M&G Credit Income Investment Trust plc: Annual Financial Report

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M&G Credit Income Investment Trust plc (MGCI)
28-Apr-2021 / 07:00 GMT/BST
Dissemination of a Regulatory Announcement that contains inside information according to REGULATION (EU) No 596/2014 (MAR), transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.

M&G Credit Income Investment Trust plc

 

Annual Report and audited Financial Statements for the year ended 31 December 2020

 

The full Annual Report and Accounts will shortly be available via the Company's website at www.mandg.co.uk/creditincomeinvestmenttrust or by contacting the Company Secretary at mandgcredit@linkgroup.co.uk.

 

The Directors present the results of the Company for the year ended 31 December 2020.

 

The third party research commissioned by the Company from Kepler, published on 26 March 2021, can be found at the following link: https://www.trustintelligence.co.uk/articles/fund-profile-m-g-credit-income-mar-2021

Company summary

M&G Credit Income Investment Trust plc (the "Company") was incorporated on 17 July 2018 as a public company limited by shares. Admission to the London Stock Exchange's (LSE) main market for listed securities and dealings in its Ordinary Shares commenced on 14 November 2018. The Company is an investment trust within the meaning of section 1158 of the Corporation Tax Act (CTA) 2010.

Financial highlights

Key data

 

 

 

 

 

As at

31 December

2020

 

As at

31 December

2019

Net assets (£'000)

146,628

132,232

Net asset value (NAV) per Ordinary Share

101.40p

101.72p

Ordinary Share price (mid-market)

92.00p

106.00p

(Discount)/Premium to

NAVa

(9.27)%

4.21%

Ongoing charges figurea

0.87%

0.93%b

 

Returns and dividends per Ordinary Share

 

 

 

 

Year ended

31 December

2020

 

Period b ended

31 December

2019

Capital return

1.3p

2.7p

Revenue return

2.9p

2.6p

NAV total returna

3.7%

5.6%

Share price total returna

(9.7)%

8.2%

First interim dividend

0.85p

2.09p

Second interim dividend

0.77p

1.65pc

Third interim dividend

0.71p

-

Fourth interim dividend

1.95pc

-

Total dividends declared

4.28p

3.74p

 

 

 

a Alternative performance measure. Further information can be found on pages 108 to 109 of the full Annual Report and Accounts.
b From the date of Initial Public Offering (IPO) 14 November 2018.
c Paid after the year/period end. Please see note 7 for further information.

Chairman's Statement

 

Performance

I am delighted to report that your Company has exceeded the performance originally targeted at our Initial Public Offering (IPO). This target was to achieve an annualised dividend yield of LIBOR plus 2.5% (on the 100p issue price) from launch until 31 December 2019 and of LIBOR plus 4% (on the opening net asset value (NAV) per Ordinary Share) thereafter. Your Company's NAV at its launch on 14 November 2018, being the gross proceeds of the IPO less the IPO expenses, was 98.38p per Ordinary Share. The opening NAV on 1 January 2020 was 101.72p per Ordinary Share and the NAV on 31 December 2020 was 101.40p per Ordinary Share. Including dividends paid, the annualised NAV total return was 4.4% since launch although the NAV total return for the year to 31 December 2020 was 3.7%, reflecting the effects of the COVID-19 pandemic.

 

Your Company navigated the difficult conditions of 2020 with great success and with no material deterioration to the credit quality of its portfolio, showing our Investment Manager's skill in delivering on its objective of low asset value volatility while building our ability to pay a regular and attractive level of income. The results showed the Company's ability to produce high risk-adjusted returns from a predominately investment-grade portfolio.

 

Having begun the year with relatively benign economic conditions, 2020 will be remembered for the impact of the COVID-19 pandemic on economies and society. The first half of the year showed NAV per Ordinary Share falling to 93.69p on 31 March 2020 as a result of the indiscriminate market sell-off before recovering to finish at 97.23p on 30 June 2020. The Company had been defensively positioned going into the March sell-off which allowed our Investment Manager to benefit from the market weakness by purchasing attractively priced public corporate bonds and then realising gains as the market recovered.

 

During the second half of the year credit markets recovered steadily and our Investment Manager was able to take advantage of a reopened flow of attractively priced private debt opportunities. By 31 December 2020 the amount of private debt instruments in your Company's portfolio, including irrevocable commitments, had increased to 49.25% (versus 27.41% at 31 December 2019) with an additional investment of some 10% in illiquid public assets which are intended to be held to maturity. These are largely higher-yielding assets which will support the payment of the regular quarterly dividend increase already announced in respect of the 2021 financial year.

 

The Board is of the view that the portfolio is now appropriately positioned with regard to its dividend target set at launch. In accordance with the agreement previously notified to Shareholders, the management fee paid by the Company to the Investment Manager will increase with effect from 1 April 2021 from 0.5% to 0.7% per annum of the Company's net asset value.

 

Share issuance and discount management

Your Directors believe that it is in the interests of shareholders for the Company to increase its assets under management over time as this should reduce its ongoing charges figure and provide greater market liquidity and diversification for holders. On 4 June 2020, given the favourable opportunities arising from the market dislocation due to the COVID-19 pandemic and the reopening of the private debt markets, the Company announced that it had issued and placed 14,745,770 Ordinary Shares at a price of 97.0p per Ordinary Share, raising £14.2 million net of expenses. This represented a premium to the then last published NAV (adjusted for the payment of the first quarter dividend) of 1.98%.

 

Subsequently, the Company's Ordinary Shares began to trade at a discount to NAV. Your Directors believe that this is not in the best interest of shareholders, both because the Company is unable to issue new shares and because existing shareholders are unable to value their holdings at or near to NAV. Accordingly, the Company announced on 18 November 2020 that it had given instructions to Winterflood Securities Limited to purchase the Company's Ordinary Shares, subject to certain pre-determined parameters and in accordance with the Company's discount management policy. As at 31 December 2020, 140,000 shares had been purchased and were held in treasury.

 

On 31 December 2020 the Ordinary Share price was 92.00p, representing a 9.27% discount to NAV as at that date.

 

Your Board is continuing to work with the Investment Manager in regard to the share price discount. To this end, the Company has commissioned third party research from Kepler Trust Intelligence which can be viewed at https://wwwtrustintelligence.co.uk/investor/articles/fund-researchinvestor-m-g-credit-income-retail-mar-2021. In addition, the Investment Manager has held many meetings with existing and potential investors to increase demand for the Company's shares. The most recent investor presentation can be viewed on the Company's website at www.mandg.co.uk/investor/funds/credit-income-investment-trust/gb00bfyyl325/. We have confidence that Winterflood will continue to purchase the Company's Ordinary Shares when it is effective to do so and the Board continues to consider other options available to it.

 

Dividends

Your Board is pleased that the Company paid dividends in respect of the year ended 31 December 2020 in accordance with the target set at launch. The Company paid quarterly dividends totalling 4.28p per Ordinary Share in respect of the year as a whole. This represented a dividend yield of LIBOR plus 4% on the opening NAV as at 1 January 2020, adjusted for the last dividend paid on 26 February 2021; and a dividend yield of 4.7% on the Ordinary Share price on 31 December 2020. Total dividends paid since launch have been fully covered by earnings derived from income and capital gains.

 

Your Board believes that it should pay dividends from income and prior capital gains (including accumulated capital gains from previous years). It therefore proposes to continue hereafter with three, level quarterly interim dividends in respect of each financial year plus a variable, fourth interim dividend to be determined after each year end, which will take into account the net income over the whole financial year and, if appropriate, any capital gains.

 

The Company proposes to increase the first three interim quarterly dividends to be paid in respect of the 2021 financial year to an annual rate of LIBOR plus 3%, calculated by reference to the opening NAV as at 1 January 2021, adjusted for the payment of the last dividend in respect of the prior year.

 

The Company uses the average daily three-month LIBOR as its reference for the purposes of its targeted dividend rate. LIBOR is in the process of being phased out by 31 December 2021 in favour of a new measure called Sterling Overnight Index Average (SONIA). Your Board will announce in due course the way in which SONIA will be substituted for LIBOR for the purpose of guidance on future dividends as well as for benchmarking the Company's investment performance.

 

Environmental, Social and Governance (ESG) issues and UK exit from the European Union

The information regarding ESG issues and the UK exit from the European Union can be found below.

 

Portfolio Manager

In May the Company announced that Adam English had been appointed as Portfolio Manager following Jeremy Richards's retirement from full time employment. Robert Whitten and Yiu-Wai Cheung have been named as Deputy Fund Managers. The Board has worked closely with Adam and the wider investment team since the launch of the Company and they have our full confidence.

 

Changes to the Articles of Association

The Board is proposing to make amendments to the Company's Articles of Association (the "Articles") to enable the Company to hold general meetings wholly or partially by electronic means and to give additional powers in respect of postponing or adjourning meetings in appropriate circumstances. The amendments are being sought to introduce flexibility to respond to challenges such as those posed by government restrictions on social interactions as a result of the COVID-19 pandemic, which have made it practically impossible at times for shareholders to attend general meetings in person.

 

The principal changes proposed to the Articles, and their effect, are set out in more detail on pages 40 to 41 of the full Annual Report and Accounts.

 

Annual General Meeting Arrangements

The Company's Annual General Meeting will be held at 12:00 noon on Wednesday, 9 June 2021 at the offices of Herbert Smith Freehills LLP, Exchange House, Primrose Street, London, EC2A 2EG.

 

As at the date of this report, restrictions on gatherings and social distancing measures remain in place and, given the ongoing uncertainty and visibility on the level of Government guidelines in early June, the Board has again decided to proceed with this year's AGM, with the minimum quorum requirements of two members only present in person. Voting will be conducted by way of a poll. In the unlikely event of the situation changing, the Company will update shareholders through an announcement to the London Stock Exchange and on the Company's website.

 

The Board strongly advises that no shareholders attend the AGM in person. However, shareholders can be represented by the chairman of the meeting acting as their proxy. The Board therefore urges you to lodge your votes in respect of the meeting in advance, by completing your proxy forms this will ensure that your votes are registered. Shareholders are also invited to address any questions to the company secretary via email to mandgcredit@linkgroup.co.uk. The Board is aware that many shareholders welcome the views of the Investment Manager and a presentation from the Investment Manager will be uploaded to the Company's website on the day of the AGM for shareholders to view.

 

Outlook

Your Company's portfolio is now approaching a good balance between higher-yielding private assets and the more liquid public assets which allow us to take advantage of market volatility and future opportunities. It is defensively positioned and it benefits from the flexibility provided by our currently undrawn £25 million revolving credit facility: together these should enable us to weather any future market shocks while having the firepower to purchase suitable assets as they arise.

 

Our Investment Manager believes that an annual total return, and thus ultimately a dividend yield, of LIBOR plus 4% will continue to be achievable in the future although there can be no guarantee that this will occur in any individual year.

 

The first quarter of the current year has started very well, with a NAV total return of over 2%, and our Investment Manager remains confident that it will continue to find attractive opportunities, particularly in private assets.

 

 

David Simpson

Chairman

 

27 April 2021

 

Investment manager's report

We are pleased to provide commentary on the factors that have impacted our investment approach over the last year, with particular reference to the performance and shape of the portfolio as we have sought to build it in accordance with the mandate agreed at IPO.

 

During 2020, we saw significant levels of volatility across financial markets. The broad recovery across asset classes has been remarkable, aided by swift and significant policy responses from governments and central banks. In March, the significant re-pricing across corporate bond markets presented attractive medium-term opportunities for investors with patient capital and the extensive resources required to evaluate individual opportunities.

