TIDMDCR
RNS Number : 0122O
Defined Capital Return Fund Ltd
27 February 2009
COMMENTARY OF THE DIRECTORS
Incorporation
The Company is a closed-ended investment company incorporated in Jersey on 17
August 2004. Admission to the official list of the UK Listing Authority and
dealing in shares commenced on 1 November 2004. The Company has a fixed life
expiring on or about 30 October 2009.
Investment objective and policy
The investment objective of the Company is to provide Ordinary Shareholders with
a defined capital payment per share of 136.49 pence ("Defined Capital Return")
at the winding-up date. This return will be contingent on the level of the FTSE
100 at the end of the life of the Company. Provided that the FTSE 100 on the
winding-up date is not below 85 per cent of its level on the start date of
4,615.40 ("Start Value") (i.e. 3,923.09). Shareholders will receive the Defined
Capital Return on or soon after 2 November 2009.
The Company has and will continue throughout its life to be invested in a
portfolio of at least 6 medium term floating rate notes ("Bonds") which pay
interest gross. The interest received from these Bonds is used to meet ongoing
costs and to fund payments due under the FTSE Transaction which it has entered
into with UBS AG ("FTSE Transaction Counterparty"). Under the FTSE Transaction,
the Company swaps periodic amounts based on the interest return received by it
in respect of the Bonds with the FTSE Transaction Counterparty. In addition,
under the FTSE Transaction, the FTSE Transaction Counterparty is (provided that
the final FTSE level is not below the break-even level) obliged to pay an amount
which, together with the principal amounts payable on redemption of the Bonds,
is intended to provide the final capital entitlement. If however, the final FTSE
level is below the break-even level, no payment is due from the FTSE Transaction
Counterparty under the FTSE Transaction and, instead the Company is obliged to
pay an amount to the FTSE Transaction Counterparty, which amount is intended to
be funded from the principal amounts payable on redemption of the Bonds.
The final capital entitlement is only payable at the winding-up date. If at the
winding-up date the final FTSE level is at least equal to 85 per cent of the
Start Value then the final capital entitlement will be equal to the Defined
Capital Return. If the final FTSE level is below 85 per cent of the Start Value,
the final capital entitlement will be reduced on a straight line basis from the
Defined Capital Return down to zero when the final FTSE level is less than or
equal to 25 per cent of the Start Value.
As at 31 October 2008, the FTSE stood at 4,377.34 and the index cover was
1.115789 times, this representing the extent to which the FTSE was higher than
the level required for Defined Capital Return to be paid.
If the winding-up date was 31 October 2008, the accrued entitlement as at that
date would have been 128.26 pence per share.
Results
The results for the period are shown in the Income Statement on page 10 and
related notes on pages 13 to 23. No dividends have been proposed as the shares
carry no rights to dividends.
Winding Up
The Company has a planned life until 30 October 2009, on which date the
directors are required to convene an Extraordinary General Meeting and propose a
resolution requiring the Company to be wound up voluntarily unless the directors
have previously been released from that obligation by the Company's
shareholders.
The limited life of the Company is designed to ensure that all shareholders can
realise the underlying net asset value of their shares (after liquidation
costs), irrespective of their market price on the winding up date.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors are responsible for preparing the financial statements in
accordance with applicable law and regulations.
Jersey Company law requires the directors to prepare financial statements for
each financial year in accordance with any generally accepted accounting
principles. The financial statements of the Company 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 year. In preparing these financial
statements, the directors should:
select suitable accounting policies and then apply them consistently;
make judgments and estimates that are reasonable and prudent;
specify which generally accepted accounting principles have been adopted in
their preparation; and
prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The directors are responsible for keeping accounting records which are
sufficient to show and explain its transactions and are such as to disclose with
reasonable accuracy at any time the financial position of the Company and enable
them to ensure that the financial statements prepared by the Company comply with
the requirements of 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.
