INVESCO Leveraged High Yield Fund Limited: Annual Financial Report
INVESCO Leveraged High Yield Fund Limited: Annual Financial Report FINANCIAL INFORMATION AND PERFORMANCE STATISTICS
Balance sheet at 30 September 2012 2011 CHANGE
Shareholders' funds (£'000) 72,391 60,476 +19.7
Net asset value per ordinary share 65.1p 54.3p +19.9
Mid-market price per ordinary share 59.9p 50.0p +19.8
Discount per ordinary share 8.0% 7.9%
Gross gearing 38% 68%
Net gearing 29% 54% Year Ended Year Ended 30 30 September September
Total Return 2012 2011
3 month LIBOR rate 0.6% 1.0%
Net asset value 29.1% -8.1%
Share price (Source: Thomson Reuters 31.6% -11.7% Datastream)
Gross income (£'000) 6,879 7,203
Net revenue available for ordinary shares (£'000) 5,988 6,283
Dividends per ordinary share:
- First interim 1.25p 1.25p
- Second interim 1.25p 1.25p
- Third interim 1.25p 1.25p
- Fourth interim 1.25p 1.25p
- Total 5.00p 5.00p
- ongoing charges 1.49% 1.37%
- performance fee 0.00% 0.00%
Return per Ordinary Share
Revenue return 5.4p 5.6p
Capital return 10.4p (10.9)p
Total return 15.8p (5.3)p
The year under review, whilst rewarding for shareholders, was not an easy one to predict nor in which to position the portfolio for optimum returns. The world economic turmoil showed no sign of abating and in such uncertain times, your investment managers demonstrated the high conviction that characterises their approach by investing in, for example, financial debt instruments against the market trend.
Results for the Year
In such testing times, I am pleased to report that the Company's net asset value (`NAV') per share increased by 19.9% to 65.1p. The mid-market price of the Company's ordinary shares increased by 19.8% to 59.9p at the year end. NAV total return per share increased by 29.1% after fees and expenses.
Your Board believes that shareholders value highly the Company's dividend stream and has continued to prioritise revenue generation through investment in relatively high-yielding and secure debt positions. Despite a substantially lower level of gearing throughout the year, the Company has produced earnings per share of 5.4p, which is comfortably in excess of the annual cost of the dividend. The Board and investment managers expect this situation to continue for the foreseeable future.
The Board declared a 4th interim dividend of 1.25p per share on 19 September 2012, making a total of 5p for the year (2011: 5p). The Board intends that the Company will maintain an annual dividend of not less than 5p per share, paid equally and quarterly, in the absence of unforeseen circumstances. One of the particular benefits of closed-end funds is their ability to smooth dividend payments through the use of the revenue reserve when required. Careful management of the Company's revenue reserve over the last few years has enabled the Company to build a significant revenue reserve equivalent to two years of annual dividends.
The ordinary shares are geared by the repo financing. Gearing was reduced in the first quarter of the period and net gearing stood at 29% at the year end (2011:54%). On an average basis, net gearing decreased to 34% for the year being reported from 41% last year.
Repo financing remains a very flexible method of providing additional capital when appropriate, and the very low interest rate environment affords the investment managers an ability to achieve an attractive `carry' on the investments. The level of gearing is carefully monitored and managed by both the Board and the investment managers, fully cognisant of the greater capital volatility that comes with the enhancement to income.
Share Buy Backs
Your Directors are again seeking the authority to buy back up to 16,682,749 shares (14.99% of the Company's issued share capital as at 27 November 2012) subject to the restrictions referred to in the notice of the AGM. This authority will expire at the AGM in 2014. In association with this authority the Board is seeking shareholder approval for the renewal of the waiver of the obligation under Rule 9 of the Takeover Code that would otherwise fall on Invesco Perpetual if its shareholding increased above 30% as a result of buy-backs.
It is the Board's current intention to buy back shares at a discount to NAV where the Board believes it is in shareholders' interests to do so. Your Directors are proposing that shares bought back by the Company either be cancelled or, alternatively, be held as treasury shares with a view to their resale, if appropriate, or later cancellation.
There have been a number of changes to the Board during the year, most notably the retirement of George Baird on 30 September 2012 and my appointment as Chairman of the Company, also on this date. In addition, Hugh Ward retired from the Board with effect from 30 September 2012. The Board would like to take this opportunity to thank George and Hugh for their most valuable contribution to the Company since its launch in 1999 and to wish them well in the future.
There were two appointments to the Board during the year, with Michael Lombardi and Peter Yates each having been appointed as a Director of the Company with effect from 1 August 2012. Mr Lombardi is a corporate lawyer specialising in investment fund and structured finance transactions. Mr Yates is an experienced Chartered Accountant and has been appointed to the role of Chairman of the Company's Audit Committee. Their respective biographies and further information in relation to the selection and appointment process can be found on pages 12 and 23 of the annual financial report. It is the Board's recommendation that shareholders support the resolutions concerning their respective appointments at the Company's AGM to be held in January of the coming year, as the Directors intend to do themselves.
The Board continues to be committed to maintaining the highest standards of Corporate Governance and is accountable to you as shareholders for the governance of the Company's affairs. The Directors believe that, during the year under review, they have complied with the provisions of the AIC Code of Corporate Governance as endorsed by the Financial Reporting Council.
