Commodity Bonds Annual Report for the year ended 31 March Generator Bonds Limited In its capacity as Trustee of Commodity Bonds Trust

Transcription

1 Commodity Bonds 2010 Annual Report for the year ended 31 March 2010 Generator Bonds Limited In its capacity as Trustee of Commodity Bonds Trust 1

2 Commodity Bonds Trust Financial statements Trustee s report The Trustee has pleasure in presenting the annual report of Commodity Bonds Trust, incorporating the financial statements and the auditors report, for the year ended 31 March The Trustee s authorised these financial statements presented on pages 4 to 20 for issue on 10 June For and on behalf of the Trustee. Ian H Witters Giles L J Ellis 2

3 Contents Statement of comprehensive income 4 Balance sheet 5 Statement of changes in trust funds 6 Cash flow statement 7 Notes to the financial statements 8-20 Audit report Statement by the Trustee 23 Regulatory and other information 24 Overview of Commodity Bonds and reference portfolio composition Page 3

4 Statement of comprehensive income Investment income Notes $ 000 $ 000 Interest income 6 5,115 5,827 Change in the fair value of financial assets at fair value through profit or loss 11 35,272 (28,627) Investment income/(expense) on financial assets held at fair value through profit or loss 40,387 (22,800) Interest expense 7 (4,981) (5,644) Change in the fair value of financial liabilities at fair value through profit or loss 14 (35,272) 28,627 Investment (expense)/income on financial liabilities held at fair value through profit or loss (40,253) 22,983 Net investment income Other expenses 8 (114) (141) Profit before income tax Income tax expense 12 - (22) Profit after tax for the year attributable to beneficiaries Other comprehensive income for the year, net of tax - - Total comprehensive income for the year attributable to beneficiaries The above statement of comprehensive income should be read in conjunction with the accounting policies and notes. 4

5 Balance Sheet As at 31 March 2010 Notes $ 000 $ 000 Assets Cash and cash equivalents Other receivables Financial assets at fair value through profit or loss 11 59,629 30,672 Total assets 60,037 31,197 Liabilities Trade and other payables Financial liabilities at fair value through profit or loss 14 59,629 30,672 Total liabilities 60,006 31,159 Trust funds Net assets attributable to beneficiaries Total trust funds The above balance sheet should be read in conjunction with the accounting policies and notes. 5

6 Statement of changes in trust funds Notes $ 000 $ 000 Total trust funds at the beginning of the financial year Profit for the year Total comprehensive income for the year Payments to beneficiaries 15, 16 (27) - Total trust funds at the end of the financial year The above statement of changes in trust funds should be read in conjunction with the accounting policies and notes. 6

7 Cash flow statement Notes $ 000 $ 000 Cash flows from operating activities Payments to suppliers (158) (213) Redemption of commodity bonds (6,303) (9,663) Proceeds from redemption of managed commodity linked notes 6,315 9,690 Interest received 5,169 5,851 Interest paid (5,046) (5,979) Net cash outflow from operating activities 20 (23) (314) Cash flows from financing activities Distributions paid to beneficiaries (27) - Net cash outflow from financing activities (27) - Net decrease in cash and cash equivalents (50) (314) Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at end of year The above cash flow statement should be read in conjunction with the accounting policies and notes. 7

8 Notes to the Financial Statements 1 General information Commodity Bonds Trust (the Trust) is an issuer of secured fixed interest rate debt securities. The address of the registered office is Level 17, Lumley Centre, 88 Shortland Street, Auckland. These financial statements have been approved for issue by the Trustee on 10 June The Trustees do not have the power to amend the financial statements after issue. 2 Summary of significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. (a) Basis of preparation The financial statements have been prepared in accordance with New Zealand Generally Accepted Accounting Practice (NZ GAAP). They comply with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS), and other applicable New Zealand Financial Reporting Standards, as appropriate for profit oriented entities. Compliance with IFRS The statements of the Trust also comply with International Financial Reporting Standards (IFRS). Entities reporting The financial statements are for the Trust as a separate legal entity. The Trust is designated as a profit oriented entity for financial reporting purposes. Statutory base The Trust was established under the Master Trust Deed on 20 July The Trust is an issuer for the purposes of the Financial Reporting Act 1993 and is domiciled in New Zealand. The financial statements have been prepared in accordance with the requirements of the Master Trust Deed and the Financial Reporting Act Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and liabilities (including derivative instruments) at fair value through profit or loss. Critical accounting estimates and judgements The preparation of financial statements in conformity with NZ IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Trust s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4. (b) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-makers. The chief operating decision makers, who are responsible for allocating resources and assessing performance of the operating segments, have been identified as the Trustees of the Trust. (c) Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The financial statements are presented in New Zealand dollars, which is the Trust s functional and presentation currency. (d) Interest income Interest income is recognised on a time proportion basis using the effective interest method. When a receivable is impaired, the Trust reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. (e) Income tax The Trust is not liable for tax on income distributed as beneficiary income to the Residual Income Beneficiary and Residual Capital Beneficiary which are charitable trusts. Income that is not treated as beneficiary income will be taxed as trustee income. The current income tax charge is calculated on the basis of the tax laws enacted or substantially enacted at balance date. Income tax expense represents the current income tax charge. (f) Goods and Services Tax (GST) The financial statements are prepared so that all components are stated inclusive of GST as the Trust is not registered for GST purposes. 8

