DJ M&G Credit Income Investment Trust plc: Annual Financial Report
M&G Credit Income Investment Trust plc (MGCI)
M&G Credit Income Investment Trust plc: Annual Financial Report
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.
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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 As at
31 December 31 December
2020 2019
Net assets (GBP'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
(9.27)% 4.21%
NAVa
Ongoing charges figurea 0.87% 0.93%b
Returns and dividends per Ordinary Share
Year ended Period b ended
31 December 31 December
2020 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 GBP14.2 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 g ains.
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.
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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 GBP25 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.
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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 GBP14.2 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 GBP32 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
Percentage of
as at 31 December 2020 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
1.58
8.569% 4 Oct 2058
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
1.37
Mar 2036
Newday Partnership Funding 2017-1
1.37
0.779% 15 Dec 2027
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
1.17
30 Sep 2023
Finance for Residential Social Housing
1.16
8.369% 4 Oct 2058
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
Percentage of
as at 31 December 2020 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 %
Company description
as at 31 December
2020
M&G European Loan Open-ended fund managed by M&G which invests in leveraged loans issued by, generally, substantial
Fund 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
11.98% NAV. (Private)
Atlas 2020 1 Trust
Var. Rate 30 Sep 2050 Floating-rate, senior tranche of a bilateral RMBS transaction backed by a pool of Australian
equity release mortgages (Private)
1.76%
Delamare Finance
1.2255% 19 Feb 2029 Floating-rate, senior tranche of a CMBS secured by the sale and leaseback of 33 Tesco superstores
and 2 distribution centres. (Public)
1.59%
Finance for
Residential Social
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Housing 8.569% High grade (AA/Aa3), fixed-rate bond backed by cash flows from housing association loans.
(Private)
4 Oct 2058
1.58%
Hall & Woodhouse Var.
Rate 30 Dec 2023 Bilateral loan to a regional UK brewer that manages a portfolio of 219 freehold and leasehold
pubs. (Private)
1.52%
Signet Excipients
Var. Rate 20 Oct 2025 Fixed-rate loan secured against two large commercial premises in London, currently leased to 2
FTSE listed UK corporations. (Public)
1.42%
Regenter Myatt Field
North Var. Rate 31 PFI (Private Finance Initiative) floating-rate, amortising term loan relating to the already
Mar 2036 completed refurbishment and ongoing maintenance of residential dwellings and communal
infrastructure in the London borough of Lambeth. (Private)
1.37%
Newday Partnership
Funding 2017-1 0.779% 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
15 Dec 2027 the UK. (Public)
1.37%
Hammond Var. Rate 28
Dec 2025 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)
1.32%
Project Driver TL
Var. Rate Senior term loan to a provider of hire purchase financing on used domestic motor vehicles to
consumers in the UK. (Private)
1.32%
RIN II 1.88% 10 Sep
2030 Mixed CLO (AAA) Consists primarily of senior secured infrastructure finance loans managed by
RREEF America L.L.C. (Public)
1.27%
Sonovate Limited Var.
Rate 12 Apr 2021 Bilateral loan to a company providing companies in the recruitment industry with an integrated
service that incorporates placement management, invoicing and financing. (Private)
1.22%
Westbourne 2016 1 WR
Senior Var. Rate 30 Westbourne provides working capital finance to SMEs in the UK. The company is focused on small
Sep 2023 borrowers and has employed an advanced technology platform for the application, underwriting and
monitoring of loans. (Private)
1.17%
Finance for
Residential Social
Housing 8.369%
High grade (AA), fixed rate bond backed by cash flows from housing association loans. (Public)
4 Oct 2058
1.16%
Ripon Mortgages High Grade ABS (AA+/Aaa) UK RMBS. The portfolio comprises buy-to-let loans originated by Bradford
1.251% 20 Aug 2056 and Bingley and Mortgage Express, secured over residential properties located in England and
Wales. (Public)
1.04%
Luminis Var. Rate 23 Floating-rate, mezzanine tranche of a regulatory capital transaction backed by a portfolio of
Sep 2025 predominately revolving facilities extended to blue chip corporates in the Americas and EMEA.
(Private)
1.02%
Marston's Issuer Marston's PLC is a leading independent brewing and pub retailing business. Marston's Issuer PLC
1.653% 15 Oct 2031 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
1.02%
acquisition purposes. (Public)
LPG 4.49% 21 May 2024 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)
0.99%
Gongga Var. Rate 2
Aug 2025 Regulatory Capital trade by Standard Chartered referencing a USUSD2bn portfolio of loans to
companies domiciled in 36 countries. (Private)
0.98%
Iliad 2.375% 17 Jun Iliad SA is a French provider of telecommunications services including fixed and mobile national
2026 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)
0.96%
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: - Asset-backed securities, backed by a pool of loans secured on, amongst other things, residential and commercial
mortgages, credit card receivables, auto loans, student loans, commercial loans and corporate loans; - Commercial mortgages; - Direct lending to small and mid-sized companies, including lease finance and receivables financing; - Distressed debt opportunities to companies going through a balance sheet restructuring; - Infrastructure-related debt assets; - Leveraged loans to private equity owned companies; - Public Debt Instruments issued by a corporate or sovereign entity which may be liquid or illiquid; - Private placement debt securities issued by both public and private organisations; and - Structured credit, including bank regulatory capital trades.