After a year of good performance, it is important to remind ourselves that we have had a long bull market in fixed income and several factors such as very low government bond yields and tight corporate spreads suggest that some parts of the market are fully valued, particularly sovereign and investment grade corporate bonds. In contrast, low inflation and interest rates together with the actions of policy-makers are supportive. In such markets the Directors believe the Managers' flexible and active approach can be successful in providing an attractive return, although it is most unlikely that this year's capital performance will be repeated in the current financial year.
27 November 2012
INVESTMENT MANAGERS' REPORT
Over the 12 months to the end of September 2012 more credit risk-sensitive assets enjoyed strong returns as the market's fear of systemic risk in the eurozone's banking system, particularly acute in the third quarter of 2011, was gradually overturned by the actions of monetary and political authorities to put in place support for the eurozone's sovereign bond markets and to promote economic growth. Combined with a macroeconomic environment of low inflation and interest rate expectations, this burgeoning investor risk appetite pushed yields down sharply from the high levels seen at times last year.
According to data from Merrill Lynch, European high yield bonds had a total return for the 12 month period under review of 17.0% (in sterling terms). The aggregate yield for the asset class fell by 353 basis points to 8.04%. This compares to a return of 3.0% for euro investment grade corporate bonds (11.3% in local currency terms) and 16.3% for sterling investment grade. Gilts returned 8.8%.
With risk appetite rising and yields low across many areas of the bond market, this period has seen strong demand for high yield bonds. European high yield bond issuance was above the average of recent years in the first quarter of 2012, following very low levels in mid-2011 (source: Barclays). In the third quarter of this year, companies were encouraged by very supportive market conditions to raise capital, pushing the supply of new bonds well above average levels for the time of year, reaching €10.2 billion (across all currencies) in September. Many individual issues have been heavily oversubscribed despite having relatively low coupons. Throughout the period, the level of defaults has remained moderate. According to Moody's, the European high yield corporate default rate rose to 2.6% in August 2012, from 1.1% a year before.
The recovery of investor confidence has been built more than anything else on two actions by the European Central Bank (`ECB') under its new president, Mario Draghi. In November and February, the bank carried out Long Term Refinancing Operations, lending a total of more than €1 trillion to some 800 European banks for a three-year term, at a low rate of interest and with relaxed collateral requirements. This effectively addressed market concerns about the funding of the European banking system. Then this summer, Draghi signalled his intent that the ECB should move towards playing the role of the eurozone's lender of last resort, a commitment that was spelled out in the announcement of conditional but, crucially, unlimited, direct support for member states' sovereign debt under the Outright Monetary Transactions programme. Combined with political progress towards a single eurozone banking supervisor and larger and more flexible rescue funds, the eurozone now appears to be significantly closer to having some structure for debt mutualisation. This has helped to contain the risk premia on the sovereign and corporate debts of peripheral eurozone states.
Across the major developed economies, monetary policy has been loosened further. The US Federal Reserve (`Fed') has continued to put downward pressure on market interest rates, both through transactions - under the auspices of Operation Twist and the recently announced third round of quantitative easing (`QE3') - and through market guidance that Fed interest rates will remain at their current near-zero level until mid-2015. The Bank of England has also maintained its record low interest rate of 0.5% and has increased its programme of asset purchases by a total of £175 billion over the past 12 months. This easy policy reflects the ongoing, weak macroeconomic environment. Across Europe, economic growth remains near zero, with business sentiment low and unemployment levels high. The US economy has improved in the last year but the recovery has been modest and consumption is still being hampered by weak employment and housing markets.
Our strategy is to construct a diversified portfolio of bonds from across the credit market which will provide an attractive level of income while seeking to keep default risk low. Our investments are concentrated in higher credit quality high yield bonds and in higher yielding investment grade bonds. In sector terms, we see financials as the biggest area of value in the corporate bond markets. We hold senior and subordinated bank debt, with a preference for large, northern European banks. Companies in this sector have continued to make progress in reforming and strengthening their capital structures. We see individual opportunities across the credit market, although there is clearly less value than a year ago when many bonds were trading considerably below par and with high yields relative to history. We think that some areas of the corporate bond market, particularly non-financials and the higher credit quality categories, now offer relatively little value.
In the year under review, the Company's NAV rose from 54.3p to 65.1p, with a total NAV return of 29.1%, gross of dividend. We commenced the year with net gearing of 54% and with net assets of £60.5 million. We reduced net gearing over the year to close at a level of 29%, while net assets rose to £72.4 million. Funding costs remain relatively low. The dividend is 5p and is well covered by the income of the portfolio.
Over the early months of this review period we took advantage of volatile markets to add exposure to high yield bonds and to financials. As the market rallied into the first quarter of 2012, we sold and trimmed positions. We have continued to take opportunities to add attractive yields to the portfolio while reducing our gearing to the market as it has rallied over the period. A large number of banks have tendered to buy back outstanding debt in the last year, seeking to take advantage of their higher liquidity levels to reduce their funding costs. In most cases, we have chosen to retain our positions rather than sell.
