Fidelity Capital Guaranteed Bond Limited. Interim Report for the six months ended 31 December 2010

Transcription

1 Interim Report for the six months ended Contents Page(s) Directors' responsibility statement 1 Chairman's report 1 Condensed statement of comprehensive income 2 Condensed balance sheet 2 Condensed statement of changes in equity 3 Condensed statement of cash flows 3 Accounting policies 4-5 Notes to the financial statements 5-12

2 Directors' responsibility statement The Directors are required by the Financial Reporting Act 1993 to prepare financial statements for the accounting which comply with Generally Accepted Accounting Practice (GAAP) and provide information as required to present a true and fair view of the financial affairs of the Company. The Directors are required by Companies Act 1993 to ensure that proper accounting records have been kept in order to determine with reasonable accuracy the financial position of the Company. The Directors have a responsibility for taking necessary steps that are reasonably available to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. The shareholder unanimously agreed to take advantage of the reporting concessions available to it under Section 211(3) of the Companies Act 1993, and agreed to limit the half year report to the following: - Completed and signed unaudited condensed financial statements including Chairman's report Signed on behalf of the Board on 10 February 2011: Chairman's report This report covers trading activity for the six-months ended. The Company broke even, compared to a $335,340 profit in the corresponding last year. Investment trading conditions were volatile in the under review. There was a mix of positive and negative months of trading. Overall, total investment income was $5.5 million, down on $12.9 million in the same last year. There was more volatility in the US long-term bond market which reduced investment income this year. All interest on the Capital Guaranteed Bonds was accrued and paid on time. The Company continues to re-estimate the likely payment of interest and principal on the $5 million Subordinated Bonds. The total interest expense includes $1.2 million accrued on these bonds. It is anticipated that in future s the Subordinated Bond will continue to accrue interest. Payment is subject to sufficient investment returns being made after first satisfying obligations to the prior ranking Capital Guaranteed Bonds. I L Braddock Chairman 10 February

3 Condensed statement of comprehensive income For the six months ended $ Note $ $ Income 52,067,589 Derivative income from options 48,146,206 25,244,676 67,749 Bank deposit interest 42,760 51, ,259 Interest from securities designated at fair value 347, ,113 (244,023) Foreign exchange gains / (losses) 169,383 (33,021) Net change in financial assets and liabilities at - (34,593,165) fair value through profit or loss (43,173,229) (12,589,248) 18,143,409 Total investment income 5,532,577 12,863,799 Expenses 533,390 Fund management fee 258, , ,388 Guarantee fee 375, , ,017 Administration fee 172, ,322 98,950 Other operating expenses 42,290 49,651 1,724,745 Total operating expenses 848, ,349 Finance costs 15,584,346 Interest expense 3 4,684,149 11,499, ,318 Profit before tax - 479, ,208 Taxation expense 4-143, ,110 Profit after tax - 335,340 - Other comprehensive income, net of tax - - Comprehensive income for the attributable to equity shareholder of Fidelity Capital 571,110 Guaranteed Bond Limited - 335,340 Condensed balance sheet $ Note $ $ Assets Current assets 4,417,048 Cash and cash equivalents 3,475,441 3,129,481 0 Financial assets at fair value through profit or loss ,248,145 - Debt securities 5 77,752,729 89,384,326 - Derivative financial instruments 5, ,128 Receivables and other financial assets 353, ,452,321 Total current assets 81,587,277 92,513,907 Non current assets 255,136 Deferred tax asset 211, ,638 83,707,457 Total assets 81,798,577 92,776,545 Liabilities Current liabilities 3,928,990 Derivative financial instruments 6 848,861 6,550,022 1,248,334 Payables and other financial liabilities 1,204, ,110 3,155,137 Accrued interest 7 3,212,158 10,613,183 8,332,461 Total current liabilities 5,265,203 18,012,315 Non current liabilities Borrowings (at amortised cost) 75,000,000 Capital Guaranteed Bonds 7 75,000,000 75,000, ,996 Subordinated Bonds accrued interest 7 1,533,374-75,374,996 Total non current liabilities 76,533,374 75,000,000 83,707,457 Total liabilities 81,798,577 93,012,315 - Net assets - (235,770) Equity 100 Share capital (100) Accumulated losses (100) (235,870) Total equity attributable to shareholder of Fidelity - Capital Guaranteed Bond Limited - (235,770) Approved by the Board on 10 February 2011 and signed on its behalf by: The accounting policies (identified alphabetically) on pages 4 to 5 and notes (identified numerically) on pages 5 to 12 are an integral part of these condensed interim financial statements. 2

