OXFORD STREET FINANCE LIMITED

Transcription

1 OXFORD STREET FINANCE LIMITED Directors' report and audited financial statements for the year ended Bedell Trust Company Limited PO Box 75, 26 New Street St. Helier, Jersey Channel Islands, JE4 8PP

2 Contents Page Directors' report 2 Independent auditor's report 6 Audited statement of comprehensive income 8 Audited statement of financial position 9 Audited statement of changes in equity 10 Audited statement of cash flows 11 12

3 Directors' report The directors present their report together with the audited financial statements for Oxford Street Finance Limited (the'company') for the year ended. Incorporation The Company was incorporated as a public company in Jersey, Channel Islands on 7 October Principal activities The Company was formed for the purpose of participating in a synthetic credit default swap transaction (the 'Transaction') arranged by KBC Financial Products Brussels N.V. ('KBC'). The Company raised monies pursuant to the issuance of class A1, A2, B, C, D, E, F, G and H floating rate credit-linked notes (together, the 'Notes'), which are listed on the Irish Stock Exchange. The total principal amount of the Notes raised was 382,000,000 divided into 87,000,000 class Al Notes, 80,000,000 class A2 Notes, 64,000,000 class B Notes, 43,000,000 class C Notes, 33,000,000 class D Notes, 28,000,000 class E Notes, 17,000,000 class F Notes, 16,000,000 class G Notes and 14,000,000 class H Notes. The Notes are subordinated in payment of principal and interest to each other in reverse enforcement order of priority. Initially the Company entered into a reverse repo agreement (the 'Reverse Repo Agreement) with KBC Bank N.V. (the 'Repo Counterparty') whereby under the agreement the Company acquired eligible investments at a purchase price of 382,000,000 as collateral (the'collateral'), purchased with the proceeds of the Notes. All income received on the Collateral was paid to the Repo Counterparty in consideration of a repo premium paid to the Company by the Repo Counterparty. Upon the maturity or early redemption of the Notes, the Repo Counterparty would deliver to the Company the purchase price of 382,000,000 or such proportion of the Collateral to match the Notes to be redeemed. On 10 October 2006 the Company transferred to the Repo Counterparty the Collateral and the funds realised thereby (a 'Repo to GIC Transfer Amount') were invested in a guaranteed investment contract (a 'GIC' and hereafter referred to as the 'Amounts due under the Investment Agreement) pursuant to an investment agreement (the 'Investment Agreement') between the Company and KBC Investments Hong Kong Limited (the 'Eligible GIC Provider'). On 7 April 2009 the Company requested the repayment of the Amounts due under the Investment Agreement by the Eligible GIC Provider, pursuant to a repayment notice. The GIC was terminated with effect from 7 April 2009 and the Company entered into a new GIC with KBG Bank N.V. Subsequent to 7 April 2009, any reference to the GIC or Eligible GIC Provider implies the new GIC and KBC Bank N.V., respectively. The funds realised and reinvested continue to be referred to as the Amounts due under the Investment Agreement. The Company also entered into a credit default swap arrangement (the 'Swap') with KBC Investments Cayman V, Ltd (the 'Swap Counterparty') pursuant to the terms of which the Company has, in return for a fee, taken on the mezzanine level credit and market risk of a diversified reference portfolio (the 'Portfolio'). The Portfolio is up to 1,500,000,000 in size. The Company has the mezzanine level credit risk for a maximum amount of 382,000,000 above the first loss tranche of 30,764,000. As security for its obligations, the Company has charged the Amounts due under the Investment Agreement to BNY Corporate Trustee Services Limited as trustee (the 'Trustee') for the secured parties (those transactional creditors to whom security is to be provided under the security trust deed (the 'Trust Deed')). The Trustee has also been appointed as trustee on behalf of the noteholders pursuant to a note trust deed and holds the benefit of certain covenants made by the Company in relation to the repayment of principal and interest on the Notes on trust for the noteholders. By way of protecting the Company from the risks of the Transaction arising from the Company's exposure to the Swap Counterparty under the Swap, the Transaction documents contain limited recourse and bankruptcy remoteness (non-petition) provisions pursuant to which each party recognises the limited financial resources of the Company and the intended bankruptcy remoteness of the Company. The Amounts due under the Investment Agreement are secured by way of support for the Company's exposure under the Swap and thereafter its obligations under the Notes. Certain of the Company's day to day obligations and powers in respect of the Transaction are performed on its behalf by KBC Bank N.V. as administrator pursuant to an administration and cash management agreement. Functions performed by the Irish paying agent, the transfer agent and the listing agent were provided by JP Morgan entities prior to January 2012 when they were novated to Bank of New York Mellon entities. -2-