The corporate bond market is being supported by several important factors. Inflation and interest rates are low. There is strong demand currently for corporate debt and this is pushing down funding costs. Furthermore, political and monetary authorities have shown real commitment in the last year to address the eurozone debt crisis and to stimulate growth. However, the market has reacted to this good news with a strong rally and bond yields are now significantly lower than they were. Also, economic growth remains weak and that is a negative factor for corporates in any circumstances. While we continue to see value and opportunities in the market, we are increasingly cautious. We expect that corporate bond returns will be more highly correlated with income, with less capital growth, and our focus is on finding securities that will add attractive income streams to the portfolio.
Paul Read/Paul Causer
27 November 2012
Report of the Directors
for the year ended 30 September 2012
Principal Risks and Uncertainties
Investment Policy (incorporating the Investment Objective)
There is no guarantee that the Company's investment objective will be achieved or provide the returns sought by shareholders. The Board has established guidelines to ensure that the investment policy that has been approved is pursued by the Manager.
The majority of the Company's investments are traded on the major securities markets. The principal risk for investors in the Company is of a significant fall in the markets and/or a prolonged period of decline in the markets relative to other forms of investment. The value of investments held within the investment portfolio is influenced by many factors including the general health of the world economy, interest rates, inflation, government policies, industry conditions, political and diplomatic events, tax laws, competition, environmental laws and by changing investor demand. In addition, there is a risk that European policy makers fail to maintain the current fragile market confidence by not implementing an effective and lasting solution to the Eurozone crisis. The Manager strives to maximise the total return from the investments held, but these investments are influenced by market conditions and the Board acknowledges the external influences on investment portfolio performance.
The investment process employed by the Manager is set out in the first paragraph under Investment Policy and Risk on page 15 of the annual financial report.
Investment portfolio performance is dependent on the performance of high yield corporate bonds in the UK and elsewhere in the Company's investment universe. These stocks are particularly influenced by prevailing interest rates, government monetary policy and by demand for income. The Manager strives to maximise both capital growth and high income from the investment portfolio and the Board naturally recognises the external influences on investment portfolio performance.
The Company is likely, from time to time, to maintain a more concentrated investment portfolio (both in terms of individual holdings and in terms of its exposure to particular industries) than those of many other investment funds. Accordingly, shareholders should be aware that the investment portfolio potentially carries a higher level of risk than a more diversified investment portfolio.
The Company is permitted from time to time to invest in other listed investment companies (including investment trusts) subject to a limit on such investment of 15% of its Total Assets. As a consequence of these investments, the Company may itself be indirectly exposed to gearing through the borrowings of these other investment companies. The Company is not currently invested in any listed investment companies (including investment trusts).
The performance of the Manager is carefully monitored by the Board, and the continuation of the Manager's mandate is reviewed each year.
Past performance of the Company is not necessarily indicative of future performance.
A fuller discussion of the economic and market conditions facing the Company and the current and future performance of the investment portfolio of the Company, see both the Chairman's Statement and Manager's Report on pages 5 to 8 of the annual financial report.
Foreign Exchange Risk
The movement of exchange rates may have unfavourable or favourable impact on returns as the Company holds non-sterling denominated investments and cash. This risk is mitigated by the use of non-sterling denominated repo financing. The foreign currency exposure of the Company is monitored by the Manager on a daily basis and formally at Board meetings.
The market value of the ordinary shares will be affected by a number of factors, including the dividend yield from time to time of the ordinary shares, prevailing interest rates and supply and demand for those ordinary shares, along with wider economic factors and changes in the law, including tax law, and political factors. The market value of, and the income derived from, the Company's ordinary shares can fluctuate and may go down as well as up.
The market value of the ordinary shares may not always reflect the NAV per ordinary share. The market price of an ordinary share may therefore trade at a discount to its NAV. As at 30 September 2012, an ordinary share of the Company traded at a discount of 8.0%. The Board and the Manager maintain an active dialogue with the aim of ensuring that the market rating of the Company's shares reflects the underlying NAV and the buy back and issuance facilities help the management of this process.
The ordinary shares are geared by the repo financing. As at 30 September 2012, net gearing was 29% at the year end (2011: 54%) and an investment in the ordinary shares should therefore be regarded as highly geared and consequently a higher risk investment.
Gearing levels may change from time to time in accordance with the Manager's assessment of risk and reward. As a consequence, any reduction in the value of the Company's investments may lead to a correspondingly greater percentage reduction in its NAV (which is likely to adversely affect the Company's share price). Any reduction in the number of ordinary shares in issue (for example, as a result of buy backs) will, in the absence of a corresponding reduction in borrowings or repo financing, result in an increase in the Company's gearing.
If it were not possible to roll over any repo financing on any repurchase date on acceptable terms, the amounts then owing by the Company under the repo financing arrangement would become payable to the counterparty. Also, although the repo financing requires the counterparties to sell the assets to the Company on the repurchase date at a fixed price, if a counterparty failed to do so the Company would be left with a contractual claim against the defaulting counterparty and there is no guarantee the Company would be able to recover all or any of the value of the assets from that counterparty.
In adverse market conditions, the risks of counterparty default may be greater than at any other time.