4 Condensed statement of changes in equity For the six months ended Six Months Ended Six Months Ended Six Months Ended Six Months Ended 2009 Six Months Ended 2009 Share Retained Share Retained Six Months Ended 2009 Capital Earnings Total Capital Earnings Total Balance at beginning of 100 (100) ( ) (571,110) Profit for the , ,340 Total comprehensive income for the , ,340 Balance end of 100 (100) (235,870) (235,770) Year Ended 30 June Share Year Ended 30 June Retained Year Ended 30 June Capital Earnings Total Balance at beginning of 100 (571,210) (571,110) Profit for the - 571, ,110 Total comprehensive income for the - 571, ,110 Balance end of 100 (100) - Condensed statement of cash flows For the six months ended Cash flows from operating activities 12,050,753 Net proceeds from sale or maturity of investments 2,955, Net purchase of investments - (507,796) 2,208 Income tax refund - - (1,596,569) Payment to suppliers (848,740) (778,622) 710,349 Interest received 420, ,634 (10,894,958) Payment of interest (3,468,750) - 271,783 Net cash from / (used) in operating activities (941,607) (1,015,784) 271,783 4,145,265 Net (decrease) / increase in cash and cash equivalents Cash and cash equivalents at 1 July (941,607) 4,417,048 (1,015,784) 4,145,265 4,417,048 Cash and cash equivalents at end of 3,475,441 3,129,481 The accounting policies (identified alphabetically) on pages 4 to 5 and notes (identified numerically) on pages 5 to 12 are an integral part of these condensed interim financial statements. 3

5 Notes to the condensed interim financial statements 1 Accounting policies General information (the Company ), is a limited liability investment company incorporated and domiciled in New Zealand (NZ), trading within NZ and listed on the New Zealand Debt Exchange (NZDX), offering Capital Guaranteed Bonds and Subordinated Bonds. The Company received its first subscription proceeds for Capital Guaranteed Bonds in February 2007, and issued the fully subscribed Capital Guaranteed Bonds of $75m on 3 April The ultimate holding company is Fidelity Life Assurance Company Limited. The registered office of the ultimate holding company and Company is Level 1, 81 Carlton Gore Road, Newmarket, Auckland, New Zealand. The board approved the interim financial statements on 10 February The Board does not have the power to amend and reissue the interim financial statements. (A) Basis of preparation The Company is registered under the Companies Act 1993, and is an issuer in terms of the Securities Act The interim financial statements have been prepared in accordance with the requirements of the Financial Reporting Act 1993 and the Companies Act The going concern concept applies as the Company has a guarantee in place with Westpac Banking Corporation, New Zealand Branch (Westpac) to protect the $75m original capital of the Fidelity Capital Guaranteed Bondholders. Projections (refer (B)) indicate that bondholders capital will be repaid in full at maturity and the contingent asset of the guarantee has not crystallised through this. Neither the projections nor the guarantee provided by Westpac provide certainty that future interest payments on the Capital Guaranteed Bonds will be met. The projections are a best estimate and provide no certainty that the guarantee will not be invoked. The projections indicate that the Subordinated Bond along with the associated interest will not be paid in full at maturity. Westpac has not provided a guarantee on the capital of the Subordinated Bond. These interim financial statements have been prepared using the same accounting policies, methods of computation and estimates as the most recent annual financial statements, with the exception of the changes in estimates, and new NZ IFRS reporting requirements as noted below. They comply with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) for interim financial statements (NZ IAS 34), and Generally Accepted Accounting Practice in New Zealand (NZ GAAP), for profit oriented entities. The entity is not affected by seasonal or cyclical business trends. The figures for the s ended December and December 2009 are unaudited. The June figures for the full year are audited. (B) Use of estimates The preparation of the financial statements in conformity with NZ IAS 34 Interim Financial Reporting requires management to make estimates and assumptions that affect the amounts that are reported in the interim financial statements and accompanying disclosures. Although these estimates are based on management's best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from the estimates. Key estimates are: (i) Yield performance of the funds under management which is estimated at a net 13.4% per annum over the term of the bonds. (ii) The fair value of financial instruments that are not traded in an active market (for example, over-the counter (OTC) derivatives) is determined by using valuation techniques. The Company uses its judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at each balance sheet date. (iii) A deferred tax asset has been recognised on the basis that it is probable that there will be sufficient future taxable income available within the Fidelity group of companies to utilise the temporary timing difference recognised by the Company. 4

