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 5 Audited statement of comprehensive income 7 Audited statement of financial position 8 Audited statement of changes in equity 9 Audited statement of cash flows de

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 or were 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 or were 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 24 October 2005 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. The Swap Agreement was amended in January 2012 to allow auctions to quantify losses in the Portfolio following the occurrences of credit events ('Credit Events') with respect to corporate obligations. 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 KBC 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 re-invested continue to be referred to as the Amounts due under the Investment Agreement. 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, the listing agent and the registrar 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 Principal activities (continued) Due to market condition credit events have occurred during the life of the "transaction" giving rise to credit settlement events resulting in partial redemption of notes in issue and a corresponding reduction in the GIC. Current notes in issue are detailed in note 10. Directors The directors of the Company, who served during the year and subsequently, are: Shane Michael Hollywood Alasdair James Hunter (resigned 26 February 2014) Ariel Pinel (appointed 26 February 2014) 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 2014 of 750 ( 899) in respect of the financial year ended 31 December 2013, being the 2013 Transaction fee (2013: 750 ( 939) in respect of the financial year ended 31 December 2012, being the 2012 Transaction fee). The directors recommend the payment of a final dividend in the sum of 750 ( 960) in respect of the financial year ended, being the 2014 Transaction fee (2013: 750 ( 899) in respect of the financial year ended 31 December 2013, being the 2013 Transaction fee). Independent auditor Ernst &Young LLP has previously been appointed and has expressed willingness to continue in office. A resolution to reappoint Ernst &Young LLP as auditor will be proposed at the next annual general meeting. Going concern The optional termination date was January 2011, following which time and on any subsequent payment date, the Swap Counterparty have the right to terminate the Transaction. In January 2016 the Company will redeem the remaining Amounts due under the Investment Agreement and will use the proceeds to repay, in full any notes remaining in January Following the repayment of the Notes, the Company and the other Transaction parties will terminate and discharge their obligations in respect of the Transaction and accordingly, the Transaction will be terminated. As the purpose for which the Company was incorporated no longer exists it will be the intention of the directors to proceed with the dissolution of the Company within the next twelve months. The financial statements have therefore been prepared on a break up basis. As the Company is solvent and will be dissolved under ordinary circumstances the directors do not feel that any material adjustments arose as a result of ceasing to apply the going concern basis. The financial statements do not include any costs relating to the dissolution of the Company as these costs will be met by KBC. Post statement of financial position events Credit Events occurred in the Portfolio during the current and prior years in the form of bankruptcy credit events, restructuring credit events, ABS ratings downgrade credit events, and permanent reduction of capital credit events. Credit Events for the following corporate obligations and asset backed securities had a settlement date on or after 1 January 2015: Bankruptcy credit events: Caesars Entertainment Operating Company, Inc. 19,200,000-3-

5 Directors' report Post statement of financial position events (continued) Credit protection valuations have been verified by an independent verification agent in respect of the Credit Event claims and settlements made under the Swap. The payment of Credit Event claims during and after the year resulted in the reduction of the Amounts due under the Investment Agreement and an equal reduction to the principal amounts due to the noteholders. In January 2016 the Company will redeem the remaining Amounts due under the Investment Agreement and will use the proceeds to repay, in full any notes remaining in January Following the repayment of the Notes, the Company and the other Transaction parties will terminate and discharge their obligations in respect of the Transaction and accordingly, the Transaction will be terminated. As the purpose for which the Company was incorporated no longer exists it will be the intention of the directors to proceed with the dissolution of the Company within the next twelve months. The termination of the Company has been discussed further in the going concern note. 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. B order of the board Secretary - Bedell Secretaries Limited Date ~~ ~~~-L~. ~ 2L~~L.s. Registered office 26 New Street St Helier Jersey JE2 3RA -4-

6 'r a better working world 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 which comprise Statement of comprehensive income, Statement of financial position, Statement of changes 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. The financial statements have been prepared on a breakup basis. 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 accept or 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 set out on page 4, 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 and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. 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.