There is no guarantee that it will be possible to re-finance the repo financing or any other borrowings on their maturity either at all or on terms that are acceptable to the Company.
The Company currently has arranged facilities for repo financing with three counterparties. All borrowings, including repo financing, are actively managed by the Manager and monitored by the Board. If one or more of the counterparties with which the Company enters into repo financing decided to stop accepting non-investment grade bonds as collateral for repo financing or decided otherwise to restrict the repo financing currently provided to the Company then the Company may be unable, or it may be impracticable, to continue utilising repo financing and/or to replace its current repo financing as it expires. In certain circumstances, such as a material increase in the margins payable on repo financing, it may be uneconomical for the Company to continue utilising repo financing. The counterparties may force closure of the repo financing positions in which case the Company may be forced to repay the repo financing at short notice and the Company may be forced to sell assets at short notice to repay that debt and may not be able to realise the expected market value of those assets.
High Yield Corporate Bonds
Corporate bonds are subject to credit, liquidity, duration and interest rate risks. Adverse changes in the financial position of an issuer of corporate bonds or in general economic conditions may impair the ability of the issuer to make payments of principal and interest or may cause the liquidation or insolvency of an issuer.
The majority of the Company's investment portfolio at the year end consists of non-investment grade securities. To the extent that the Company invests in non-investment grade securities, the Company may realise a higher current yield than the yield offered by investment grade securities, but investment in such securities involves a greater volatility of price and a greater risk of default by the issuers of such securities, with consequent loss of interest payment and principal. Non-investment grade securities are likely to have greater uncertainties of risk exposure to adverse conditions and will be speculative with respect to an issuer's capacity to meet interest payments and repay principal in accordance with its obligations.
A lack of liquidity in corporate bonds may make it difficult for the Company to sell those bonds at or near their purported value. This may particularly be the case if the Company is forced to sell assets quickly, for example, to repay any repo financing that becomes unexpectedly repayable or which it is not possible to rollover or in the event of a liquidation of the Company. A lack of liquidity in corporate bonds may also make it difficult or impossible to rebalance the Company's investment portfolio as and when it believes it would be advantageous to do so. To mitigate these risks, the investment manager actively monitors both the ratings and liquidity of the bond portfolio in relation to the Company's known repo financing requirements.
The Company may enter into derivative transactions (including options, futures, contracts for difference, credit derivatives and interest rate swaps) for the purpose of efficient portfolio management. The Company will not enter into derivative transactions for speculative purposes. Efficient portfolio management may include reduction of risk, reduction of cost and enhancement of capital or income through transactions designed to hedge all or part of the investment portfolio, to replicate or gain synthetic exposure to a particular investment position where this can be done more effectively or efficiently through the use of derivatives than through investment in physical securities or to transfer risk or obtain protection from a particular type of risk which might attach to portfolio investments.
The Company may hedge against exposure to changes in currency rates to the extent that repo financing has not offset such exposure.
Derivative instruments can be highly volatile and expose investors to a high risk of loss. The low initial margin deposits or low initial amounts payable in relation to or to enter into some derivatives enable a higher degree of leverage than might be acquired in respect of a direct investment in the underlying asset. As a result, relatively small fluctuations in the value of the underlying asset or the subject of the derivative may result in a substantial fluctuation in the value of the derivative, either up or down. In addition, the amount of loss to the Company through holding a derivative may not be restricted to, and indeed may be many times greater than, the initial margin deposit or amount payable in respect of the derivative. Daily limits on price fluctuations and speculative position limits on exchanges may prevent prompt liquidation of positions resulting in potentially greater losses.
Where derivatives are used for hedging, there is a risk that the returns on the derivative do not exactly correlate to the returns on the underlying investment, obligation or market sector being hedged against. If there is an imperfect correlation, the Company may be exposed to greater loss than if the derivative had not been entered into.
Trading in derivatives markets may be unregulated or subject to less regulation than other markets.
Derivatives markets are historically relatively new and there are uncertainties as to how these markets will perform during periods of unusual price volatility or instability, market liquidity or credit distress, including current market circumstances. The Company could suffer substantial losses from its derivatives holdings in these or other situations.
Reliance on Third Party Service Providers
The Company has no employees and the Directors have all been appointed on a non-executive basis. The Company is reliant upon the performance of third party service providers for its executive function. The Company's most significant contract is with the Manager, to who the responsibility for the Company's portfolio is delegated. The Company has other contractual arrangements with third parties to act as company secretary, auditor, registrar, custodian and broker. Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to successfully pursue its investment policy and expose the Company to reputational risk.
The Manager may be exposed to the risk that litigation, misconduct, operational failures, negative publicity and press speculation, whether or not it is valid, will harm its reputation. Any damage to the reputation of the Manager could result in counterparties and third parties being unwilling to deal with the Manager and by extension the Company. This could have an adverse impact on the ability of the Company to pursue its investment policy.
The Board seeks to manage these risks in a number of ways:
• The Manager monitors the performance of all third party providers in relation to agreed service standards on a regular basis, and any issues and concerns are dealt with promptly and reported to the Board. The Manager formally reviews the performance of all third party providers and reports to the Board on an annual basis.