4 Directors' report Directors The directors of the Company, who served during the year and subsequently, are: Shane Michael Hollywood Alasdair James Hunter Secretary The secretary of the Company during the year and subsequently is: Bedell Secretaries Limited Results and dividends The results for the year are shown in the statement of comprehensive income. The directors have paid a final dividend during 2012 of 750 ( 870) in respect of the financial year ended 31 December 2011, being the 2010 Transaction fee (2011: 750 ( 839) in respect of the financial year ended 31 December 2010, being the 2009 Transaction fee). The directors recommend the payment of a final dividend in the sum of 750 ( 895) in respect of the financial year ended, being the 2011 Transaction fee (2011: 750 ( 870) being the 2010 Transaction fee). Independent auditor Ernst &Young LLP has previously been appointed and has expressed willingness to continue in office. resolution to reappoint Ernst &Young LLP as auditor will be proposed at the next annual general meeting. A Going concern As highlighted in note 13 to the financial statements, the Company is a special purpose bankruptcy remote financial vehicle therefore exposure to risk in relation to capital management is not considered significant. The financial risk management objectives and exposures of the Company to market risk, credit risk and liquidity risk are also disclosed in note 13. The Transaction documents are structured such that the obligations of the Company are limited in recourse and the Company has the benefit of bankruptcy remoteness (non-petition) provisions pursuant to which each Transaction party recognises the limited financial resources of the Company and the intended bankruptcy remoteness of the Company. As a result of the structure described above, and despite the Swap Counterparty having the option to end the Transaction by terminating the Swap on, or after, any payment date following the optional termination date which fell in January 2011, the directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Company continues to adopt the going concern basis in preparing the financial statements. Post statement of financial position events At the date of approving these financial statements there is considerable uncertainty in the financial markets following the global liquidity and credit crisis. As a consequence there have been significant rating downgrades and write downs in residential mortgage backed and other asset backed securities held or issued by banking and financial institutions. Credit events have occurred in the Portfolio in the form of a) bankruptcy credit events, b) restructuring credit events, c) ABS ratings downgrade credit events, and d) permanent reduction of capital credit events (together, the 'Credit Events') with a claim date during the year ended and subsequently, for the following corporate obligations and asset backed securities: -3-

5 Directors' report Post statement of financial position events (continued) a) bankruptcy credit events: Overseas Shipholding Group, Inc., Sino-Forest Corporation and The PMI Group, Inc. b) restructuring credit events: Bankia SA - restructuring default, Irish Life &Permanent Public Limited Company - restructured default, Irish Life & Permanent Public Limited Company - restructured default 2, Northern Rock (Asset Management) plc - restructured default, The Governor and Company of the Bank of Ireland - restructured default, and Victor Company of Japan, Limited - restructured default. c) ABS ratings downgrade credit events: ACE 2005-HE2 M7, ACE 2005-HE4 M7, BSABS 2005-HE5 M4, CARR 2006-NC5 M1, CMLTI 2006-WFH4 M2, CWALT 2006-OA14 1A3, CWALT 2007-OH2 A3, CWCI A B, CWL MV6, EMLT M7, FFML 2004-FF4 61, FFML 2004-FF8 B1, FMIC M4, MSAC 2004-WMC1 B1, MSAC HE3 B1, SASC 2006-WF2 M1, and SVHE 2006-OPT5 M1. d) permanent reduction of capital credit events: HELT 2007-FRE1 M6, GPMF 2006-AR2 3A3, and SAMI 2006-AR4 2A3. Credit protection valuations continue to be verified by an independent verification agent in respect of the Credit Event claims and settlements made under the Swap. Therefore, to date, the payment of Credit Event claims resulted in the utilisation of the cash reserve amount (the 'Cash Reserve Amount'), in full, the reduction of the Amounts due under the Investment Agreement and an equal reduction to the principal amounts due to the noteholders. On the cash settlement date of 7 January 2013, the Amounts due under the Investment Agreement was reduced by 1,010,768 and the principal balance of the class C Notes was reduced to nil. On the cash settlement date of 7 January 2013, the Amounts due under the Investment Agreement and the principal balance of the class B Notes were reduced by 5,368,002. The adjusted principal balance of the class B Notes was 58,631,998. On the cash settlement date of 8 April 2013, the Amounts due under the Investment Agreement and the principal balance of the class B Notes were reduced by 11,D64,053. The adjusted principal balance of the class B Notes was 47,567,945. On the cash settlement date of 8 July 2013, the Amounts due under the Investment Agreement and the principal balance of the class B Notes were reduced by 5,667,900. The adjusted principal balance of the class B Notes was 41,900, 045. The Swap Agreement was amended in January 2012 to allow auctions to quantify losses in the Portfolio following the occurrences of Credit Events with respect to corporate obligations: notwithstanding the current provisions for the valuation of losses following the occurrence of Credit Events with respect to corporate obligations and the satisfaction of the conditions to settlement if a) the International Swaps and Derivatives Association, Inc. (the 'ISDA') publicly announces that the relevant credit derivatives determinations committee has resolved that an auction will be held in connection with such Credit Event, and b) an auction conversion event has occurred, then the final price to be used in the valuation of the loss shall be the auction price; if either a) an auction will not be held in connection with a Credit Event, or b) an auction conversion event has not occurred, then the final price shall be determined in accordance with the market valuation provisions set forth in the Swap Agreement as applicable prior to any modifications pursuant to the extraordinary resolution; and the calculation agent shall make commercially reasonable efforts to provide written notice to the Swap Counterparty and the Company promptly upon a) learning of each ISDA auction announcement, and b) the occurrence of an auction conversion event. -4-