7 '~ ~~ -\ l i~ ~~ilding a better working world INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF OXFORD STREET FINANCE LIMITED (continued) 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: ~ ~ July 2015

8 Audited statement of comprehensive income Notes Bncome Movement in fair value of the Swap through profit or loss 24,604,425 87,631,267 Swap premium 4 1,192,271 1,296,410 Investment income 5 471, ,108 Transaction fee Bank interest ,269,852 89,388,306 Expenses Movement in fair value of the Notes through profit or loss 21,714,252 64,552,134 Settlement of Credit Event claims 6 2,895,299 23,110,723 Interest payable on the Notes 1,570,835 1,622,533 Operating expenses 88, ,017 ( ) (89, 387, 407) 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 11 to 25 are an integral part of these financial statements. -7-

9 Audited statement of financial position Notes Assets Current assets Amounts due under the Investment Agreement 6 206,004, ,900,045 Trade and other receivables 7 40, ,533 Cash and cash equivalents 8 274, ,010 Total assets 206,319, ,291,588 Equity and liabilities Equity attributable to owners of the Company Called up share capital Retained earnings Total equity 1,862 1,841 Liabilities Current liabilities Swap at fair value through profit or loss 7,912,438 32,516,863 Notes at fair value through profit or loss ,837, ,122,929 Trade and other payables ,955 Total liabilities 206,317, ,289,747 Total equity and liabilities 206,319, ,291,588 The financial statements on pages 7 to 25 were approved by the board of directors and authorised for issue on ~~ 1 4~ ~~ ~~~ 2015, and signed on its behalf by: '~-w, ~~ Director -Shane Michael Hollywood ~j~-~.~ Director - Ariel Pinel The notes on pages 11 to 25 are an integral part of these financial statements. -8-

10 Audited statement of changes in equity Called up share Retained capital earnings Total Balance at 1 January ,834 1,837 Profit for the year Total comprehensive income for the year ended 31 December Transactions with owners: Equity dividend paid (895) (895) Balance at 31 December ,838 1,841 Called up share Retained capital earnings Total Balance at 1 January ,838 1,841 Profit for the year Total comprehensive income for the year ended Transactions with owners: Equity dividend paid (939) (939) Balance at 3 1,859 1,862 The notes on pages 11 to 25 are an integral part of these financial statements. -9-

11 Audited statement of cash flows Notes Net cash used in operating activities 12 (101,265) (85,148) Cash flows generated from investing activities Swap premium 1,203,204 1,245,482 Investment income 542, ,629 Bank interest Redemption of Amounts due under the Investment Agreement 6 2,895,299 23,110,723 Net cash flows generated from investing activities 4,641,881 24,820,465 Cash flows used in financing activities Interest payable on the Notes (1,649,967) (1,661,243) Settlement of Credit Event claims 6 (2,895,299) (23,110,723) Equity dividend (939) (895) Net cash flows used in financing activities (4,546,205) (24,772,861 ~ Net decrease in cash and cash equivalents (5,589) (37,544) Cash and cash equivalents at 1 January ,554 Cash and cash equivalents at 31 December 8 274, ,010 The notes on pages 11 to 25 are an integral part of these financial statements. -10-

12 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 7 to 24 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: Going concern The optional termination date was January 2011, following which time and on any subsequent payment date, the Swap Counterparty have the right to terminate the Transaction. In January 2016 the Company will redeem the remaining Amounts due under the Investment Agreement and will use the proceeds to repay, in full any notes remaining in January Following the repayment of the Notes, the Company and the other Transaction parties will terminate and discharge their obligations in respect of the Transaction and accordingly, the Transaction will be terminated. As the purpose for which the Company was incorporated no longer exists it will be the intention of the directors to proceed with the dissolution of the Company within the next twelve months. The financial statements have therefore been prepared on a break up basis. As the Company is solvent and will be dissolved under ordinary circumstances the directors do not feel that any material adjustments arose as a result of ceasing to apply the going concern basis. The financial statements do not include any costs relating to the dissolution of the Company as these costs will be met by KBC. Adoption of new and revised standards At the date of authorisation of these financial statements, there are no new accounting standards and interpretations that are effective for the first time for the financial year beginning on or after 1 January 2014 that are expected to have a significant impact upon the financial statements of the Company. Standards and interpretations in issue not yet adopted At the date of authorisation of these financial statements the following standard and interpretation, which has not been applied in these financial statements, was in issue but not yet effective: IFRS 9 Financial Instruments (effective 1 January 2018) ('IFRS 9'). The directors have reviewed and considered all 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 all standards, amendments and interpretations issued but not yet effective are not expected to be adopted due to the anticipated dissolution of the Company.