6 Notes to the condensed interim financial statements 1 Accounting policies (continued) (B) Use of estimates (continued) Change in accounting estimate compared to last half year The Company adjusted its accounting estimate in relation to the expected future interest payments on the Capital Guaranteed and Subordinated Bonds (together the Bonds ) on issue at. The Bonds are accounted for using the effective interest method which uses the rate calculated at the inception of the Bonds that exactly discounted the estimated future cash payments at the inception over the expected life of the instrument to the net carrying amount of the financial liability. The interest amounts payable on the Bonds rely on the investment portfolio generating adequate returns to cover interest payments as they fall due, the Company re-estimated the expected future cash flows payable based on investment returns to date. The Company notes that the change in accounting estimate does not affect the notional amount of the Bonds or the legal rights of the Bondholders. As such, the Company confirms that the guarantee attaching to the principal amount of the Capital Guaranteed Bonds is unaffected by this change in estimate, refer to note 3 and 7 for the impact of the change in estimate. The Company expects that the future cash flows on the Bonds will be re-estimated in future s, but due to the uncertainty of the performance on the investment portfolio it is impracticable to estimate the effect of the change in accounting estimate on future s. 2 Segment information The Directors look at the Company as one operating segment for decision-making purposes. The Company derives income from New Zealand and United States of America through trading investment securities. The Company invests though a single fund manager Tyndall Investment Management, except for $3,182 of bank deposit interest (Dec 2009: $3,335, June : $6,353) all other investment income is derived through the fund manager. The total investment income attributable to New Zealand and United States of America are: Year Ended Six Months Ended Six months Ended $ Total investment income for the ended $ $ 6,598,457 New Zealand 2,390,679 2,875,263 11,544,952 United States of America 3,141,898 9,988,536 18,143,409 Total investment income 5,532,577 12,863,799 5

7 3 Finance costs Finance costs Interest expense obligations on: 6,779,044 Capital Guaranteed Bonds (Senior Bond) 3,525,771 3,497, ,708 Suspended interest Capital Guaranteed Bonds - 463, ,500 Subordinated Bonds 311, ,288 Effective interest rate adjustment: 7,941,598 Capital Guaranteed Bonds - 7,538,221 (242,504) Subordinated Bonds 847,090 (311,288) 15,584,346 4,684,149 11,499,393 4 Taxation (a) Tax charged to the statement of comprehensive income (i) The total tax charge comprises: 163,710 Current tax: For this (43,836) 143, ,710 Total current tax (43,836) 143,717 Deferred tax 99,498 Origination of temporary differences current year 43,836-99,498 Total deferred tax 43, ,208 Total tax charged to the statement of comprehensive income - 143,717 All tax is attributable to New Zealand. (ii) The Company, as a proxy for bondholders under New Zealand tax legislation, is required to deduct withholding taxes on interest income paid in each and remit to the New Zealand Inland Revenue. (iii) Deferred tax charged to the statement of comprehensive income represents movements on the following items: 87,672 - Deferred transaction costs: Temporary difference on transaction costs of bond issue Temporary difference on bond interest 43,836-87,672 Origination of timing differences 43,836 - (136) Prior adjustment ,962 Impact of change in tax rate to 28% ,498 Total deferred tax charged to the statement of comprehensive income 43,836 - (b) Reconciliation of income tax expense to prima facie tax payable 834,318 Operating profit before tax - 479, ,295 Tax at 30% - 143,717 1,087 Prior adjustment - - Tax effect of temporary differences: (87,672) Amortisation of transaction costs on bond issue (43,836) - 163,710 (163,710) Current year tax payable / (recoverable) Current year tax offset within the Group (43,836) , Total tax payable / (recoverable) (43,836) 143,717 6