 

The Investment Manager was able to use the initial period of market dislocation to increase credit exposure and yield in the portfolio. Asset valuations recovered in the second half of 2020, resulting in the NAV of 101.40p per Ordinary Share as at 31 December 2020 being above the NAV at launch.

 

For the year ended 31 December 2020, the Company declared dividends of 4.28p per Ordinary Share (of which 0.85p per Ordinary Share was paid in May 2020, 0.77p per Ordinary Share was paid in August 2020, 0.71p per Ordinary Share was paid in November 2020 and 1.95p per Ordinary Share paid in February 2021).

 

The portfolio is 79% invested in investment grade assets, with a weighted average credit rating across the whole portfolio of BBB. The annualised dividend yield in respect of last year was equivalent to an annual rate of 4% over LIBOR on the opening NAV (adjusted for the final interim dividend in respect of the period ended 31 December 2019). The NAV total return for the same period was 3.7%.

 

Portfolio activity and positioning

The Company entered 2020 cautiously positioned. Attractively priced assets were hard to find as a result of tight spreads on corporate credit and low government bond yields, so we remained defensively positioned with allocations to high grade asset-backed securities (ABS) and covered bonds. The outbreak of COVID-19 in Europe led to a fast and dramatic repricing across all risk assets. The speed and severity of the spread widening across all sectors, regardless of credit quality or duration, was extraordinary. As a result, the NAV of the Company declined. However, this dislocation presented attractive opportunities in the public markets. We were able to use existing cash holdings alongside proceeds from the sale of ABS and covered bonds to redeploy into mispriced, longer dated, fixed rate investment grade and high yield corporate bonds. Private transactions were put on hold, with almost all lenders and borrowers awaiting some semblance of market stabilisation and the establishment of a "new normal" before re-engaging.

 

As a result of the fiscal and monetary policy measures implemented by governments and central banks around the world, investor confidence started to return by the end of the second quarter. As liquidity in the ABS market improved, we were able to continue adding credit risk to the portfolio and increase the yield by switching into longer dated, fixed rate bonds. The Company was able to add attractively priced new issues as companies sought to improve balance sheets and liquidity alongside bonds from the secondary market where valuations had become misaligned relative to the underlying credit fundamentals.

 

Towards the end of the second quarter, we saw the reopening of the private credit markets with a significant number of borrowers seeking finance. Those private transactions that came to market in the second half of the year were very attractive; improved covenants, more conservative structures and better pricing than prior to the start of the pandemic. The Company committed to a number of private deals in the second half of the year across a variety of sectors, including the first direct investment into the social housing/infrastructure sector. This project relates to the maintenance of residential dwellings in the London borough of Lambeth and the provision of green spaces; a community centre; and a district heating network. As at 31 December 2020, the private asset portion of the portfolio, including irrevocable commitments, had increased to 49.25% (versus 27.41% at 31 December 2019) with an additional investment of approximately 10% in illiquid publicly listed assets, which are intended to be held to maturity. There continues to be a strong pipeline of private lending opportunities. The Company increased it's holding in the M&G European Loan Fund ('ELF') in the second half of the year (11.98% as at 31 December 2020) as it offered good relative value to public high yield bonds. This loan portfolio was not immune from the fall in asset prices at the end of March and, whilst that NAV recovered in 2020, the loans market lagged the recovery seen in the public high yield market. This is a long-term holding intended to provide a steady and attractive stream of income.

 

Credit markets rallied strongly towards the end of 2020, bolstered by vaccine optimism, the removal of uncertainty over the US presidency and continued central bank support. Returns for the year as a whole finished in positive territory in both investment grade and high yield markets. Credit spreads in high yield markets ended the year higher than they were at the start of 2020, with investment grade credit spreads broadly unchanged despite the substantially different economic climate. In the public markets, we took the opportunity to reduce our exposure to sectors that may experience difficulty over the short-to-medium term, where spreads were no longer sufficiently wide enough to compensate for the associated risks. In addition, we sold some of the more defensive positions in the portfolio which had tightened significantly versus the long-term target of the Company. This improved the risk profile, realised capital gains and added to the yield of the portfolio The proceeds were used to purchase new private transactions.

 

We continue to hedge the interest rate risk of the fixed rate bonds in the portfolio to reduce the portfolio's sensitivity to changes to interest rates Gilt futures are used to maintain a modified duration of between 1 and 1.5 years. When the Gilt yields fall this position will detract from the portfolio performance however, in a rising yield environment, the hedging strategy will provide an offset to a fall in price of duration sensitive fixed rate bonds.

 

In June 2020, the Company raised an additional £14.2 million (net of expenses) via a placing of Ordinary Shares. The money raised was initially invested in a variety of public corporate bonds that were offering good relative value, but has since been redeployed into private and more illiquid public assets. In the second half of 2020, the Company entered into an unsecured revolving credit facility with State Street Bank International GmbH. It is intended that this will be used to provide liquidity for investing when it is unattractive to sell existing holdings. The facility will be particularly useful when there is a significant number of private investments due to settle within a short period.

 

Outlook

In early 2021, investor sentiment is optimistic and appears to be assuming a smooth recovery, no doubt buoyed by the vaccine rollout and the agreement of the Brexit deal between the UK and the EU. This investor confidence, coupled with central bank support, has resulted in a rally in credit market spreads offset by an increase in Government yields across most developed markets.

 

Underlying NAV performance has had a strong start to 2021. In the first quarter of the year NAV total return was up by 2.02%, which compares well to the performance on fixed income indices such as the ICE BofA Sterling and Collateralised Index which fell by 4.48% and the ICE BofA European Currency Non-Financial High Yield 2% Constrained Index which rose by 1.51%. The Company performance compares well to these fixed income indices due to both its low interest rate risk, achieved by hedging the fixed-rate instruments in the portfolio, and to the tightening credit spread environment.

 

The Company is now reaching its long-term state of deployment and is delivering on its long-term performance objective set out at launch. The pipeline for new private investments remains strong with £32 million expressions of interest given with an average yield in line with the long term dividend policy of the Company. However, there has been some compression in illiquidity premia vs public markets as public market tightening is now beginning to be reflected in private transactions. Therefore, selecting the correct investments will be key.

 

Looking ahead, the Company will continue to sell strongly performing public bonds. These were generally bought at much wider spread levels in 2020 and will realise good capital gains. The cash raised will be redeployed into private assets which are being presented to us at attractive yield levels and will improve the income coverage of the dividend.

 

M&G Alternatives Investment Management Limited

 

27 April 2021

 

 

Portfolio analysis

 

Top 20 holdings

 

as at 31 December 2020

Percentage of

portfolio of

investmentsa

M&G European Loan Fund

11.98

Atlas 2020 1 Trust Var. Rate 30 Sep 2050

1.76

Delamare Finance 1.2255% 19 Feb 2029

1.59

Finance for Residential Social Housing

8.569% 4 Oct 2058

1.58

Hall & Woodhouse Var. Rate 30 Dec 2023

1.52

Signet Excipients Var. Rate 20 Oct 2025

1.42

Regenter Myatt Field North Var. Rate 31

Mar 2036

1.37

Newday Partnership Funding 2017-1

0.779% 15 Dec 2027

1.37

Hammond Var. Rate 28 Dec 2025

1.32

Project Driver TL Var. Rate

1.32

RIN II 1.88% 10 Sep 2030

1.27

Sonovate Limited Var. Rate 12 Apr 2021

1.22

Westbourne 2016 1 WR Senior Var. Rate

30 Sep 2023

1.17

Finance for Residential Social Housing

8.369% 4 Oct 2058

1.16

Ripon Mortgages 1.251% 20 Aug 2056

1.04

Luminis Var. Rate 23 Sep 2025

1.02

Marston's Issuer 1.653% 15 Oct 2031

1.02

LPG 4.49% 21 May 2024

0.99

Gongga Var. Rate 2 Aug 2025

0.98

Iliad 2.375% 17 Jun 2026

0.96

Total

36.06

a Including cash on deposit and derivatives.

 

Source: State Street

 

 

Geographical exposure

 

as at 31 December 2020

Percentage of

portfolio of

investmentsa

United Kingdom

59.22%

United States

7.95%

France

5.18%

Australia

3.45%

European Union

3.11%

Other

21.09%

a Excluding cash on deposit and derivatives.

 

Source: M&G and State Street as at 31 December 2020

 

 

Portfolio overview

 

as at 31 December 2020

% 

Cash on deposit

2.77

Public

52.98

Asset-backed securities

22.37

Bonds

30.61

Private

44.09

Asset-backed securities

6.29

Bonds

1.28

Investment funds

11.98

Loans

13.81

Private placements

0.99

Other

9.74

Derivatives

0.16

Debt derivatives

(0.26)

Forwards

0.42

Total

100.00

 

Source: State Street

 

Credit rating breakdown

 

as at 31 December 2020

%

Unrated

0.16

Derivatives

0.16

Cash and investment grade

79.27

Cash on deposit

2.77

AAA

5.53

AA+

2.53

AA

4.66

AA-

3.98

A+

0.21

A

1.67

A-

3.28

BBB+

10.51

BBB

11.38

BBB-

22.96

M&G European Loan Fund (ELF) (see note)

9.34

Sub-investment grade

20.57

BB+

4.76

BB

2.81

BB-

4.24

B+

1.40

B

3.08

B-

0.39

CCC+

0.58

CC

0.42

D

0.25

M&G European Loan Fund (ELF) (see note)

2.64

Total

100.00

 

Source: State Street

 

 

Note: ELF is an open-ended fund managed by M&G which invests in leveraged loans issued by, generally, substantial private companies located in the UK and Continental Europe. ELF is not rated and the Investment Manager has determined an implied rating for this investment, utilising rating methodologies typically attributable to collateralised loan obligations. On this basis, 78% of the Company's investment in ELF has been ascribed as being investment grade, and 22% has been ascribed as being sub-investment grade. These percentages have been utilised on a consistent basis for the purposes of determination of the Company's adherence to its obligation to hold no more than 30% of its assets in below investment grade securities.

