Eirles Two Limited. Directors report and financial statements. For the year ended 31 December Registered number

Transcription

1 Eirles Two Limited Directors report and financial statements For the year ended 31 December 2015 Registered number

2 Eirles Two Limited Contents Page Directors and other information 1 2 Directors report 3 7 Statement of Directors responsibihties 8 Independent auditor s report 9 10 Financial Statements Statement of financial position 11 Statement of comprehensive income 12 Statement of cash flows 13 Statement of changes in equity 14 Notes to the financial statements 15 71

3 Ireland Turlough Galvin (Irish) Appointment (5 May 2015) London EC2N 2DB Bank of New York Mellon Ireland Ireland Ireland London EC2P 2AT United Kingdom IFSC United Kingdom 6 Bishopsgate P0 Box Great Winchester Street Winchester House Registered office 6 Floor, Pinnacle 2 Administrator & Deutsche International Corporate Services (Ireland) Limited Arranger Deutsche Bank AG, London Branch company Secretary Floor, Pinnacle 2 Trustee Deutsche Trustee Company Limited Liam Quirke (Irish) Resignation (5 May 2015) Dublin 3 Sir John Rogersons Quay Dublin 2 Dublin 3 Dublin 1 1 Harbourmaster Place Chartered Accountants, Statutory Audit Firm Independent auditor KPMG Niall O Carroll (Irish) Margaret Kennedy (Irish) Appointment (27 February 2015) Riverside Two Grand Canal Dock Eastpoint Business Park Eastpoint Business Park Directors Michael Whelan (Irish) Resignation (27 February 2015) Directors and other information Eirles Two Limited

4 London EC2P 2AT United Kingdom Ireland London EC2P 2AT Bank of New York Mellon Ireland London EC2P 2AT Riverside Two Luxembourg Bank of New York Mellon United Kingdom London EC2P 2AT Ireland L 1115 Listing Agents [Luxembourg Listing Agent] Deutsche Bank Luxembourg S.A. Dublin 2 Dublin Dublin 2 PC Box 441 Riverside Two Grand Canal Dock Solicitor Matheson Deutsche Bank AG, London Branch Sir John Rogersons Quay 70 Sir John Rogerson s Quay United Kingdom Sir John Rogersons Quay United Kingdom P0 Box Bishopsgate Swap Counterparty Deutsche Bank AG, London Branch 6 Bishopsgate 2 Boulevard konrad Adenauer [Irish Stock Exchange] 6 Bishopsgate 6 Bishopsgate PC Box 441 Grand Canal Dock PC Box 441 Bankers Deutsche Bank AG, London Branch Custodian Deutsche Bank AG, London Branch Directors and other information Eirles Two Limited 7

5 The Directors present the annual report and audited financial statements of Eirles Two Limited (the The Eirles Two Limited program was set up a segregated multi issuance Special Purpose Entity in The Company has established a EUR 10,000,000,000 MultiIssuance Programme (the the other (if applicable). This means that Eirles Two Limited (the Company or the issuer ) can Each Series is governed by a separate Supplemental Programme Memorandum (SPM). Each securities will be issued in Series (each a Series ) and the terms and conditions of the debt securities of each Series will be set out in a SPM for such Series. the issuance of that particular series of debt securities issued. the portfolio through the use of derivative instruments. securities including a first fixed charge over certain collateral, primarily in the form of investment securities, total return swaps or cash, as set out in the relevant SPM and a first fixed charge over The Programme offers investors the opportunity to invest in a portfolio of investments, the investment securities and total return swaps, and alter the interest rate risk and credit risk profile of Each Series may also be secured by an assignment of the Company s rights under a Swap Programme ) to issue debt securities and/or other secured limited recourse indebtedness. Debt Each series of debt securities will be secured as set out in the terms and conditions of the debt funds held by the Agents under the Agency Agreement (each as defined in the terms and conditions realisation of the collateral of that series. Refer to note 4 (b) (H) on details on liquidity risk. The entity holds cash and cash collateral, investments in total return swaps and investment The credit risk of the investment securities and total return swaps is borne by either the, Company s particular series) or the Company s holders of debt securities. Refer to note 4 (b) (i) and 22 (a) for additional security as may be described in the relevant SPM (together the Mortgaged Property ). further details about how the company manages credit risk, year. note 6 for details of series which hold derivatives. Document (each as defined in the terms and conditions of the debt securities issued) and any securities. Please refer to notes 5 and 7 to the financial statements for more information. swap counterparty (in cases where a default swap transaction has been entered into for that As arranger, DB also agreed to reimburse the Company against any costs, fees, expenses or outgoings incurred. DB is also the swap counterparty for all series where derivatives are held. Refer to For details of the assets held by the Company at the end of the year, refer to note 7. The Company s obligation to the holders of debt securities of a particular series is limited to the net proceeds upon of the debt securities issued). Refer to note 22 (d) (iv) for the profile series of debt securities issued. of debt securities within each series the entity holds collateral purchased with proceeds raised from issue various series of debt securities ranging from AAA to nonrated. Series consists of an investment in collateral or total return swap from the proceeds of the issuance Agreement and/or Option Agreement and/or Repurchase Agreement and/or Credit Support taxable under Irish law at a current rate of 25% and the net amount is retained as the profit for the For every new issuance of debt securities, Deutsche Bank AG, London Branch (DB), as arranger, April 2000 to issue multiple series of debt securities, with the rating on each series independent of Principal activities, business review and future developments transfers to the Company an amount of USD 200 as corporate benefit (income). This income is Company ) for the year ended 31 December Directors Report Eirles Two Limited 2