9 Notes to the Financial Statements 2 Summary of significant accounting policies (continued) (g) Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. (h) Other receivables Other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment is established when there is objective evidence that the Trust will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtors, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the statement of comprehensive income within other expenses. When a trade receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against other expenses in the statement of comprehensive income. (i) Financial assets and liabilities (including derivatives) The Trust classifies its financial assets and liabilities in the following categories: financial assets and/or liabilities at fair value through profit or loss and loans and receivables. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and re evaluates this designation at each reporting date. (i) Financial assets and liabilities at fair value through profit or loss The asset category has two sub categories: financial assets held for trading, and those designated at fair value through profit or loss on initial recognition. A financial asset is classified in this category if it is acquired principally for the purpose of selling in the short term or if so designated by management. A financial asset or liability is designated as at fair value through profit or loss on initial recognition on the basis that it eliminates or reduces a measurement or recognition inconsistency. The interest bearing assets and liabilities issued by the Trust contain embedded derivatives, and as such the Trust has designated its notes as at fair value through profit or loss. These securities are initially recognised at fair value, excluding transaction costs which are expensed as incurred. Subsequent to initial recognition these securities are carried at their fair value. Gains and losses arising from changes in the fair value are included in the statement of comprehensive income in the period in which they arise. The commodity linked notes are not actively traded. However, the risks and features of the commodity linked notes are identical to those of the commodity bond notes listed on the New Zealand Stock Exchange ( NZX ), with the exception of the coupon rate, which is higher for the linked notes than for the bond notes. (ii) Loans and receivables Loans and receivables are non derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Trust provides money, goods or services directly to a debtor with no intention of selling the receivable. Loans and receivables are cash and cash equivalents and other receivables on the balance sheet. Loans and receivables are carried at amortised cost using the effective interest method. Purchases and sales of investments are recognised on trade date the date on which the Trust commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Trust has transferred substantially all the risks and rewards of ownership. The Trust assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. Impairment testing for trade receivables is described in the accounting policy for these above. Fair value estimation The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. The Trust uses a variety of methods and makes assumptions that are based on market conditions existing at each balance date. Quoted market prices or dealer quotes for similar instruments are used for long term debt instruments held. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward exchange contracts is determined using forward exchange market rates at the balance sheet date. The nominal value less estimated credit adjustments of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Trust for similar financial instruments. 9