• The Board reviews the performance of the Manager at every board meeting and otherwise as appropriate. The Board has the power to replace the Manager and reviews the management contract formally once a year.
• The day-to-day management of the portfolio is the responsibility of Paul Read and Paul Causer, who are Co-Heads of the Invesco Perpetual Fixed Interest Team. They have 17 years and 18 years' experience in fixed income markets, respectively and have been the investment managers of the Company since 2001. The Board has adopted guidelines within which the investment managers are permitted wide discretion. Any proposed variation outside these guidelines is referred to the Board and the guidelines themselves are reviewed at every board meeting.
• The risk that the investment managers might be incapacitated or otherwise unavailable is mitigated by the fact that they work closely with each other and they also work within, and are supported by the wider Invesco Perpetual Fixed Interest team.
The Company is subject to various laws and regulations by virtue of its status as a Company registered under the Companies (Jersey) Law 1991, as an investment company and its listing on the London Stock Exchange. A serious breach of regulatory rules may lead to suspension from the London Stock Exchange or a qualified Audit Report. Other control failures, either by the Manager or any other of the Company's service providers, may result in operational or reputational problems, erroneous disclosures or loss of assets through fraud, as well as breaches of regulations.
The Manager reviews the level of compliance with financial regulatory requirements on a daily basis. All transactions, income and expenditure are reported to the Board. The Board regularly considers all risks, the measures in place to control them and the possibility of any other risks that could arise. The Board ensures that satisfactory assurances are received from service providers. The Manager's compliance and internal audit officers produce regular reports for review by the Company's Audit Committee.
Any changes in the Company's tax status or in taxation legislation or accounting practice could affect the value of investments held by the Company, affect the Company's ability to provide returns to shareholders or alter the post-tax returns to shareholders.
As a result of the Company's policy of charging 50% of management fees and financing costs (including the cost of the repo financing) to capital, maintenance of its NAV requires that the Company's investment portfolio achieves capital growth equivalent to the total amount of such costs and that all other costs are covered by income. Any changes to the way in which the Company accounts for expenses, tax or tax relief as a result of changes to recommended accounting practices, accounting standards, or tax legislation could have an adverse effect on the level of profits available for the payment of dividends.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
in respect of the Preparation of the Annual Financial Report
The Directors are responsible for preparing the annual financial report in accordance with applicable laws and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (`IFRSs') as adopted by the European Union. The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
International Accounting Standard 1 requires that financial statements present fairly for each financial year the Company's financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's `Framework for the preparation and presentation of financial statements'. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs.
In preparing these financial statements, the Directors are required to:
• properly select and apply accounting policies and then apply them consistently;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
• provide additional disclosures when compliance with specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and
• make an assessment of the Company's ability to continue as a going concern.
The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and which enable them to ensure that the accounts comply with the Companies (Jersey) Law 1991. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report (including a Business Review) and a Corporate Governance Statement that comply with that law and those regulations.
The Directors of the Company, each confirm to the best of their knowledge that:
• the financial statements, which have been prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;
• this annual financial report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces; and