6 Directors' report Statement of directors' responsibilities with regard to the financial statements The directors are required by the Companies (Jersey) Law 1991, as amended, to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company as at the end of the financial year and of the profit or loss for that period. In preparing these financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and appropriate; state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The directors are responsible for keeping accounting records that are sufficient to show and explain the Company's transactions. These records must disclose with reasonable accuracy at any time the financial position of the Company and to enable the directors to ensure that any financial statements prepared comply with the Companies (Jersey) Law 1991, as amended. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud, error and non-compliance with law and regulations. By order of the board,. Secr'etary~- Bedell Secretaries~Limited 3 o au~ Date Registered office 26 New Street St Helier Jersey JE2 3RA -5-

7 IIIIIIIII~III =~ ERNST &YOUNG INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF OXFORD STREET FINANCE LIMITED We have audited the financial statements of Oxford Street Finance Limited for the year ended 31 December 2012 which comprise Statement of comprehensive income, Statement of financial position, Statement of changes in equity, Statement of cash flows and the related notes 1 to 18. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards. This report is made solely to the company's members, as a body, in accordance with Article 113A of the Companies (Jersey) Law Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not acceptor assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors As explained more fully in the Statement of directors' responsibilities with regards to the financial statements set out on page 5, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Directors' report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the financial statements: give a true and fair view of the state of the company's affairs as at and of its result for the year then ended; have been properly prepared in accordance with International Financial Reporting Standards; and have been prepared in accordance with the requirements of the Companies (Jersey) Law 1991.

8 I~~~',~ ~ I I ~ ERNST &YOUNG INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF OXFORD STREET FINANCE LIMITED Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies (Jersey) Law 1991 requires us to report to you if, in our opinion: proper accounting records have not been kept, or proper returns adequate for our audit have not been received from branches not visited by us; or the financial statements are not in agreement with the accounting records and returns; or we have not received all the information and explanations we require for our audit. Kirsty Mackay for and on behalf of Ernst &Young LLP Jersey, Channel Islands Date: 31 July 2013

9 Audited statement of comprehensive income Notes Income Movement in fair value of the Swap through profit or loss Investment income 4 Swap premium 5 Bank interest Transaction fee 5 Movement in fair value of the Notes through profit or loss Cash reserve income 8 115,268,076 2,032,211 1,417,213 3, ,721,488 55, 861,138 4,406,296 3,272,683 8, ,147, ,488,470 Expenses Movement in fair value of the Notes through profit or loss Settlement of Credit Event claims 6 Interest payable on the Notes Operating expenses 65,235,051-49,852,145 90,495,647 3,527,182 6,904, ,543 ( ) (97.487,575) Total comprehensive income for the year The Company has no other items of income or expense for the year and accordingly the profit for the year represents total comprehensive income. The notes on pages 12 to 27 are an integral part of these financial statements. -8-

10 Audited statement of financial position Notes Assets Current assets Amounts due under the Investment Agreement 6 232,010, ,862,913 Trade and other receivables 7 116,103 1,039,432 Cash and cash equivalents Total assets Equity and liabilities Equity attributable to owners of the Company Called up share capital Retained earnings 1,834 1,765 Total equity Liabilities Current liabilities Swap at fair value through profit or loss 120,148, ,416,206 Notes at fair value through profit or loss ,570,795 46,335,744 Trade and other payables , Total liabilities , Total equity and liabilities 232,444, ,321 The financial statements on pages 8 to 27 were approved by the board of directors and authorised for issue n 0 July 2013, and signed on its behalf by: Director - Alasdair James Hunter Alternate director- Ariel~Pinel The notes on pages 12 to 27 are an integral part of these financial statements. -9-

11 Audited statement of changes in equity Called up share Retained capital earnings Total Balance at 1 January 2011 Profit for the year Total comprehensive income for the the year ended 31 December 2011 Transactions with owners: Equity dividend paid Balance at 31 December ,709 1,712 _ _ (839) (839) Called up share Retained capital earnings Total Balance at 1 January 2012 Profit for the year Total comprehensive income for the the year ended 31 December 2012 Transactions with owners: Equity dividend paid Balance at 3 1, 765 1, 768 _ (870) (870) 3 1,834 1,837 The notes on pages 12 to 27 are an integral part of these financial statements. -10-