13 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). Based on the most recent information the directors believe that the scheduled amortisation date for the Company will be in January It is expected that the notes are likely to be repaid in full to the noteholders unless there are any credit events before this date. Following the repayment date in January 2016 it will be the intention of the directors to proceed with the dissolution of the Company within the next twelve months. 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; Notes; Swap; and trade and other payables. 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. -12-

14 2 Accounting policies (continued) Recognition and derecognition of financial assets and liabilities 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. 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. 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. -13-

15 2 Accounting policies (continued) Cash and cash equivalents Cash and cash equivalents comprise cash on hand, demand deposits with banks and other financial institutions. 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 will 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 effective interest rate basis. The annual Transaction fee receivable is recognised on an accruals basis and is due to the Company in accordance with the Transaction documentation. 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. ~ics

16 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 (2013: 0%). 4 Swap premium and Transaction fee Swap premium Transaction fee 1,192,271 1,296, ,231 1,297,309 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, Investment income Investment income 471, ,108 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. 6 Amounts due under the Investment Agreement Amounts due under the Investment Agreement 206,004, ,900,045 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 2,895,299 (2013: 23,110,723) in order to settle its obligations under the Swap due to Credit Event claims. The Amounts due under the Investment Agreement are classified as a current asset in recognition of the Svrap 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 January The Company has the ability to terminate the GIC at any date to settle Credit Events or note repayments. It is expected that the Company will repay the notes in full in January

17 7 Trade and other receivables Accrued investment income Accrued bank interest Transaction fee 39, , , , Cash and cash equivalents Balance as at 1 January ,554 Net decrease in cash and cash equivalents (5,5891!37,544) Balance as at 31 December 274, ,010 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. -16-

18 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 It is expected that the Company will repay the notes in full 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 Amounts due under the Investment Agreement, in part, and impacted upon the principal amounts due to the noteholders, as follows: At cost Reduction of At cost At fair value At fair value 1 January principal in 31 December 31 December 31 December 2014 the year Class Al 87,000,000 87,000,000 85,677,819 80,771,246 Class A2 80,000,000 80,000,000 77,064,334 68,884,150 Class B , ,299 39,004,746 35, ,467, ,900,045 2,895, ,004, ,837, ,122,929 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, then class C, and then in part class B. 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 B will suffer the next realised loss, 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 are secured 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 +0.40% Class A2-3 month EURIBOR +0.55% Class B - 3 month EURIBOR +0.75% 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 +1.10% Class B - 3 month EURIBOR +1.50% or, (c) for each interest period commencing on or after the termination date and in respect of each class of Notes, zero. -17-