 

Top 20 holdings %

as at 31 December 2020

Company description

M&G European Loan Fund

11.98%

Open-ended fund managed by M&G which invests in leveraged loans issued by, generally, substantial private companies located in the UK and Continental Europe. The fund's objective is to create attractive levels of current income for investors while maintaining relatively low volatility of NAV. (Private)

Atlas 2020 1 Trust Var. Rate 30 Sep 2050

1.76%

Floating-rate, senior tranche of a bilateral RMBS transaction backed by a pool of Australian equity release mortgages (Private)

Delamare Finance 1.2255% 19 Feb 2029

1.59%

Floating-rate, senior tranche of a CMBS secured by the sale and leaseback of 33 Tesco superstores and 2 distribution centres. (Public)

Finance for Residential Social Housing 8.569%

4 Oct 2058

1.58%

High grade (AA/Aa3), fixed-rate bond backed by cash flows from housing association loans. (Private)

Hall & Woodhouse Var. Rate 30 Dec 2023

1.52%

Bilateral loan to a regional UK brewer that manages a portfolio of 219 freehold and leasehold pubs. (Private)

Signet Excipients Var. Rate 20 Oct 2025

1.42%

Fixed-rate loan secured against two large commercial premises in London, currently leased to 2 FTSE listed UK corporations. (Public)

Regenter Myatt Field North Var. Rate 31 Mar 2036

1.37%

PFI (Private Finance Initiative) floating-rate, amortising term loan relating to the already completed refurbishment and ongoing maintenance of residential dwellings and communal infrastructure in the London borough of Lambeth. (Private)

Newday Partnership Funding 2017-1 0.779%

15 Dec 2027

1.37%

High Grade ABS (AAA) UK credit card. Securitisation of a portfolio of designated consumer credit card, store card and instalment credit accounts initially originated or acquired by NewDay Ltd in the UK. (Public)

Hammond Var. Rate 28 Dec 2025

1.32%

Secured, bilateral real estate development loan backed by a combined portfolio of two office assets leased to an underlying roster of global corporate tenants. (Private)

Project Driver TL Var. Rate

1.32%

Senior term loan to a provider of hire purchase financing on used domestic motor vehicles to consumers in the UK. (Private)

RIN II 1.88% 10 Sep 2030

1.27%

Mixed CLO (AAA) Consists primarily of senior secured infrastructure finance loans managed by RREEF America L.L.C. (Public)

Sonovate Limited Var. Rate 12 Apr 2021

1.22%

Bilateral loan to a company providing companies in the recruitment industry with an integrated service that incorporates placement management, invoicing and financing. (Private)

Westbourne 2016 1 WR Senior Var. Rate 30 Sep 2023

1.17%

Westbourne provides working capital finance to SMEs in the UK. The company is focused on small borrowers and has employed an advanced technology platform for the application, underwriting and monitoring of loans. (Private)

Finance for Residential Social Housing 8.369%

4 Oct 2058

1.16%

High grade (AA), fixed rate bond backed by cash flows from housing association loans. (Public)

Ripon Mortgages 1.251% 20 Aug 2056

1.04%

High Grade ABS (AA+/Aaa) UK RMBS. The portfolio comprises buy-to-let loans originated by Bradford and Bingley and Mortgage Express, secured over residential properties located in England and Wales. (Public)

Luminis Var. Rate 23 Sep 2025

1.02%

Floating-rate, mezzanine tranche of a regulatory capital transaction backed by a portfolio of predominately revolving facilities extended to blue chip corporates in the Americas and EMEA. (Private)

Marston's Issuer 1.653% 15 Oct 2031

1.02%

 

Marston's PLC is a leading independent brewing and pub retailing business. Marston's Issuer PLC operates as a special purpose entity on behalf of Marstons PLC, formed for the purpose of issuing debt securities to repay existing credit facilities, refinance indebtedness, and for

acquisition purposes. (Public)

LPG 4.49% 21 May 2024

0.99%

Private placement (PP) note from a business support services company which operates across four divisions: LPG (liquefied petroleum gas), Retail & Oil, Technology and Healthcare. (Private)

Gongga Var. Rate 2 Aug 2025

0.98%

Regulatory Capital trade by Standard Chartered referencing a US$2bn portfolio of loans to companies domiciled in 36 countries. (Private)

Iliad 2.375% 17 Jun 2026

0.96%

Iliad SA is a French provider of telecommunications services including fixed and mobile national telephony services, dial-up and high speed DSL and TV internet access, prepaid phone cards and internet hosting services. Fixed, callable bond. Senior unsecured. (Public)

 

Strategic Review

The Directors present the Strategic Report of the Company for the period ended 31 December 2020. The Strategic Report aims to provide Shareholders with the information to assess how the Directors have performed their duty to promote the success of the Company during the period under review.

 

Business and status of the Company

The Company was incorporated on 17 July 2018 and the Initial Public Offering (IPO) of the Company's shares took place on 14 November 2018.

 

The Company is registered in England and Wales as a public limited company and is an investment company within the terms of section 833 of the Companies Act 2006. The principal activity of the Company is to carry on business as an investment trust.

 

The Company has been approved by HM Revenue & Customs as an authorised investment trust under sections 1158 and 1159 of the Corporation Tax Act 2010. In the opinion of the Directors, the Company is directing its affairs so as to enable it to continue to qualify for such approval.

 

The Company's shares have a listing on the premium segment of the Official  List of the FCA and trade on the London Stock Exchange's (LSE) main market for listed securities.

 

Investment objective

The Company aims to generate a regular and attractive level of income with low asset value volatility.

 

Investment policy

The Company seeks to achieve its investment objective by investing in a diversified portfolio of public and private debt and debt-like instruments ("Debt Instruments"). Over the longer term, it is expected that the Company will be mainly invested in private Debt Instruments, which are those instruments not quoted on a stock exchange.

 

The Company operates an unconstrained investment approach and investments may include, but are not

limited to:

 

 

The Company invests primarily in Sterling denominated Debt Instruments. Where the Company invests in assets not denominated in Sterling, it is generally the case that these assets are hedged back to Sterling.

 

Investment restrictions

There are no restrictions, either maximum or minimum, on the Company's exposure to sectors, asset classes or geography. The Company, however, achieves diversification and a spread of risk by adhering to the limits and restrictions set out below.

 

The Company's portfolio comprises a minimum of 50 investments.

 

The Company may invest up to 30% of Gross Assets in below investment grade Debt Instruments, which are those instruments rated below BBB- by S&P or Fitch or Baa3 by Moody's or, in the case of unrated Debt Instruments, which have an internal M&G rating below BBB-.

 

The following restrictions will also apply at the individual Debt Instrument level which, for the avoidance of doubt, does not apply to investments to which the Company is exposed through collective investment vehicles:

 

 Rating

Secured Debt Instruments

 (% of Gross Assets)a

 

 Unsecured Debt Instruments

 (% of Gross Assets)

 

 AAA

 5%

 5%b

 AA/A

 4%

 3%

 BBB

 3%

 2%

 Below investment grade

 2%

 1%

 

a Secured Debt Instruments are secured by a first or secondary fixed and/or floating charge.

b This limit excludes investments in G7 Sovereign Instruments.

 

For the purposes of the above investment restrictions, the credit rating of a Debt Instrument is taken to be the rating assigned by S&P, Fitch or Moody's, or in the case of unrated Debt Instruments, an internal rating by M&G. In the case of split ratings by recognised rating agencies, the second-highest rating will be used.

 

The Company typically invests directly, but it also invests indirectly through collective investment vehicles which are managed by an M&G Entity. The Company may not invest more than 20% of Gross Assets in any one collective investment vehicle and not more than 40% of Gross Assets in collective investment vehicles in aggregate. No more than 10% of Gross Assets may be invested in other investment companies which are listed on the Official List.

 

Unless otherwise stated, the above investment restrictions apply at the time of investment.

 

Borrowings

The Company is managed primarily on an ungeared basis although the Company may, from time to time, be geared tactically through the use of borrowings. Borrowings will principally be used for investment purposes, but may also be used to manage the Company's working capital requirements or to fund market purchases of Shares. Gearing represented by borrowing will not exceed 30% of the Company's Net Asset Value, calculated at the time of draw down, but is typically not expected to exceed 20% of the Company's Net Asset Value.

 

Hedging and derivatives

The Company will not employ derivatives for investment purposes. Derivatives may however be used for efficient portfolio management, including for currency hedging.

 

Cash management

The Company may hold cash on deposit and may invest  in cash equivalent investments, which may include short- term investments in money market-type funds ("Cash and Cash Equivalents").

 

There is no restriction on the amount of Cash and Cash Equivalents that the Company may hold and there may be times when it is appropriate for the Company to have a significant Cash and Cash Equivalents position. For the avoidance of doubt, the restrictions set out above in relation to investing in collective investment vehicles do not apply to money market type funds.

 

Changes to the investment policy

Any material change to the Company's investment policy set out above will require the approval of Shareholders by way of an ordinary resolution at a general meeting and the approval of the Financial Conduct Authority (FCA).

 

Investment strategy

The Company seeks to achieve its investment objective by investing in a diversified portfolio of public and private debt and debt-like instruments of which at least 70% is investment grade. The Company is mainly invested in private debt instruments. This part of the portfolio generally includes debt instruments which are nominally quoted but are generally illiquid. Most of these will be floating rate instruments, purchased at inception and with the intention to be held to maturity or until prepaid by issuers; shareholders can expect their returns from these instruments to come primarily from the interest paid by the issuers.

 

The remainder of the Company's portfolio is invested in cash, cash equivalents and quoted debt instruments, which are more readily available and which can generally be sold at market prices when suitable opportunities arise. These instruments may also be traded to take advantage of market conditions. Fixed rate instruments will often be hedged in order to protect the portfolio from adverse changes in interest. Shareholders can expect their returns from this part of the portfolio to come from a combination of interest income and capital movements.

 

Investment process

The investment process for the Company consists of a number of stages: the decision to invest, monitoring of investments and ongoing engagement and divestment.

 

Investment decision-making is undertaken by the Investment Manager, who determine whether an investment is appropriate for the Company's investment mandate. Investments are only made after extensive research based on information, research and analysis from the Investment Manager's in-house analysts and external sources. The investment process is designed to ensure that the risk and return profile of investments is fully understood.

 

Regular monitoring of investments  enables  determination of whether an investment remains appropriate. This includes monitoring the performance of investments by fund managers, analysts and internal control and governance processes. The Investment Manager proactively engages with relevant parties on any issue which may, potentially, affect an investment's ability to deliver sustainable performance in line with expectations.

 

At some point, the Investment Manager may decide to divest from an investment (or the investment may complete in line with agreed terms, including pre-payment). This might be for a variety of reasons including; the investment being no longer suitable for the investment mandate, the outcome of engagement being unsatisfactory or as a result of the investment team's valuation assessment. Investment decision making is only undertaken by the fund managers designated by the Investment Manager.

 

As part of the investment process, full consideration is given to sustainability risk, as set our in more detail below.

 

Key performance indicators

In order to measure the success of the Company in meeting its objectives and policy, and to evaluate the performance of the Investment Manager, the Directors take into account the following key performance indicators (KPIs):

 

 

as at or
year ended
31 December
2020

as at or
perioda ended

31 December

2019

NAV per share

101.40p

101.72p

Ordinary Share price (mid-market)

92.00p

106.00p

(Discount)/premium to NAVb

(9.27)%

4.21%

Annualised dividend yieldb

4.65%

3.13%

Dividends declared per Ordinary Share

4.28p

3.74p

Revenue return per Ordinary Share

2.9p

2.6p

NAV total returnb

3.7%

5.6%

Share price total returnb

(9.7)%

8.2%

Ongoing charges figureb

0.87%

0.93%

 

a From the date of Initial Public Offering (IPO) 14 November 2018.

b Alternative performance measures. Please see pages 108 to 109 of the full Annual Report and Accounts for further information.

 

Share price discount or premium to NAV

The share price discount to NAV as at 31 December 2020 was (9.27)% (31 December 2019: 4.21% premium). During the year to 31 December 2020 the shares traded at an average discount to NAV of 1.59%.

 

Dividend yield

The Company paid dividends during the year on a quarterly basis. The second dividend of 1.65p per Ordinary Share in respect of the period ended 31 December 2019 was paid on 28 February 2020.

 

The first quarterly dividend in respect of the year ended 31 December 2020 of 0.85p per Ordinary Share in respect of the year ended 31 December 2020 was paid on 28 May 2020. The second quarterly dividend of 0.77p per Ordinary Share was paid on 28 August 2020 and the third quarterly dividend of 0.71p per Ordinary Share was paid on 27 November 2020.

 

The fourth quarterly dividend of 1.95p per Ordinary Share was paid on 26 February 2021. The total dividend declared per share for the year ended 31 December 2020 was 4.28p (period ended 31 December 2019: 3.74p).

 

The annualised dividend yield for the year was 4.65%, based on the closing share price on 31 December 2020 (for the period since IPO, based on the closing share price on 31 December 2019, the yield was 3.13%).

 

Portfolio performance

In support of the Company's investment objective, the Board monitors the portfolio performance against the benchmark of a NAV total return of LIBOR plus 4% per annum. In addition, performance is assessed against a number of total return indices in public investment grade and high yield markets.