10 Notes to the Financial Statements 2 Summary of significant accounting policies (continued) (j) Trade and other payables These amounts represent liabilities for goods and services provided to the Trust prior to the end of financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. Trade and other payables are initially recognised at fair value plus transaction costs. Thereafter, they are carried at amortised cost using the effective interest method. (k) Borrowing costs Interest expense is recognised as an expense in the statement of comprehensive income using the effective interest method. (l) Residual income available for distribution to beneficiaries In accordance with the Trust Deed, the Trust distributes all its distributable income to the beneficiaries by way of cash. Under NZ IFRS, net assets attributable to Beneficiaries are classified as equity. Distributable income is determined by reference to the taxable income of the Trust. Provision is made for the amount of any distribution on or before the end of the financial year but not distributed at balance date. Distributions are recognised as an expense in the statement of changes in equity. Non-distributable income is transferred directly to beneficiaries funds and may consist of unrealised changes in the fair value of investments, accrued income not yet assessable for income tax, under or over distributions from prior periods, expenses provided or accrued for which are not yet deductible for tax purposes, and tax free or tax deferred income. Realised gains on the sale of investments and accrued income not yet assessable will be included in the determination of distributable income in the same year in which it becomes assessable for tax. (m) Changes in accounting policies (i) New and amended standards adopted by the Trust As a result of the new and revised accounting standards which became operative for the annual reporting period commencing 1 April 2009 the following standards, interpretations and amendments have been adopted with effect from 1 April 2009 in the preparation of these financial statements: NZ IFRS 7 Financial instruments: Disclosures - The amendments require additional disclosures on fair value and liquidity risk. NZ IFRS 8 Operating Segments - Further aligns external operating segment reporting with internal reporting to key management personnel. NZ IAS 1 Presentation of Financial Statements (revised) - The amendments affect the presentation of owner changes in equity and of comprehensive income, but do not change the recognition, measurement or disclosure of specific transactions and events required by other standards. (ii) Future accounting developments The following new standards, interpretations and amendments have been issued, but are not yet effective and have not been early adopted by the Trust: NZ IFRS 9 Financial Instruments: Classification and Measurement - If this standard is not early adopted it will be effective from 1 April The major changes under the standard are that: NZ IFRS 9 replaces the multiple classification and measurement models in NZ IAS 39 Financial Instruments: Recognition and Measurement with a single model that has two classification categories: amortised cost and fair value; A financial asset is measured at amortised cost if two criteria are met: a) the objective of the business model is to hold the financial assets for the collection of the contractual cash flows, and b) the contractual cash flows under the instrument solely represent the payment of principal and interest; If a financial asset is eligible for amortised cost measurement, an entity can elect to measure it at fair value if it eliminates or significantly reduces an accounting mismatch; There will be no bifurcation of an embedded derivative where the host is a financial asset; Equity instruments must be measured at fair value however, an entity can elect on initial recognition to present the fair value changes of an equity investment directly in other comprehensive income. There is no subsequent recycling of fair value gains and losses to profit or loss, however dividends from such investments will continue to be recognised in profit and loss; and If an entity holds a tranche in a waterfall structure it must determine the classification of that tranche by looking through to the assets ultimately underlying that portfolio and assess the credit quality of the tranche compared with the underlying portfolio. If an entity is unable to look though, then the tranche must be measured at fair value. 10

11 Notes to the Financial Statements 2 Summary of significant accounting policies (continued) NZ IAS 1 Presentation of Financial Statements The amendments to the standard were issued in April 2009 and are applicable to the Trust in the 2011 financial year. The amendments clarify that the terms of a liability, which could be settled at any time by the issuance of equity instruments at the option of the counterparty, do not affect its classification. NZ IAS 7 Statement of Cash Flow - Amendments to the standard were issued in April 2009 and are applicable to the Trust in the 2011 financial year. The amendments clarify that only expenditure which results in a recognised asset can be classified as cash flow from investing activities. NZ IAS 24 Related Party Disclosures The revised standard was approved in November 2009, and is applicable to the Trust in the 2012 financial year. The main changes to the standard simplify the definition of a related party and clarify its intended meaning. NZ IAS 32 Financial Instrument: Presentation Amendments to the standard were issued in October 2009, and are applicable to the Trust in the 2011 financial year. The amendments clarify the classification of rights issues. 11

12 Notes to the Financial Statements 3 Financial risk management The Trust s activities expose it to a variety of financial risks: market risk (including, fair value interest rate risk and price risk), credit risk and liquidity risk. Risk management is conducted by the Trustees in accordance with the risk management policies. The risk management policies cover specific areas, such as interest rate risk, credit risk, use of derivative financial instruments and non derivative financial instruments, and investment of excess liquidity. (a) Market risk (i) Foreign exchange risk The Trust is not exposed to foreign currency risk (2009: Nil). (ii) Price risk The Trust is exposed to commodity price risk. The Trust is exposed to commodity price risk through the acquisition of the managed commodity linked notes. Coupon payments are not affected by commodity prices, and only the capital amount is at risk through commodity price movements. The amount payable to the Trust as the managed commodity linked note holder and the subsequent payment to bondholders on the redemption date of the bonds will be 100% of the subscription amount unless more than 11 portfolio events occur. A portfolio event occurs if the average price of an underlying commodity over a 10 day averaging period near the end of the five year term is below a trigger price for that commodity in the reference portfolio. Whilst spot prices of the underlying commodities will not effect coupon distributions, they may affect the financial position of the Trust through revaluations in the commodity linked notes. Price risk is managed as the commodity linked notes and the commodity bonds are in a naturally hedged position. (iii) Interest rate risk The Trust s main interest rate risk arises from the value of the underlying managed commodity linked notes and the corresponding collateral assets. Fair value interest rate risk is managed as the commodity linked notes and the commodity bonds are in a naturally hedged position and the Trustee s monitor the quarterly change in value of the managed commodity linked notes. The table below identifies the period in which interest rates are subject to review on interest bearing financial assets and liabilities, and provides the current weighted average interest rate on each item. Interest is at fixed rates on each item except for deposits which earns interest at floating rates. Weighted Less than Between 1 Between 2 Over 5 years Non interest Total average interest 1 year and 2 years and 5 years bearing rate $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 At 31 March 2010 Financial assets at fair value through profit or loss 8.45% - 59, ,629 Other receivables n/a Cash and cash equivalents 2.93% , ,037 Financial liabilities at fair value through profit or loss 8.25% - 59, ,629 Trade and other payables n/a , ,948 Weighted Less than Between 1 Between 2 Over 5 years Non interest Total average interest 1 year and 2 years and 5 years bearing rate $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 At 31 March 2009 Financial assets at fair value through profit or loss 8.45% , ,672 Other receivables n/a Cash and cash equivalents 2.95% , ,197 Financial liabilities at fair value through profit or loss 8.25% , ,672 Trade and other payables n/a , ,077 12