The directors are responsible for the maintenance and integrity of the corporate
and financial information included on the Company's website. Legislation in
Jersey governing the preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
By order of the Board:
Reef Hogg
23 February 2009
BALANCE SHEET
As at 31 October 2008
+----------------------------------------------+-------+--+------------+--+------------+
| | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| | | | 2008 | | 2007 |
+----------------------------------------------+-------+--+------------+--+------------+
| | | | GBP | | GBP |
+----------------------------------------------+-------+--+------------+--+------------+
| Assets | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| Non-current assets | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| Financial assets at fair value through | | | | | |
| profit or loss | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| Securities | | | - | | 27,658,900 |
+----------------------------------------------+-------+--+------------+--+------------+
| Derivative instruments | | | - | | 5,013,250 |
+----------------------------------------------+-------+--+------------+--+------------+
| Prepayments | | | - | | 161,786 |
+----------------------------------------------+-------+--+------------+--+------------+
| Prepayment of directors' fees | | | - | | 9,130 |
+----------------------------------------------+-------+--+------------+--+------------+
| | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| | | | - | | 32,843,066 |
+----------------------------------------------+-------+--+------------+--+------------+
| | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| Current assets | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| Financial assets at fair value through | | | | | |
| profit or loss | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| Securities | | | 27,732,500 | | - |
+----------------------------------------------+-------+--+------------+--+------------+
| Derivative instruments | | | 2,254,000 | | - |
+----------------------------------------------+-------+--+------------+--+------------+
| Cash and cash equivalents | | | 228,781 | | 152,435 |
+----------------------------------------------+-------+--+------------+--+------------+
| Receivables | | | 4,669 | | 6,591 |
+----------------------------------------------+-------+--+------------+--+------------+
| Prepayments | | | 163,639 | | 165,432 |
+----------------------------------------------+-------+--+------------+--+------------+
| Prepayment of directors' fees | | | 9,130 | | 9,130 |
+----------------------------------------------+-------+--+------------+--+------------+
| | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| | | | 30,392,719 | | 333,588 |
+----------------------------------------------+-------+--+------------+--+------------+
| | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| Total assets | | | 30,392,719 | | 33,176,654 |
+----------------------------------------------+-------+--+------------+--+------------+
| | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| Liabilities | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| Current liabilities | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| Provisions | | | 30,000 | | - |
+----------------------------------------------+-------+--+------------+--+------------+
| Non-current liabilities | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| Provisions | | | - | | 30,000 |
+----------------------------------------------+-------+--+------------+--+------------+
| Liabilities (excluding net assets | | | | | |
| attributable to holders | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| of ordinary shares) | | | 30,000 | | 30,000 |
+----------------------------------------------+-------+--+------------+--+------------+
| | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| Net assets attributable to ordinary | | | 30,362,719 | | 33,146,654 |
| shareholders | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| Number of ordinary shares in issue | | | 28,000,000 | | 28,000,000 |
+----------------------------------------------+-------+--+------------+--+------------+
| | | | | | |
+----------------------------------------------+-------+--+------------+--+------------+
| Net asset value per ordinary share | | | 1.0844 | | 1.1838 |
+----------------------------------------------+-------+--+------------+--+------------+
Approved by the Board of directors and authorised for issue on 23 February 2009
and signed on its behalf by:
Reef Hogg
INCOME STATEMENT
For the year ended 31 October 2008
+--------------------------------------------------+------+--+-------------+--+-----------+
| | | | 2008 | | 2007 |
+--------------------------------------------------+------+--+-------------+--+-----------+
| | | | GBP | | GBP |
+--------------------------------------------------+------+--+-------------+--+-----------+
| Revenue | | | | | |
+--------------------------------------------------+------+--+-------------+--+-----------+
| Interest income | | | 9,144 | | 6,482 |
+--------------------------------------------------+------+--+-------------+--+-----------+
| Gain on financial assets at fair value through | | | 1,720,959 | | 2,593,133 |
| profit or loss | | | | | |
+--------------------------------------------------+------+--+-------------+--+-----------+
| | | | | | |
+--------------------------------------------------+------+--+-------------+--+-----------+
| Total revenue | | | 1,730,103 | | 2,599,615 |
+--------------------------------------------------+------+--+-------------+--+-----------+
| | | | | | |
+--------------------------------------------------+------+--+-------------+--+-----------+
| Expenditure | | | | | |
+--------------------------------------------------+------+--+-------------+--+-----------+
| Loss on financial assets at fair value through | | | 2,759,250 | | - |
| profit or loss | | | | | |
+--------------------------------------------------+------+--+-------------+--+-----------+
| Management fee | | | 112,307 | | 112,000 |
+--------------------------------------------------+------+--+-------------+--+-----------+
| Administration fees and expenses | | | 31,872 | | 31,960 |
+--------------------------------------------------+------+--+-------------+--+-----------+
| Custodian fees | | | 6,821 | | 6,840 |
+--------------------------------------------------+------+--+-------------+--+-----------+
| Directors fees | | | 9,130 | | 9,130 |
+--------------------------------------------------+------+--+-------------+--+-----------+
| Audit fees | | | 11,400 | | 11,400 |
+--------------------------------------------------+------+--+-------------+--+-----------+
| Interest on FTSE transaction | | | 1,534,819 | | 1,463,877 |
+--------------------------------------------------+------+--+-------------+--+-----------+
| General expenses | | | 48,439 | | 59,847 |
+--------------------------------------------------+------+--+-------------+--+-----------+
| | | | | | |
+--------------------------------------------------+------+--+-------------+--+-----------+
| Total expenditure | | | 4,514,038 | | 1,695,054 |
+--------------------------------------------------+------+--+-------------+--+-----------+
| | | | | | |
+--------------------------------------------------+------+--+-------------+--+-----------+
| (Decrease)/increase in net assets attributable | | | (2,783,935) | | 904,561 |
| to ordinary shareholders | | | | | |
+--------------------------------------------------+------+--+-------------+--+-----------+
| | | | | | |
+--------------------------------------------------+------+--+-------------+--+-----------+
There are zero earnings attributable to the management shares.
STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO ORDINARY SHAREHOLDERS
For the year ended 31 October 2008
+------------------------------------------------+--+--+------+----------+-------------+
| | | | | | 2008 |
+------------------------------------------------+--+--+------+----------+-------------+
| | | | | | GBP |
+------------------------------------------------+--+--+------+----------+-------------+
| | | | | | |
+------------------------------------------------+--+--+------+----------+-------------+
| Balance at 1 November 2007 | | | | | 33,146,654 |
+------------------------------------------------+--+--+------+----------+-------------+
| | | | | | |
+------------------------------------------------+--+--+------+----------+-------------+
| Decrease in net assets attributable to | | | | | (2,783,935) |
| ordinary shareholders | | | | | |
+------------------------------------------------+--+--+------+----------+-------------+
| | | | | | |
+------------------------------------------------+--+--+------+----------+-------------+
| Net assets attributable to ordinary | | | | | 30,362,719 |
| shareholders at 31 October 2008 | | | | | |
+------------------------------------------------+--+--+------+----------+-------------+
| | | | | | |
+------------------------------------------------+--+--+------+----------+-------------+
| | | | | | |
+------------------------------------------------+--+--+------+----------+-------------+
| | | | | | |
+------------------------------------------------+--+--+------+----------+-------------+
For the year ended 31 October 2007
+------------------------------------------------+--+--+------+----------+------------+
| | | | | | 2007 |
+------------------------------------------------+--+--+------+----------+------------+
| | | | | | GBP |
+------------------------------------------------+--+--+------+----------+------------+
| | | | | | |
+------------------------------------------------+--+--+------+----------+------------+
| Balance at 1 November 2006 | | | | | 32,242,093 |
+------------------------------------------------+--+--+------+----------+------------+
| | | | | | |
+------------------------------------------------+--+--+------+----------+------------+
| Increase in net assets attributable to | | | | | 904,561 |
| ordinary shareholders | | | | | |
+------------------------------------------------+--+--+------+----------+------------+
| | | | | | |
+------------------------------------------------+--+--+------+----------+------------+
| Net assets attributable to ordinary | | | | | 33,146,654 |
| shareholders at 31 October 2007 | | | | | |
+------------------------------------------------+--+--+------+----------+------------+
| | | | | | |
+------------------------------------------------+--+--+------+----------+------------+
| | | | | | |
+------------------------------------------------+--+--+------+----------+------------+
| | | | | | |
+------------------------------------------------+--+--+------+----------+------------+
CASH FLOW STATEMENT
For the year ended 31 October 2008
+------------------------------------------------+------+--+-------------+--+-------------+
| | | | 2008 | | 2007 |
+------------------------------------------------+------+--+-------------+--+-------------+
| | | | GBP | | GBP |
+------------------------------------------------+------+--+-------------+--+-------------+
| Cash flows from operating activities | | | | | |
+------------------------------------------------+------+--+-------------+--+-------------+
| (Decrease)/increase in net assets attributable | | | (2,783,935) | | 904,561 |
| to ordinary shareholders | | | | | |
+------------------------------------------------+------+--+-------------+--+-------------+
| Adjustments for: | | | | | |
+------------------------------------------------+------+--+-------------+--+-------------+
| Interest income | | | (9,144) | | (6,482) |
+------------------------------------------------+------+--+-------------+--+-------------+
| Gain on financial assets at fair value through | | | (1,720,959) | | (2,593,133) |
| profit or loss | | | | | |
+------------------------------------------------+------+--+-------------+--+-------------+
| Loss on financial assets at fair value through | | | 2,759,250 | | - |
| profit or loss | | | | | |
+------------------------------------------------+------+--+-------------+--+-------------+
| | | | | | |
+------------------------------------------------+------+--+-------------+--+-------------+
| Operating result before working capital | | | (1,754,788) | | (1,695,054) |
| changes | | | | | |
+------------------------------------------------+------+--+-------------+--+-------------+
| | | | | | |
+------------------------------------------------+------+--+-------------+--+-------------+