 

In addition, progress of deployment of funds into private assets is monitored alongside the balance of fixed to floating rate coupons, yield to maturity and modified duration of the portfolio. Further details are provided in the Chairman's statement and Investment Manager's report above.

 

Ongoing charge

The Board reviews the costs of running the Company calculated using the Association of Investment Companies' (AIC) methodology for the ongoing charges.

 

Risk management

 

Role of the Board

The Directors have overall responsibility for risk management and internal control within the Company. They recognise that risk is inherent in the Company's operation and that effective risk management is an important element in the success of the organisation. The Directors have delegated responsibility for the assurance of the risk management process and the review of mitigating controls to the Audit Committee.

 

The Directors, when setting the risk management strategy, also determine the nature and extent of the significant risks and their risk appetite in implementing this strategy.

 

In arriving at its judgement of what risks the Company faces, the Board has considered the Company's

operations in the light of the following factors:

 

 

Principal risks

The Company is exposed to a variety of risks that could cause the valuation of its assets and/or the income from the investment portfolio to fluctuate. The Board, through delegation to the Audit Committee, has undertaken a robust assessment and review of the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. Accordingly, the Audit Committee has taken into consideration the risks posed to the Company by the societal and economic impacts of governmental responses to the ongoing COVID-19 pandemic and considers this to be a major ongoing risk event which has the potential to affect the likelihood of occurrence and materiality of impact of the Company's principal risks on its net asset value and performance. The pandemic has triggered, and may continue to trigger, increased volatility in terms of global risk asset valuations as well as presenting operational challenges for the Company's service providers as they respond to various limitations on free movement of staff imposed by governments across the world. The Board continues to receive regular reporting from the Company's major service providers and does not anticipate a fall in the level of service. The duration and ultimate impact of the pandemic is not presently possible to predict and the Board will continue to monitor and report on material developments on an ongoing basis.

 

These risks are formally documented in the Company's risk register, so that the risks identified and the controls in place to mitigate those risks can be monitored. Any new or emerging risks that are identified and that are considered to be of significance are also included in the Company's risk register together with any mitigating actions required.

 

The Board will continue to assess these risks on an ongoing basis In relation to the UK Code, the Board is confident that the procedures that the Company has put in place are sufficient to ensure that the necessary monitoring of risks and controls has been carried out throughout the reporting period.

 

The key risks identified by the Board, and the associated key mitigants and controls, are set out below:

 

Key Risk

Key Mitigants and controls

 

Market risk

 

Market risk embodies the potential for both losses and gains and includes foreign currency risk, interest rate risk and price risk. Market risk mainly arises from uncertainty about future values of financial instruments influenced by price, currency and interest rate movements. It represents the potential gain or loss that the Company may suffer through holding market positions in investments in the face of market movements.

Market risk includes the potential impact of events which are outside the Company's control, such as the COVID-19 pandemic.

 

 

 

Foreign currency risk

 

Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company is exposed to risks that the exchange rate of its reporting currency relative to other currencies may change in a manner that has an effect on the value of the portion of the Company's assets which are denominated in currencies other than its own reporting currency.

The Company fully hedges non-base currency investments at time of purchase using spot and forward foreign exchange contracts which are rolled forward periodically. Non-base currency exposure is monitored on an ongoing basis via internal systems, with hedging maintained at approximately +/-20bps tolerance.

 

 

Interest rate risk

 

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company's investments are in some cases subject to interest rate risk. In relation to fixed-rate obligations, when interest rates decline, the values can be expected to rise, and, conversely, when interest rates rise, the value of fixed rate obligations can be expected to decline.

The Company uses gilt futures contracts to mitigate interest rate risk with portfolio duration monitored on an ongoing basis via internal systems and adjusted accordingly. Market conditions since launch have seen the Company maintain an average modified duration of between 1-1.5 years. There are no restrictions regarding the level of duration the Company can maintain however its Investment Objective outlines commitment to low asset value volatility.

 

Market price risk

 

Market price risk includes changes in market prices, other than those arising from foreign currency or interest rate risk, which may affect the value of investments, such as macroeconomic and geopolitical events and trends, and sectoral influences.

As the Company invests in public and private debt instruments, it is regularly exposed to market risk and the value of the Company's portfolio fluctuates in response to developments in financial markets.

The Board has put in place limits on the Company's gearing, portfolio concentration and use of derivatives, which it believes to be appropriate to keep the Company's investment portfolio adequately diversified and to manage risk.

 

Credit risk

 

Because of its investment strategy, the Company is also materially exposed to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The main concentration to which the Company is exposed arises from the Company's investments in Debt Instruments.

The Company is also exposed to counterparty credit risk on trading derivative products, Cash and Cash Equivalents, amounts due from brokers and other receivable balances.

 

The Company's policy to manage this risk is to invest no more than 30% of the Company's assets in Debt Instruments that have a minimum credit rating below BBB- (or equivalent). Within the above limit, the Company may also invest in unrated assets where a rating is assigned by the Investment Manager using an internal methodology that is based on the categorisations used by rating agencies. When new investment opportunities arise, a detailed credit review is undertaken by the Investment Manager. A fundamental qualitative and  quantitative assessment of both business and financial risk, supported by appropriate financial modelling, alongside a review of the corporate structure and issuance document form the basis of the credit review. On an ongoing basis, the Investment Manager monitors the Company's investments against a variety of measures including financial performance and their progress against a variety of covenants.

The Company only transacts with parties that the Investment Manager considers to be suitable from a credit risk perspective.

 

Investment management performance risk

 

Other than in respect of market risk, the performance of the Company's portfolio of assets depends primarily on the investment strategy, asset allocation and stock selection decisions taken by the Investment Manager within the parameters and constraints imposed by the Company's investment policy.

The Investment Manager applies a 'three lines of defence' model for risk management, incorporating the individual fund manager and line management; independent risk and compliance functions and reporting structures; and internal audit. Measures and tools such as volatility estimation, value at risk analysis and stress testing are used in order to better understand risk concentrations within the portfolio.

 

Liquidity risk

 

The Company invests in public and private debt instruments. Some of these investments may be difficult to value or realise (if at all). The market price that is achievable for such investments may ultimately therefore be different than the carrying values of these assets as reflected in the Company's reported NAV per Ordinary Share from time to time.

As the Company is closed-ended, it is not exposed to the same risks of liquidity mismatch that are inherent in the management of portfolios owned by open-ended funds. This enables the Company to invest in assets that have limited or no secondary market liquidity in order to seek to capture the additional yield that is generally available compared to more liquid instruments.

Before the Company's fifth AGM in 2024, the Board will submit to Shareholders proposals to enable them to realise the value of their Ordinary Shares. The Board monitors the liquidity profile of the Company's assets on a quarterly basis through the receipt of an asset liquidity analysis from the Investment Manager.

 

Dividend policy risk

 

The level of dividends that the Board will declare, and the extent to which those dividends comprise 'streamed' income on the one hand and capital profits on the other hand, will be dependent largely on the performance of the Company's investment portfolio over time and the market conditions that exist during relevant performance periods. Apart from asset selection and market conditions, factors that may also  affect performance include, inter alia, the Company's level of gearing, its accounting policies, changes in variable interest rates, the level of loan or bond prepayments and a change in the tax treatment of the interest received by the Company.

The Investment Manager runs a dividend projection model that is regularly reviewed by the Board.

 

Operational risk

 

In common with most other investment trusts, the Company has no executive directors, no executive management and no employees. The Company delegates key operational tasks to third-party service providers that are specialists in their fields, as follows:

● Management of the Company's investment portfolio to M&G Alternatives Investment Management Limited

● Preparation and maintenance of the Company's Financial Statements and maintenance of its records to State Street Bank and Trust Company

● Company Secretarial Services to Link Company Matters Limited

● Registrar services to Link Group

● Worldwide custody of the Company's assets to State Street Bank and Trust Company

● Safekeeping and depositary services to State Street Trustees Limited

Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a mate...

Due diligence is undertaken before contracts are entered into with third-party service providers. Thereafter, service provider oversight is conducted through ongoing interaction with the Management Engagement and Audit Committees and is formalised through an annual evaluation process....

Most third party service providers produce internal control reports to provide assurance regarding the effective operation of internal controls as reported on by their reporting accountants. These reports are provided to the Audit Committee for review by the Investment Manager's Supplier Management Team. The Committee would seek further representations from the service providers if not satisfied with the effectiveness of their control environment.

The Management Engagement and Audit Committees also consider the business  continuity arrangements of the Company's key service providers and reviews these as part of the review of the Company's risk register.

In respect of the emerging risks posed by the COVID-19 pandemic in terms of the ability of service providers to function  effectively, the key service providers have provided details of the measures that they have put in place to address the crisis, in addition to their existing business continuity framework. Having considered these arrangements and reviewed service levels since the crisis has evolved, the Committees and Board are confident that a good level of service has and will be maintained.

 

Regulatory, legal and statutory risk: changes in laws, government policy or regulations

 

The Company is subject to laws, government policy and regulations enacted by national and local governments. Any change in the law, regulation or government policy affecting the Company may have a material adverse effect on the value of its investments, its ability to carry on its business and successfully pursue its investment policy and on its earnings and returns to Shareholders.

In particular, the Company is required to comply with certain requirements that are applicable to listed closed- ended investment companies, including section 1158 of the Corporation Tax Act 2010. Any failure to comply may potentially result in a loss of investment trust company status.

The Company must comply with the Listing Rules, Prospectus Rules, the Disclosure Guidance and Transparency Rules, the Market Abuse Regulation (MAR) and the rules of the London Stock Exchange. Any failure in future to comply with any future changes to such rules and regulations may result in the Shares being suspended from trading on the London Stock Exchange.

MAR can be defined as Regulation (EU) No 596/2014 of the European Parliament on market abuse, otherwise known as the Market Abuse Regulation, or "MAR". It requires the Board of the Company to adopt certain processes to ensure that, inter alia, price sensitive information must be, subject to certain exemptions, promptly disclosed to the public via a regulatory news service in order to ensure an orderly market in the Company's shares.

The Company mitigates any such failure by delegating key operational tasks to specialist third-party service providers combined with close oversight and monitoring through the Audit Committee.

The Investment Manager monitors investment movements, the level and type of forecast income and expenditure and the amount of proposed dividends to ensure that the provisions of Chapter 4 of Part 24 of the Corporation Tax Act 2010 are not breached. The results are reported to the Board at each meeting.

Compliance with the accounting rules affecting investment trusts are also carefully and regularly monitored.

The Company Secretary, Investment Manager and the Company's professional advisers provide regular reports to the Board in respect of compliance with all applicable rules and regulations. The Board and the Investment Manager also monitor changes in government policy and legislation which may have an impact on the Company.

The risk to the company of failure to comply with MAR is mitigated by close Board oversight and monitoring through the compliance function at the Investment Manager.

 

 

Sustainability Risk

 

Sustainability risk means exposure to an environmental, social or governance ("ESG") event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of an investment.

Please refer to the 'Sustainability risk and investment process' section below for further details.

 

 

UK exit from the European Union

The UK officially left the EU on 31 January 2020 ("Brexit") and the agreed transitional arrangements, where all relevant rules and regulations remained in place, ended on 31 December 2020. A post-Brexit agreement on trade and other issues was agreed just a week before the transitional period ended, although, there is still no established bilateral agreement relating to the provision of cross border financial services.

 

The Directors believe the activities by the Company will continue to be largely unchanged by the UK's ongoing relationship with the EU, at least for the foreseeable future.