13 Notes to the Financial Statements 3 Financial risk management (continued) (a) Market risk (continued) (iv) Summarised sensitivity analysis The table below summarises the impact on profit after tax and net assets attributable to beneficiaries (equity) should interest rates or other price risks move by the percentages stated. The sensitivity analysis is based on analysis of interest rate risk and price risk performed internally for the Trustees and represents the Trustee s assessment of the possible change in interest rates and commodity prices. Interest rate risk Other price risk 1.25% +1.25% 20% +20% 31 March 2010 Amount exposed to risk Profit Equity Profit Equity Profit Equity Profit Equity $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Financial assets Cash and cash equivalents 85 (1) (1) Financial assets at fair value through profit or loss 59,629 1,019 1,019 (990) (990) (11,926) (11,926) 11,926 11,926 Financial liabilities Financial liabilities at fair value through profit or loss 59,629 (1,017) (1,017) ,926 11,926 (11,926) (11,926) Total increase/(decrease) 1 1 (1) (1) Interest rate risk Other price risk 1.25% +1.25% 20% +20% 31 March 2009 Amount exposed to risk Profit Equity Profit Equity Profit Equity Profit Equity $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Financial assets Cash and cash equivalents 135 (2) (2) Financial assets at fair value through profit or loss 30, (538) (538) (6,134) (6,134) 6,134 6,134 Financial liabilities Financial liabilities at fair value through profit or loss 30,672 (551) (551) ,134 6,134 (6,134) (6,134) Total increase/(decrease) (b) Credit risk Credit risk arises from cash and cash equivalents, financial assets at fair value through profit and loss and deposits with banks and financial institutions. The maximum exposure to credit risk at the reporting date is the higher of the carrying value and fair value of each class of receivables mentioned above. The Trust does not hold any collateral as security. The Trust has invested the proceeds from the Bond Issue in managed commodity linked notes in accordance with the investment mandate documented in the commodity bonds prospectus dated 16 July This investment is with a single entity. There are no impaired assets, restructured assets, assets acquired through the enforcement of security or past due assets as at 31 March 2010 (2009: Nil). (c) Concentrations of funding Funding is predominately from retail bonds issued to New Zealand residents. (d) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. The Trustee s administer liquidity requirements by maintaining adequate reserves and continuously monitoring forecast and actual cash flows and by matching the maturity profiles of financial assets and liabilities. The table below analyses the Trust s financial assets and liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant. 13

14 Notes to the Financial Statements 3 Financial risk management (continued) (d) Liquidity risk (continued) Less than 1 year Between 1 Between 2 Over 5 years Total and 2 years and 5 years At 31 March 2010 $ 000 $ 000 $ 000 $ 000 Financial assets at fair value through profit or loss - 57, ,400 Other receivables Cash and cash equivalents Interest receivable 4,527 2, ,952 4,935 59, ,760 Financial liabilities at fair value through profit or loss - 57, ,400 Trade and other payables Interest payable 4,419 2, ,787 4,738 59, ,506 Net cash inflow Less than 1 year Between 1 Between 2 Over 5 years Total and 2 years and 5 years At 31 March 2009 $ 000 $ 000 $ 000 $ 000 Financial assets at fair value through profit or loss ,900-63,900 Other receivables Cash and cash equivalents Interest receivable 5,010 5,400 2,700-13,110 5,535 5,400 66,600-77,535 Financial liabilities at fair value through profit or loss ,900-63,900 Trade and other payables Interest payable 4,891 5,272 2,636-12,799 5,296 5,272 66,536-77,104 Net cash inflow (e) Capital risk management The Trust manages net assets attributable to beneficiaries as its capital. The Trust s objectives when managing capital are to safeguard their ability to continue as a going concern, so it can continue to provide returns for beneficiaries and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Trust may adjust the amount of distributions to beneficiaries. The Trust monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including borrowings and trade and other payables as shown in the balance sheet) less cash and cash equivalents. Total capital is calculated as Trust funds as shown in the balance sheet (including minority interest) plus net debt. 14