19 11 Trade and other payables Interest accrued on the Notes 291, ,738 Swap premium received in advance 243, ,388 Other creditors 33,170 46, Cash flows from operating activities Reconciliation of operating profit to net cash flows used in operating activities Profit for the year Swap premium (1,192,270) (1,296,410) Investment income (471,568) (459,108) Bank interest (628) (622) Settlement of Credit Event claims 2,895,299 23,110,723 Interest payable on the Notes 1,570,835 1,622,533 Decrease/(increase) in trade and other receivables (61) 40 Increase/(decrease) in trade and other payables (13,659) 15,930 Movement in fair value of the Swap through profit or loss (24,604,425) (87,631,267) Movement in fair value of the Notes through profit or loss 21, ,552,134 Cash flows used in operations (101,265) (85,148) 13 Financial instruments In pursuing its objective as acting as an investment issuing entity for the KBC Group, the Company holds, held or has issued a number of financial instruments. These comprise: Amounts due under the Investment Agreement; trade and other receivables; Notes; Swap; and trade and other payables. The Company's activities expose it to a variety of financial risks, including market prices, foreign currency exchange rates and interest rates as well as credit risk and liquidity risk. The Company's overall risk management programme seeks to minimise potential adverse effects on the financial performance of the Company. The Company is also exposed to the risk of loss resulting from inadequate or failed processes, people and systems or from external events. In order to reduce this risk the Board of Directors of the Company have outsourced certain functions to allow the Company to achieve its operational objectives. A corporate service provider with appropriate expertise was appointed to keep books of account and to provide adequate resources to the financial function. 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 and by the Bank of New York Mellon in its role as paying agent, transfer agent and listing agent. The directors also perform risk assessments of all legal documents entered into by the Company to ensure that the risks of the Company are mitigated. 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: -18-

20 13 Financial instruments (continued) (a) Mailcet risk The Company's exposure to market risk is comprised of the following risks: (i) Foreign exchange 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 were denominated in. The credit default swap was denominated in. Accordingly, the directors are of the opinion that there was no material currency risk exposure to the Company. (ii) Interest 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. Therefore 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. The credit rating assigned by Moody's to KBC Bank NV was Baal. 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 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 is met 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 was 206,319,578 (2013: 209,291,588). (c) Liquidity risk Liquidity risk is the risk that the Company will encounter difficulties in meeting obligations associated with financial liabilities. The transaction documents are structured so that the Company's liquidity is managed through the matching of cashflows. All amounts due are received on the same day that payments are due to be paid to reduce liquidity risk. In the opinion of the directors the risk of liquidity was further reduced as the Transaction documents were structured such that the obligations of the Company were limited in recourse and the Company had the benefit of bankruptcy remoteness. -19-

21 Audited notes to the financiay statements 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 207,245, ,601, ,245, ,601,838 Swap Less than 1 year Between 1 and 5 years More than 5 years 7,912,438 32,516,863 7,912,438 32,516,863 Other liabilities Trade and other payables - maturity within 1 year ,217 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. The minimum future amount that may be settled under the Swap will be nil and the maximum amount that may be settled will be in the sum of 206,004,746 (2013: 208,900,045). 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 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 of a Credit Event claim, 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; the excess of aggregate amount of the Credit Event claim over the first loss tranche on such date; and the mezzanine level credit risk of 382,000,000 plus the Cash Reserve Amount less the sum of each Credit Event claim paid prior to such date. The payment of Credit Event claims has impacted on the Amounts due under the Investment Agreement and the principal due to the noteholders as described in notes 6 and 10 respectively. -20-