| Decrease in trade and other receivables | | | 174,631 | | 185,862 |
+------------------------------------------------+------+--+-------------+--+-------------+
| | | | | | |
+------------------------------------------------+------+--+-------------+--+-------------+
| | | | (1,580,157) | | (1,509,192) |
+------------------------------------------------+------+--+-------------+--+-------------+
| | | | | | |
+------------------------------------------------+------+--+-------------+--+-------------+
| Interest income | | | 1,647,359 | | 1,579,478 |
+------------------------------------------------+------+--+-------------+--+-------------+
| Deposit interest received | | | 9,144 | | 6,026 |
+------------------------------------------------+------+--+-------------+--+-------------+
| | | | | | |
+------------------------------------------------+------+--+-------------+--+-------------+
| Net cash generated from operations | | | 76,346 | | 76,312 |
+------------------------------------------------+------+--+-------------+--+-------------+
| | | | | | |
+------------------------------------------------+------+--+-------------+--+-------------+
| Net increase in cash and cash equivalents | | | 76,346 | | 76,312 |
+------------------------------------------------+------+--+-------------+--+-------------+
| Cash and cash equivalents at beginning of | | | 152,435 | | 76,123 |
| period | | | | | |
+------------------------------------------------+------+--+-------------+--+-------------+
| | | | | | |
+------------------------------------------------+------+--+-------------+--+-------------+
| | | | | | |
+------------------------------------------------+------+--+-------------+--+-------------+
| Cash and cash equivalents at end of year | | | 228,781 | | 152,435 |
+------------------------------------------------+------+--+-------------+--+-------------+
| | | | | | |
+------------------------------------------------+------+--+-------------+--+-------------+
NOTES
The financial statements have been prepared in accordance and comply with
International Financial Reporting Standards ("IFRS").
2. Securities at fair value through profit or loss
+------------------------------------------+----+-------------+---+------------+
| Securities - long positions | | 2008 | | 2007 |
+------------------------------------------+----+-------------+---+------------+
| | | GBP | | GBP |
+------------------------------------------+----+-------------+---+------------+
| | | | | |
+------------------------------------------+----+-------------+---+------------+
| Debt securities | | 27,732,500 | | 27,658,900 |
+------------------------------------------+----+-------------+---+------------+
3. Derivative financial instruments
+------------------------------------------+----+-------------+----+------------+
| Derivatives | | 2008 | | 2007 |
+------------------------------------------+----+-------------+----+------------+
| | | GBP | | GBP |
+------------------------------------------+----+-------------+----+------------+
| | | | | |
+------------------------------------------+----+-------------+----+------------+
| Valuation at 31 October 2008 (due to the | | 2,254,000 | | 5,013,250 |
| Company) | | | | |
+------------------------------------------+----+-------------+----+------------+
| | | | | |
+------------------------------------------+----+-------------+----+------------+
| Movement in unrealised (loss)/gain on | | (2,759,250) | | 1,226,670 |
| derivative financial instruments | | | | |
+------------------------------------------+----+-------------+----+------------+
The Company has entered into an index swap transaction with UBS AG. The equity
notional amount of the index swap equals GBP 28,000,000 and expires on 30
October 2009. Under the terms of the agreement, the Company received an amount
of GBP 1,050,000 at the inception of the index swap transaction and subsequently
will swap amounts on each of 30 January, 30 April, 30 July and 30 October each
year based on the interest return receivable by it in respect of the Bonds held
less a fixed payment of GBP28,750. Under the swap transaction UBS AG ("Swap
Transaction Counterparty") will (provided that the final FTSE level is not below
the break-even level of 85 per cent of the level of the FTSE at launch) be
obliged to pay an amount which, together with the principle amounts payable on
redemption of the Bonds, is intended to provide the final capital entitlement.
If however, the final FTSE level is below the break-even level, no payment will
be due from the Swap Transaction Counterparty under the swap transaction and,
instead the Company will be obliged to pay an amount to the Swap Transaction
Counterparty, which amount is intended to be funded from the principal amounts
payable on redemption of the bonds.