15 Notes to the Financial Statements 3 Financial risk management (continued) (e) Capital risk management (continued) During 2010, the Trust s strategy was unchanged from The assets of the Trust are funded through non callable bonds with a maturity date equal to the maturity date of the underlying assets. A credit rating of within investment grade is current and unchanged on these bonds. The gearing ratios at 31 March 2010 and 31 March 2009 were as follows: $ 000 $ 000 Total borrowings Less: Cash and cash equivalents (note 9) (85) (135) Net debt Total net assets attributable to beneficiaries Total capital Gearing ratio 90% 90% (f) Fair value estimation Effective 1 April 2009, the Trust adopted the amendment to IFRS 7 for financial instruments that are measured in the balance sheet at fair value. This requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: 1. Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); 2. Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2); and 3. Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3). The Trust s financial assets at fair value of $59,629,416 are managed commodity linked notes and the financial liabilities at fair value of $59,629,416 are commodity bonds. The managed commodity linked notes and the commodity bonds are level 3 measurements. The fair value of the managed commodity linked notes and commodity bonds are based on the bid price as at 31 March derived from information obtained from Barclays Bank Plc. The bid price valuation consists of a number of variables, some of which are based on market observable data and some of which are based on assumptions not supported by market observable data. The Trustee s do not have full visibility of the mechanics of the calculation to determine the bid price (in particular the non-market observable inputs). However the valuation methodology is consistent with that used to calculate the price of the managed commodity linked notes for the quarterly redemption facility. For more information, refer to price risk disclosures in Note 3(a)(ii) and sensitivity analysis in Note 3(a)(iv). 4 Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Trust makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Fair value commodity bonds and commodity linked notes The commodity bonds and commodity linked notes are not actively traded. The fair value of the bonds and notes has therefore been calculated using a model that includes as an input the implied yield of the notes. Periodically, the model is calibrated using available observable market data, where that data is consistent with the features of the commodity linked notes. Refer to Note 3(f) for further discussions. 5 Segment information The Trustees look at Trust as one geographic and product segment. The Trust is an issuer of commodity bonds on the New Zealand Stock Exchange ( NZX ). The Trust s interest revenue from the managed commodity linked notes is all derived from Barclays Bank Plc. 6 Interest income $ 000 $ 000 Cash at bank 4 23 Interest margin received in relation to bonds redemption Managed commodity linked notes 5,098 5,781 5,115 5,827 15

16 Notes to the Financial Statements 7 Interest expense $ 000 $ 000 Commodity bonds 4,981 5,644 8 Other expenses 4,981 5,644 $ 000 $ 000 Trustee fees Audit fees Taxation fees paid to auditors - 7 Registry fees Bond trustee fees Other expenses Cash and cash equivalents $ 000 $ 000 Bank balances The bank balance bears interest at a rate of 2.93% (2008: 2.95%). 10 Other receivables $ 000 $ 000 Interest receivable Financial assets at fair value through profit or loss Designated at fair value through profit or loss $ 000 $ 000 At beginning of year 30,672 68,989 Change in fair value 35,272 (28,627) Redemptions during the year (6,315) (9,690) At end of year 59,629 30,672 $ 000 $ 000 Managed commodity linked notes 59,629 30,672 59,629 30,672 The managed commodity linked notes were purchased by the Trust with a face value of $121.4m. The managed commodity linked notes have a fixed interest rate of 8.45% and a five year term maturing on 7 th September The recovery rate of the managed commodity linked notes is linked to the number of portfolio events that occur. The recovery rate will be unaffected if less than 12 portfolio events occur and will reduce to 0% if 12 or more portfolio events occur. A portfolio event occurs if the average price of a commodity over a 10-day averaging period near the end of the 5 year term is below a trigger price for that commodity in the Reference Portfolio. This means that portfolio events can only occur at the end of the term of the managed commodity linked note in relation to the commodity prices over the averaging period. Commodity prices at any other time will not affect the repayment of the principal of the managed commodity linked notes. In November 2007, a redemption facility was set up to allow bondholders to redeem their holdings at a value based off these underlying notes. Redemptions of $33.1m were made in November 2007, $10.7m in January 2008, $1.6m in April 2008, $4.2m in July 2008, $7.6m in October 2008, $0.3m in January 2009, $1m in July 2009, $2.7m in October 2009 and $2.8m in January These redemptions represent the face value of the bonds. 16