8 5 Financial assets at fair value through profit or loss (a) Financial investments comprise: At fair value through At fair value through 2009 profit or loss profit or loss Face Other Face Other Value Trading than trading Total Value Trading than trading Total Debt Securities issued by New Zealand registered banks 86,611,000-77,752,729 77,752,729 85,396,887-89,384,326 89,384,326 Total financial investments 86,611,000-77,752,729 77,752,729 85,396,887-89,384,326 89,384, June At fair value through profit or loss Face Other Value Trading than trading Total Debt Securities issued by New Zealand registered banks 88,970,000-78,248,145 78,248,145 Total financial investments 88,970,000-78,248,145 78,248,145 7

9 6 Derivative financial instruments The Company uses options to generate investment income. No derivatives are used for hedging purposes. Non-hedge derivatives The following is a summary of the cost/amortised cost, gross unrealised gains and losses and fair value of derivative financial investments: Contract notional amount Contract notional amount Fair value asset Fair value liability 2009 Contract notional amount Contract notional amount Fair value asset Fair value liability US $m NZ $m NZ$ NZ$ US $m NZ $m NZ$ NZ$ Put Options over the counter US $ , ,544,951 Sub total , ,544,951 Call Options over the counter US $ , ,071 Sub total , ,071 Total , ,262-6,550, June Contract notional amount Contract notional amount Fair value asset Fair value liability US $m NZ $m NZ$ NZ$ Put Options over the counter US $ ,407 Sub total ,407 Call Options over the counter US $ ,807,014 Sub total ,807,014 Forward Currency Selling US $ ,569 Sub total ,569 Total ,003-3,928,990 8

10 7 Borrowings Coupon interest rate Cost Transaction costs Interest accrued Effective interest rate adjustment $ $ Capital Guaranteed Bonds 9.25% 75,000,000-3,212,158-78,212,158 Subordinated Bonds 12.35% 5,000,000 (2,369,534) 2,312,665 (3,409,757) 1,533,374 Total 80,000,000 (2,369,534) 5,524,823 (3,409,757) 79,745,532 Expected to be settled within one year 3,212,158 Expected to be settled in more than one year 76,533,374 The maturity date to repay the principal borrowings for both the Capital Guaranteed Bonds and Subordinated Bonds is the 15 July ,745,532 Coupon interest rate Cost Transaction costs Interest accrued Effective interest rate adjustment 2009 $ $ Capital Guaranteed Bonds 9.25% 75,000,000-10,613,183-85,613,183 Subordinated Bonds 12.35% 5,000,000 (2,369,534) 1,790,642 (4,421,108) - Total 80,000,000 (2,369,534) 12,403,825 (4,421,108) 85,613,183 Expected to be settled within one year 10,613,183 Expected to be settled in more than one year 75,000,000 85,613,183 Coupon interest rate Cost Transaction costs Interest accrued Effective interest rate adjustment 30 June $ $ Capital Guaranteed Bonds 9.25% 75,000,000-3,155,137-78,155,137 Subordinated Bonds 12.35% 5,000,000 (2,369,534) 2,001,377 (4,256,847) 374,996 Total 80,000,000 (2,369,534) 5,156,514 (4,256,847) 78,530,133 Expected to be settled within one year 3,155,137 Expected to be settled in more than one year 75,374,996 78,530,133 9