6 Eirles Two Limited Directors Report (continued) Principal activities, business review and future developments (continued) on 9 June 2015, the long term credit rating of Deutsche Bank AG, London Branch was downgraded to BBB+ by Standard and Poor s (S&P). The minimum prescribed rating per the Supplemental Programme Memorandum is Ai by S&P and P1 by Moody s. As a result, the company reviewed the credit Support Agreement ( CSA ) entered into with the swap counterparty in respect of relevant series. CSA contains minimum rating requirement provision and in the event that the swap counterparty ceases to have the minimum prescribed credit ratings, it is required to provide additional collateral in respect of its obligations pursuant to the applicable swap agreement. The downgrade had an impact on series 164. However, no additional collateral was required in 2015 as the existing collateral posted in 2008 and 2012 downgrade was still sufficient. The long term credit rating of S&P for Deutsche Bank AG, London Branch is BBB+ as at 31 December 2015 (2014: A). The company made a net gain on investment securities and total return swap of EUR 86,082k (2014: net gain EUR 172,382k) for the year and a net loss on derivative financial instruments of EUR 21564k (2014: net gain EUR 10,921k). Due to the limited recourse nature of the debt securities issued and as the return on those issued securities is directly linked to the performance of the investment securities, total return swaps and derivative financial instruments, the Company made a corresponding net loss of EUR 64,518k (2014: net loss EUR k) on the debt securities in issue for the year resulting in a net profit of nil for the year ended 31 December 2015 (2014: nil). Refer to notes 13, 14 and 15 of the financial statements for further information. As at 31 December 2015, the fair value of the Company s total debt securities issued was EUR 449,621k (2014: EUR 1,091,000k). The Company issued Series 367 (2014: no new issues) during the year. Refer to Note 7 and 9 for further details. Series 49, 191, 192, 200, 205 and 229 have matured in 2015 (2014: no series) whereas series 176, 194, 215, 216, 254, 309, 312, 354, 357, 361, 363 and 364 (2014: series 325, 326, 327, 328, 329, 334 and 360) were redeemed in full. Series 316 was partially redeemed during the year (2014: nil) The following series are currently in issue as at year end date: Series 91, , 255, 299, 316, 319, 345, 347, 351, 352, 353, 355, 365, 366 and 367 (2014: Series 49, 91, 164, 176, 191, 192, 194, 195, 200, 205, 215, 216, 229, 254, , 299, 309, 312, 316, 319, 345, 347, 351, 352, 353, 354, 355, 357, 361, 363, 364, 365, and 366). Series 3, 4, 5, 6, 25, 26, 27, 28, 29, 30, 31, , 41, 54, 57, 83, 86, 95, 111 (Class B), 124, 130, 138, 154, 155, 169 (class B), 170, 190, 204, 206, 249, 250, 253, 289, 302, 314 and 315 have never been issued. Results and dividends for the year The results for the year are set out on page 12. dividend for the year under review. The Directors do not recommend the payment of a Changes in Directors during the year The Directors of the Company are shown on page 1. Michael Whelan resigned and Margaret Kennedy was appointed as Director on 27 February Liam Quirke resigned and Turlough Galvin was appointed as Director on 1 May There were no further changes to the Company directors during the year. 4

7 5 The principal risks and uncertainties facing the company relate to the debt securities issued, investment securities and total return swap and derivative instruments held by the Company. The The Directors and secretary who held office on 31 December 2015 did not hold any beneficial Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated generally accepted standards of corporate behaviour. Operational risks arise from all of the Company s operations. were no contracts of any significance in relation to the business of the Company in which the Since the end of the reporting period, the Company issued new series of debt securities as follows: The following series have been disposed after year end: The Board has established processes and systems of internal control and risk management to Directors had any interest, as defined in the companies Act 2014, at anytime during the year. credit event with respect to reference entities to which the notes are credit linked did not result in the whole or in part in accordance with the terms of the notes due to sufficient headroom in place. The Board of Directors (the Board ) is responsible for establishing and maintaining adequate International Corporate Services (Ireland) Limited (the Administrator ) to maintain the accounting the Company and the Trustee. The Administrator is also contractually obliged to prepare the annual report including financial During the year, credit event arised in Series 91 with reference entities INDX 2004ARS 2A1. The interest in shares in the Company or in any related parties at that date, or during the year. There the company s financial reporting objectives and can only provide reasonable and not absolute accounting and reporting issues as the need arises. Subsequent events occurrence of any payment under the relevant credit default swap agreement or early redemption in Series January 2016 USD 10,000,000 Full Unwind Series April 2016 USD 30,000,000 Maturity Series April2016 USD ,000 Maturity Annual Corporate Governance Statement process. Such systems are designed to manage rather than eliminate the risk of failure to achieve risk management framework in place to deal with these risks are explained in note 4 and 22 of the with the company s processes, personnel and infrastructure, and from external factors other than principal financial risks and uncertainties facing the Company (other than operational risk) and the financial statements. credit, market and liquidity risks such as those arising from legal and regulatory requirements and internal control and risk management systems for the Company in relation to the financial reporting maintain proper accounting records and to that end performs reconciliations of its records to those of records independently of the Company and the Trustee. The Administrator is contractually obliged to Risks and uncertainties Credit Event assurance against material misstatement or loss. Directors, secretary and their interests Series January 2016 USD 10,000,000 ensure its effective oversight of the financial reporting process. These include appointing Deutsche statements for review and approval by the Board. The Board evaluates and discusses significant Directors Report (continued) Eirles Two Limited

8 6 and independence. The Administrator has operating responsibility for internal control in relation to The Board is responsible for assessing the risk of irregularities whether caused by fraud or error in and external matters with a potential effect on financial reporting. The Board has also put in place The Administrator is contractually obliged to design and maintain control structures to manage the the financial reporting process and reports to the Board. detecting or preventing the risk of significant deficiencies in financial reporting for every significant The Board delegates the asset valuation function to DB who operates a sophisticated system of controls to ensure appropriate valuation of the assets. All the values for the financial instruments satisfied that the amounts as stated in the Company s financial statements represent a reasonable approximation of those values. The Company s policies and the Board s instructions with relevance for financial reporting are Association themselves may be amended by special resolution of the shareholders. processes to identify changes in accounting rules and best practice to ensure that these changes financial reporting and ensuring that the processes are in place for the timely identification of internal risks which the Board judges to be significant for internal control over financial reporting. These control structures include segregation of responsibilities and specific control activities aimed at held by the Company have been provided by the swap counterparty. In our opinion, DB is the most Given the contractual obligations on the Administrator, the Board has concluded that there is Articles of Association and Irish Statute comprising the companies Act The Articles of With regard to the appointment and replacement of Directors, the Company is governed by its Appointment and replacement of Directors and amendments to the Articles of Association No individual, including any individual Director has any special rights of control over the Company s From time to time, the Board also examines and evaluates the Administrator s financial accounting to consider and address the shortcomings identified and measures recommended by the to perform effective monitoring and oversight of the internal control and risk management systems of currently no need for the Company to have a separate internal audit function in order for the Board Annual corporate Governance Statement (continued) and reporting routines and monitors and evaluates the external auditors performance, qualifications are accurately reflected in the Company s financial statements. account in the financial statements and the related notes in the Company s annual report. appropriate and reliable source of such fair values in its capacity as the swap counterparty. We are meetings to ensure that all financial reporting information requirements are met in a complete and the Company in relation to the financial reporting process. There are no restrictions on voting rights. board, the Directors of the Company have authority to issue or buy back shares of the Company. updated and communicated via appropriate channels, such as , correspondence and accurate manner, The Board has an annual process to ensure that appropriate measures are taken share capital, including issuance or buying back of the Company s shares. However collectively as a independent auditors. Directors Report (continued) Eirles Two Limited day administration of the Company to the administrator as stated above. subject to the supervision and direction by the Directors. The Directors have delegated the day to The Board is responsible for managing the business affairs of the Company with the Articles of Association. The Directors may delegate certain functions to the administrator and other parties Powers of Directors.