 

Viability statement

The UK Financial Reporting Council (FRC) maintains the UK's Corporate Governance Code ("the Code") to promote high quality corporate governance and reporting. Under the Code, the Directors are required to state that in their opinion the Company's resources are adequate for it to continue in business for at least 12 months from the date of the Financial Statements and, therefore, it is appropriate that the Financial Statements be prepared on a going concern basis. This statement appears below.

 

The Directors are also required, in accordance with provision 31 of the 2018 UK Corporate Governance Code, to assess the prospects for the Company over a longer period than the 12 months referred to in the going concern guidance and statement. The Directors have elected to review the viability of the Company for a three-year period by reference to the weighted average life of the Debt Instruments in the Company's portfolio.

 

In assessing the viability of the Company over this three-year period, the Directors have considered a number of factors. Most importantly, they have weighed the characteristics of a closed-end fund and the investment policy of the Company against the risks the Company faces as set out in this Strategic Report. The Directors have also taken account in their assessment of the uncertainty around the potential duration of the COVID-19 pandemic, its impact on the global economy and the prospects for the Company's portfolio.

 

The Directors have assumed that neither the closed-ended structure of the Company, the investment policy it follows nor the risks it faces are likely to change substantially, or for the worse with respect to the viability of the Company, over the three-year period they have selected for the purposes of this viability statement. The Directors have also assumed that the Company will continue to maintain a sufficient level of liquidity and to generate substantial income for the foreseeable future in order to meet its liabilities. As the Directors are ultimately responsible for ensuring that the investment policy of the Company is followed by the Investment Manager, they are confident in making these assumptions about the future of the Company.

 

The Company is an investment trust, not a trading company, and it invests in a diversified portfolio. As a closed-ended fund, it is not subject to redemptions by Shareholders prior to, potentially, the 2024 exit opportunity.

 

Before the Company's fifth annual general meeting in 2024, the Board will formulate and submit to Shareholders proposals (which may constitute a tender offer or other method of distribution) to provide Shareholders an opportunity to realise the value of their Ordinary Shares at NAV per Ordinary Share less costs. In all circumstances, the Board will seek to balance the interests of both continuing Shareholders and those electing to realise their investment with a view to minimising any reduction in the overall size of the Company.

 

The Company's portfolio also generates substantial levels of income to meet its expenses, which are largely fixed overheads that represent a small percentage of its net assets. Based on their assessment of the nature of the Company, its investment policy and financial resources, the Directors have a reasonable expectation that the Company will be able to continue in operation and to meet its liabilities as they fall due over the next three years.

 

Going concern statement

The activities of the Company, together with the factors likely to affect its future development, including its performance, financial position, cash flows and liquidity position, are described in the Strategic Report.

 

In addition, the Company's policies and processes for managing its key financial risks are described in note 14.

 

As at 31 December 2020, the Company's total assets less current liabilities were £146.63m (31 December 2019: £132.23m). The Directors have reviewed the financial projections of the Company from the date of this report, which shows that the Company will be able to generate sufficient cash flows in order to meet its liabilities as they fall due.

 

As a consequence, the Directors believe that the Company continues to be well placed to manage its business risks successfully. In assessing the going concern basis of accounting, the Directors have also considered the COVID-19 pandemic and the impact this may have on the Company's investments and the Company's NAV. The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future and for a period of 12 months from the date of the approval of this Annual Report. Accordingly, they continue to adopt the going concern basis in preparing this Annual Report and Accounts.

 

Investment management and third-party service provider arrangements

The Board has overall responsibility for the Company's activities, including the review of investment activity and performance and the control and supervision of all suppliers of services to the Company, including the Investment Manager. It is also responsible for the determination of the Company's investment policy and strategy and the Company's system of internal and financial controls, including ensuring that commercial risks and financing needs are properly considered and that the obligations of a public limited company are adhered to.

 

To assist the Board in the operations of the Company, arrangements have been put in place to delegate authority for the performance of day-to-day operations of the Company to the Investment Manager and other third-party service providers. The Board has appointed the Investment Manager to manage the Company's investment portfolio within guidelines set by the Board.

 

The Investment Manager is in frequent contact with the Board and supplies the Directors with  regular  updates on the Company's activities and detailed reports at each Board meeting.

 

Investment Manager

The Company has appointed M&G Alternatives Investment Management Limited (the "Investment Manager") to act as the Company's Alternative Investment Fund Manager (AIFM) for the purposes of the AIFM Directive and, accordingly, the Investment Manager is responsible for providing discretionary portfolio management and risk management services to the Company.

 

The Investment Management Agreement dated 26 September 2018 is for an initial term of five years from 14 November 2018 and thereafter subject to termination on not less than six months' written notice by either party. The Investment Management Agreement can be terminated at any time in the event of the insolvency of the Company or the Investment Manager or in the event that the Investment Manager ceases to be authorised and regulated by the FCA (if required to be so authorised and regulated to continue to carry out its duties under the Investment Management Agreement).

 

The Investment Manager is entitled to receive from the Company an investment management fee, which is calculated and paid quarterly in arrears at an annual rate of 0.5% per annum of the prevailing published NAV until such time as the Board agrees that the portfolio is appropriately positioned to meet the Company's medium term annualised dividend target of LIBOR plus 4%.

 

Subsequent to the year-end the Board agreed that the portfolio was appropriately positioned to meet the Company's medium term annualised dividend target of LIBOR plus 4%. On 2 March 2021 a side letter to the Investment Management Agreement was executed to reflect that with effect from 1 April 2021 the Investment Management Fee would be calculated at the rate of 0.7% per annum of the prevailing published NAV.

 

Where the Company invests in a collective investment vehicle that is managed or advised by an M&G entity, the Investment Manager reduces its investment management fee by the amount of any equivalent management fee that is charged to such collective investment vehicle or such entity rebates its management fee such that the Investment Manager ensures the Company is not charged twice. The above arrangement does not apply to any other fees or expenses charged to the Company or any such entity in which it invests.

 

The Investment Manager is also entitled to be paid half of any arrangement fee charged by the Company to the issuer of a Debt Instrument in which the Company invests. The balance of any arrangement fee is retained by the Company.

 

Continuing appointment of Investment Manager

As at the date of this Report, the Directors are of the opinion that the Investment Manager has executed the Company's investment strategy according to the Board's expectations. Accordingly, the Directors believe that the continuing appointment of M&G Alternatives Investment Management Limited as the Investment Manager of the Company, on the terms agreed, is in the best interests of the Company and its Shareholders as a whole.

 

Administrator

Under an Administration Agreement dated 26 September 2018, the Company has appointed State Street Bank and Trust Company to act as administrator. The administrator provides day-to-day administration of the Company and is also responsible for the Company's general administrative functions, including the calculation and publication of the NAV and maintenance of the Company's accounting and statutory records.

 

The Administration Agreement is terminable, inter alia, upon not less than six months' written notice. The Administration Agreement is also terminable immediately upon the occurrence of certain standard events, including the insolvency of the Company or the Administrator or a party committing a material breach of the Administration Agreement (where such breach has not been remedied within 30 calendar days of written notice being given).

 

Depositary

Under a Depositary Agreement dated 26 September 2018, the Company has also appointed State Street Trustees Limited as depositary to provide depositary services to the Company, which will include safekeeping of the assets of the Company. The Depositary is permitted to delegate (and authorise its delegates to sub-delegate) the safekeeping of the assets of the Company.

 

The Administrator and Depositary are entitled to a combined fee (the "State Street Fee"). The State Street Fee shall be up to 0.08% of the NAV per annum. The fee is subject to a minimum ratea, whereby if the NAV is less than £250 million, the fee will be calculated as if the NAV were £250 million. The State Street Fee is calculated monthly and payable monthly in arrears.

 

a The minimum rate is waived until 31 December 2021.

 

Custodian

The Depositary has delegated safekeeping duties as set out in the AIFM Directive and the FCA Handbook to State Street Bank & Trust Company, whom it has appointed as global sub-custodian.

 

Registrar

The Company entered into a Registrar Agreement dated 26 September 2018 with Link Group to provide registrar services in relation to the transfer and settlement of shares. Under the agreement, the Registrar is entitled to a fee calculated on the basis of the number of Shareholders and the number of transfers processed (exclusive of any VAT). In addition, the Registrar is entitled to certain other fees for ad hoc services rendered from time to time. The Registrar Agreement is for an initial period of one year from the date of Initial Admission and thereafter shall automatically renew for successive periods of 12 months unless or until terminated by either party (a) at the end of the initial period, provided written notice is given to the other party at least 6 months prior to the end of the initial period or (b) at the end of any successive 12-month period, provided written notice is given to the other party at least six months prior to the end of such successive 12-month period.

 

In April 2021 the Company entered into a new Registrar Agreement with Link Group to provide registrar services in relation to the transfer and settlement of shares. Effective from 1 May 2021, under the terms of the agreement a fixed annual fee of £13,000 will be payable. The Registrar Agreement is for a period of three years until 30 April 2024 when the fee will increase in line with RPI.

 

Company Secretary

The Company entered into a Company Secretarial Services Agreement dated 26 September 2018 appointing Link Company Matters Limited ("Company Matters") as Company Secretary to provide the company secretarial functions required by the Companies Act. Under the terms of the Company Secretarial Services Agreement, the aggregate fees payable to Company Matters was £61,920 per annum. Following the initial period of 12 months the Company Secretarial Agreement automatically renews for successive periods of 12 months unless or until terminated by either party, provided written notice is given at the end of any successive 12-month period, provided written notice is given to the other party at least six months prior to the end of such successive 12-month period.

 

With effect from 1 September 2020, the Company entered into an addendum to the Company Secretarial Services Agreement under the terms of which the annual fee was increased to £65,000 and a one-off fee of £5,000 was payable in relation to the services provided between September 2019 and August 2020.

 

Section 172 Statement

 

Overview

The Directors' overarching duty is to act in good faith and in a way that is the most likely to promote the success of the Company as set out in Section 172 of the Companies Act 2006. In doing so, Directors must take into consideration the interests of the various stakeholders of the Company and the impact the Company has on the community and the environment; take a long-term view on consequences of the decisions they make; and aim to maintain a reputation for high standards of business conduct and fair treatment between the members of the Company.

 

Fulfilling this duty naturally supports the Company in achieving its investment objective and helps to ensure that all decisions are made in a responsible and sustainable way. In accordance with the requirements of the Companies (Miscellaneous Reporting) Regulations 2018, the Company explains how the Directors have discharged their duty under Section 172 below.

 

To ensure that the Directors are aware of and understand their duties, they are provided with the relevant information as part of their induction, as well as receiving regular and ongoing updates and training on the relevant matters. They also have continued access to the advice and services of the Company Secretary and, when deemed necessary, the Directors can seek independent professional advice.

 

The schedule of Matters Reserved for the Board, as well as the Terms of Reference of its committees are reviewed on at least an annual basis and further describe the Directors' responsibilities and obligations, and include any statutory and regulatory duties. The Audit Committee has the responsibility for the ongoing review of the Company's risk management systems and internal controls and, to the extent that they are applicable, risks related to the matters set out in Section 172 are included in the Company's risk register and are subject to periodic and regular reviews and monitoring.

 

Decision-making

The Board considers the impact that any material decision will have on all relevant stakeholders to ensure that it is making a decision that promotes the long-term success of the Company, whether this be in relation to dividends, new investment opportunities, potential future fundraisings etc.

 

Stakeholders

The Board seeks to understand the needs and  priorities  of the Company's stakeholders and these are taken into account during all its discussions and as part of its decision-making. The Board has considered which parties should be deemed  to be stakeholders of the Company. As the Company is an externally managed investment company and does not have any employees or customers, its key stakeholders comprise its Shareholders, regulators (including service party regulators) and service providers. The section below discusses why these stakeholders are considered of importance to the Company and the actions taken to ensure that their interests are taken into account.