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:
Secured Debt Instruments Unsecured Debt Instruments Rating (% of Gross Assets)a (% 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
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DJ M&G Credit Income Investment Trust plc: Annual -5-
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
as at or perioda ended
year ended
31 December 31 December
2020
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: - the nature and extent of risks it regards as acceptable for the Company to bear in line with its overall business
objective; - the threat of such risks becoming reality; - the Company's ability to reduce the incidence and impact of risk on its performance; - the cost to the Company and benefits related to the review of risk and associated controls of the Company; and - the extent to which the third-party service providers operate the relevant controls.
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.
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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 The Company fully hedges non-base currency investments at time
fluctuate because of changes in foreign exchange rates. of purchase using spot and forward foreign exchange contracts
The Company is exposed to risks that the exchange rate which are rolled forward periodically. Non-base currency
of its reporting currency relative to other currencies exposure is monitored on an ongoing basis via internal systems,
may change in a manner that has an effect on the value with hedging maintained at approximately +/-20bps tolerance.
of the portion of the Company's assets which are
denominated in currencies other than its own reporting
currency.
Interest rate risk
Interest rate risk is the risk that the fair value of The Company uses gilt futures contracts to mitigate interest
future cash flows of a financial instrument will rate risk with portfolio duration monitored on an ongoing basis
fluctuate because of changes in market interest rates. via internal systems and adjusted accordingly. Market
The Company's investments are in some cases subject to conditions since launch have seen the Company maintain an
interest rate risk. In relation to fixed-rate average modified duration of between 1-1.5 years. There are no
obligations, when interest rates decline, the values restrictions regarding the level of duration the Company can
can be expected to rise, and, conversely, when interest maintain however its Investment Objective outlines commitment
rates rise, the value of fixed rate obligations can be to low asset value volatility.
expected to decline.
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 The Board has put in place limits on the Company's gearing,
events and trends, and sectoral influences. portfolio concentration and use of derivatives, which it
believes to be appropriate to keep the Company's investment
As the Company invests in public and private debt portfolio adequately diversified and to manage risk.
instruments, it is regularly exposed to market risk and
the value of the Company's portfolio fluctuates in
response to developments in financial markets.
Credit risk
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
Because of its investment strategy, the Company is also a minimum credit rating below BBB- (or equivalent). Within the
materially exposed to credit risk, which is the risk above limit, the Company may also invest in unrated assets
that one party to a financial instrument will cause a where a rating is assigned by the Investment Manager using an
financial loss for the other party by failing to internal methodology that is based on the categorisations used
discharge an obligation. The main concentration to by rating agencies. When new investment opportunities arise, a
which the Company is exposed arises from the Company's detailed credit review is undertaken by the Investment Manager.
investments in Debt Instruments. A fundamental qualitative and quantitative assessment of both
business and financial risk, supported by appropriate financial
The Company is also exposed to counterparty credit risk modelling, alongside a review of the corporate structure and
on trading derivative products, Cash and Cash issuance document form the basis of the credit review. On an
Equivalents, amounts due from brokers and other ongoing basis, the Investment Manager monitors the Company's
receivable balances. 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 The Investment Manager applies a 'three lines of defence' model
of the Company's portfolio of assets depends primarily for risk management, incorporating the individual fund manager
on the investment strategy, asset allocation and stock and line management; independent risk and compliance functions
selection decisions taken by the Investment Manager and reporting structures; and internal audit. Measures and
within the parameters and constraints imposed by the tools such as volatility estimation, value at risk analysis and
Company's investment policy. stress testing are used in order to better understand risk
concentrations within the portfolio.
Liquidity risk
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
The Company invests in public and private debt Company to invest in assets that have limited or no secondary
instruments. Some of these investments may be difficult market liquidity in order to seek to capture the additional
to value or realise (if at all). The market price that yield that is generally available compared to more liquid
is achievable for such investments may ultimately instruments.
therefore be different than the carrying values of
these assets as reflected in the Company's reported NAV Before the Company's fifth AGM in 2024, the Board will submit
per Ordinary Share from time to time. 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 The Investment Manager runs a dividend projection model that is
performance periods. Apart from asset selection and regularly reviewed by the Board.
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.
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 Due diligence is undertaken before contracts are entered into
operational tasks to third-party service providers that with third-party service providers. Thereafter, service
are specialists in their fields, as follows: provider oversight is conducted through ongoing interaction
with the Management Engagement and Audit Committees and is
? Management of the Company's investment portfolio to M formalised through an annual evaluation process.