9 Eirles Two Limited Directors Report (continued) Transfer of shares The instrument of transfer of any share shall be executed by or on behalf of the transferor and, in cases where the share is not fully paid, by or on behalf of the transferee. The transferor shall be deemed to remain the holder of the share until the name of the transferee is entered on the register in respect thereof. If the Directors refuse to register a transfer, they shall, within two months after the date on which the transfer was lodged by the Company, send to the transferee notice of the refusal. Audit committee The sole business of the company relates to the issuing of assetbacked debt securities. In some series, it also enters into certain derivatives to hedge out interest rate, currency and portfolio default risk exposures arising between asset and liability mismatches. Refer to note 6 for the derivative financial instruments entered by the company. Under Regulation 91(9)(d) of the European Communities (Statutory Audits) (Directive 2006/431EC) Regulations 2010 (the Regulations ), which were published by the Irish Minister for Enterprise, Trade and Innovation on 25 May 2010, such a Company may avail itself of an exemption from the requirement to establish an audit committee. Given the contractual obligations of the Administrator and the limited recourse nature of the securities issued by the Company, the Board of Directors has concluded that there is currently no need for the Company to have a separate audit committee in order for the Board to perform effective monitoring and oversight of the internal control and risk management systems of the company in relation to the financial reporting process. Accordingly, the Company has availed itself of the exemption under Regulation 91(19)(d) of the Regulations. Accounting records The Directors believe that they have complied with the requirements of Section 281 to 285 of the Companies Act 2014 with regard to adequate accounting records by engaging a service provider who employs accounting personnel with the appropriate expertise and by providing adequate resources to the finance function. The accounting records of the Company are maintained at 6th Floor, Pinnacle 2, Eastpoint Business Park, Dublin 3, Ireland. Independent auditor In accordance with Section 383(2) of the Companies Act 2014, KPMG, Chartered Accountants, will continue in office. On behalf of the board N Margaret Kennedy Director Niall o carroll Director Date:..t.Cj. Zo( 7

10 Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with applicable law. accordance with applicable law and regulations. The Directors are responsible for preparing the Director s Report and financial statements, in International Financial Reporting Standards ( IFRS ) as adopted by the European Union. ( EU ) and financial statements Statement of Directors responsibilities in respect of Directors report and the select suitable accounting policies and then apply them consistently; make judgments and estimates that are reasonable and prudent; state whether they have been prepared in accordance with IFRS as adopted by the EU; and prepare the financial statements on the going concern basis unless it is inappropriate to of the Companies Act the financial statements, prepared in accordance with IFRS as adopted by the EU, give a true the Directors Report contained in the Annual Report includes a fair review of the development of the principal risks and uncertainties that it faces. $ Date: 2S. Ck ZS \ C Margaret Kennedy \ Niall O Carroll Director Director Onb&a Each of the Directors, whose names and functions are listed on page 1 of these Financial and fair view of the assets, liabilities and financial position of the Company at 31 December 2015 and its result for the year then ended; and and performance of the business and the position of the Company, together with a description Statements confirm that, to the best of each person s knowledge and belief; Responsibility Statement, in accordance with the Transparency Regulations They have general responsibility for taking such steps as are reasonably open to them to Directors are also responsible for preparing a Directors Report that complies with the requirements reasonable accuracy at any time the assets, liabilities, financial position and profit or loss of the safeguard the assets of the Company and to prevent and detect fraud and other irregularities. The The Directors are responsible for keeping adequate accounting records which disclose with Company and enable them to ensure that its financial statements comply with the Companies Act business and a description of the principal risks and uncertainties facing the Company. Transparency Regulations ), to include a management report containing a fair review of the The Directors are also required by the Transparency (Directive 2004/1O9IEC) Regulations 2007 (the are satisfied that they give a true and fair view of the assets, liabilities and financial position of the presume that the Company will continue in business. Under company law the directors must not approve the company financial statements unless they Company and of the its profit or loss for that year In preparing the Company financial statements, the directors are required to: Eirles Two Limited

11 the KPMG Audit 1 Harbourmaster Place IFSC Dublin 1 DOl F6F5 Ireland Independent auditor s report to the members of Eirles Two Limited We have audited the financial statements ( financial statements ) of Eirles Two Limited ( the company ) for the year ended 31 December 2015 which comprise Statement of Financial Position, Statement of Comprehensive Income, Statement of Cash Flows, Statement of Changes in Equity and the related notes. The financial reporting framework that has been applied in their preparation is Irish law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. Opinions and conclusions arising from our audit 1 Our opinion on the financial statements is unmodified In our opinion the financial statements: give a true and fair view of the assets, liabilities and financial position of the Company as at 31 December 2015 and of its result for the year then ended; have been properly prepared in accordance with IFRS as adopted by the European Union; and have been properly prepared in accordance with the requirements of the Companies Act Our conclusions on other matters on which we are required to report by the Companies Act 2014 are set out below We have obtained all the information and explanations which we consider necessary for the purposes of our audit. In our opinion the accounting records of the Company were sufficient to permit the financial statements to be readily and properly audited and the financial statements are in agreement with the accounting records. In our opinion the information given in the Directors Report is consistent with the financial statements. In addition we report, in relation to information given in the Corporate Governance Statement on pages 5 to 6, that: based on knowledge and understanding of the company and its environment obtained in the course of our audit, no material misstatements in the information identified above have come to our attention; based on the work undertaken in the course of our audit, in our opinion the description of the main features of the internal control and risk management systems in relation to the process for preparing the Company financial statements, and information relating to voting rights and other matters required by the European Communities (Takeover Bids (Directive 2004/25/EC) Regulations 2006 and specified by the Companies Act 2014 for our consideration, are consistent with the financial statements and have been prepared in accordance with the Companies Act 2014, and Corporate Governance Statement contains the information required by the Companies Act We have nothing to report in respect of matters on which we are required to report by exception ISAs (UK & Ireland) require that we report to you if, based on the knowledge we acquired during our audit, we have identified information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading. 9 KPMG, an Irish pattnersh s and a member firm of the KPMG network of independent member Ilrmn ab Liated with KPMG International cooperative rkpmg Internarlonafl a Swiss entity

12 Independent auditor s report to the members of Eirles Two Limited (continued) In addition, the Companies Act 2014 requires us to report to you if, in our opinion, the disclosures of directors remuneration and transactions required by sections 305 to 312 of the Act are not made. Basis of our report, responsibilities and restrictions on use As explained more fully in the Statement of Directors Responsibilities set out on page 8, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view and otherwise comply with the Companies Act Our responsibility is to audit and express an opinion on the financial statements in accordance with Irish law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Financial Reporting Council s Ethical Standards for Auditors. An audit undertaken in accordance with ISAs (UK & Ireland) 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 nonfinancial information in the Annual 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. Whilst an audit conducted in accordance with ISAs (UK & Ireland) is designed to provide reasonable assurance of identifying material misstatements or omissions it is not guaranteed to do so. Rather the auditor plans the audit to determine the extent of testing needed to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements does not exceed materiality for the financial statements as a whole. This testing requires us to conduct significant audit work on a broad range of assets, liabilities, income and expense as well as devoting significant time of the most experienced members of the audit team, in particular the engagement partner responsible for the audit, to subjective areas of the accounting and reporting. Our report is made solely to the Company s members, as a body, in accordance with section 391 of the Companies Act Our audit work has been undertaken so that we might state to the Company s members those mailers 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. /.? Allbhe Kenny 29Apr for and on behalf of KPMG Chartered Accountants, Statutory Audit Firm 1 Harbourmaster Place IFsc Dublin I I0