12 Audited statement of cash flows Notes Net cash used in operating activities 12 ( ) (84,302) Cash flows generated from investing activities Investment income 2,954,069 4,198,485 Cash reserve income 3,791,667 Swap premium 1,580,517 2,551,396 Bank interest 4,564 8,601 Redemption of Amounts due under the Investment Agreement Net cash flows generated from investing activities 54,391, ,129 Cash flows used in financing activities Interest payable on the Notes (4,565,784) (7,096,543) Settlement of Credit Event claims 6 (49,852,145) (90,495,647) Equity dividend (870) (839) Net cash flows used in financing activities (54, ) ( ) Net decrease in cash and cash equivalents (135,422) (423,202) Cash and cash equivalents at 1 January 8 452, Cash and cash equivalents at 31 December 8 317, ,976 The notes on pages 12 to 27 are an integral part of these financial statements. -11-

13 1 General information The Company is a public limited company incorporated in Jersey, Channel Islands. The principal activities of the Company are described in the directors' report. 2 Accounting policies Statement of compliance The financial statements for the year ended on pages 8 to 27 have been prepared in accordance with the International Financial Reporting Standards ('IFRS'). Basis of measurement The financial statements are prepared in accordance with accounting principles generally accepted in the island of Jersey, incorporating IFRS and have been prepared under the historical cost convention, except for the revaluation of certain financial instruments. These financial statements are presented in Euro (' '), which is the Company's functional and reporting currency. A summary of the more important policies in dealing with items that are considered material to the Company are shown below: Adoption of new and revised standards At the date of authorisation of these financial statements the following standard, which has been applied in these financial statements, was in issue and effective: IFRS 7 Financial Instruments: Disclosures (amended) (effective 1 July 2011) ('IFRS 7 (amended) 1 July 2011'). The directors consider that the adoption of IFRS 7 (amended) 1 July 2011 has not had a significant impact upon the Company. Standards and interpretations in issue not yet adopted At the date of authorisation of these financia statements the following standards and interpretations, which have not been applied in these financial statements, were in issue but not yet effective: IFRS 9 Financial Instruments (effective 1 January 2015) ('IFRS 9'); IFRS 12 Disclosure of Interests in Other Entities (effective 1 January 2013) ('IFRS 12'); and IFRS 13 Fair Value Measurement (effective 1 January 2013) ('IFRS 13'). The directors anticipate that the adoption of IFRS 9, IFRS 12 and IFRS 13 will not have a significant impact upon the results of the Company, but will have an impact on the disclosures of the Company. The directors have reviewed and considered all other standards, amendments and interpretations issued but not yet effective as at the date the financial statements are authorised for issue. In the opinion of the directors the other standards, amendments and interpretations issued but not yet effective are either not relevant to the activities of the Company or will have no impact on the financial statements of the Company. -12-

14 2 Accounting policies (continued) Critical accounting judgements and key sources of estimation uncertainty The preparation of these financial statements requires the directors to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities and the disclosure of contingent liabilities as at the statement of financial position date. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. In the event such estimates and assumptions which are based on the best judgement of the directors as at the statement of financial position date deviate from the actual circumstances in the future, the original estimates and assumptions will be modified as appropriate in the year or period in which the circumstances change. The estimates and underlying assumptions are reviewed on an ongoing basis. Revision to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The assumptions made in calculating the fair value and the models used are detailed in note 13(d). There are no other significant assumptions made concerning the future or other sources of estimation uncertainty that have been identified as giving rise to a significant risk of causing material adjustment to the carrying amount of assets and liabilities within the next financial year. Foreign exchange Transactions in foreign currencies are recorded at the rate of exchange ruling at the date of transaction. Monetary assets and liabilities denominated in foreign currencies are revalued at the rate of exchange ruling at the statement of financial position date. Foreign exchange gains and losses are included in the statement of comprehensive income for the period. Financial instruments In pursuing its objectives as a special purpose bankruptcy remote financing vehicle, the Company holds, held or has issued a number of financial instruments. These comprise: Amounts due under the Investment Agreement; trade and other receivables; cash and cash equivalents; Notes; Cash Reserve Amount; Swap; and trade and other payables. The Company has applied the Fair Value Option revision to International Accounting Standard 39 Financial Instruments: Recognition and Measurement (amended 17 June 2005) ('IAS 39'). Accordingly all financial instruments except trade and other receivables, cash and cash equivalents and trade and other payables are classified as financial instruments at fair value through profit or loss in accordance with the provisions set out in IAS