11 8 Related party transactions The Company is a wholly-owned subsidiary of Fidelity Life Assurance Company Limited ( the parent company ). The Trustee has appointed the parent company as the Administrator of the Company. The parent company charges an annual administration fee equal to 0.4% per annum of the principal amount of the Capital Guaranteed Bonds outstanding, which is payable half yearly; the next payment is on the 15 January The parent company also holds the entire $5,000,000 of Subordinated Bonds. Interest is accrued on these bonds at a rate of 12.35% per annum. During the no coupon interest payments were made in respect of the Subordinated Bonds. The principal balance and all interest payments rank behind payments owing to the Capital Guaranteed Bond Holders. At 31 December, the principal value of the Subordinated Bonds is $nil (Dec 2009: $nil, June : $nil) under the effective interest rate adjustment method. At the accrued interest on the Subordinated Bond is $1,533,374 (Dec 2009: $nil, June : $374,996) under the effective interest rate adjustment method. This is on the basis that is expected there will be insufficient cash flow to meet payment of the principal and accrued interest amounts owing to the Subordinated bond holder. Interest to Parent Company Six Months Six Months 2009 Interest expense in Payable at half year Interest expense in Payable at half year $ Interest expense accrued on Subordinated Bonds payable 15 January 311,288 2,312, ,288 1,790,462 Effective Interest rate adjustment 847,090 (779,291) (311,288) (1,790,462) 1,158,378 1,533, Interest to Parent Company Year Ended 30 June 30 June Interest expense in Payable at year end $ $ Interest expense accrued on Subordinated Bonds payable 15 January 617,500 2,001,377 Effective interest rate adjustment (242,504) (1,626,381) 374, ,996 Services payable to Parent Company Six Months Six Months 2009 Expense in Payable at half year Expense in Payable at half year $ Administration fee accrued - payable 15 January 172, , , , , , , ,805 Services payable to Parent Company Year Ended 30 June 30 June Expense in Payable at year end $ $ Administration fee accrued - payable 15 January 330, , , ,750 10

12 8 Related party transactions (continued) Receivable from Parent Company Six Months Six Months 2009 Issued in Receivable at half year Issued in Receivable at half year $ Share capital Receivable from Parent Company Year ended 30 June 30 June Issued in Receivable at year end $ $ Share capital Payable to Parent Company Six Months Six Months 2009 Expense in Payable at half year Expense in Payable at half year $ Group tax offset - 625, , , ,519 Payable to Parent Year ended 30 June 30 June Expense in Payable at year end $ $ Group tax offset 163, , , ,229 Total compensation paid by the parent to the directors (key management) of the Company Details of Directors Compensation Directors' fees are paid by the parent company on behalf of the Company, and their roles as directors of this Company are incidental to their role as directors of the parent company. 11

13 9 Reconciliation of operating loss after tax to net cash from / used in operating activities 571,110 Operating profit after tax - 335,340 Adjusted for the following non cash items: - Expenses - 106,697 7,699,094 Interest expense (effective interest rate adjustment) 847,090 14,935,797 (5,667,001) Unrealised (gains) and losses (1,997,976) 4,797,735 2,603,203 (1,150,886) 20,175,569 Add/(less) movements in working capital related to operating activities (1,110,030) Decrease / (increase) in financial assets debt securities 2,493,392 (34,497,750) - (Increase) in derivatives current assets (5,285) - (604,209) Decrease / (increase) in receivables 433, ,208 99,498 Decrease / (increase) in deferred tax assets 43,836 (262,638) (2,717,820) Increase / (decrease) in payables and accrued interest payable 324,159 10,874,094 2,001,141 (Decrease) / increase in derivatives current liabilities (3,080,129) 2,556, ,783 Net cash flows from / (used in) operating activities (941,607) (1,015,784) 10 Subsequent events The interest coupon for the Capital Guaranteed Bonds due on the 15 January 2011 ($3,468,750) was paid on 17 January 2011, the first working day subsequent to the 15 January. There were insufficient funds to meet the interest coupon for the Subordinated Bonds due on the 15 January There are no other subsequent events. 11 Contingencies and commitments There are no outstanding capital commitments or contingencies at (Dec 2009: $nil, Jun : $nil). The Company entered into a guarantee with Westpac Banking Corporation, New Zealand branch to cover the $75m Capital Guaranteed Bond on 7 February This guarantee is deemed a contingent asset available to the Capital Guaranteed Bondholders to reimburse them for the original capital invested ($75m) if insufficient funds arise either at close out or at maturity. This guarantee confers no rights to non paid interest on the Capital Guaranteed Bonds. 12