&G Alternatives Investment Management Limited
Most third party service providers produce internal control
? Preparation and maintenance of the Company's reports to provide assurance regarding the effective operation
Financial Statements and maintenance of its records to of internal controls as reported on by their reporting
State Street Bank and Trust Company accountants. These reports are provided to the Audit Committee
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for review by the Investment Manager's Supplier Management
? Company Secretarial Services to Link Company Matters Team. The Committee would seek further representations from the
Limited service providers if not satisfied with the effectiveness of
their control environment.
? Registrar services to Link Group
The Management Engagement and Audit Committees also consider
? Worldwide custody of the Company's assets to State the business continuity arrangements of the Company's key
Street Bank and Trust Company service providers and reviews these as part of the review of
the Company's risk register.
? Safekeeping and depositary services to State Street
Trustees Limited In respect of the emerging risks posed by the COVID-19 pandemic
in terms of the ability of service providers to function
Failure by any service provider to carry out its effectively, the key service providers have provided details of
obligations to the Company in accordance with the terms the measures that they have put in place to address the crisis,
of its appointment could have a materially detrimental in addition to their existing business continuity framework.
impact on the operation of the Company or Having considered these arrangements and reviewed service
administration of its investments. The termination of levels since the crisis has evolved, the Committees and Board
the Company's relationship with any third-party service are confident that a good level of service has and will be
provider or any delay in appointing a replacement for maintained.
such service provider could disrupt the business of the
Company materially and could have a material adverse
effect on the Company's performance.
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 The Company mitigates any such failure by delegating key
effect on the value of its investments, its ability to operational tasks to specialist third-party service providers
carry on its business and successfully pursue its combined with close oversight and monitoring through the Audit
investment policy and on its earnings and returns to Committee.
Shareholders.
The Investment Manager monitors investment movements, the level
In particular, the Company is required to comply with and type of forecast income and expenditure and the amount of
certain requirements that are applicable to listed proposed dividends to ensure that the provisions of Chapter 4
closed- ended investment companies, including section of Part 24 of the Corporation Tax Act 2010 are not breached.
1158 of the Corporation Tax Act 2010. Any failure to The results are reported to the Board at each meeting.
comply may potentially result in a loss of investment
trust company status. Compliance with the accounting rules affecting investment
trusts are also carefully and regularly monitored.
The Company must comply with the Listing Rules,
Prospectus Rules, the Disclosure Guidance and The Company Secretary, Investment Manager and the Company's
Transparency Rules, the Market Abuse Regulation (MAR) professional advisers provide regular reports to the Board in
and the rules of the London Stock Exchange. Any failure respect of compliance with all applicable rules and
in future to comply with any future changes to such regulations. The Board and the Investment Manager also monitor
rules and regulations may result in the Shares being changes in government policy and legislation which may have an
suspended from trading on the London Stock Exchange. impact on the Company.
MAR can be defined as Regulation (EU) No 596/2014 of The risk to the company of failure to comply with MAR is
the European Parliament on market abuse, otherwise mitigated by close Board oversight and monitoring through the
known as the Market Abuse Regulation, or "MAR". It compliance function at the Investment Manager.
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.
Sustainability Risk
Sustainability risk means exposure to an environmental, Please refer to the 'Sustainability risk and investment
social or governance ("ESG") event or condition that, process' section below for further details.
if it occurs, could cause an actual or a potential
material negative impact on the value of an investment.
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 GBP146.63m (31 December 2019: GBP132.23m). 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.
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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 GBP250 million, the fee will be calculated as if the NAV were GBP250 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 GBP13,000 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 GBP61,920 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 GBP65,000 and a one-off fee of GBP5,000 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.
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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
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
Continued Shareholder support and engagement are monthly calculation and publication of the NAV per share which is
critical to the continued existence of the Company announced via the regulatory news service of the London Stock
and the successful delivery of its long-term Exchange. In addition, a monthly factsheet and/or a quarterly
strategy. 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.
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 Shareholder meetings: unlike trading companies, one-to-one
provide Shareholders with an opportunity to realise Shareholder meetings take the form of a meeting with the Investment
the value of their Ordinary Shares at the then Manager rather than members of the Board. Feedback from all
prevailing NAV per Ordinary Share less costs. In substantive meetings between the Investment Manager and
all circumstances, the Board will seek to balance Shareholders is shared with the Board. The Chairman, the Chairman
the interests of both continuing Shareholders and of the Audit Committee or other members of the Board are available
those electing to realise their investment. 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
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.
Holding the Company's shares offers investors a - Encouraging open, honest and collaborative discussions at all
publicly traded investment vehicle through which levels, allowing time and space for original and innovative
they can obtain exposure to the Company's thinking
diversified portfolio. The Investment Manager's - Ensuring that the impact on the Investment Manager is fully
performance is critical for the Company to considered and understood before any business decision is made
successfully deliver its investment strategy and - Ensuring that any potential conflicts of interest are avoided
meet its objective. or managed effectively
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
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
(MORE TO FOLLOW) Dow Jones Newswires
April 28, 2021 02:01 ET (06:01 GMT)