15 2 Accounting policies (continued) Financial instruments (continued) All financial instruments are initially recorded at cost, which corresponds with the fair value of such instruments. Subsequently, with the exception of trade and other receivables, cash and cash equivalents and trade and other payables, which are measured at amortised cost, they are re-measured at fair value in accordance with the guidance provided in IAS 39 and established industry practices for the determination of fair values. Any gain or loss resulting from changes in fair value is included in the statement of comprehensive income in the period in which they arise. Trade and other receivables, cash and cash equivalents and trade and other payables are recorded at amortised cost. The Swap is a derivative financial instrument which is classified as held for trading under IAS 39. This instrument is therefore measured at fair value through profit or loss. The Notes issued by the Company and the Amounts due under the Investment Agreement have also been measured at fair value through profit or loss as it eliminates a measurement inconsistency, an accounting mismatch, that would otherwise arise from measuring the derivatives at fair value through profit and loss and the related Notes and the Amounts due under the Investment Agreement at amortised cost. Recognition and derecognition of financial assets and liabilities The Company initially recognises financial assets and liabilities on the date they originated. Purchases and sales of financial assets are recognised on the date on which the Company commits to purchase or sell the asset. All other financial assets and liabilities (including assets and liabilities designated at fair value through profit or loss) are initially recognised on the date on which the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognised when the right to receive cash flows from the assets has expired or when the Company has transferred its contractual right to receive the cash flows of the financial assets and substantially all the risks and rewards of ownership have been transferred. Financial liabilities are derecognised when they are extinguished, that is when the obligation is discharged, cancelled or expires. Impairment of financial assets Financial assets are assessed at each reporting date to determine whether there is any objective evidence that the asset is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of such asset. An impairment loss in respect of an asset measured at amortised cost is calculated as the difference between the carrying value of the asset and the present value of the estimated future cash flows discounted at the original effective interest rate. All impairment losses are recognised in the statement of comprehensive income. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. Fair value The determination of fair values for financial assets and liabilities for which there is no observable market price requires the use of valuation techniques as described below. For financial instruments that trade infrequently and have little price transparency, fair value is less objective and requires varying degrees of judgment depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risk factors affecting each financial instrument. For complex financial instruments the Company uses proprietary models which are developed from recognised valuation models. Some or all of the significant inputs into these models may not be market observable and are derived from market prices or rates or are estimates based on assumptions. -14-

16 2 Accounting policies (continued) Fair value (continued) The value produced by a model or other valuation techniques is adjusted to allow for a number of factors as appropriate, since valuation techniques cannot appropriately reflect all factors market participants consider when entering into a transaction. Valuation adjustments are recorded to allow for model risk, bid-ask spreads, liquidity risks and other contributing factors. The directors believe that these valuation adjustments are necessary and appropriate to disclose the fair value of the financial instruments on the statement of financial position that give a true and fair view. Amounts due under the Investment Agreement Amounts due under the Investment Agreement initially represented an amount equal to 382,000,000 and was invested pursuant to the Investment Agreement between the Company and the Eligible GIC Provider under a GIC. Amounts due under the Investment Agreement are measured at fair value through profit or loss. Cash and cash equivalents Cash and cash equivalents comprise cash on hand, demand deposits with banks and other financial institutions and comprised amounts payable in relation to the Cash Reserve Amount and are or were measured at amortised cost. Interest payable on the Notes Interest payable on the Notes is accounted for using the effective interest basis in accordance with IAS 39. Revenue recognition Investment income under the Investment Agreement will accrue from time to time on the Amounts due under the Investment Agreement. On each payment date prior to the termination date, the Eligible GIC Provider will pay to the Company the amount of investment income accrued during the interest period ending on such payment date. Investment income wild be determined by the daily application of: a per annum rate equal to EURIBOR; to the Amounts due under the Investment Agreement, on the basis of the actual number of days elapsed during such interest accrual period and a 360 day year. Swap premium is receivable under the Swap from the Swap Counterparty in return for the Company taking on the mezzanine level credit and market risk of the Portfolio. The Company receives a Swap premium which will equal the difference between the investment income (excluding the Transaction fee) and expenses and all other operating expenses of the Company. Investment income and Swap premium are recognised on an accruals basis. The annual Transaction fee receivable is recognised on an accruals basis and is due to the Company in accordance with the Transaction documentation. -15-