17 Notes to the Financial Statements 12 Income tax The income tax on the Trust s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the Trust as follows: $ 000 $ 000 Profit before tax Income tax expense calculated at 33% 7 14 Income not assessable for tax purposes (12) (13) Expenses not deductible for tax purposes 4 8 Distributions to beneficiaries - (9) Unrecognised tax losses 1 - Prior period adjustments - 22 Tax charge - 22 the Trust made a taxable loss of $3,911. The tax losses has not been recognised on the basis that it is not probable future taxable profits will be available against which the losses can be utilised, per NZ IAS 12. The cumulative amount of taxable losses not recognised is $3,911 (2009: $Nil). For the year ended 31 March 2009 all of the Trust s taxable income was distributed to beneficiaries and therefore no taxable income remained in the Trust. 13 Trade and other payables $ 000 $ 000 Accrued interest on bonds Other payables Financial liabilities at fair value through profit or loss Designated at fair value through profit or loss $ 000 $ 000 At beginning of year 30,672 68,989 Change in fair value 35,272 (28,627) Redemption during the year (6,315) (9,690) At end of year 59,629 30,672 $ 000 $ 000 Commodity bonds 59,629 30,672 59,629 30,672 The commodity bonds are secured fixed interest debt securities of the Trust and are secured over the assets of the Trust in accordance with the Trust deed dated 20 July The bonds have a term of 5 years, maturing 7th of September 2011, and pay a fixed rate of 8.25%. In November 2007, a redemption facility was set up to allow bondholders to redeem their holdings at a value based on the underlying notes. Redemptions of the bonds was based on the cancellation of the underlying notes. Redemptions of $33.1m were made in November 2007, $10.7m in January 2008, $1.6m in April 2008, $4.2m in July 2008, $7.6m in October 2008 and a further $0.3m in January 2009 $1m in July 2009, $2.7m in October 2009 and $2.8m in January These redemptions represent the face value of the bonds. 17

18 Notes to the Financial Statements 15 Residual income available for distribution to beneficiaries As stipulated in the Trust Deed, each beneficiary has a right to an individual share in the Trust capital. There are no separate classes of trust capital and each beneficiary has the same rights attaching to their interest in the Trust. Movements in net assets attributable to beneficiaries $ 000 $ 000 Opening balance Net profit for the year Distributions paid to beneficiaries (27) - Closing balance Distributions to beneficiaries Since year end the Trustee has recommended that no distribution be paid to beneficiaries for the year ended 31 March 2010 on the basis that the Trust has no taxable income. On 27th August 2009, the Trustees resolved to distribute the Trust s taxable income of $26,825 for the year ended 31 March The distribution was paid on 28th August 2009 out of net assets attributable to beneficiaries at 31 March 2009, but was not recognised as a liability at 31 March Contingencies As at 31 March 2010 the Trust had no contingent liabilities or assets (2009:$Nil). 18 Commitments As at 31 March 2010 the Trust had no commitments (2009:$Nil). 19 Related party transactions (a) Trustee The Trustee is Generator Bonds Limited. (b) Bond trustee The Bond trustee is New Zealand Permanent Trustees Limited. (c) Beneficiaries The beneficiaries of the Trust are the Residual Income Beneficiary and the Residual Capital Beneficiary. The beneficiaries being The Wellington City Mission (Anglican) Trust Board, KidsCan Charitable Trust, Auckland City Mission, Auckland University Rugby Football Club Inc., Lifeline Foundation, Sumner Lifeboat Institutions Incorporated and Wellington Regional Breast Cancer Trust in such proportions and amounts as are determined at the Trustee s sole discretion. The beneficiaries did not subscribe, purchase or contribute to their beneficial interest in the Trust. (d) Transactions with related parties The following transactions occurred with related parties other than key management personnel or entities related to them: Trustee and directors fees paid to: $ 000 $ 000 Trustee (Generator Bonds Limited) Bond Trustee (New Zealand Permanent Trustees Ltd) The directors of the Generator Bonds Limited resolved to waive the trustee fee for the quarter ended 31 March

19 Notes to the Financial Statements 19 Related party transactions (continued) (e) Outstanding balances As at 31 March 2010 the Trust had no balances outstanding in relation to transactions with related parties other than key management personnel (2009: $Nil). (f) Terms and conditions All other transactions were made on normal commercial terms and conditions and at market rates. Outstanding balances are unsecured and are repayable in cash. (g) Related party holdings Macquarie Investment Management Limited, a sister company of the Trustee, purchased 155 of the bonds issued by the Trust during the year (2009: 50). At year end, the balance held was 820 bonds (2009: 665) with fair value of $85,185 (2009: $31,920). 20 Reconciliation of profit after income tax to net cash outflow from operating activities $ 000 $ 000 Profit for the year Decrease in other receivables (Increase)/decrease in other financial assets at fair value through profit or loss (35,272) 28,627 Decrease in trade and other payables (110) (385) Increase/(decrease) in other financial liabilities at fair value through profit or loss 35,272 (28,627) Net cash outflow from operating activities (23) (314) 21 Financial instruments by category Loans and Assets at Total receivables fair value through profit or loss At 31 March 2010 $ 000 $ 000 $ 000 Assets per balance sheet Cash and cash equivalents Other receivables Financial assets at fair value through profit or loss - 59,629 59,629 Total ,629 60,037 Other financial Liabilities at Total liabilities at fair value amortised cost through profit or loss At 31 March 2010 $ 000 $ 000 $ 000 Liabilities as per balance sheet Trade and other payables Financial liabilities at fair value through profit or loss - 59,629 59,629 Total ,629 59,948 19