• the annual report and accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.
Signed on behalf of the Board of Directors
27 November 2012
INVESTMENT Portfolio at 30 September 2012
All investments are fixed interest bonds unless otherwise stated.
The definitions of the Moody/Standard & Poor ratings below are set out on page 57 of the annual financial report.
Bonds and Equity Investments
AT MARKET COUPON VALUE % OF
COMPANY % MATURITY RATING £'000 PORTFOLIO
UPC 7.625 15 Jan Ba3/BB- 1,717 } 6.1
2020 8.125 01 Dec Ba3/BB- 1,707 } 2017 9.750 15 Apr B2/B- 1,273 } 2018 9.500 15 Mar B3/B- 895 } 2021
Ally Financial 7.500 21 Apr B1/B+ 3,435 3.7
Santos Finance Floating 22 Sep NR/BB 2,427 2.6
UBS Capital Floating Perpetual Ba2/BBB- 2,403 2.6 Securities 8.836
Unicredit Floating Perpetual Ba2/BB+ 2,140 2.4
Telecom Italia 5.250 17 Mar Baa2/BBB 1,179 } 2.2
2055 7.750 24 Jan Baa2/BBB 847 } 2033
Rexam Floating 29 Jun Ba2/BB 1,921 2.1
Bank of America 4.625 07 Aug Baa2/A- 1,749 1.9
Alliander Floating Perpetual A3/A- 1,675 1.8
Origin Floating 16 Jun Baa3/BB 1,625 1.8
SSE Floating Perpetual Baa2/BBB 1,612 1.7
Allianz Finance Floating 08 Jul A2/A+ 1,608 1.7
Lottomatica Floating 31 Mar Ba2/BB 1,566 1.7
RWE Floating Perpetual Baa2/BBB- 1,562 1.7
Commerzbank 7.750 16 Mar Ba1/BBB 1,524 1.7
Aviva Floating 22 May A3/BBB 772 } 1.2
6.875 2038 Floating Perpetual Baa1/BBB 347 } 4.729
Intesa Sanpaolo Floating Perpetual Ba2/BB+ 1,115 1.2
Wind Acquisition 11.750 15 Jul B3/BB- 804 } 1.2
2017 7.375 15 Feb Ba3/BB 295 } 2018
Lloyds Banking Group 6.385 12 May Ba3/BB+ 1,088 1.1 - LBG Capital No 2 (ECN) 2020
Levi Strauss 7.750 15 May B2/B+ 975 1.1
Ineos 9.250 15 May B1/B+ 857 0.9
Reynolds 7.750 15 Oct B1/B+ 829 0.9
Gategroup Finance 6.750 01 Mar B1/BB 817 0.9
Campofrio 8.250 31 Oct Ba3/BB- 803 0.9
ECO-BAT Finance 7.750 15 Feb B1/B+ 801 0.9
Matterhorn Mobile Floating 15 May B1/BB- 798 0.9
Xefin 8.000 01 Jun Ba3/B+ 789 0.9
BPCE Floating Perpetual Ba2/BBB- 787 0.8
Abengoa 8.500 31 Mar B1/B+ 772 0.8
Zinc Capital 8.875 15 May B2/B+ 546 0.6
Schaeffler Finance 6.750 01 Jul Ba3/B+ 422 0.5
Sappi Papier 6.625 15 Apr Ba2/BB 406 0.4
Stora Enso 5.500 07 Mar Ba2/BB 402 0.4
Fiat Finance & Trade 6.375 01 Apr Ba3/BB- 395 0.4
Mark IV Europe 8.875 15 Dec Ba3/BB- 380 0.4
Cirsa Finance 8.750 15 May B3/B+ 375 0.4
Telenet Finance 6.750 15 Aug Ba3/B+ 201 } 0.4
2024 6.250 15 Aug Ba3/B+ 161 } 2022
Beverage Packaging* 9.500 15 Jun Caa2/CCC+ 353 0.4
CNP Assurances Floating Perpetual A- 350 0.4
Codere Finance 8.250 15 Jun Caa2/B- 348 0.4
Ono Finance 11.125 15 Jul Caa1/B- 339 0.4
Lecta 8.875 15 May B1/B+ 198 0.2
Fortis Bank Floating Perpetual Ba3/BB 183 0.2
Techem 6.125 01 Oct Ba3/B+ 147 0.2
2019 50,720 55.1 *A subsidiary of the Reynolds Group Inc. AT MARKET COUPON VALUE % OF
COMPANY % MATURITY RATING £'000 PORTFOLIO
Virgin Media Finance 7.000 15 Jan 2018 Baa3/BBB- 2,151 } 3.5
8.875 15 Oct 2019 Ba2/BB- 1,122 }
Lloyds Banking Group
- Lloyds TSB 7.625 22 Apr 2025 Baa3/BBB- 2,084 } 3.4
- LBG Capital No 2 (ECN) 9.000 15 Dec 2019 Ba3/BB+ 1,010 }
Iron Mountain 7.250 15 Apr 2014 B1/B+ 2,020 2.2
Enterprise Inns 6.500 06 Dec 2018 NR/BB- 1,752 1.9
Intergen 9.500 30 Jun 2017 Ba3/BB- 1,425 1.5
Société Genérale Floating Perpetual Ba2/BBB- 1,329 1.4
Barclays Bank Floating Perpetual Ba1/BBB 1,252 1.4
Aviva 6.125 Perpetual A3/BBB 1,190 1.3
Jaguar Land Rover 8.250 15 Mar 2020 Ba3/BB- 1,079 1.2
Thames Water 7.750 01 Apr 2019 B1/NR 1,063 1.2
DFS Furniture 9.750 15 Jul 2017 B2/B+ 1,040 1.1
Pipe 9.500 01 Nov 2015 B3/B 1,013 1.1
Southern Water 8.500 15 Apr 2019 NR/BB- 998 1.1
General Electric Floating 15 Sep 2066 A2/AA- 931 1.0 Capital 5.500
Boparan 9.875 30 Apr 2018 Ba3/B+ 852 0.9
Odeon & UCI Finco 9.000 01 Aug 2018 B3/B 505 0.5
EDP Finance 8.625 04 Jan 2024 Ba1/BB+ 503 0.5
Matalan Finance 8.875 29 Apr 2016 B1/BB- 483 0.5
Gala Finance 8.875 01 Sep 2018 B3/B+ 477 0.5
Santander Floating 27 Jul 2019 Baa3/BBB+ 465 0.5
Novae 6.500 27 Apr 2017 Baa3/NR 454 0.5
Bakkavor Finance 8.250 15 Feb 2018 B2/B- 449 0.5
Legal & General Floating Perpetual Baa2/BBB+ 449 0.5
AXA Floating Perpetual Baa1/BBB 428 0.5
Premier Farnell 89.2p Cum Red NR/NR 427 0.5
Unicredit Floating Perpetual Ba2/BB+ 414 0.4
Care UK 9.750 01 Aug 2017 B2/B+ 398 0.4
Bupa Care Homes 11.800 30 Jun 2014 NR/NR 268 0.3
Skipton Floating 12 Dec 2018 Ba2/NR 249 0.3
Cattles 6.875 17 Jan 2014 NR/NR 6 } -
7.125 05 Jul 2017 NR/NR 3 } 28,289 30.6
General Motors 10 Jul 2019 Warrant 1,821 } 2.1
10 Jul 2016 Warrant 134 }
General Motors 0.000 15 Jul 2033 NR/NR 44 }
Compagnie Générale de 7.750 15 May 2017 Ba3/BB- 1,289 1.4 Géophysique - Veritas
Hutchison Whampoa 6.000 Perpetual Baa2/BBB 1,286 1.4
Vedanta Resources 6.750 07 Jun 2016 Ba3/BB 1,215 1.3
