CQS New City High Yield Fund Ltd – Annual Results

CQS NEW CITY HIGH YIELD FUND LIMITED

Annual Results Announcement for the year ended 30 June 2019

STRATEGIC REPORT

Financial Highlights

* A glossary of the terms, including alternative performance measures, used can be found in the Annual Report and Financial Statements.

STATEMENT FROM THE CHAIR

Highlights

• Net asset value total return of 3.79%.
• Ordinary share price total return of 6.71%.
• Dividend yield of 7.30%, based on dividends at an annualised rate of 4.45 pence and a share price of 61.0 pence as at 30 June 2019.
• Ordinary share price at a premium of 10.53% as at 30 June 2019.
• £12.6 million of equity raised during the year to 30 June 2019.

Investment and Share Price Performance

The period of subdued performance that I spoke of when I wrote to you at the interim stage of our financial year subsequently reversed and the year ending 30 June 2019 covered by this annual report saw a net asset value total return of 3.79% for the Company's portfolio and a share price total return for the same period of 6.71%. The Company's shares have continued to trade at a premium to their net asset value and as at 30 June 2019 this stood at 10.53%, up from the 7.15% premium at the start of the review period. The average premium over the year to 30 June 2019 was 6.49% and over three years 5.55%. 

There has been no let up in major news flow against which the Company's investment portfolio has been managed. In the UK, Brexit negotiations have dragged on, whilst abroad, expectations that US interest rates would be cut were felt during the period under review even though the cut actually happened in July. Add to this mix ongoing tensions around the imposition of US / China trade tariffs and there was plenty for Ian Francis, your Investment Manager, to grapple with. He discusses the year in more detail in his review.

Earnings and Dividends

The Company's revenue earnings per share were 4.49 pence per share for the year, 1.10% lower than the 4.54 pence earned in the same period last year whilst still covering the dividends paid per share.

The Company declared three interim dividends of 1.00 pence per share in respect of the period, and a final one of 1.45 pence per share. The aggregate payment of 4.45 pence per share represents a 0.68% increase on the 4.42 pence paid last year. Based on an annualised rate of 4.45 pence and a share price of 61.00 pence as at 30 June 2019, this represents an attractive dividend yield of 7.30%. The same annual dividend with a share price of 59.20 pence at the time of writing, equates to a dividend yield of 7.52%.

The Board pays close attention to dividends and, since its launch in 2007, dividends paid by the Company have increased every year. This is illustrated by the graph on the inside front cover.

Gearing

In December 2018 the Company replaced its existing one year £30 million Scotiabank loan facility with a new two year £35 million facility with the same bank at a current all-in rate of 2.01%. With the exception of its term, the facility is comparable to the one that it replaced. £28 million was drawn down at 30 June 2019 and the Company had an effective gearing ratio of 9.51%.

Share Issuance

The market continues to attach a premium rating to your Company's shares, allowing us to issue new shares in a gradual manner and only when your Investment Manager is confident he can invest the additional funds favourably. £12.6 million was raised from new and existing shareholders during the review period, with 21.4 million ordinary shares issued from the block listing facility. A further £1.9 million has been raised since 30 June 2019. As well as a modest increase in net asset value from any issue of shares, the Board expects that over time existing shareholders may benefit from lower ongoing charges (as a proportion of the Company's assets) and greater liquidity in the Company's shares, all other things being equal.

Management Arrangements and Management Fee

On 18 September 2019 the Company entered into a new Investment Management Agreement to appoint CQS (UK) LLP (“CQS”) as its Investment Manager. Under the previous agreement, which has been terminated, the Investment Manager, CQS Cayman Limited Partnership had, with the agreement of the Board, delegated that function to CQS. 

I am pleased to advise that our Investment Manager, has agreed a new, lower fee schedule for your Company. With effect from 18 September 2019, the management fee includes a tier of 0.60% per annum for Adjusted Total Assets greater than £300 million. The existing tier of 0.80% per annum for Total Assets up to £200 million remains in place and the tier of 0.70% per annum is now for Total Assets between £200 million and £300 million.

Board Changes

As described in the interim report, I took over the Chair on 14 December 2018, half way through the period under review, and once again, on behalf of shareholders, the Board would like to express much appreciation to my predecessor, Jimmy West, who retired at the Annual General Meeting held on that date. Jimmy had been Chair of the Company since its launch in Jersey in January 2007, a period which saw the Company more than quadruple in size and, as mentioned above, continue to increase dividends every year. His experience and dedication to the Company will be missed.

Administration Changes

Again as described in the interim report, our Company Secretary and Jersey administrators, R&H Fund Services (Jersey) Limited, informed us in December 2018 that they were terminating their agreement with your Company as they wish to exclude relationships where they only provide some, but not all, of the administrative functions. 

Following a thorough selection process, the Board has chosen BNP Paribas Securities Services S.C.A. Jersey Branch (“BNP”) as the Company's new Company Secretary and Administrator. BNP's appointment will be effective from 15 October 2019. BNP will also replace HSBC Bank Plc as the Company's Depositary, Custodian and Banker from the same date. As well as being a cost effective move, the Board believes this will assist communication and operational efficiency by having everything under one roof.

Outlook

Brexit, US/China trade war tensions and a number of fully or partially inverted government bond yield curves are far from reassuring, while political instability, not least in the UK, is a particular concern given that markets currently seem driven, at least in the short term, as much by politics as fundamentals. As always, though, uncertainty also provides investment opportunities. In this context, the 35 years' investment experience of our lead Investment Manager, Ian “Franco” Francis, together with his proven long-term track record, is an invaluable asset, reinforcing the 'strength through diversity' that continues to characterise your Company's investment portfolio.