no par value for total consideration of £5.54 million. As at the date of this report the issued share capital of the Company was 455,151,858 ordinary share of no par value.

 

Dividend declaration

The fourth interim dividend of 1.47 pence per share was announced on 22 July 2021 and paid on 31 August 2021 to Shareholders on the register on 30 July 2021, having an ex-dividend date of 29 July 2021.

 

Bank loan amendment

In advance of LIBOR ceasing to be published on 31 December 2021, the Company signed an amendment agreement with Scotiabank on 16 September 2021 that changes the benchmark reference rate from LIBOR to SONIA (or similar alternative reference rates for drawdowns in other permitted currencies).

Glossary of Terms and Definitions 

 

AIC Code	Association of Investment Companies of Corporate Governance published in February 2019.
Alternative Performance Measures ("APMs")	Alternative performance measures are numerical measures of the Company's current, historical or future performance, financial position or cash flows, other than financial measures defined or specified in the applicable financial framework. The Company's applicable financial framework includes IFRS and the AIC SORP.
Annual dividend per ordinary share	The total amount of dividends declared for every issued ordinary share over the Company's financial year.
Company	CQS New City High Yield Fund Limited
Dividend cover	Earnings per share divided by dividends per ordinary share expressed as a ratio.
Dividend yield	The annual dividend per share expressed as a percentage of the share price (bid price).
FRN	Floating Rate Note.
Gearing	The level of borrowing that the Company has undertaken. Represented by total assets (being total assets less current liabilities (excluding borrowings)) less all cash, expressed as a percentage of Shareholders' funds (being the Net Asset Value of the Company) minus 100.
Net Asset Value or NAV and NAV per ordinary share	The value of total assets less total liabilities. Liabilities for this purpose included current and long-term liabilities. To calculate the net asset value per ordinary share, the net asset value divided by the number of shares in issue produces the net asset value per share.
Ongoing charges ratio   (calculated using AIC guidance)	A measure of all operating costs incurred in the reporting period, calculated as a percentage of average net assets in that year. Operating costs exclude costs suffered within underlying investee funds, costs of buying and selling investments, interest costs, taxation and the costs of buying back or issuing ordinary shares.
Premium or discount	The amount by which the market price per share of an investment company is higher or lower than the net asset value per share. The discount or premium is expressed as a percentage of the net asset value per share.
Prior charges	The name given to all borrowings including debentures, loan and short term loans and overdrafts that are to be used for investment purposes, reciprocal foreign currency loans, currency facilities to the extent that they are drawn down, index-linked securities, and all types of preference or preferred capital and the income shares of split capital trusts, irrespective of the time until repayment.
Revenue earnings per ordinary share	Revenue earnings (which includes dividends paid out during the year) divided by the weighted average number of ordinary shares in issue during the financial year, expressed as a percentage.
Revenue reserve per ordinary share (after recognition of annual dividends)	Revenue reserve (which includes dividends paid out during the year) divided by the number of ordinary shares at the balance sheet date, expressed as a percentage.
SME	Small and medium-sized enterprises.
Total Return	The return to Shareholders calculated on a per share basis by adding dividends paid and declared in the period to the increase or decrease in the share price (bid) or net asset value. The dividends are assumed to have been reinvested in the form of ordinary shares or net assets.

 

Alternative Performance Measures

In accordance with ESMA Guidelines on APMs the Board has considered what APMs are included in the Annual Financial Report and Financial Statements which require further clarification.

 

The Company uses the following APMs (as described below) to present a measure of profitability which is aligned with the requirements of our investors and potential investors, to draw out meaningful data around revenues and earnings, and to provide additional information not required for disclosure under accounting standards:

 

·    Premium or discount

·    Annual dividend per ordinary share

·    Dividend yield

·    Dividend cover

·    Revenue earnings per ordinary share

·    Revenue reserves per ordinary share

·    NAV total return

·    Ordinary share price total return

·    Ongoing charges ratio

·    Gearing

 

All APMs relate to past performance. The following tables detail the methodology of the Company's APMs.

 

Premium or discount

The amount by which the market price per share of an investment company is higher or lower than the net asset value per share. The discount or premium is expressed as a percentage of the net asset value per share.

 

		2021	2020
Share price (bid price)	a	54.80p	47.40p
NAV per share	b	52.62p	47.52p
Premium /(Discount)	(a-b)/b	4.14%	(0.25%)

 

Annual dividend per ordinary share

The total amount of dividends declared for every issued ordinary share over the Company's financial year.