22 13 Financial instruments (continued) (d) Fair value estimation All financial instruments except trade and other receivables, cash and cash equivalents and trade and other payables are classified as financial assets at fair value through profit or loss in accordance with the provisions set out in IAS 39. Changes in fair value of the financial instruments are included in the statement of comprehensive income in the period in which they occur. Fair value is not the amount that the Company would receive or pay in a forced transaction, involuntary liquidation or distress sale. However, fair value reflects the credit quality and liquidity of the financial assets and liabilities measured. The objective of using these valuation techniques is to establish what the transaction price would have been at the balance sheet date in an arm's length exchange motivated by normal business considerations. Refer to use of estimates and judgements in the summary of Significant Accounting Policies (Note 2). IFRS 13 establishes athree-tier hierarchy as a framework for disclosing fair value based on inputs to value the Company's financial instruments. The hierarchy of inputs is summarized below: quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2); and inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3) The fair value of the Notes has been categorised under the IFRS 13 fair value hierarchy as level 3 as a market quotation is not readily available. Instead the fair value has been determined through the use of the models below utilising unobservable inputs. The fair value of the Notes has been calculated using the Gaussian Copula Mixture model (the 'GCM'). This method is used to model the distribution of default times of the underlying corporate obligations and asset backed securities in the Portfolio. The asset default trigger in the GCM is derived from the Swap spreads in the market. By discounting the cash flows resulting from the default time curves on the underlying assets, a value for a specific tranche of Notes is reached. The GCM models the fair value of the Notes via the following steps: for each individual underlying asset in the Portfolio, the Swap spread curve in the market is observed and a recovery rate is assumed, consistent with the markets expectations towards the recovery rate. The Swap spreads reflect the market's perception of the creditworthiness of the underlying asset. The Swap spread curves and assumed recovery rates are then translated into individual survival probability curves. The probability curve provides an indication of the probability and timing of default. For example, the probability curve can show that for a certain underlying asset, there is percentage probability that the underlying asset will not be in default in one year and a percentage probability the underlying asset will not be in default after two years; given the recovery rate assumption and the survival probability curve for each underlying asset, an immense number of scenarios are simulated. The scenarios are randomly generated through a Monte Carlo simulation, consistent with the individual survival probability curves and taking into account base correlations in the Portfolio; the Notes comprise different inner tranches and a direct bucket of corporate obligations and asset backed securities. The latter can be viewed as one entire inner tranche. The prior two steps are repeated for each of the inner tranches included in the Notes. The result of immense simulations is a Portfolio loss distribution for each of the inner tranches; b~ie

23 13 Financial instruments (continued) (d) Fair value estimation (continued) the individual loss distributions for each inner tranche are mapped to market observations. Mechanically calibrating a model to a developing market might not result in a rational model and stable parameters. Therefore, a balance is created between the economically plausible model while pricing to the market. Initially the implied loss distribution from the index tranche market is derived then a mapping is created between the market implied Ioss distribution and the modelled loss distribution; and given a set of GCM parameters and a set of calibrated loss distributions for the individual underlying inner tranches, the Note tranches can be fair valued. The GCM takes into account the correlation between the different inner tranches, reflecting the overlap in underlying asset pools. The GCM also takes into account 'correlation skew'. In a good state of the economy, correlation is less than in a bad state of the economy. A mixture of parameter weights reflects the percentage of time that the economy is in either state. The fair value of the Swap has been categorised by the IFRS 13 fair value hierarchy as level III as a market quotation is not readily available. Instead the fair value of the Swap has been calculated, using the model of the Notes above, as the net present value of future cash flows to maturity. The discount rate used in this model is the weighted coupon. The weighted coupon is calculated as the total of the individual coupons for each class of Notes divided by the notional balance for each class of Notes. There has been a significant cumulative decrease, since issue, in the fair value of the Notes due to Credit Events occurring. Amounts due under the Investment Agreement were realised in payment of the Credit Event claims. The cumulative fair value of the Swap has significantly decreased in value and accordingly reflects the amounts still due and payable due to future Credit Events. The Company's financial assets and liabilities have been measured using valuation techniques and assumptions as set out above. Underlying the definition of fair value (as defined by IAS 39) is a presumption that the Company is a going concern without any intention or need to liquidate, to curtail materially the scale of its operations or to undertake a transaction on adverse terms. Cost Fair value Fair value Financial assets Amounts due under Investment Agreement Trade and other receivables Cash and cash equivalents Financial liabilities Swap Notes Trade and other payables 206,004, ,004, ,900,045 40,411 40, , , , , 010-7,912,431 32,516, ,004, ,837, ,122, , , ,955 Reconciliation of fair value measurements for the year in the level 3 hierarchy from the beginning balances to the closing balance are as follows: Reconciliation of Level 3 Fair Value Hierarchy GIC 31 December 2013 GIC Opening Balance 208,900, ,010,768 Partial redemptions 2,895,299 23,110, 723 Closing Balance 206,004, ,900,