17 2 Accounting policies (continued) Dividends Under International Accounting Standard 10 Events after the Reporting Period ('IAS 10'), proposed dividends are not considered to be a liability until the dividends are approved and declared by the directors of a company for interim dividends or the shareholders of a company, at the annual general meeting, for final dividends. Under IAS 10 dividends are recorded in the period in which they are declared. Going concern As highlighted in note 13 to the financial statements, the Company is a special purpose bankruptcy remote financial vehicle therefore exposure to risk in relation to capital management is not considered significant. The financial risk management objectives and exposures of the Company to market risk, credit risk and liquidity risk are also disclosed in note 13. The Transaction documents are structured such that the obligations of the Company are limited in recourse and the Company has the benefit of bankruptcy remoteness (non-petition) provisions pursuant to which each Transaction party recognises the limited financial resources of the Company and the intended bankruptcy remoteness of the Company. As a result of the structure described above, and despite the Swap Counterparty having the option to end the Transaction by terminating the Swap on, or after, any payment date following the optional termination date which fell in January 2011, the directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Company continues to adopt the going concern basis in preparing the financial statements. 3 Taxation The Company is registered in Jersey, Channel Islands as an income tax paying company. The general rate of income tax for companies resident in Jersey (such as the Company) is 0% for the current year of assessment (2011:0%). 4 Investment income Investment income 2,032,211 4,406,296 Investment income is received on the Amounts due under the Investment Agreement held with the Eligible GIC Provider and is received on each quarterly payment date pursuant to the terms of the Investment Agreement, calculated on the basis of EURIBOR. There is no premium or discount on the Amounts due under the Investment Agreement therefore the EURIBOR rate will equal the effective interest rate. 5 Swap premium and Transaction fee Swap premium Transaction fee 1,417,213 3,272, , ,

18 5 Swap premium and Transaction fee (continued) The Company entered into the Swap with-the Swap Counterparty pursuant to the terms of which the Company has, in return for the Swap premium, taken on the mezzanine level credit and market risk of the Portfolio. The Portfolio is up to 1,500,000,000 in size. The Swap Counterparty originally retained the first loss tranche of 30,764, Amounts due under the Investment Agreement Amounts due under the Investment Agreement 232, ,862,913 The Amounts due under the Investment Agreement comprise the sum of all amounts deposited with or transferred to the Eligible GIC Provider at the direction of the Eligible GIC Provider less all amounts withdrawn from such arrangement, other than payments of investment income. The Company has pledged the Amounts due under the Investment Agreement to the Trustee to secure the trustee claims under the Trust Deed. The trustee claims entitle the Trustee to demand that all present and future obligations under the Notes are fulfilled. On the legal maturity date or such earlier date on which the last outstanding notes are to be redeemed in whole, the Eligible GIC Provider shall transfer to the Company the balance of the Amounts due under the Investment Agreement to the Company's principal collections account on such date. During the year the Company realised Amounts due under the Investment Agreement in the sum of 49,852,145 (2011: 86,703,980) and used the proceeds together with nil (2011: 3,791,667) from the Cash Reserve Amount to settle Credit Event claims totalling 49,852,145 (2011: 90,495,647). The Amounts due under the Investment Agreement have been classified as a current asset in recognition of the Swap Counterparty's option to end the Transaction by terminating the Swap on, or after, any payment date following the optional termination date which fell in April Trade and other receivables Accrued investment income Accrued bank interest Transaction fee 115,006 1, 036, , , 039,432 8 Cash and cash equivalents Balance as at 1 January 452, ,178 Net decrease in cash and cash equivalents ( ) (423,202) Balance as at 31 December ,

19 8 Cash and cash equivalents (continued) The Company received the Cash Reserve Amount from KBC equivalent to 0.25% per annum of the underlying Portfolio payable on each payment date until the earlier of the payment date which fell in October 2011 or the termination date. The Cash Reserve Amount was retained in a cash reserve bank account held with KBC Bank N.V. and was pledged in priority to the Amounts due under the Investment Agreement to secure all present and future obligations under the Notes. Application of the Cash Reserve Amount: the Company paid to the Swap Counterparty cash settlement amounts in an amount equal to the Credit Event claims which exceeded the first loss tranche; and in the event that a principal shortfall existed on the Notes the Company would reinstate the principal amount of the Notes. Such reinstatements would have been allocated to the Notes in enforcement order of priority until the adjusted principal balance was reinstated to its initial principal balance. The Company was called to settle amounts under the Swap and used the Cash Reserve Amount, in full, before the Company realised Amounts due under the Investment Agreement equal to the amounts due. Due to the limited recourse nature of the Transaction, such settlement amounts reduced the principal amounts due to the noteholders in reverse enforcement order of priority. The Company continued to receive the Cash Reserve Amount until the payment date which fell in October During the prior year the Company received a total of 3,791,667 into the cash reserve bank account and used this amount in order to settle its obligations under the Swap due to Credit Event claims. Income receivable under the Cash Reserve Amount in the sum of 3,791,667 was recognised during the prior year. 9 Called up share capital Authorised: 2 ordinary shares of 1.00 each - at historical cost 3 3 Issued and fully paid: 2 ordinary shares of 1.00 each - at historical cost 3 3 There are no other share classes which would dilute the rights of the ordinary members. Amongst other rights as prescribed in the articles of association of the Company, the rights of the ordinary members include: the right to attend meetings of members. On a show of hands every member present in person or by proxy shall have one vote and on a poll every member shall have one vote for each share of which the member is a shareholder; and the right to receive dividends recommended by the directors and approved by the shareholders. 10 Notes The Company issued the following classes of Notes which have a legal maturity date of April 2044 and an optional maturity date which is exercisable by the Swap Counterparty on, or after, the payment date which fell in January Credit protection valuations continue to be verified by an independent verification agent in respect of the Credit Event claims and settlements made under the Swap. Therefore, the occurrence of the Credit Event claims resulted in the utilisation of the Cash Reserve Amount, in full, and impacted upon the principal amounts due to the noteholders, as follows: -18-