13 Eirles Two Limited Statement of financial position As at 31 December Note OOO 000 Assets Cash and cash equivalents Cash collateral Derivative assets Investment securities and total return swaps at fair value through profit or loss Other assets Total assets , , ,111 81, , , ,975 2, ,520 1,222,344 Liabilities Derivative liabilities Debt securities issued at fair value through profit or loss Other liabilities Total liabilities Equity Share capital Retained earnings Total equity Total liabilities and equity , , ,621 1,091,000 3,759 3, ,329 1,222, ,520 1,222,344 On behalf of the Board / CULL ru LAI Margaret Kennedy Director Niall O Carroll Director Date:?$. t.o\< The notes on pages 15 to 71 form an integral part of these financial statements II

14 12 Other expenses 17 (86) (79) Other income ie Net finance loss on debt securities issued 15 (64518) (183,303) Net (Ioss)/gain from derivative financial instruments 14 (21564) Note OOO OOO Statement of comprehensive income EirIes Two Limited The notes on pages 15 to 71 form an integral part of these financial statements continuing operations. All items dealt with in arriving at the above profit for the year ended 31 December 2015 related to Total comprehensive income for the year Other comprehensive income Result for the year Income tax expense 18 Profit before taxation Operating income cash collateral, cash and cash equivalents 13 86, ,382 Net gain from investment securities, total return swaps,

15 13 Cash flows from operating activities Cash flows from investing activities Note Coupon income 13 (19,304) (25,877) Coupon expense 15 13, and cash equivalents 13 (20,987) (105) and total return swaps 13 (20,129) (116,309) Movement in working capita! Net unrealised foreign exchange gain on cash collateral, Net realised foreign exchange gain on cash collateral, cash Net unrealised gain on investment securities Net realised (gain) I loss on investment securities and total Net unrealised loss I (gain) on derivative financial instruments ,997 (9,020) Net realised (gain)! loss on derivative financial instruments 14 (80,585) 541 Credit default swap income 14 (1848) (2,442) Adjustments for cash and cash equivalents 13 (2.290) (31.886) Profit for the year Net realised loss I (gain) on debt securities issued 15 28,680 (6,539) return swaps 13 (23,372) 1,795 Net unrealised loss on debt securities issued 15 22, ,117 Statement of cash flows Eirles Two Limited The notes on pages 15 to 71 form an integral part of these financial statements Proceeds from redemption / maturity I disposal of investment Cash flows from financing activities Proceeds from issuance of debt securitites 9,119 2,011 Cash and cash equivalents at 31 December Coupon receipts 21,970 29,980 Net payments in respect of derivative financial instruments 74,534 18,991 securities, total return swaps and cash collateral 627, ,747 cash collateral (11,498) (70,015) Payments on redemption! maturity of debt securities (706,432) (403,013) Cash and cash equivalents at 1 January Coupon payments on debt securities issued (13,306) (19,698) Acquisition of investment securities, total return swaps and Net cash from investing activities 712, ,703 Net cash used in financing activities (712,619) (420,700) Net (decrease)! increase in cash and cash equivalents (179) 3 Net cash used in operating activities (179) Change in other assets (18) (5) Change in other liabilities (161) 5

16 Other comprehensive income Profit for the year 2014 Profit for the year 2015 Other comprehensive income Balance as at 31 December OOO 000 OOO capital earnings Total Share Retained Balance as at 31 December Total comprehensive income for the year Balance as at 31 Oecember Total comprehensive income for the year For the year ended 31 December2015 Statement of changes in equity The notes on pages 15 to 71 form an integral part of these financial statements Eirles Two Limited

17 30 (a) Introduction and overview (continued) For series where no swap agreements were entered into, the ultimate amount repaid to ultimate amount repaid to the holders of these debt securities will depend on the This note presents information about the Company s exposure to each of the above risks, In exchange for the receipt of premium income for the relevant series, the Company has the Company amounts equal to the interest payable under the debt securities, and if the swap agreement has not terminated prior to the maturity date of the respective notes, a The swap counterparty delivers the collateral to the account of the Company and pays sum equal to the redemption amount payable on the debt securities. The Company also entered into a number of Credit Default Swap Agreements with DB. investment securities. The debt securities issued are recorded at fair value which equates to the net proceeds received in Euro and are subsequently carried at fair value through profit or loss. The counterparty is obliged to make under the terms of the swap agreement. proceeds from the investment securities or total return swaps and any payment the swap the holders of the related debt securities will depend on the proceeds from the 4 Financial risk management (continued) sold credit protection on a number of reference entities, as detailed in Note 6. Note 22 to these financial statements. Company s risk management framework. The Board of Directors has overall responsibility for the establishment and oversight of the The risk profile of the Company is such that market, credit, liquidity and other risks relating instruments are borne fully by the holders of debt securities issued. The Company has exposure to the following risks from its use of financial instruments: the Company s management of capital. Further quantitative disclosures are included in the Company s objectives, policies and processes for measuring and managing risk and (Ni) Market risk. (ii) Liquidity risk; and (i) Credit risk; (b) Risk management framework to the investment securities and total return swap as well as derivative financial Eirles Two Limited

18 31 documentation of the relevant series. the priority of payments described in the SPM of the relevant series. depending on the loss amounts, as well as, other terms and conditions on the debt. counterparty andlor the Company s holders of debt securities for that particular the swap counterparty that has purchased the credit protection from the Company. and also from the derivative contract that the Company has entered into. The Company limits its exposure to credit risk by only investing in bonds and total The risk of default on these assets and on the underlying reference entities is borne The credit quality of the Company s investment securities has been disclosed in The credit risk relating to underlying reference entities as shown in Note 22(d) arises default or credit events in the underlying portfolio of reference entities may trigger Company, any such losses would ultimately be borne by either the Company s swap Secondly, the Company has also sold credit protection to the swap counterparty in Company any such payments in respect of the credit default swap, i.e. the debt securities by way of corresponding reduction in the nominal amounts of those securities issued. series. debt securities issued depending on the terms and conditions attached to debt Because of the limited recourse nature of the debt securities issued by the by the swap counterparty and/or the holders of the debt securities as designated in from the Company s credit linked securities (investments and total return swaps) a reduction in the nominal amounts of the debt instrument which the Company holds (I) Credit risk 4 Financial risk management (continued) portfolio of reference entities. Therefore any default or credit events in the protection has been sold are creditlinked to the credit quality of the underlying principally from the investment assets and total return swaps which the Company Credit risk is the risk of the financial loss to the Company if the counterpafty to a (b) Risk management framework (continued) financial instrument fails to meet its contractual obligations, and arises principally Note 22 (a). return swaps and only with counterparties that have a credit rating defined in the holds which are creditlinked to a portfolio of underlying reference entities. Any return for a premium. The corresponding debt securities issued on which the credit collateral i.e. certain investment securities held by the Company to be delivered to underlying portfolio of reference entities might require a specific amount of the However, due to the limited recourse nature of the debt securities issued by the underlying portfolio of reference entities would ultimately be borne by the holders of Eirles Two Limited