 

Importance

Board engagement

 

Shareholders

 

 

Continued Shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy.

 

Before the Company's fifth Annual General Meeting in 2024, the Board will formulate and submit to Shareholders proposals (which may constitute a tender offer or other method of distribution) to provide Shareholders with an opportunity to realise the value of their Ordinary Shares at the then prevailing NAV per Ordinary Share less costs. In all circumstances, the Board will seek to balance the interests of both continuing Shareholders and those electing to realise their investment.

The Company has over 150 Shareholders, including institutional and retail investors. The Board is committed to maintaining open channels of communication and to engage with Shareholders in a manner they find most meaningful in order to gain an understanding of their views. These include the channels below.

 

AGM: under normal circumstances the Company welcomes and encourages attendance and participation from Shareholders at its AGMs and when possible, Shareholders will have the opportunity to meet the Directors and Investment Manager and to address questions to them directly. The Company values any feedback and questions it may receive from Shareholders ahead of and during the AGM and will take action or make changes, when and as appropriate.

 

Publications: the Annual Report and Half Year Report are made available on the Company's website and the Annual Report is circulated to Shareholders. This information is supplemented by the monthly calculation and publication of the NAV per share which is announced via the regulatory news service of the London Stock Exchange. In addition, a monthly factsheet and/or a quarterly newsletter is published by the Investment Manager on the Company's website. Feedback and/or questions that the Company receives from Shareholders help the Company evolve its reporting, aiming to render the reports and updates transparent and understandable.

 

Shareholder meetings: unlike trading companies, one-to-one Shareholder meetings take the form of a meeting with the Investment Manager rather than members of the Board. Feedback from all substantive meetings between the Investment Manager and Shareholders is shared with the Board. The Chairman, the Chairman of the Audit Committee or other members of the Board are available to meet with Shareholders to understand their views on governance and the Company's performance where they wish to do so. With assistance from the Investment Manager, the Chairman seeks meetings with Shareholders who might wish to meet with him. During the year there were 16 meetings with shareholders.

 

Shareholder concerns: in the event that Shareholders wish to raise issues or concerns with the Board, they are welcome to do so at any time by writing to the Chairman at the registered office. The Senior Independent Director is also available to Shareholders if they have concerns that contact through the normal channel of the Chairman has failed to resolve or for which such contact is inappropriate.

 

Investor relations updates: at every Board meeting, the Directors receive updates from the Company's broker on the share trading activity, share price performance and any Shareholders' feedback, as well as an update from the Investment Manager.

 

 

Other stakeholders

 

 

The Investment Manager

 

Holding the Company's shares offers investors a publicly traded investment vehicle through which they can obtain exposure to the Company's diversified portfolio. The Investment Manager's performance is critical for the Company to successfully deliver its investment strategy and meet its objective.

Maintaining a close and constructive working relationship with the Investment Manager is crucial, as the Board and the Investment Manager both aim to continue to achieve consistent, long-term returns in line with the Company's investment objective. Important components in the collaboration with the Investment Manager, representative of the Company's culture include those listed below.

 

 

The Board holds detailed and intensive discussions with the Investment Manager on all key strategic and operational topics on an ongoing basis. In addition to a monthly call there have been numerous meetings on a range of topics including the retirement of Jeremy Richards and the appointment of Adam English. Beyond this, there are weekly discussions by email and calls on various operational matters.

The Administrator, the Company Secretary, the Registrar, the Depositary, the Custodian and the Broker

 

 

 

In order to function as an investment trust with a listing on the premium segment of the official list of the FCA and trade on the London Stock Exchange's (LSE) main market for listed securities, the Company relies on a diverse range of reputable advisors for support in meeting all relevant obligations.

The Board maintains regular contact with its key external providers and receives regular reporting from them through the Board and committee meetings, as well as outside of the regular meeting cycle. Their advice, as well as their needs and views are routinely taken into account. The Management Engagement Committee formally assesses their performance, fees and continuing appointment at least annually to ensure that the key service providers continue to function at an acceptable level and are appropriately remunerated to deliver the expected level of service. The Audit Committee reviews and evaluates the control environments in place at each service provider and assesses the effectiveness through review of the annual assurance reports from each organisation. This reporting is supplemented by the view of the Investment Manager's Supplier Management Team regarding the control environments in operation at the providers. Interactions take place at least monthly including in the approval of the NAV, review of forecasts and management accounts.

Regulators (including third-party service party providers' regulators)

 

 

The Company can only operate with the approval of its regulators and its third-party service providers' regulators who have a legitimate interest in how the Company operates in the market and how it treats its Shareholders.

The Company regularly considers how it meets various regulatory and statutory obligations and follows voluntary and best practice guidance. It also gives full consideration to how any governance decisions it makes can have an impact on its stakeholders, both in the shorter and in the longer term. The Company's service providers provide regular reporting to the Company in respect of their interaction with their own respective regulators.

Lenders

 

Availability of funding and liquidity are crucial to the Company's ability to take advantage of investment opportunities as they arise.

Considering how important the availability of funding is, the Company aims to demonstrate to lenders that it is a well-managed business, and in particular, that the Board focuses regularly and carefully on the management of risk. The Board has worked with the Investment Manager to agree the terms of the revolving credit facility.

Institutional Investors and proxy advisers

 

The evolving practice and support of the major institutional investors and proxy adviser agencies are important to the Directors, as the Company aims to maintain its reputation for high standards of corporate governance, which contributes to its long-term sustainable success.

Recognising the principles of stewardship, as promoted by the UK Stewardship Code, the Board welcomes engagement with all of its investors. The Board recognises that the views, questions from, and recommendations of many institutional investors and proxy adviser agencies provide a valuable feedback mechanism and play a part in highlighting evolving shareholders' expectations and concerns.

 

The above mechanisms for engaging with stakeholders are kept under review by the Directors and will be discussed on a regular basis at Board meetings to ensure that they remain effective.

 

Examples of the Board's principal decisions during the year, and how the Board fulfilled its duties under Section 172 of the Act, and the related engagement activities are set out below.

 

Principal decision

Long-term impact

Stakeholder considerations and engagement

The Company raised £14.3 million from an issue of ordinary shares.

The issue of shares enlarged the capital base over which to spread the Company's fixed operating costs and also satisfied ongoing demand for the shares whilst potentially improving the liquidity for the Company's shares in the secondary market.

 

The Board determined that as a result of the COVID-19 pandemic there were favourable opportunities for investment opening up in the private debt markets. The Board and Investment Manager considered that it would be advantageous to seek to raise additional capital to take advantage of these opportunities and undertook an issue of shares through a non pre-emptive placing.

The Company entered into an agreement for a revolving credit facility of £25 million with State Street Bank International GmbH.

In line with its approach to balance sheet management, the Company entered into an agreement for a one-year multicurrency revolving credit facility of £25 million.

 

The Board regularly reviews the Company's cash position and commitments taking into consideration the impact on shareholders. The facility will be used to support the long-term growth of the Company and in particular to fund investments. The facility increases the Company's net liquid resources available for future deployment, including dividend payments to shareholders and any repurchase of the Company's issued share capital. The terms of the credit facility with State Street Bank International GmbH contain covenants with which the Company is regularly required to confirm to State Street Bank International GmbH that is has remained compliant.

 

Culture

The Directors are of the opinion that establishing and maintaining a healthy corporate culture amongst the Board and in its interaction with the Investment Manager, Shareholders and other stakeholders will support the delivery of its purpose, values and strategy. The Board seeks to promote a culture of openness, transparency and integrity through ongoing dialogue and engagement with its stakeholders, principally the Investment Manager.

 

The Board strives to ensure that its culture is in line with the Company's purpose, values and strategy and will consider this through its annual evaluation processes. There are also policies and procedures in place to assist with maintaining a culture of good governance that include those relating to Directors' dealings in the Company's shares, conflicts of interest, bribery and tax evasion.

 

The Board seeks to appoint appropriate third-party service providers and evaluates their services on a regular basis as described on above. Their ongoing appointments are not only reflective of their performance by reference to their contractual and service level obligations, but also take into account the extent to which their individual corporate cultures align with those of the Company. The Board considers the culture of the Investment Manager and other stakeholders, including their policies, practices and behaviour, through regular reporting from these stakeholders and in particular during the annual review of the performance and continuing appointment of all service providers.

 

Employees, human rights and social and community issues

The Board recognises certain requirements under the Companies Act 2006 to detail information about human rights, employees and community issues, including information about any policies it has in relation to these matters and the effectiveness of these policies. These requirements are not in practice applicable to the Company as it has no employees, all the Directors are non-executive and it has outsourced all operational functions to third-party service providers. The Company has therefore not reported further in respect of these provisions.

 

Under listing rule 15 4 29(R), the Company, as a closed-ended investment fund, is exempt from complying with the Task Force on Climate-related Financial Disclosures.

 

Board diversity

As at 31 December 2020, the Board of Directors of the Company comprised three male directors and one female director. The Board is an enthusiastic supporter of diversity in its composition, recognizing that it brings additional benefits to the Company and its stakeholders beyond specialist skills, knowledge, experience, backgrounds and perspectives. As a result, the Board's views on diversity principles are aligned with those expressed in the Hampton-Alexander Review regarding the proportion of women on boards and also the Parker Review about ethnic representation on boards, amongst other published commentaries. It is the intention of the Board to work towards enhancement of its diversity alongside the maintenance of key skillsets as the Company grows its size over the medium term, and developments in this area will be reported to stakeholders periodically.

 

It is the Board's policy that any future Board appointments will be made on the basis of merit against the specific criteria for the role being offered and there will be no discrimination on the grounds of gender, race, ethnic or national origins, religion, sexual orientation, age or disabilities.

 

Environmental, social and governance (ESG) issues

The Company has no employees, property or activities other than investments, so its direct environmental impact is minimal. In carrying out its activities and in its relationships with service providers and their employees, the Company aims to conduct itself responsibly, ethically and fairly.

 

The day-to-day management of the Company's investing activities is delegated to the Investment Manager.

 

The Investment Manager has a long-term track record of commitment to responsible investment principles, and became a signatory to the United Nations-supported PRI Association ("the PRI"), the world's leading organisational proponent of responsible investing, more than eight years ago. By virtue of that status, the Investment Manager has committed itself to adhering to the following overarching principles in the conduct of its investment management activities.

 

Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.

 

Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.

 

Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.

 

Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.

 

Principle 5: We will work together to enhance our effectiveness in implementing the Principles.

 

Principle 6: We will each report on our activities and progress towards implementing the Principles.

 

As a signatory member to the PRI, the Investment Manager is committed to providing detailed ESG transparency to market participants in relation to its business activities. The most recent transparency report is available at https://www.unpri.org/signatorydirectory/mandg-investments/1483.article.

 

Given its commitment to responsible investment, the Investment Manager has allocated significant human and financial capital to the implementation of the PRI principles.

 

Sustainability risk and investment process

The Board believes that sustainability risk can have a material impact on long term investment outcomes. Sustainability risk means exposure to an environmental, social or governance ("ESG") event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of an investment. The Company's goal is to generate the best possible risk adjusted returns for investors, taking into account all factors that influence investment performance, and therefore ESG issues are incorporated into investment decisions wherever they have a potentially meaningful impact on risk or return.

 

ESG factors themselves are, generally, non-financial considerations that may impact the risk, volatility and long-term return of individual investments, as well as markets as a whole. Individual investments can have both a positive and negative impact on society and the environment.