The final capital entitlement is only payable at the winding-up date. If at the
winding-up date the final FTSE level is at least equal to 85 per cent of the
start value then the final capital entitlement will be equal to 136.49 pence
(Defined Capital Return). If the final FTSE level is below 85 per cent of the
start value, the final capital entitlement will be reduced on a straight line
basis from the Defined Capital Return down to zero when the final FTSE level is
less than or equal to 25 per cent of the start value. At a final FTSE level of
25 per cent or less of the start value, the final capital entitlement to
shareholders would be zero because the entire redemption proceeds of the Bonds
would be payable to UBS AG ("FTSE Transaction Counterparty").
The financial instrument detailed above is not quoted in an active market;
therefore its fair value is determined by UBS AG.
4. Cash and cash equivalents
+--------------------------------------------+----+----------+----+------------+
| | | 2008 | | 2007 |
+--------------------------------------------+----+----------+----+------------+
| | | GBP | | GBP |
+--------------------------------------------+----+----------+----+------------+
| | | | | |
+--------------------------------------------+----+----------+----+------------+
| Cash at bank | | 228,781 | | 152,435 |
+--------------------------------------------+----+----------+----+------------+
5. Receivables
+----------------------------------------+-----+------------+----+------------+
| | | 2008 | | 2007 |
+----------------------------------------+-----+------------+----+------------+
| | | GBP | | GBP |
+----------------------------------------+-----+------------+----+------------+
| | | | | |
+----------------------------------------+-----+------------+----+------------+
| Bank interest receivable | | 968 | | 703 |
+----------------------------------------+-----+------------+----+------------+
| Other debtors | | 3,701 | | 5,888 |
+----------------------------------------+-----+------------+----+------------+
| | | | | |
+----------------------------------------+-----+------------+----+------------+
| | | | | |
+----------------------------------------+-----+------------+----+------------+
| | | 4,669 | | 6,591 |
+----------------------------------------+-----+------------+----+------------+
6. Prepayments
+----------------+--+----------+--+--------------+--+-----------+--+-------------+
| | | Due | | Due after | | Due | | Due after |
| | | within | | more than | | within | | more than |
| | | one year | | one year | | one year | | one year |
+----------------+--+----------+--+--------------+--+-----------+--+-------------+
| | | 2008 | | 2008 | | 2007 | | 2007 |
+----------------+--+----------+--+--------------+--+-----------+--+-------------+
| | | GBP | | GBP | | GBP | | GBP |
+----------------+--+----------+--+--------------+--+-----------+--+-------------+
| | | | | | | | | |
+----------------+--+----------+--+--------------+--+-----------+--+-------------+
| Management | | 111,386 | | - | | 112,000 | | 111,693 |
| fees | | | | | | | | |
+----------------+--+----------+--+--------------+--+-----------+--+-------------+
| Administration | | 31,960 | | - | | 31,960 | | 31,872 |
| fees | | | | | | | | |
+----------------+--+----------+--+--------------+--+-----------+--+-------------+
| Custodian fees | | 7,150 | | - | | 6,840 | | 6,821 |
+----------------+--+----------+--+--------------+--+-----------+--+-------------+
| Audit fees | | 11,400 | | - | | 11,400 | | 11,400 |
+----------------+--+----------+--+--------------+--+-----------+--+-------------+
| General | | 1,743 | | - | | 3,232 | | - |
| expenses | | | | | | | | |
+----------------+--+----------+--+--------------+--+-----------+--+-------------+
| | | | | | | | | |
+----------------+--+----------+--+--------------+--+-----------+--+-------------+
| | | | | | | | | |
+----------------+--+----------+--+--------------+--+-----------+--+-------------+
| | | 163,639 | | - | | 165,432 | | 161,786 |
+----------------+--+----------+--+--------------+--+-----------+--+-------------+
Management fees, administration fees, custodian fees and audit fees have been
prepaid for the life of the Company.
7. Provisions
+----------------------------------------+-----+------------+----+------------+
| | | 2008 | | 2007 |
+----------------------------------------+-----+------------+----+------------+
| | | GBP | | GBP |
+----------------------------------------+-----+------------+----+------------+
| | | | | |
+----------------------------------------+-----+------------+----+------------+
| Provision made for winding-up costs | | 30,000 | | 30,000 |
+----------------------------------------+-----+------------+----+------------+
The carrying value of the provision has not changed from 2007 as no additional
provisions have been made. The exact amount of the provision is uncertain and
reflects the directors' best estimate of expected amounts which will become
payable at the end of the life of the Company.