19 32 Refer to Note 6 Derivative financial instruments for further details. swap counterparties. The credit default swap is a leveraged arrangement. The linking of the Company s issued debt securities to the underlying portfolio of than the notional amounts of the credit default swaps and the nominal amounts of the Company are not contractually required to be made available to meet payment and the deficit is instead borne by the holders of debt securities and/or the swap The aggregate reference portfolio notional amounts are usually substantially higher the debt securities issued. This leverage increases the risk of loss to the Company and, therefore, to the holders of debt securities. Refer to the table in Note 22(e) Fair Values for further details. The timing and amount of proceeds from realising the collateral of each series is default on any of its contractual commitments during the year. counterparty according to established priority of payment on any particular payment date. disadvantage to the Company. proceeds be insufficient to make all payment obligations in respect of a particular series of debt securities, the other assets held as collateral for remaining series of obligations arising from its financial liabilities that are settled by delivering cash or The Company s obligation to the holders of debt securities of a particular series is collateral, investment securities, total return swaps and derivatives. Should the net limited to the net proceeds upon realisation of the collateral of that series, i.e. cash Liquidity risk is the risk that the Company will encounter difficulties in meeting (H) Liquidity risk reference entities is achieved by entering into credit default swap agreements with another financial asset, or that such obligation will have to be settled in a manner counterparties in respect to meeting its obligations to holders of debt securities issued or to swap counterparty. The Company or the swap counterparty did not subject to market conditions. There were no liquidity issues experienced by the Company or the swap (i) Credit risk (continued) 4 Financial risk management (continued) (b) Risk management framework (continued) EirIes Two Limited

20 Eirles Two Limited 4 Financial risk management (continued) (b) Risk management framework (continued) (Ni) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and other price risk will affect the company s income or the value of its holdings of financial instruments and receivables under total return swaps. The objective of the market risk management is to manage and control market risk exposures within acceptable parameters while optimising the return on risk. Foreign exchange risk and interest rate risk are economically hedged with the use of currency swap agreements and the asset swap agreements, respectively. A cross currency swap is incorporated in the asset swap. 5 Cash and cash equivalents and cash collateral Cash and cash equivalents Cash and cash equivalents which consists of cash at bank held with Deutsche Bank AG, London Branch Cash collateral 26, ,043 27, ,390 Cash collateral consist of cash held as collateral for series 91 and 355 (2014: Series 91, 176, 194, 215, 216, 309, 355, 363 and 364). One hundred percent (100%) is held by The Bank of New York Mellon (2014: 62% was held by Deutsche Bank AG, London Branch and 38% was held by The Bank of New York Mellon) in accordance with the terms of the Supplemental Programmme Memorandum. These represents restricted cash and can only be used for activities relevant to the respective series. Refer to Note 22(a) for credit ratings for cash and cash equivalents and cash collateral. 33

21 fully redeemed during the year (2014: nil) while series 229 and its related credit default swap has 34 eliminate the mismatch between the amount payable in respect of those issued debt securities and The asset swaps consist mainly of interest rate swaps, currency swaps and credit default obligations. 298 and 299). Asset swaps ,474 61,105 swaps default ,367 1,111 6,882 74,968 81,850 Assetswaps 1,111 1,111 6,882 74,968 81,850 Derivative assets Derivative liabilities 000 ( 000 ( 000 ( 000 ( 000 ( ,367 Less Greater 2015 Less Greater , ,280 the return from the investment securities held by the Company as collateral. The asset swap The company entered into asset swap agreements. other than those mentioned below to ,318 80, , , than than Total than one than Total one year one year year one year redeemed during the year (2014: Series 325, 326, 327, 328, 329, 334 and 360) while series 49, agreements for series 176, 215, 216, 254, 309, 312, 354, 357, 361, 363 and 364 were fully series 316 have decreased during the year due to partial redemption (2014: series 195). entered into for the following series: 191, 192, 200, 205, 298 and 299 (2014: 191, 192, 200, 205, The Company has also entered into credit default swaps for series 91, 176, 194, 215, 216, 229, the debt securities). Series 176, 194, 215, 216 and 312 along with their credit default swap were matured during the year (2014: nil). The credit default swap for series 316 have decreased during borne by the holders of debt securities issued by the Company. There are no swap agreements In cases where no asset swaps nor credit default swaps are in place for a series, the credit risk is the year due to partial redemption. in order to provide an asset risk profile which is suited to the needs of the investors (the holders of 6 Derivative financial instruments For the year ended 31 December2015 Credit 191, 192, 200, 205 and 229 matured during the year (2014: nil). The asset swap agreements for 312, 316, 319 and 367 in 2015 (2014: series 91, 176, 194, 215, 216, 229, , 319 and 334) Eirles Two Limited

22 35 counterparty. A debit valuation adjustment ( DVA ) is calculated to reflect the credit risk of the Maturity analysis of investment securities and total return swaps and also reimburses certain the expenses related to the series. The company assessed the valuation adjustment required for credit risks associated with derivatives Bonds 298 and 299). This series was entered into for the purposes of constituting and/or securing the The Company holds investments in unconsolidated structured entities with fair value amounting to Under these arrangements the proceeds from the issuance of debt securities are held on deposit Counterparty provides a return that replicates the return due to the holders of the debt securities The carrying value of all of the above assets of the Company represents their maximum exposure credit risk is borne by the holders of debt securities issued by the Company as detailed in Note 6. The investment securities and total return swaps are held as collateral for debt securities issued by The Company has issued certain passthrough series of notes which do not meet the recognition credit performance of a portfolio of reference entities through a credit default swap. The Swap 393, , , , ,329 Within one year 73,941 2,112 Total return swap 110, ,115 Designated at fair value through profit or loss OOO 000 through profitor loss at fair value through profit or loss Investment securities and total return swaps at fair value is considered immaterial to the company s statement of financial position. with the Swap Counterparty under the swap agreement. The deposit is synthetically linked to the securities issued by the Company. Total return swaps EUR 27,707k. Refer to note 23 (b) for disclosure on interest on other entities. Passthrough series are not recognised in the financial statements for the year ended 31 December 31 December 2015, the passthrough series in issue was 299 (2014: series 191, 192, 200, 205, the Company. The investment securities and total return swaps are held as collateral for debt risk in respect of the credit default swap. In cases where no swaps are in place for a series, the to credit risk. The credit risk is eventually transferred to the Swap Counterparty through credit Branch and a credit valuation adiustment (CVA ) was calculated to reflect the credit risk of the swap measured at fair value as at 31 December All derivatives were executed with DB AG London, Greater than five years 241, ,157 notes and setting out the terms of the agreements between the Company, Trustee and DB. Fair value adjustment for credit risk One to five years 188, ,060 default swap or the holders of debt securities. The Swap Counterparty is then exposed to credit 2015 and 31 December Derivative financial instruments (continued) criteria under las 39 Financial Instruments: Recognition and Measurement since inception. As at Eirles Two Limited company. As at 31 December2015. there was no bilateral adiustment made by the company as this