20 10 Notes (continued) At cost Reduction of At cost At fair value At fair value 1 January principal in 31 December 31 December 31 December 2012 the year Class Al 87,000,000 87,000,000 56,844,461 28,053,374 Class A2 80,000,000 80,000,000 43,243,030 16,125,093 Class B 64,000,000 64,000,000 11,483,304 2,157,277 Class C 43,000,000 (41,989,232) 1,010,768 Class D 7.862,913 (7.862,913) ( ) The aggregate amount of realised losses were allocated in reverse enforcement order of priority whereby class H Notes suffered the first realised loss, then class G, then class F, then class E, then class D and then, in part, class C. The aggregate amount of any future realised losses will be allocated to each class of Note in reverse enforcement order of priority whereby the remaining class C will suffer the next realised loss, then class B Notes, then class A2 Notes and thereafter class Al Notes. The payment obligations of the Company under the Notes in respect to interest and principal amounts is secured by the Cash Reserve Amount and by the Amounts due under the Investment Agreement. Issue costs in respect of the Notes have been paid by KBC Bank N.V. The agent bank is required, as soon as practicable after the interest determination date in relation to each interest period, to calculate the amount of interest (the 'Interest Amount) payable in respect of each Note for such interest period. The Interest Amount for each Note is calculated by applying the rate of interest applicable to such Note for the relevant interest period to the adjusted principal balance of such Note on the first day of such interest period, multiplying the product by the actual number of days in such interest period divided by 360 and rounding the resulting figure to the nearest cent (half a cent being rounded upwards). The interest margin means: (a) subject to (b) and (c) below, in respect of each class of Notes listed below, the rate and margin per annum set out next to such: Class, rate and interest margin Class Al - 3 month EURIBOR /o Class A2-3 month EURIBOR +0.55% Class B - 3 month EURIBOR +0.75% Class C - 3 month EURIBOR +0.90% Class D - 3 month EURIBOR +1.10% or, (b) subject to (c) below if the Swap Counterparty has not exercised the Swap termination option by the payment date scheduled to fall in January 2016 (the 'Coupon Step-Up Date') and the termination date has not otherwise occurred, for each interest period commencing on or after the Coupon Step-Up Date and in respect of each class of Notes listed below, the rate and margin per annum set out next to such: Class, rate and interest margin Class Al - 3 month EURIBOR +0.80% Class A2-3 month EURIBOR +x,10% Class B - 3 month EURIBOR +1.50% Class C - 3 month EURIBOR +1.80% Class D - 3 month EURIBOR +2.20% or, (c) for each interest period commencing on or after the termination date and in respect of each class of Notes, zero. -19-

21 11 Trade and other payables Interest accrued on Notes Swap premium received in advance Other creditors 409,448 1,448, , ,012 30,899 33, Cash flows from operating activities Reconciliation of operating profit to net cash flows used in operating activities. Profit for the year Investment income Cash reserve income Swap premium Bank interest Settlement of Credit Event claims Interest payable on the Notes Increase in trade and other receivables (Decrease)/increase in trade and other payables Movement in fair value of the Swap through profit or loss Movement in fair value of the Notes through profit or loss (2,032,211) (1,417,213) (3,049) 49,852,145 3,527,182 (44) (2,642) (115,268,076) 65, (4,406,296) (3,791,667) (3,272,683) (8,297) 90,495,647 6,904,385 (25) 2, 371 (55,861,138) (30.147,494) Cash flows used in operations ( ) (84,302) 13 Financial instruments In pursuing its objectives as a special purpose bankruptcy remote financing vehicle, the Company holds, held or has issued a number of financial instruments. These comprise: Amounts due under the Investment Agreement; trade and other receivables; cash and cash equivalents; Notes; Cash Reserve Amount; Swap; and trade and other payables. The main risks from holding or issuing the Company's financial instruments are detailed below together with the policies adopted by the board of directors to manage the risk: -20-