Catlin Floating Perpetual NR/BBB+ 1,210 1.3
Stora Enso 7.250 15 Apr 2036 Ba2/BB 1,114 1.2
Citigroup Preference NR/NR 838 0.9
Cemex 9.250 12 May 2020 NR/B- 699 0.8
Chrysler 8.000 15 Jun 2019 B2/B 662 0.7
Société Genérale 8.750 Perpetual Ba2/BBB- 627 0.7
Nara Cable 8.875 01 Dec 2018 B1/B+ 564 0.6
Aperam 7.750 01 Apr 2018 B2/BB- 511 0.6
Schaeffler Finance 8.500 15 Feb 2019 Ba3/B+ 344 0.4
Prudential 6.500 Perpetual Baa1/A- 305 0.3
Peabody 4.750 15 Dec 2066 NR/NR 263 0.3
Rothschilds Floating Perpetual NR/NR 217 0.2
Novasep 8.000 15 Dec 2016 Caa1/B- 63 0.1
Total investments 92,215 100.0
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 SEPTEMBER
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
NOTES £'000 £'000 £'000 £'000 £'000 £'000
Profit/(loss) on 11 - 8,589 8,589 - (11,406) (11,406) investments at fair
Exchange differences - 1,751 1,751 - (718) (718)
Profit on derivative
- currency hedges - 1,763 1,763 - 522 522
Income 2 6,879 - 6,879 7,203 - 7,203
Investment management 3 (339) (339) (678) (347) (347) (694) fees
Other expenses (310) (1) (311) (276) (1) (277)
Profit/(loss) before 6,230 11,763 17,993 6,580 (11,950) (5,370) finance costs and
Finance costs (213) (213) (426) (264) (264) (528)
Profit/(loss) before tax 6,017 11,550 17,567 6,316 (12,214) (5,898)
Taxation (29) - (29) (33) - (33)
Profit/(loss) after tax 5,988 11,550 17,538 6,283 (12,214) (5,931)
Return per ordinary 4 5.4p 10.4p 15.8p 5.6p (10.9)p (5.3)p share The total column of this statement represents the Company's statement of comprehensive income, prepared in accordance with International Financial Reporting Standards. The profit/(loss) after tax is the total comprehensive income. The supplementary revenue and capital columns are both prepared in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations. No operations were acquired or discounted in the year. . STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 SEPTEMBER SHARE SHARE CAPITAL REVENUE CAPITAL PREMIUM RESERVE RESERVE TOTAL NOTES £'000 £'000 £'000 £'000
At 1 October 2010 5,570 113,634 (58,524) 12,689 73,369
Total comprehensive - - (12,214) 6,283 (5,931) income for the year
Dividends paid 5 - - - (6,962) (6,962)
At 1 October 2011 5,570 113,634 (70,738) 12,010 60,476
Total comprehensive - - 11,550 5,988 17,538 income for the year
Shares bought back and (5) - (51) - (56) cancelled
Dividends paid 5 - - - (5,567) (5,567)
At 30 September 2012 5,565 113,634 (59,239) 12,431 72,391
AS AT 30 SEPTEMBER
NOTES £'000 £'000
Investments held at fair value through 92,215 90,297 profit or loss
Other receivables 2,265 2,658
Derivative financial instruments - - 336 unrealised gain
Cash and cash equivalents 6,868 8,715
Other payables (1,081) (305)
Derivative financial instruments - (104) - unrealised loss
Securities sold under agreements to (27,772) (41,225) repurchase
Net current liabilities (19,824) (29,821)
Total net assets 72,391 60,476
Issued capital and reserves attributable to equity holders
Share capital 6 5,565 5,570
Share premium 113,634 113,634
Capital reserve (59,239) (70,738)
Revenue reserve 12,431 12,010
Shareholders' funds 72,391 60,476
Net asset value per ordinary share 7 65.1p 54.3p
These financial statements were approved and authorised for issue by the Board of Directors on 27 November 2012.
Donald Adamson Chairman
STATEMENT OF CASHFLOWS
FOR THE YEAR ENDED 30 SEPTEMBER
NOTES £'000 £'000
Cash flow from operating activities
Profit/(loss) before tax 17,567 (5,898)
Taxation (29) (33)
Purchases of investments (13,137) (58,766)
Sales of investments 20,605 50,185
(Decrease)/increase from securities sold (13,453) 11,906 under agreements to repurchase
(Profit)/loss on investments (8,589) 11,406
Exchange differences (1,751) 718
Net cash inflow/(outflow) from derivative 440 (1,492) instruments - currency hedges
Finance costs 426 528
Operating cash flows before movements in 2,079 8,554 working capital
Decrease/(increase) in receivables 393 (328)
Increase/(decrease) in payables 40 (39)
Net cash flows from operating activities 2,512 8,187
Cash flows from financing activities
Interest paid (487) (476)
Shares repurchased and cancelled (56) -
Equity dividends paid 5 (5,567) (6,962)
Net cash used in financing activities (6,110) (7,438)
Net (decrease)/increase in cash and cash (3,598) 749 equivalents
Exchange differences 1,751 (718)
Cash and cash equivalents at beginning of 8,715 8,684 year
Cash and cash equivalents at end of year 6,868 8,715
NOTES TO THE FINANCIAL STATEMENTS
1. Principal Accounting Policies
The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied during the current year and the preceding year, unless otherwise stated. The accounts have been prepared on a going concern basis.