23 Fines Two Limited For the year ended 31 December Investment securities and total return swaps at fair value through profit or loss (continued) Total return swaps (continued) In the event that any of these reference entities default, a notice is served to the Company. The receivable under total return swap is reduced by an amount equal to the amount in the default as determined by the calculation agent with reference to the defaulted reference entity and the company s obligation under the debt securities is also reduced by the same amount as per the terms of the SPM. Refer to Note 22(a) for credit risk disclosure relating to the investment securities and total return swaps. 8 Other assets OOO Coupon income receivable from investment securities and total return swaps Other receivables ,975 2,775 All other assets are current. Refer to Note 22 (a) for credit risk disclosure. 9 Debt securities issued at fair value through profit or loss Designated at fair value through profit or loss ,091,000 Maturity analysis of the debt securities issued at fair value through profit or loss Within one year 73,703 8,361 Onetofiveyears 183, ,817 Greater than five years 192, , ,621 1,091,000 The company s obligations under the debt securities issued and related derivative financial instruments as disclosed in Note 6 are secured by collateral held as noted in Note 7. The investors recourse per series is limited to the assets of that particular series. There is only one class of debt securities within each series in issue at year end. 36

24 Eirles Two Limited 9 Debt securities issued at fair value through profit or loss (continued) In the event that accumulated losses prove not to be recoverable during the life of the debt securities issued, then the obligation to the holders of the debt securities issued by the Company will be reduced to the extent of the accumulated losses. Series 49, 191, 192, 200, 205 and 229 have matured during the year (2014: nil) whereas series 176, 194, 215, 216, 254, 309, 312, 354, 357, and 364 were redeemed in full (2014: Series 325, 326, 327, 328, 329, 334 and 360). Debt securities for 164, 195, 255, , 319, 345, 347, 351, 352, 353, 355, 365, 366 and 367 are listed on the Irish Stock Exchange while debt security for 91 is listed in Luxembourg Stock Exchange. The fair value amount of financial liabilities designated at fair value through profit or loss as at 31 December 2015 was EUR 117m (2014: EUR 70m) less than the contractual amount at maturity. The contractual amount at maturity is disclosed on the basis that there will be no payment calls made due to an occurence of credit event until maturity. 10 Other liabilities OOO Coupon payable on debt securities issued 3,557 3,143 Accrued expenses Other payables ,759 3,506 All of the above other liabilities are current. 11 Share capital Authodsed: 100,000,000 ordinary shares of 1 each 100, ,000 Issued and fully paid 3 ordinary shares of 1 each 37

25 38 Derivative assets financial assets and liabilities whose carrying amounts profit or loss Total assets 534, , ,344 1,222,344 Total liabilities cost Other assets Total financial assets at amortised Cash and cash equivalents Cash collateral 26,843 28,986 28, , Accounting categorisation and fair values of financial assets and liabilities 1, ,043 2, , , ,329 1,222,153 1,222,153 approximate fair value. The financial instruments not accounted for at fair Derivative liabilities Other liabilities 80,949 80,949 through profit or loss Debt securities issued Total return swaps Investment securities value through profit or loss 2, , Eirles Two Limited Financial assets designated at fair Financial assets at fair value through Financial liabilities at amortised cost Financial liabilities at fair value 449, ,621 1,091,000 value through profit or loss are shortterm 1,091,000 Financial assets at amortised cost Financial liabilities designated at fair value through profit or loss 393, , , , , ,647 1,111 1,111 81,850 81,850 OOO value value value value Carrying Fair Carrying Fair , , , ,115 3,759 3,759 3,506 3,506

26 Eirles Two Limited 13 Net gain from investment securities, total return swaps, cash collateral, cash and cash equivalents Net gain I (loss) from investment securities and total return swaps at fair value through profit or loss (including coupon receipts): Bonds Total return swaps (6145) (279) Analysed as follows: coupon income including accrued income 19,304 25,877 Net unrealised gain on investment securities, total return swaps and cash collateral ,309 Net realised gain I (loss) on disposal I maturities of investment securities, total return swaps and cash collateral 23,372 (1,795) Net unrealised foreign exchange gain on cash collateral, cash and cash equivalents 2,290 31,866 Net realised foreign exchange gain on cash collateral, cash and cash equivalents 20, , , Net (loss)i gain from derivative financial instruments Net (loss) / gain from derivative financial instruments carried at fair value (including coupon receipts) Asset swap (33,226) (1,959) Credit default swap 11,662 12,880 (21,564) 10,921 Analysed as follows: Credit default swap income 1,848 2,442 Net unrealised (loss)? gain on derivative financial instruments (103,997) 9,020 Net realised gain I (loss) on settlement of derivative financial instruments 80,585 (541) (21,564) 10,921 39

27 OOO securities issued (28.680) 6,539 coupon payments including accruals (13,720) (18,725) at fair value through profit and loss (64,518) (183,303) Analysed as follows: Net finance loss on debt securities issued Net finance loss on debt decurities Net unrealised loss on debt securities issued (22,118) (171,117) Net realised (loss) I gain on maturities I redemption of debt Eirles Two Limited Audit fees relates to the statutory audit of the financial statements. has no employees. The Company is administered by Deutsche International Corporate Services (Ireland) Limited and (86) (79) Audit remuneration (46) (44) Directors fee (13) (13) Administration fee (27) (22) OOO OOO 17 Other expenses corporate benefit (2014: nil). Company during the year. During the year, series 367, as a newly issued series, earned USD 200 expenses of the Company. Arranger income is equal to the total expenses incurred by the As per the Expense Agreement, Deutsche Bank AG, London Branch as the arranger bears all the Corporate benefit Arranger income Other income (64.518) (183,303)

28 41 Other operating expenses are after charging the following: 000 OOO Auditors remuneration (excluding VAT) Other expenses (continued) (39) (37) Tax advisory services (6) (6) Eirles Two Limited Any temporary difference arising on the assets will be offset by a corresponding difference in the liabilities. Therefore the Company does not have any exposure to deferred tax. Deferred tax Taxes Consolidation Act, The Company will continue to be actively taxed at 25% in accordance with Section 110 of the Current tax charge Current tax at standard rate of 25% Profit before tax charge is as follows: Corporation tax has been calculated based on the profit for the year and the resulting taxation Factors affecting tax charge for the period Current tax expense 18 Incometaxexpense Other nonaudit services (2) Audit of company financial statements (31) (31)