 

In certain contexts, ESG factors may be referred to as sustainability factors. Due to the nature of its stated investment strategy, the Company does not seek to actively promote ESG factors and does not seek to maximise portfolio alignment with ESG factors, but it nevertheless remains exposed to sustainability risks.

 

Impacts on the Company following the occurrence of a sustainability risk event may be numerous and will vary depending on the specific investment risk, geographical region and asset class. In general, where a sustainability risk event occurs in respect of an individual asset, there is the potential for a negative impact on, or an entire loss of, its value.

 

The following types of sustainability risks have the potential to materially impact the returns of the Company over time :

 

  • Environmental factors, which include, but are not limited to, the ability of  investee companies to mitigate and adapt to climate change, the potential for higher carbon prices, exposure to increasing water scarcity and potential for higher water prices, waste management challenges, and impact on global and local ecosystems.

 

  • Social risks, which include, but are not limited to, product safety, supply chain management and labour standards, health and safety and human rights, employee welfare, data & privacy concerns and increasing technological regulation.

 

  • Governance aspects, which include, but are not limited to, board composition and effectiveness, management incentives, management quality, ethnic and gender diversity, and stakeholder alignment.

 

The potential impacts of sustainability risk events on the Company's portfolio include degradation of issuer cashflow and consequent inability to meet debt servicing obligations, and inability to continue to actively and competitively participate in its chosen markets. Sustainability risks may also affect the credit quality of an issuer. The Company has exposure to higher-yielding private debt arrangements, which may include debt securities of smaller companies, some of which may be privately owned, and thus may be less transparent in respect of environmental, social and governance and sustainability-related disclosures.

 

In order to ensure that sustainability risks are properly considered within the investment decision making and risk monitoring processes, to the extent that they represent potential or actual material risks and/or opportunities for maximising long-term risk-adjusted returns, the Investment Manager follows a series of environmental, social and governance investment principles described in the Investment Manager's ESG Principles Statement, which can be accessed via the Investment Manager's website.

 

Greenhouse gas emissions

The Company has no greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emission-producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013.

 

Modern slavery

The Company, as an investment vehicle, does not provide goods or services in the normal course of business and does not have customers. The Directors consider that the Company is thus not required to make a slavery or human trafficking statement under the Modern Slavery Act 2015. The Board considers the Company's supply chains, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.

 

Approval

The Strategic Report was approved by the Board at its meeting on 27 April 2021. The Chairman's Statement together with the Investment Manager's Report form part of this Strategic Report.

 

David Simpson

Chairman

 

27 April 2021

 

 

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

 

The Directors are responsible for preparing the Annual Report and audited Financial Statements in accordance with applicable law and regulations.

 

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.

 

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

 

  • select suitable accounting policies and then apply them consistently;

  • make judgements and estimates that are reasonable and prudent;

  • state whether applicable UK Accounting Standards have been followed, subject to any material

  • departures disclosed and explained in the financial statements;

  • assess the Company's ability to continue as a going concern, disclosing, as applicable, matters

  • related to going concern; and

  • use the going concern basis of accounting unless they either intend to liquidate the Company or to

  • cease operations, or have no realistic alternative but to do so.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to  enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

 

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

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

 

The Directors confirm that to the best of their knowledge:

 

  • the Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit [or loss] of the company taken as a whole; and

 

  • the Strategic Report/Directors' Report include a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.

 

The 2018 UK Corporate Governance Code also requires Directors to ensure that the Annual Report and audited Financial Statements are fair, balanced and understandable In order to reach a conclusion on this matter, the Board has requested that the Audit Committee advise on whether it considers that the Annual Report and audited Financial Statements fulfil these requirements The process by which the Audit Committee has reached these conclusions is set out in the Corporate Governance Statement in the full Annual Report and Accounts. As a result, the Board has concluded that the Annual Report and audited Financial Statements for the year ended 31 December 2020, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position, performance, business model and strategy.

 

On behalf of the Board

 

David Simpson

Chairman

 

27 April 2021

 

 

NON-STATUTORY ACCOUNTS

The financial information set out below does not constitute the Company's statutory accounts for the year ended 31 December 2020 but is derived from those accounts. The statutory accounts will be delivered to the Registrar of Companies in due course. The Auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditors' report can be found in the Company's full Annual Report and Accounts at www.mandg.co.uk/creditincomeinvestmenttrust.

 

Income statement

 

Year ended 31 December 2020

Period from 17 July 2018
to 31 December 2019

 

Note

Revenue
£'000

Capital
£'000

Total
£'000

Revenue
£'000

Capital
£'000

Total
£'000

Net gains on investments

9

-

2,714

2,714

-

3,593

3,593

Net losses on derivatives

9

-

(1,368)

(1,368)

-

(221)

(221)

Net currency (losses)/gains

 

(7)

451

444

(19)

(78)

(97)

Income

3

5,195

-

5,195

4,530

-

4,530

Investment management fee

4

(714)

-

(714)

(678)

-

(678)

Other expenses

5

(464)

-

(464)

(706)

-

(706)

Net return on ordinary activities before finance costs and taxation

 

 

4,010

1,797

5,807

3,127

3,294

6,421

Finance Cost

6

(24)

-

(24)

-

-

-

Net return on ordinary activities before taxation

 

 

3,986

 

1,797

 

5,783

 

3,127

 

3,294

 

6,421

Taxation on ordinary activities

8

-

-

-

(1)

-

(1)

Net return attributable to Ordinary Shareholders after taxation

 

 

 

3,986

 

 

1,797

 

 

5,783

 

 

3,126

 

 

3,294

 

 

6,420

Net return per Ordinary Share (basic and diluted)a

 

2

 

2.88p

 

1.30p

 

4.18p

 

2.55p

 

2.69p

 

5.24p

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 a Return figures have been calculated using weighted average shares for the year 1 January 2020 to 31 December 2020 and for the period 14 November 2018 to 31 December 2019.

The total column of this statement represents the Company's profit and loss account. The "Revenue" and "Capital" columns represent supplementary information provided under guidance issued by the Association of Investment Companies.

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

The Company has no other comprehensive income and therefore the net return on ordinary activities after taxation is also the total comprehensive income for the period.

 

The notes below form an integral part of these Financial Statements.

 

Statement of financial position

 

 

As at 31 December 2020

As at 31 December 2019

 

Note

£'000

£'000

£'000

£'000

Non-current assets

 

 

 

 

 

Investments at fair value through profit or loss

9

 

140,091

 

126,793

Current assets

 

 

 

 

 

Derivative financial assets held at fair value through profit or loss

9

225

 

523

 

Receivables

10

1,345

 

1,092

 

Cash and Cash Equivalents

10

7,278

 

4,877

 

 

 

8,848

 

6,492

 

Current liabilities

 

 

 

 

 

Payables

10

(2,311)

 

(1,053)

 

 

 

(2,311)

 

(1,053)

 

Net current assets

 

 

6,537

 

5,439

Net assets

 

 

146,628

 

132,232

Capital and reserves

 

 

 

 

 

Called up share capital

11

 

1,447

 

1,300

Share premium

 

 

42,217

 

28,229

Special distributable reserve

12

 

98,499

 

99,000

Capital reserve

11

 

3,349

 

1,968

Revenue reserve

 

 

1,116

 

1,735

Total shareholders' funds

 

 

146,628

 

132,232

Net Asset Value per Ordinary Share (basic and diluted)

2

 

101.40p

 

101.72p

 

 

 

 

 

 

 

The notes below form an integral part of these Financial Statements.

 

Approved and authorised for issue by the Board of Directors on 27 April 2021 and signed on its behalf by:

 

 

David Simpson

Chairman

Company registration number: 11469317

27 April 2021

 

Statement of changes in equity

 

 

Year ended 31 December 2020

 

Called up Ordinary Share capital

Share premium

Special distributable reserve

Capital reserve

Revenue reserve

Total

 

Note

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 December 2019

 

1,300

28,229

99,000

1,968

1,735

132,232

Ordinary Shares issued during the year

11

147

13,945

-

-

-

14,092

Purchase of Ordinary Shares to be held in treasury

 

-

-

(129)

-

-

(129)

Initial public offering costs written off

 

-

43

-

-

-

43

Net return attributable to shareholders

 

-

-

-

1,797

3,986

5,783

Dividends paid

7

-

-

(372)

(416)

(4,605)

(5,393)

Balance at 31 December 2020

 

1,447

42,217

98,499

3,349

1,116

146,628

 

Period from 17 July 2018 to

31 December 2019

 

Called up Ordinary Share capital

Share premium

Special distributable reserve

Capital reserve

Revenue reserve

Total

 

Note

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 17 July 2018

 

-

-

-

-

-

-

Initial public offering cost

 

-

(1,592)

-

-

-

(1,592)

Ordinary Shares issued during the period

11

1,300

128,839

-

-

-

130,139

Cancellation of share premium

 

-

(99,000)

99,000

-

-

 

Cancellation of share premium costs

 

-

(18)

-

-

-

(18)

Net return attributable to shareholders

 

-

-

-

3,294

3,126

6,420

Dividends paid

7

-

-

-

(1,326)

(1,391)

(2,717)

Balance at 31 December 2019

 

1,300

28,229

99,000

1,968

1,735

132,232

 

The notes below form an integral part of these Financial Statements.

 

Cash flow statement

 

 

Note

Year ended
31 December 2020

£'000

Period from
17 July 2018 to
31 December 2019
£'000

Cash flows from operating activities

 

 

 

Net profit before finance costs and taxation

 

5,807

6,421

Adjustments for:

 

 

 

Net gains on investments

9

(2,714)

(3,593)

Net losses on derivatives

9

1,368

221

Increase in receivables

 

(253)

(1,092)

(Decrease)/ increase in payables

 

(96)

1,053

Overseas withholding tax suffered

 

-

(1)

Purchases of investmentsa

9

(78,730)

(167,659)

Sales of investmentsa

9

68,430

43,715

Net cash outflow from operating activities

 

(6,188)

(120,935)

Financing activities

 

 

 

Finance costs

6

(24)

-

Issue of Ordinary Shares

 

14,092

130,139

Initial public offering costs written off

 

43

-

Initial public offering costs

 

-

(1,592)

Cancellation of share premium costs

 

-

(18)

Purchase of Ordinary Shares to be held in treasury

 

(129)

-

Dividend paid

7

(5,393)

(2,717)

Net cash inflow from financing activities

 

8,589

125,812

Increase in Cash and Cash Equivalents

10

2,401

4,877

Cash and Cash Equivalents at the start of the year/period

 

4,877

-

Increase in Cash and Cash Equivalents as above

 

2,401

4,877

Cash and Cash Equivalents at the end of the year/period

10

7,278

4,877

 

a Receipts from the sale of, and payments to acquire investment securities have been classified as components of cash flows from operating activities because they form part of the company's dealing operations.

 

The notes below form an integral part of these Financial Statements.

 

Notes to the Financial Statements

  1. Significant accounting policies

 

The Company is a public limited company incorporated in England and Wales, with the registered office of Beaufort House, 51 New North Road, Exeter EX4 4EP.

 

The significant accounting policies, as set out below, have all been applied consistently throughout the year and the preceding period.

 

a)    Basis of accounting

 

The Financial Statements have been prepared on a going concern basis under the historical cost convention, modified to include certain items at fair value, and in accordance with United Kingdom Accounting Standards, including FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland" (United Kingdom Generally Accepted Accounting Practice) and the Statement of Recommended Practice issued by the Association of Investment Companies ('SORP') in October 2019 "Financial Statements of Investment Trust Companies and Venture Capital Trusts".