8. Interest income
+----------------------------------------+-----+------------+----+------------+
| | | 2008 | | 2007 |
+----------------------------------------+-----+------------+----+------------+
| | | GBP | | GBP |
+----------------------------------------+-----+------------+----+------------+
| | | | | |
+----------------------------------------+-----+------------+----+------------+
| Bank interest | | 9,144 | | 6,482 |
+----------------------------------------+-----+------------+----+------------+
9. Gain on financial assets at fair value through profit or loss
+----------------------------------------+-----+------------+----+------------+
| | | 2008 | | 2007 |
+----------------------------------------+-----+------------+----+------------+
| | | GBP | | GBP |
+----------------------------------------+-----+------------+----+------------+
| | | | | |
+----------------------------------------+-----+------------+----+------------+
| | | | | |
+----------------------------------------+-----+------------+----+------------+
| Gain on debt securities | | 1,720,959 | | 2,593,133 |
+----------------------------------------+-----+------------+----+------------+
10. Loss on financial assets at fair value through profit or loss
+----------------------------------------+-----+------------+----+------------+
| | | 2008 | | 2007 |
+----------------------------------------+-----+------------+----+------------+
| | | GBP | | GBP |
+----------------------------------------+-----+------------+----+------------+
| | | | | |
+----------------------------------------+-----+------------+----+------------+
| | | | | |
+----------------------------------------+-----+------------+----+------------+
| Loss on derivative financial | | 2,759,250 | | - |
| instruments | | | | |
+----------------------------------------+-----+------------+----+------------+
11. Related party transactions
Jupiter Asset Managers (Jersey) Limited (the "Manager"), Standard Bank Fund
Administration Jersey Limited (the "Administrator") and Standard Bank Jersey
Limited (the "Custodian") are related parties. Both the Administrator and the
Custodian are owned by the same ultimate holding company.
Jupiter Asset Managers (Jersey) Limited, the Manager, owns the management
shares.
The fees for the above are all arms length transactions and have all been paid
in advance. They are being amortised over the remaining life of the Company.
Fees payable in the period are as disclosed in the Income Statement on page 10.
12. Risk management
The Company's objective in managing risk is the creation and protection of
shareholder value. Risk is inherent in the Company's activities, but it is
managed through a process of ongoing identification, measurement and monitoring,
subject to risks limits and other controls. The Company is exposed to credit
risk and market risk (which includes interest rate risk and price risk).
The Manager is responsible for identifying and controlling risks. The Board of
directors supervises the Manager and is ultimately responsible for the risk
management approach within the Company.
Fair values
The carrying amounts of financial assets and liabilities at fair value through
profit or loss, receivables, cash at bank and other payables approximate their
fair values.
Strategy in using financial instruments
It is intended that the Company will continue throughout its life to be invested
in a portfolio of at least 6 medium term floating rate notes ("Bonds") which pay
interest gross.
Risks to which the Company are exposed are explained in detail below.
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or
unwilling to meet commitments it has entered into with the Company. If the
Company does not receive a scheduled interest payment under a Bond when that
payment is due, this may result in the Company being unable to make a
corresponding payment under the FTSE Transaction. Such a failure would entitle
UBS AG ("FTSE Transaction Counterparty") to enforce its rights to cause one or
more Bonds to be sold in order to satisfy such payment obligation of the
Company. Additionally or alternatively, the FTSE Transaction Counterparty would
be entitled to terminate the FTSE Transaction and this may result in a
termination payment being owed by the Company to the FTSE Transaction
Counterparty. Any sale of Bonds in these circumstances might not realise their
full market value.
The Company's credit risk concentration risk is spread between debt securities
and the index swap transaction. Concentration risk is mitigated as far as
possible since: (i) no individual debt security makes up more than 16.44 per
cent of the total portfolio, and (ii) UBS AG is an approved institution. An
approved financial institution at the time of such selection is one of the
following:
* an EU credit institution,
* a bank authorised in a member state of the European Economic Area,
* a bank authorised in a signatory state to the Basel Capital Convergence
Agreement of July 1988, an entity whose obligations under the relevant Bond or
FTSE Transaction at the time of such selection are either a) unconditionally and
irrevocably guaranteed by a financial institution falling within the above or b)
benefits from an arrangement which is equivalent in effect to such a guarantee,
and
* in the case of any institution within any of the above which is incorporated
outside the UK, is regulated by a regulator with responsibility for regulating
banks or securities firms which has a lead regulation agreement for financial
supervision with the FSA, provided such activity falls within the approved scope
of the institution's business.