20 Notes to the Financial Statements 21 Financial instruments by category (continued) Loans and Assets at Total receivables fair value through profit or loss At 31 March 2009 $ 000 $ 000 $ 000 Assets per balance sheet Cash and cash equivalents Other receivables Financial assets at fair value through profit or loss - 30,672 30,672 Total ,672 31,197 Other financial Liabilities at Total liabilities at fair value amortised cost through profit or loss At 31 March 2009 $ 000 $ 000 $ 000 Liabilities as per balance sheet Trade and other payables Financial liabilities at fair value through profit or loss - 30,672 30,672 Total ,672 31,077 The carrying value of loans and receivables and other financial liabilities at amortised cost are assumed to approximate their fair values due to their short term nature. 22 Events occurring after the balance sheet date No significant events have occurred after the balance sheet date which would impact on the financial position of the Trust at 31 March 2010 or the results and cash flows of the Trust for the year then ended. 20

21 21

22 22

23 Statement by Trustee In accordance with the Trust Deed, the Trustee has caused the Manager to prepare the Accounts. Based on the Trustee s ongoing program of monitoring of the Trust, the Manager and the Trustee s review of the accounts: The Trust has been conducted in accordance with the stated investment policies in the Trust Deed dated 20 July The Trustee is not aware of any material matters occurring up to the date of this report that require disclosure and which have not been disclosed in the financial statements. Dated at Auckland this 10th day of June 2010 Ian H Witters Giles L J Ellis 23

24 Regulatory and other information Incorporation of Generator Bonds Limited Generator Bonds Limited was incorporated under the Companies Act 1993 (New Zealand) on 18 June Its registered number is AK Directors shareholdings and holdings of Commodity Bonds No directors have holdings in Commodity Bonds. Corporate governance The Directors comply with the legislation and regulation applicable to the corporate governance of Generator Bonds Limited in its capacity as trustee of Commodity Bonds Trust and the terms of the Trust Deed dated 20 July Directors of Generator Bonds ELLIS, Giles Lancelot James appointed 22 May 2006 WITTERS, Ian Hamish appointed 17 December 2009 VINCENT, Katherine Jane appointed 26 November 2009 SWANGER, Craig Nicholas resigned 26 November 2009 BROMFIELD, David Luke resigned 17 December 2009 MCLAY, James Kenneth resigned 1 June 2009 ROWLEY, John Noel resigned 1 July 2009 TERRY, Bruce Neil resigned 8 September 2009 Annual Report This is an annual report of Generator Bonds Limited in its capacity as trustee of Commodity Bonds Trust for the purposes of the NZX Listing Rules. Prepared with information available up to and including 31 March Dated 10 June Ian H Witters Giles L J Ellis 24

25 Overview Trust Review as at 28 May 2010 Overview Commodity Bonds 1 NZX code MCB010 Interest rate 8.25% p.a. Maturity date 7 September 2011 S&P credit rating Within Investment Grade 2 (unchanged) Years to maturity 1.25 Upcoming interest payment dates 7 June September December March June 2011 Changes to the portfolio Addition Current price Trigger price No changes this quarter Removal No changes this quarter Commentary Since 23 August 2006 (the portfolio s base date), the best performing commodity held in the portfolio has been Gold, the price of which has increased to more than 190% of the price level on the base date. The price of four out of the nine commodities in the Reference Portfolio has decreased since the base date as demonstrated by graph 1. The poorest performers in the portfolio have been Aluminium and Zinc. For a Portfolio Event to occur, the average price of a commodity, over a 10 day Averaging Period near the end of the five year term, must be below a trigger price for that commodity in the Reference Portfolio. Currently the portfolio can withstand 11 Portfolio Events, however if 12 or more Portfolio Events took place the principal repayment would be reduced to 0%. There can be more than one Trigger Price per commodity. For a full list of current Trigger Prices please refer to the Reference Portfolio composition report at the end of this report. Graph 1: Prices and trigger levels 220% 200% 180% Precious metals Base metals Price level on base date: 23 August 2006 First trigger price Current price level: 28/05/ % 140% 120% % of initial price 100% 80% 60% 40% 20% 0% Gold Silver Platinum Palladium Aluminium Copper Nickel Lead Zinc Source: Macquarie Equities New Zealand 25