 

Dividend History	Rate	xd date	Record date	Payment date
First interim 2021	1.00p	22 October 2020	23 October 2020	30 November 2020
Second interim 2021	1.00p	28 January 2021	29 January 2021	26 February 2021
Third interim 2021	1.00p	29 April 2021	30 April 2021	28 May 2021
Fourth interim 2021	1.47p	29 July 2021	30 July 2021	31 August 2021
Annual dividend per ordinary share	4.47p
First interim 2020	1.00p	24 October 2019	25 October 2019	29 November 2019
Second interim 2020	1.00p	23 January 2020	24 January 2020	28 February 2020
Third interim 2020	1.00p	23 April 2020	24 April 2020	29 May 2020
Fourth interim 2020	1.46p	23 July 2020	24 July 2020	28 August 2020
Annual dividend per ordinary share	4.46p

 

Dividend yield

The annual dividend per ordinary share expressed as a percentage of the share price (bid price).

 

		2021	2020
Annual dividend per ordinary share	a	4.47p	4.46p
Share price (bid price)	b	54.80p	47.40p
Dividend yield	a/b	8.16%	9.41%

 

 

Dividend cover

Earnings per share divided by the annual dividend per ordinary share expressed as a ratio.

 

		2021	2020
Earnings per ordinary share	a	4.18p	4.59p
Annual dividend per ordinary share	b	4.47p	4.46p
Dividend cover	a/b	0.94x	1.03x

 

Revenue earnings per ordinary share

Revenue earnings (which includes dividends paid out during the year) divided by the weighted average number of ordinary shares in issue during the financial year, expressed as a percentage.

 

		2021	2020
Revenue earnings	a	£18,302,000	£19,666,000
Weighted average number of ordinary shares in issue	b	437,519,666	428,002,951
Revenue earnings per ordinary share	(a/b)*100	4.18p	4.59p

 

Revenue reserves per ordinary share

Revenue reserve (which includes dividends paid out during the year) divided by the number of ordinary shares at the balance sheet date, expressed as a percentage.

 

		2021	2020
Revenue reserve	a	£16,830,543	£17,982,000
Ordinary shares in issue	b	445,051,858	432,851,858
Revenue reserves per ordinary share	(a/b)*100	3.78p	4.15p

 

NAV and ordinary share price total return

The return to Shareholders calculated on a per share basis by adding dividends paid and declared in the period to the increase or decrease in the share price (bid) or net asset value. The dividends are assumed to have been reinvested in the form of ordinary shares or net assets.

 

2021	Annual dividend per share	NAV	Share price (bid)
30 June 2020	4.46p	47.52	47.40
30 June 2021	4.47p	52.62	54.80
Capital return		10.73%	15.61%
Effect of dividend reinvestment		10.65%	10.70%
Total return		21.38%	26.31%

 

2020	Annual dividend per share	NAV	Share price (bid)
30 June 2019	N/A	55.19	59.80
30 June 2020	4.46p	47.52	47.40
Capital return		(13.89)%	(20.74)%
Effect of dividend reinvestment		7.67%	6.60%
Total return		(6.22)%	(14.14)%

 

Ongoing charges ratio

A measure of all operating costs incurred in the reporting period, calculated as a percentage of average net assets in that year. Operating costs exclude costs suffered within underlying investee funds, costs of buying and selling investments, interest costs, taxation and the costs of buying back or issuing ordinary shares.

 

		2021	2020
Average NAV	a	214,507,033	223,518,807
Operating expenses per Statement of Comprehensive Income		2,754,644	2,754,552
Ineligible expenses		(64,535)	(101,813)
Operating expenses	b	2,690,109	2,652,739
Ongoing charges figure (calculated using the AIC methodology)	b/a	1.25%	1.19%

 

Gearing

The level of borrowing that the Company has undertaken. Represented by total assets (being total assets less current liabilities (excluding borrowings)) less all cash, expressed as a percentage of Shareholders' funds (being the Net Asset Value of the Company) minus 100.

 

		2021 £'000	2020 £'000
Total assets		273,028	243,476
Current liabilities (excluding borrowings)		(5,301)	(6,797)
Cash and cash equivalents		(11,427)	(2,853)
Total	a	256,300	233,826
Net Asset Value	b	234,178	205,679
Gearing	((a/b)-1)*100	9.45%	13.68%

 

A copy of the Company's Annual Report will be available shortly from the Company Secretary, (BNP Paribas Securities Services S.C.A., Jersey Branch, IFC 1, The Esplanade, St Helier, Jersey, JE1 4BP), or will be circulated on the Company's website (https://ncim.co.uk/cqs-new-city-high-yield-fund-ltd).