 

The Directors believe that the Company has adequate resources to continue in operational existence for the foreseeable future and for at least the next 12 months from the date of approval of these financial  statements. In forming this opinion, the Directors have considered the potential impact of COVID-19 and viability of  the Company. The Directors have reviewed the liquidity of the investment portfolio, financial projections, the level of income and expenses, and key service providers' operational resilience in making their assessment. Further information is given in the Viability Statement and the Going Concern Statement above.

 

The functional and presentational currency of the Company is pounds sterling because that is the currency of the primary economic environment in which the Company operates.

 

All values are recorded to nearest thousands, unless otherwise stated.

 

b)   Financial instruments

 

Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the instrument.

 

Financial liabilities are classified according to the substance of the contractual arrangements entered into.

 

Financial assets and liabilities

All financial assets and liabilities are classified as at fair value through profit or loss (FVTPL), and are initially measured at fair value (which is normally the transaction price excluding transaction costs), unless the arrangement constitutes a financing transaction. If an arrangement constitutes a financing transaction, the financial asset or financial liability is measured at the present value of the future payments discounted at a market rate of interest for a similar Debt Instrument.

 

Changes in the fair value of financial instruments held at FVTPL and gains and losses on disposal are recognised as capital.

 

Financial assets and liabilities are offset in the statement of financial position only when there exists a legally enforceable right to set off the recognised amounts and the Company intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

 

With the exception of some hedging instruments, other Debt Instruments not meeting conditions of being 'basic' financial instruments are measured at FVTPL.

 

Commitments to make and receive loans that meet the conditions mentioned above are measured at cost (which may be nil) less any impairment. They are recorded and disclosed at the date of the legal commitment and recognised upon funding.

 

Financial assets are derecognised only when (a) the contractual rights to the cash flows from the financial asset expire or are settled, (b) the Company transfers to another party substantially all of the risks and rewards of ownership of the financial asset, or (c) the Company, despite having retained some, but not  all, significant risks and rewards of ownership, has transferred control of the asset to another party.

 

Financial liabilities are derecognised only when the obligation specified in the contract is discharged, cancelled or expires.

 

Derivative financial instruments

Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The resulting gain or loss is recognised in the Income Statement. Derivative returns are recognised as revenue or capital depending on their nature.

 

Fair value measurement

The best evidence of fair value is a quoted price for an identical asset in an active market. When quoted prices are unavailable, the price of a recent transaction for an identical asset provides evidence of fair value as long as there has not been a significant change in economic circumstances or a significant lapse of time since the transaction took place. If the market is not active and recent transactions of an identical asset on their own are not a good estimate of fair value, the fair value is estimated by using  a valuation technique.

 

c)    Impairment of assets

 

Assets, other than those measured at fair value, are assessed for indicators of impairment at each balance sheet date. If  there is objective evidence of impairment, an impairment loss is recognised in profit or loss as described below.

 

Non-financial assets

An asset is impaired where there is objective evidence that,  as a result of one or more events that occurred after initial recognition, the estimated recoverable value of the asset has been reduced. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use.

 

Where indicators exist for a decrease in impairment loss previously recognised for assets other than goodwill, the prior impairment loss is tested to determine reversal. An impairment loss is reversed on an individual impaired asset to the extent that the revised recoverable value does not lead to a revised carrying amount higher than the carrying value had no impairment been recognised.

 

d)   Tax

 

Current tax is accounted for at the appropriate rate of corporation tax. The tax accounting treatment follows the principal amounts involved.

 

Deferred tax is recognised in respect of all timing differences between the treatment of certain items for tax and accounting purposes that have originated but not reversed at the balance sheet date.

 

Due to the Company's status as an investment trust company and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.

 

e)    Income and expenses

 

Interest from Debt Instruments is recognised as revenue  by reference to the coupon payable adjusted to spread any premium or discount on purchase over its remaining life. Other interest income is recognised as revenue on an accruals basis. Income from investment funds is recognised in revenue when the right to receive it is established. Expenses not incidental to the purchase or sale of investments are recognised on an accruals basis and charged to revenue. Rebate of management fees incurred by investment funds managed by M&G Alternatives Investment Management Limited are recognised on an accrual basis as revenue or capital in accordance with the underlying scheme's distribution policy.

 

f)     Finance cost

 

Finance costs are recognised on an accrual basis and are charged to revenue.

 

g)   Foreign currency

 

Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date.

 

Other exchange differences are recognised in profit or loss in the period in which they arise.

 

All gains and losses on the translation of foreign currency are recognised as revenue or capital in the Income Statement depending on the underlying nature of the transactions.

 

h)   Cash and Cash Equivalents

 

Cash and Cash Equivalents are defined as cash and short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to insignificant risk of change in value.

 

They also include unfunded commitments on investments not classified under financial assets.

 

i)      Share capital and reserves

 

Called up ordinary share capital

Called up ordinary share capital represents the nominal value of Ordinary Shares issued.

 

Share premium 

Share premium represents the excess over nominal value of shares issued, net of expenses of the share issue, except where amounts have been cancelled in accordance with section 610 of the Companies Act 2006 and transferred to special distributable reserve.

 

Special distributable reserve 

Share premium of £99,000,001 was cancelled on 12 February 2019 and transferred to the special distributable reserve, in accordance with section 610 of the Companies  Act 2006. The Company may, at the discretion of the Board, pay all or part of any future dividends out of this special distributable reserve, taking into account the Company's investment objective. The costs of repurchasing Ordinary Shares has been funded by the special distributable reserve.

 

Capital reserve 

Capital reserve reflects any:

  • gains or losses on the disposal of investments;

  • exchange differences of a capital nature;

  • increases and decreases in the fair value of investments held at the year/period end;

 

This reserve can also be used for distributions by way of a dividend.

 

Revenue reserve

Revenue reserve reflects all income and expenditure which are recognised in the revenue column of the Income Statement and is distributable by way of dividends.

 

j)      Investment management fee

 

Investment management fees are recognised on an accruals basis and are charged to revenue.

 

k)    Accounting judgements, estimates and assumptions

 

The preparation of the financial statements requires the Directors to make judgements, estimates and assumptions that affect the amounts recognised in the Financial Statements. However, uncertainty about these judgements, assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in future periods.

 

Whilst estimates are based on best judgement using information and financial data available the actual outcome may differ from these estimates.

 

No significant judgements, estimates or assumptions have been required in the preparation of the accounts for the current period.

 

  1. Returns and net asset value (NAV)

 

 

Year ended
31 December 2020

Period from
17 July 2018 to
31 December 2019

Revenue return

 

 

Revenue return attributable to Ordinary Shareholders (£'000)

3,984

3,126

Weighted average number of shares in issue during the year/period

138,289,698a

122,606,191b

Revenue return per Ordinary Share (basic and diluted)

2.88pa

2.55pb

Capital return

 

 

Capital return attributable to Ordinary Shareholders (£'000)

1,797

3,294

Weighted average number of shares in issue during the year/period

138,289,698a

122,606,191b

Capital return per Ordinary Share (basic and diluted)

1.30pa

2.69pb

Net return

 

 

Net return per Ordinary Share (basic and diluted)

4.18pa

5.24pb

NAV per Ordinary Share

 

 

Net assets attributable to Ordinary Shareholders (£'000)

146,628

132,232

Number of shares in issue at year/period end

144,605,771

130,000,001

NAV per Ordinary Share

101.40p

101.72p

 

a Return figures have been calculated using weighted average shares for the period 1 January 2020 to 31 December 2020.

b Return figures have been calculated using weighted average shares for the period 14 November 2018 (date of IPO) to 31 December 2019.

 

 

  1. Income

 

 

Year ended
31 December 2020

Period from
17 July 2018 to
31 December 2019

 

£'000

£'000

Income from investments

 

 

Interest income from Debt Instruments

4,633

3,865

Distributions from investment funds

468

444

Management fee rebate

78

74

 

5,179

4,383

Other income

 

 

Interest from Cash and Cash Equivalents

16

147

 

5,195

4,530

 

 

  1.  Investment management fee

 

 

Year ended
31 December 2020

 

£'000

Period from
17 July 2018 to
31 December 2019

£'000

Investment management fee 

714

678

 

The amount outstanding at the year/period end is shown in note 10.

 

The basis for calculating the investment management fee is set out above.

 

  1. Other expenses

 

 

Year ended
31 December 2020

£'000

Period from
17 July 2018 to
31 December 2019
£'000

Revenue expenses

 

 

Directors' fees

110

128

Legal fees

7

20

Printing and postage

-

23

Registrar's and secretarial fees

102

111

Administration fees

77

88

Broker fees

57

68

LSE block listing fee

-

78

Other

45

111

 

398

627

Auditors' remuneration:

 

 

- Audit services

54

58

- Non-audit services a

12

21

 

464

706

 

a Non-audit fees (including VAT) payable to the auditor in respect of the agreed upon procedures on the interim as of 30 June 2020 are £12,000 (30 June 2019: £21,000). The agreed upon procedures did not constitute an audit engagement or a review of the Half Year Report. In addition, for the period ending 31 December 2019 non-audit service fees of £81,600 (including VAT) were paid to the auditor in relation to the reporting accountant role for the Company's IPO, recognised in the share premium account.

 

  1. Finance costs

 

 

Year ended
31 December 2020

£'000

Period from
17 July 2018 to
31 December 2019

£'000

Commitment fee

15

-

Arrangement fees

3

-

Legal fees

6

-

 

24

-

 

On 19 October 2020 the Company entered into a £25 million revolving credit facility agreement with State Street Bank International GmbH. As at 31 December 2020 no amounts were drawn down.

 

  1. Dividends

 

 

Year ended
31 December 2020

£'000

Period from
17 July 2018 to
31 December 2019
£'000

Revenue

 

 

2019 first interim interest distribution of 1.07p

-

1,391

2019 second interim interest distribution of 1.33p

1,729

-

2020 first interim interest distribution of 0.72p

936

-

2020 second interim interest distribution of 0.63p

912

-

2020 third interim interest distribution of 0.71p

1,028

-

 

4,605

1,391

Capital

 

 

2019 first interim dividend of 1.02p

-

1,326

2019 second interim dividend of 0.32p

416

-

2020 first interim dividend of 0.13p

169

-

2020 second interim dividend of 0.14p

203

-

 

788

1,326

 

 

 

 

Set out below are the total dividends in respect of the year/period, which forms the basis on which the requirements of Sections 1158-1159 of the Corporation Tax Act 2010 are considered.

 

 

Year ended
31 December 2020

£'000

Period from
17 July 2018 to
31 December 2019
£'000

Interest distributions paid of 2.06p (2019: 1.07p)

4,605

1,391

Dividend distributions paid of 0.27p (2019: 1.02p)

788

1,326

Proposed interest distribution of 0.77p (2019: 1.33p)

1,114

1,729

Proposed dividend distribution of 1.18p (2019: 0.32p)

1,706

416

 

8,213

4,862

 

 

 

 

On 28 January 2021 the Board declared a fourth interim dividend of 1.95p per Ordinary Share for the year ended 31 December 2020, which was paid on 26 February 2021 to Ordinary Shareholders on the register on 5 February 2021. The ex-dividend date was 4 February 2021.

 

In accordance with FRS 102, Section 32, 'Events After the End of the Reporting Period', the 2020 fourth interim dividend has not been included as a liability in this set of financial statements.

 

  1. Taxation on ordinary activities

 

 

Year ended 31 December 2020

Period from 17 July 2018 to 31 December 2019

 

Revenue
£'000

Capital
£'000

Total
£'000

Revenue
£'000

Capital
£'000

Total
£'000

Foreign tax

-

-

-

1