The Company invests in financial assets which have an investment grade as rated
by well known rating agencies. For unrated assets a rating is assigned using an
approach that is consistent with rating agencies.
Portfolio by rating category
+------------------------------------+--+------------+-----------+------------+
| | | Moody's | S&P | Composite |
+------------------------------------+--+------------+-----------+------------+
| | | | | |
+------------------------------------+--+------------+-----------+------------+
| Bayer Landesbank FRN 30/10/2009 | | Aa2 | A | - |
+------------------------------------+--+------------+-----------+------------+
| Swedbank Hypotek FRN 30/10/2009 | | Aaa | AAA | AAA |
+------------------------------------+--+------------+-----------+------------+
| Depfa Bank FRN 30/10/2009 | | NA | BBB | NR |
+------------------------------------+--+------------+-----------+------------+
| HBOS Treasury SVS FRN 30/10/2009 | | NA | AAH | NR |
+------------------------------------+--+------------+-----------+------------+
| NIB Capital Bank FRN 30/10/2009 | | Baa1 | BBB+ | BBB+ |
+------------------------------------+--+------------+-----------+------------+
| RBOS FRN 30/10/2009 | | Aa1 | AAH | AA+ |
+------------------------------------+--+------------+-----------+------------+
The maximum exposure to credit risk is GBP 30,215,281 (2007 - GBP 32,824,585).
In accordance with the Company's policy, the Manager monitors the Company's
credit position by reviewing all available market data relevant to the Bond
Issuers. The Board of directors reviews this information on a quarterly basis.
Market price risk
The Company's securities are susceptible to market price risk arising from
uncertainties about the future prices of the instruments. However, as the
Company holds only floating rate bonds, the market price risk is limited. The
positions held by the Company at the period end are disclosed in Note 16. These
positions are monitored on a regular basis by the Board of directors.
The Company has entered into a Derivative Contract in order to provide the
Defined Capital Return. For reporting purposes this Derivative contract is fair
valued. The principal factors affecting this value are the underlying FTSE 100
value, implied volatility of the FTSE 100, 1 year Sterling interest rates and
the expected future dividend yield of the FTSE 100. A change in any of these
factors may have a positive or negative effect on valuation of the Derivative
Contract and accordingly the net asset value as reported on these accounts and
in the monthly valuation. As outlined in Note 4, the final value of the
derivative contract will be determined by the level of the FTSE on expiry, when
these additional factors that lead to the volatility of the valuation of the
Derivative Contract will no longer affect its valuation.
At 31 October 2008 and 31 October 2007, the overall market exposures were as
follows:
+---------------------+-+------------+-+------------+-+------------+-+------------+
| | | 2008 | | 2008 | | 2007 | | 2007 |
+---------------------+-+------------+-+------------+-+------------+-+------------+
| | | Fair value | | % of net | | Fair | | % of net |
| | | | | assets | | value | | assets |
| | | GBP | | | | GBP | | |
+---------------------+-+------------+-+------------+-+------------+-+------------+
| | | | | | | | | |
+---------------------+-+------------+-+------------+-+------------+-+------------+
| Securities | | 27,732,500 | | 91.34 | | 27,658,900 | | 83.44 |
| designated as fair | | | | | | | | |
| value through | | | | | | | | |
| profit or loss | | | | | | | | |
+---------------------+-+------------+-+------------+-+------------+-+------------+
| | | | | | | | | |
+---------------------+-+------------+-+------------+-+------------+-+------------+
| Derivative assets | | 2,254,000 | | 7.42 | | 5,013,250 | | 15.12 |
+---------------------+-+------------+-+------------+-+------------+-+------------+
| | | | | | | | | |
+---------------------+-+------------+-+------------+-+------------+-+------------+
| | | 29,986,500 | | 98.76 | | 32,672,150 | | 98.56 |
+---------------------+-+------------+-+------------+-+------------+-+------------+
| | | | | | | | | |
+---------------------+-+------------+-+------------+-+------------+-+------------+
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates
will affect future cash flows or the fair value of financial instruments. The
Company holds only floating rate Bonds which re-price quarterly as market rates
change. Under the terms of the derivatives held by the Company, and as set out
in Note 4, the Company swaps interest received on the bonds with the Swap
Transaction Counterparty based on Libor rates. Interest rate risk exists as some
of the floating rate bonds float at rates other than Libor. The effective annual
interest rates are disclosed in note 16 below for the Bonds held. The effective
annual interest rate earned on cash and cash equivalents is 5.08 per cent (2007
- 5.01 per cent.)