Basis of Preparation
Accounting Standards Applied
The financial statements have been prepared on an historical cost basis, except for the measurement at fair value of investments and derivatives, and in accordance with the applicable International Financial Reporting Standards (`IFRS') and interpretations issued by the International Financial Reporting Interpretations Committee as adopted by the European Union. The standards are those endorsed by the European Union and effective at the date the financial statements were approved by the Board.
Where presentational guidance set out in the Statement of Recommended Practice (`SORP') `Financial Statements of Investment Trust Companies and Venture Capital Trusts', issued by the Association of Investment Companies in January 2009, is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP. The supplementary information which analyses the statement of comprehensive income between items of a revenue and a capital nature is presented in accordance with this.
Income from investments
UK dividends 27 27
UK bond interest 2,143 2,232
Overseas bond interest 4,667 4,856
Overseas dividends 29 67
Deposit interest 13 21
Total income 6,879 7,203
3. Investment Management Fees
2012 2011 Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management 339 339 678 347 347 694 fee
339 339 678 347 347 694 Details of the investment management agreement are disclosed in the Report of the Directors. At the year end the management fee accrued was £181,000 (2011: £ 151,000). No performance related fee was accrued for the year (2011: £nil) as previous years' underperformance has not been fully recovered. 4. Return per Share The basic revenue, capital and total return per ordinary share is based on each of the returns on ordinary activities after taxation and on 111,342,253 (2011: 111,392,526) ordinary shares, being the weighted average number of ordinary shares in issue throughout the year. 5. Dividends 2012 2011 Pence £'000 pence £'000
Dividends paid and recognised in the year:
Second interim for 2010 - - 2.50 2,785
Fourth interim for 2011 1.25 1,393 - -
First interim for 2012/2011 1.25 1,392 1.25 1,392
Second interim for 2012/2011 1.25 1,391 1.25 1,393
Third interim for 2012/2011 1.25 1,391 1.25 1,392
5.00 5,567 6.25 6,962 Set out below are the dividends that have been declared in respect of the financial years ended 30 September: 2012 2011
Pence £'000 pence £'000
Dividends in respect of the year:
First interim 1.25 1,392 1.25 1,392
Second interim 1.25 1,391 1.25 1,393
Third interim 1.25 1,391 1.25 1,392
Fourth interim 1.25 1,391 1.25 1,393
5.00 5,565 5.00 5,570
The fourth interim dividend for 2012 was paid on 31 October 2012 to shareholders on the register on 12 October 2012.
6. Share Capital
200,000,000 ordinary shares of 5p each (2011: 200,000,000 10,000 10,000 shares)
Allotted, called-up and fully paid:
111,292,526 ordinary shares of 5p each (2011: 111,392,526 5,565 5,570 shares)
During the year 100,000 ordinary shares were bought back at 56.325p and cancelled.
7. Net Asset Value per Share
The net asset value per ordinary share and the net assets attributable at the year end were as follows:
NET ASSET VALUE NET ASSETS PER ORDINARY SHARE ATTRIBUTABLE 2012 2011 2012 2011
PENCE PENCE £'000 £'000
Ordinary shares 65.1 54.3 72,391 60,476
Net asset value per ordinary share is based on net assets at the year end and on 111,292,526 (2011: 111,392,526) ordinary shares, being the number of ordinary shares in issue at the year end.
8. Related Party Transactions and Transactions with the Manager
Under international GAAP and accounting standards, the Company has identified no related parties and there have been no related party transactions during the year. Invesco Asset Management Limited (`IAML'), a wholly owned subsidiary of Invesco Limited, acts as Manager to the Company. Details of the investment management agreement are disclosed in the Report of the Directors and management fees payable to IAML are shown in note 5 of the annual financial report.
This annual financial report announcement is not the Company's statutory accounts. The statutory accounts for the year ended 30 September 2011 and for the year ended 30 September 2012 received an audit report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report. The statutory accounts for the financial year ended 30 September 2012 have been approved and audited but not yet filed.
The audited annual financial report will be posted to shareholders shortly. Copies may be obtained during normal business hours from the Company's Registered Office, Ordnance House, 31 Pier Road, St.Helier, Jersey, JE4 8PW or the Manager's website at www.invescoperpetual.co.uk/investmenttrusts.
The Annual General Meeting of the Company will be held at the offices of R&H Fund Services (Jersey) Limited on 24 January 2013 at 10.30am.
By order of the Board
R&H Fund Services (Jersey) Limited
27 November 2012
-0- Nov/27/2012 14:35 GMT