26 About the Investment Commodity Bonds are structured investments and as such carry certain risks as set out in section 4.6 of the Commodity Bonds combined investment statement and prospectus dated 20 July 2006 ( the offer document ). For more information a copy of the offer document can be found at Commodity Bonds are able to pay an interest rate of 8.25% p.a. because they include certain risks to the repayment of your Principal Amount that are not prevalent in traditional fixed income investments. Commodity prices can be volatile. In certain circumstances, falls in the prices of commodities to which the Commodity Bonds are exposed during the Averaging Period, near the end of the term, may result in a reduction or loss of your Principal Amount. This can be expected to occur more sharply than a loss of principal on traditional fixed income investments. If you wish to invest in Commodity Bonds you should have sufficient financial resources to withstand this risk. In general it will not be appropriate for you to invest more than a small part of your overall investment portfolio in Commodity Bonds. However, you should seek financial advice as to whether an investment in Commodity Bonds is suitable for you The Collateral Assets^^ are comprised of European asset backed securities, currently EUR denominated Arran Funding Class A-2 Series 2005-B Floating Rate Asset Backed Securities issued by Arran Funding Limited ISIN (XS ). Reference Portfolio and Protection Amount 3 Full details of the reference portfolio composition can be found on pages 27 and 28. Protection Amount: The Portfolio can withstand 11 Portfolio Events, however if 12 or more Portfolio Events took place the principal repayment would be reduced to 0%. The Portfolio Manager, TCW Asset Management Company, may change the Reference Portfolio and the Protection Amount in accordance with its objective and management guidelines over the five year term of Commodity Bonds. Commodities not currently in the Reference Portfolio that may be included in the future are: Tin, WTI Crude oil, Brent Crude Oil, Heating Oil, Gas oil, Unleaded Gasoline and Natural Gas. For more information about the Reference Portfolio and Protection Amount and how they relate to Commodity Bonds please refer to the offer document. 26

27 Reference Portfolio composition as at 28 May

28 28 Reference Portfolio composition continued 3

29 1 Commodity Bonds are issued by Generator Bonds Limited ( Generator ) in its capacity as trustee of the Commodity Bonds Trust and constitute first ranking secured obligations of Generator, in its capacity as trustee of that trust. This report is issued by Macquarie Equities New Zealand Limited ( MENZ ) on behalf of Generator. The information contained herein that pertains to Generator and Commodity Bonds is provided in good faith based on accurate reliable information as at 28 May No responsibility for the accuracy, completeness or timeliness of the information is accepted. In preparing this report, we did not take into account the investment objectives, financial situation and particular needs of the reader and to the extent allowed by law we do not accept any liability for any loss howsoever caused arising from reliance upon the information contained in it. This report is based on information obtained from sources believed to be reliable but we do not make any representation or warranty that it is accurate, complete or up to date nor do we accept any obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group of companies and their officers and employees may have interests in securities referred to in this report, including being directors of, or providing investment banking services to, their issuer. Further, they may buy or sell those securities as principal or agent, and as such may effect transactions which are not consistent with the views, analyses or recommendations (if any) in this report. Investments in Commodity Bonds are not deposits with or liabilities of Macquarie Bank Limited ABN ( Macquarie Bank ) nor any member of the Macquarie Group and are subject to investment risk, including possible delays in repayment and loss of income and or principal invested. None of Macquarie Bank Limited, Generator, MENZ or any other member of the Macquarie Group guarantees any particular rate of return on the Commodity Bonds nor do they guarantee the repayment of the principal of the Commodity Bonds. Macquarie Bank Limited is a company incorporated in Australia and authorised under the Banking Act 1958 (Australia) to conduct banking business in Australia. Neither Macquarie Bank nor any member of the Macquarie Group are registered as a registered bank in New Zealand under the Reserve Bank of New Zealand Act 1989 (New Zealand). 2 A credit rating is not a recommendation to buy, hold or sell the securities; nor does it attest to the suitability of an investment in the securities for any individual investor. Any rating is subject to revision, suspension or withdrawal at any time by Standard & Poor s. 3 Note that the reference portfolio may change over time. The reference portfolio currently has exposure to gold, silver, platinum, palladium, aluminium, copper, nickel, lead and zinc. Other commodities that may be included are tin, WTI crude oil, Brent crude oil, heating oil, gas oil, natural gas and unleaded gasoline. ^^ The Collateral Assets are rated AAA by S&P. 29