22 13 Financial instruments (continued) (a) Market risk The Company's exposure to market risk is comprised of the following risks: (i) Foreign exchange risk The Notes issued by the Company are or were denominated in. The Amounts due under the Investment Agreement are represented by funds deposited with the Eligible GIC Provider and are denominated in. The Portfolio contains securities denominated in currencies other than but the Company only takes on the credit risk and market risk of such securities. Any credit or market risk, regardless of currency, which materialises is transferred to the noteholders. Accordingly, the directors are of the opinion that there is no material currency risk exposure to the Company. (ii) Inferest rate risk Amounts due under the Investment Agreement -the Company receives investment income at a rate equal to EURIBOR. Notes -the Company pays interest on the Notes in accordance with the terms of the Notes as described in note 10. Swap -the Company receives funds under the Swap (Swap premium), this is calculated as the difference between the investment income (excluding the Transaction fee) and expenses comprising interest payable on Notes and all other operating expenses of the Company. The directors consider that the Company is not exposed to the risk of interest rate fluctuations. (b) Credit risk The Company has two types of risk. Firstly there is a risk that the Company will lose title over its deposits held by KBC and Amounts due under the Investment Agreement. The risk of this is considered remote. Secondly, there is the risk of a claim being made on the Amounts due under the Investment Agreement as a result of Credit Events in the Portfolio. The Transaction documents are structured such that the obligations of the Company are limited in recourse and such documents contain bankruptcy remoteness (non-petition) provisions. In the event of Credit Events occurring before the redemption of the Notes, the Company will be obliged, subject to certain conditions, to make payments) to the Swap Counterparty. This obligation was met initially by use of the Cash Reserve Amount and once this was utilised and, subsequent to this, by utilising a proportionate amount of the Amounts due under the Investment Agreement. The credit risk is transferred to the noteholders who receive a reduced amount of interest and principal. Accordingly the directors are of the opinion that there is no net credit risk to the Company. The maximum credit risk at the year end is 232,444,425 (2011: 283,355,321). (c) Liquidity risk Liquidity risk is the risk that the Company will encounter difficulties in meeting obligations associated with financial liabilities. In the opinion of the directors the risk of liquidity is reduced as the Transaction documents are structured such that the obligations of the Company are limited in recourse and the Company has the benefit of bankruptcy remoteness. -21-

23 13 Financial instruments (continued) (c) Liquidity risk (continued) The undiscounted contractual cash flows maturity profile of the Company's significant financial liabilities is as follows: Notes Less than 1 year Between 1 and 5 years More than 5 years 230, 055, , 837, , 530 Swap Less than 1 year Between 1 and 5 years More than 5 years 120,148, ,416, , ,416,206 Other liabilities Trade and other payables - maturity within 1 year 314, The maturity profile of the Notes in the current and prior year is less than one year in recognition of the optional termination date which is on, or after, the payment date which fell in January Amounts of interest payable on the Notes have been calculated based on a twelve month maturity period notwithstanding the fact that the Swap Counterparty may exercise their option to cause the Transaction to terminate on any payment date prior to the legal maturity date. Credit Events have occurred in the Portfolio. In accordance with the Swap and prior to the redemption of the Notes, the Company will be obliged, subject to certain conditions, to make payments) to the Swap Counterparty in the form of a Credit Event claim. Pursuant to the Swap, the Swap Counterparty retained the first loss tranche of 30,764,000. The Company has the mezzanine level credit risk for a maximum amount of 382,000,000 above the first loss tranche. This obligation was met initially by the Cash Reserve Amount and, subsequent to this, by utilising a proportionate amount of the Amounts due under the Investment Agreement. The liquidity risk is transferred to the noteholders who will receive a reduced amount of interest and principal. The minimum future amount that may be settled under the Swap will be in the sum of nil and the maximum amount that may be settled will be in the sum of 232,010,768 (2011: 281,862,913). In the opinion of the directors, the best estimate for the amount that shall be settled under the Swap equates to the fair value of the Swap as at. Consequently, as disclosed in the above maturity analysis, the Cash Reserve Amount has been utilised in full and the payment of principal on the Notes has been reduced in the reverse enforcement order of priority with reference to the best estimate of the amount to be settled under the Swap and in accordance with the structure of the Transaction. Upon receipt of the valuation of the Credit Event claims within two years of such occurrence, the amount to be settled under the Swap may differ from the fair value of the Swap. Therefore the amount of interest and principal payable to the noteholders may differ from the amounts included in the above maturity analysis. In the event the aggregate value of a Credit Event claim exceeds the first loss tranche of 30,764,000, payment to the Swap Counterparty will occur on the first payment date which falls four or more business days after the calculation verification date, as described in the Transaction documentation. The amount to be paid to the Swap Counterparty will be the least of: the aggregate amount of a Credit Event claim eligible for payment on such date; -22-