Interest rate risk is not actively managed by the Manager.
The following table sets out the fair value, by maturity, of the Company's
financial instruments that are exposed to interest rate risk:
+-------------+------------+--------+--------+------------+
| | Within | 2-5 | More | Total |
+-------------+------------+--------+--------+------------+
| 31 | 1 year | years | than 5 | |
| October | | | | |
| 2008 | | | | |
+-------------+------------+--------+--------+------------+
| | | | years | |
+-------------+------------+--------+--------+------------+
| | GBP | GBP | GBP | GBP |
+-------------+------------+--------+--------+------------+
| Floating | | | | |
| rate | | | | |
+-------------+------------+--------+--------+------------+
| Bonds | 27,732,500 | - | - | 27,732,500 |
+-------------+------------+--------+--------+------------+
| FTSE | 2,254,000 | - | - | 2,254,000 |
| Transaction | | | | |
| Swap | | | | |
+-------------+------------+--------+--------+------------+
| Cash | 228,781 | - | - | 228,781 |
| assets | | | | |
| (effective | | | | |
| interest | | | | |
| rate 5.08 | | | | |
| per cent | | | | |
| per annum) | | | | |
+-------------+------------+--------+--------+------------+
| | | | | |
+-------------+------------+--------+--------+------------+
| | 30,215,281 | - | - | 30,215,281 |
+-------------+------------+--------+--------+------------+
+-------------+---------+------------+--------+------------+
| | Within | 2-5 | More | Total |
+-------------+---------+------------+--------+------------+
| 31 | 1 year | years | than 5 | |
| October | | | | |
| 2007 | | | | |
+-------------+---------+------------+--------+------------+
| | | | years | |
+-------------+---------+------------+--------+------------+
| | GBP | GBP | GBP | GBP |
+-------------+---------+------------+--------+------------+
| Floating | | | | |
| rate | | | | |
+-------------+---------+------------+--------+------------+
| Bonds | - | 27,658,900 | - | 27,658,900 |
+-------------+---------+------------+--------+------------+
| FTSE | - | 5,013,250 | - | 5,013,250 |
| Transaction | | | | |
| Swap | | | | |
+-------------+---------+------------+--------+------------+
| Cash | 152,435 | - | - | 152,435 |
| assets | | | | |
| (effective | | | | |
| interest | | | | |
| rate 5.01 | | | | |
| per cent | | | | |
| per annum) | | | | |
+-------------+---------+------------+--------+------------+
| | | | | |
+-------------+---------+------------+--------+------------+
| | 152,435 | 32,672,150 | - | 32,824,585 |
+-------------+---------+------------+--------+------------+
At 31 October 2008, had interest rates decreased by 1 per cent with all other
variables held constant, the net assets attributable to shareholders would
change by approximately GBP16,500 (2007 - GBP 15,900).
The directors believe the Company is not or is immaterially exposed to the
following risks:
Liquidity risk
Liquidity risk is defined as the risk that the Company will encounter difficulty
in meeting obligations associated with its financial liabilities. Liquidity risk
arises because of the possibility that the Company could be required to pay its
liabilities earlier than expected.
The Company's debt securities are considered to be readily realisable and are
issued by approved financial institutions under note programmes. The FTSE
Transaction is not readily realisable however, other than a provision for
winding-up expenses, the Company has no further financial liabilities. The
Company is closed ended and will suffer no redemption requests from shareholders
before the end of its life.
Liquidity risk is not actively managed.
Currency risk
Currency risk is the risk that the value of a financial instrument will
fluctuate due to changes in foreign exchange rates. The Company does not invest
in securities that are denominated in currencies other than the currency in
which the shares are denominated. Accordingly, the value of the Company's assets
are not affected by fluctuations in currency rates and therefore not subject to
foreign exchange risks.
Capital management
The Company does not actively manage its capital requirements and there are no
risk management procedures in place.
The Annual General Meeting of the Company has been convened for Tuesday 31 March
2009 at 10 a.m.
The final results announcement is prepared on the same basis as set out in the
Statutory Accounts for the year ended 31 October 2008 and was approved by the
Board of Directors on 23 February 2009. The Auditors have reported on the
Statutory accounts for the year ended 31 October 2008 and their report was
unqualified
The Annual Report and Accounts are expected to be posted to all registered
shareholders shortly and copies may be obtained from the registered office of
the Company at Standard Bank House, 47-49 La Motte Street, St Helier, Jersey JE4
8XR, Channel Islands.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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