29 Eirles Two Limited 19 Ownership of the Company The issued shares are held on trust by Matsack Trust Limited, Matsack Nominees Limited and Matheson Services Limited (the Share Trustees ), each of whom own one share under the terms of a declaration of trust dated 19 June 2000, under which the relevant Share Trustee holds an issued share of the company on trust for charity. The Share Trustees have appointed the Board of Directors to run the daytoday activities of the company. The Board of Directors have considered the issue as to who is the controlling party of the Company. It has determined that the control of the daytoday activities of the Company rests with the Board. The Board is composed of three Directors, one of whom is an employee of Deutsche International corporate Services (Ireland) Limited, being the entity that acts as the administrator of the company. The remaining two Directors are considered to be independent of the Deutsche Bank Group. Deutsche Bank AG, under International Financial Reporting Standards (IFRS), has consolidated Series 91, , and 353 as at 31 December 2015 (2014: 91, 176, 195, 215, 216, 299, 351, 352 and 353). 20 Charges The debt securities issued by the Company are secured by way of mortgage over the collateral purchased in respect of each of the Note, and by the assignment of a fixed first charge of the Company s rights, title and interest under the respective swap agreement for each series. 21 Related party transactions Transactions with Key Management Personnel During the year the Company incurred a fee of EUR 21,505 (2014: EUR 19,271) relating to administration and other services provided by Deutsche International Corporate Services (Ireland) Limited ( DICSL ). Michael Whelan, Director of the company until 27 February 2015, had an interest in this fee in his capacity as Director of Deutsche International Corporate Services (Ireland) Limited. Following to Michael Whelan s resignation, Margaret Kennedy was appointed as Director of the Company. There is no outstanding balance due to DICSL as at 31 December Professional, Legal, Trustee and other fees of EUR 8,756 (2014: EUR 6,349) (included in Directors fees) were payable to Matheson, refer to note 17 for details. Liam Quirke was Director of the Company until 5 May Following his resignation, Turlough Galvin was appointed Director on 5 May They both had an interest in this fee in their capacity as partner of Matheson solicitors. Other Transactions Under a Series Proposal Agreement entered into for each series by the Company and Deutsche Bank AG, London Branch as Arranger for each Series, will pay the Company a Series Fee of USS 200 per Series on commencement of the series and agree to reimburse the Company against any costs, fees, expenses or outgoings incurred, refer to note 16 for details. Deutsche Bank AG, London Branch is also the swap counterparty for all Series containing credit default and asset swap agreements. 42

30 security is not sufficient to settle the Company s liabilities, any such losses would ultimately be London Branch is BBB+ as at 31 December 2015 (2014: A). exposure to credit risk by issuing notes that are linked to its investments securities. If a credit event were to occur with respect to any of the investment securities and the value of the cash collateral are held with the Bank of New York Mellon which is rated M as at 31 maximum exposure to the credit risk at the reporting date was: Derivative assets 1, cash and cash equivalents cash collateral 26, ,043 The carrying amount of financial assets represents the maximum credit exposure. The Investment securities and total return swaps through profit or loss 504, Other assets , ,520 1,222,344 The credit risk is the risk of financial loss to the Company if the counterpahy fails to meet its contractual obligation and arises principally from investment securities. The Company limits its bome by the Company s swap counterparty and/or the Company s holders of debt securities December 2015 (2014: A+) based on rating agency S&P. downgraded to BBB by Standard and Poor s (S&P). The minimum prescribed rating per the Supplemental Programme Memorandum is Ai by S&P and P1 by Moody s. As a result, the downgrade was still sufficient. The long term credit rating of S&P for Deutsche Bank AG, The Company s cash and cash equivalents are held with the Deutsche Bank AG, London Branch which is rated 888+ by Standard and Poor s (S&P) in 2015 (2014: A). The Company s ratings, it is required to provide additional collateral in respect of its obligations pursuant to the additional collateral was required in 2015 as the existing collateral posted in 2008 and 2012 At the reporting date the credit quality of the Company s financial assets was as follows: issued. Cash and cash equivalents and and cash collateral: Company reviewed the Credit Support Agreement ( tsa ) entered into with the swap counterparty in respect of relevant series. CSA contains minimum rating requirement provision and in the event that the swap counterparty ceases to have the minimum prescribed credit applicable swap agreement. The downgrade had an impact on series 164. However, no 22 Financial instruments (a) credit risk On 9 June 2015, the long term credit rating of Deutsche Bank AG, London Branch was Forthe year ended 31 December2015 Eirles Two Limited

31 Eirles Two Limited 22 Financial instruments (continued) (a) credit risk (continued) Derivative financial instruments: The company has entered into asset swap transactions with the swap counterparty to eliminate the mismatch between the amount payable in respect of the debt securities issued and the return from the investments securities and total return swaps held as collateral, There are a limited number of series, as set out in note 6, which do not have any derivatives allocated to them.the company entered into a number of credit Default Swap Agreements with Deutsche Bank AG, London Branch whereby the company has sold credit protection on a number of reference entities in exchange for the receipt of premium income for the relevant series as disclosed in note 6. The table below shows a breakdown by derivatives financial instruments for each class of debt securities issued: class of debt securities issued Derivatives types ,946 13,007 (288) credit linked debt securities cash collateral credit linked debt securities collateralised Debt Obligation credit linked debt securities Deposit credit linked debt securities Asset Swap ,385 Inflation linked debt securities cash collateral 93 Inflation linked debt securities Deposit 702 Zero coupon notes collateralised Debt 13,955 Obligation Zero coupon notes Asset Swap 6,351 Zero coupon notes cross currency swap (1,599) 1,111 81,650 On a series by series basis where there are various components of an asset swap such as interest rate swap and currency swap with different values, the values of the various components are disclosed on net basis as they are governed by the same single swap agreement. 44

32 Eirles Two Limited 22 Financial instruments (continued) (a) Credit risk (continued) The Company is exposed to the credit risk of the derivative counterparty with respect to payments due under the derivatives. This risk is borne by the debt securities who are subject to the risk of defaults by the swap counterparty as well as to the risk of defaults of the investment securities, reference obligations under the TRS and credit default swaps. The Company s exposure and the credit rating of its counterparty are continually monitored. Deutsche Bank AG, London Branch is the primary derivative counterparty. Deutsche Bank AG, London Branch is currently long term rated by S&P as BBB+ (2014: A). In vestment securities and total return swaps: At the reporting date, the credit quality and the asset concentration of the company s investment securities and total return swaps are shown in the following table based on carrying amount in the statement of financial position. None of the investments held were past due nor defaulted during the year. Significant movement in ratings from last year are due to an issuance of new series, partial/full unwind, and maturities during the year. class of debt collateral Country of Rating Rating Rating securities issued type issuance Agency ,378 Credit linked debt Corporate securities bonds France S&P Al NP 9,153 8,205 Germany S&P BBB+ 9,158 Great Britain S&P BBB BBB 11,967 11,104 Luxembourg Moody Baa3 NR 179, ,983 Singapore S&P* BBB 70,006 Government bond Italy S&P NR Mortgage Netherlands S&P NR NP 5 5 Total Return Swap TRS S&P NR NR 110, , , ,020 45

33 Eirles Two Limited For the year ended 31 December Financial instruments (continued) (a) Credit risk (continued) For those investment securities in which ratings were not available on any market sources, management assessed the associated credit risk based on the coupon received on the investments and historical performance of the investment in terms of default. During the year, no defaults occurred in respect of the bonds held and interests were received when paid, accordingly. Other assets: The other assets mainly include income receivable from bonds held by the Company as at the year end. The credit rating and concentration of the investments securities and TRS at the year end are disclosed under investment securities and TRS in the previous table. (b) Liquidity risk The following are the contractual maturities of financial assets and liabilities including undiscounted interest payments and excluding the impact of netting agreements: 2015 Gross Carrying contractual Less than Two to five More than amounts cash flows one year years five years OOO 000 OOO Cash and cash equivalents Cash collateral 26,843 26,843 4,808 22,035 Investment securities and total return swaps 504, , , ,540 Derivative assets 1,111 1, Other assets 1,975 1,975 1,975 Derivative liabilities (80,949) (31,057) (13,346) (17,711) Debt securities issued (449,621) (713,884) (61,867) (214,275) (417,742) Other liabilities (3,759) (3,759) (3,759)

34 46 NR bond Italy S&Pt Fixed Rated Corporate securities issued type issuance Agency OOO NR Total Return Government (a) credit risk (continued) 22 Financial instruments (continued) Class of debt Collateral Country of Rating Rating Rating EirIes Two Limited Government 88,624 82,055 Inflation linked Corporate 94, ,209 collateral for those notes with eligible collateral. There were no any significant movements in the ratings from last year. securities can only hold collateral of a certain rating. If the rating of the collateral for these specific debt securities goes below the required level, Deutsche Sank as swap counterparty will replace the As per the terms and conditions of the Supplemental Programme Memoranda (SPMs), some debt *Rating agency for Swap TRS S&P Total Return notes bonds United States S&P Zero Coupon Corporate United States S&P A A ,852 Spain S&P 885+ BBS 27,702 25,462 S&P BBB+ A 18,482 17,067 debt securities bonds Great Britain S&P A A 27,757 25,674 Swap TRS S&P bond Italy Moody* Secured Notes bonds Canada S&P A A 94,973 96,985 Baa2u NR NR 58, ,045 59,377 21,005 2,112 92,112

35 48 OOO OOO Gross amounts cash flows one year years five years Carrying contractual Less than Two to five More than (b) Liquidity risk (continued) 22 Financial instruments (continued) 2014 Eirles Two Limited financial assets to which they relate the reference portfolio of the CDS. materially differ until maturity assuming that there is no default on any of the underlying The gross contractual cashflow of the Company to the noteholders dislosed above will not Company s assets match the undiscounted cash flows arising on the Company s liabilities. flows required to ensure that the contractual undiscounted cash flows arising from the derivatives in place. The above table reflects derivative liability cash flows as being the cash exposure on a series by series basis other than those disclosed in note 6 which do not have The asset swaps and credit default swaps have been entered into to hedge the liquidity securities issued. Refer to notes 6, 7 and 9 for maturity profile of derivatives, investments securities and debt Derivative liabilities represent asset swaps and credit default swaps Other liabilities (3,506) (3,506) (3,506) Debt securities issued (1.091,000) (1,427,551) (19,876) (351,662) ( ) Other assets 2,775 2,775 2,775 Derivative assets 81, ,821 5,819 45, ,414 Derivative liabilities ( ) (309,875) (9260) (71,243) (229372) Investment securities and total return swaps 860,329 1,262,137 23, , ,119 Cash collateral 277, , ,043 Cash and cash equivalent

36 EirIes Two Limited 22 Financial instruments (continued) (c) Market risk Market risk embodies the potential for both loss and gains and includes currency risk, interest rate risk and other price risk. (i) Currency risk The Company is exposed to movements in exchange rates between its functional currency Euro and foreign currency denominated financial instruments. At the reporting date, the Company had the following exposure to foreign currency risk: 1, USD JPY GBP Total OOO OOO 000 Monetary assets Cash and cash equivalents Cash collateral 22,036 22,036 Derivative assets 1,111 Investment securities and total return swaps 393, ,665 Other assets 1,626 1, , ,467 Monetary liabilities Derivative liabilities 30,083 45,653 Debt securities issued 265,496 61,633 Other liabilities , , ,702 Net exposure 122,237 (107,479) 7 14,765 49

37 50 swap. Monetary assets 749, OOO (c) Market risk (continued) USD JPY GBP Total 22 Financial instruments (continued) Eirles Two Limited statement of comprehensive income of the company. counterparty and thus the exchange rate changes have no net impact on the equity or the currency swap agreements for all the relevant series. Any difference is borne by the swap relating to any relevant series issued is offset by entering into asset swap which contains The impact of any change in the exchange rates on the investment securities and TRS Sensitivity analysis JPY GBP USD The following exchange rates were applied during the year: Average rate Closing rate different currencies due to the existence of a cross currency swap forming part of an asset cases where the debt security and its associated financial assets are denominated in The currency risk exposure of the noteholder is eliminated on a series by series basis in The company has traded in GBP, JPY, and USD during 2015 and Netexposure 141,254 (201,147) 7 (59,886) 608, , ,347 Other liabilities 1, ,191 Derivative liabilities 59,872 63,915 Debt securities issued , , ,787 Monetary liabilities Other assets Investment securities and total 468,342 Derivative assets 7, ,085 7, ,342 cash collateral 274,085 Cash and cash equivalents 2 (i) Currency risk (continued)

38 Eirles Two Limited For the year ended 31 December Financial instruments (continued) (B) Interest rate risk The Company classified the instruments as fixed interest rate when the assigned rate remains fixed for the entire term of the instrument. Floating interest rate were assigned for the instruments with rates that were based from the market benchmark. The instruments were classified as variable interest rate when the rate and the index changes over the period. At the reporting date, the interest rate risk profile of the company s non derivative interest bearing financial instruments was: Investments securities and total return swaps Class of debt securities issued Currency OOO OOO Fixed rated instruments: Credit linked debt securities USD ,314 Fixed rated Secured Notes EUR 92,112 Fixed rated Secured Notes USD 94,973 96,985 Inflation linked debt securities USD 88, , ,466 Floating rated instruments: Credit linked debt securities EUR 5 5 Credit linked debt securities USD 179, ,983 Zero coupon notes USD 21, , ,993 Variable rate instruments: Credit linked debt securities EUR 110, ,339 Fixed rated Secured Notes EUR 2,112 Zero coupon notes EUR 58, , ,115 51

39 52 agreements. 53, ,411 Debt securities issued 294, ,155 securities respectively. The Company manages its interest rate risk by entering into swap Refer to notes 7 and 9 for maturity profile for investment securities and TRS and debt OOO 000 Class of debt securities issued Currency (ii) Interest rate risk (continued) (c) Market risk (continued) Fixed rated secured notes EUR 2,112 Fixed rated secured notes JPY ,299 Inflation linked debt securities uso 3, Inflation linked debt securities EUR 9,541 9,995 Inflation linked debt securities USD 73,703 67, Financial instruments (continued) Fixed rated instmments: Floating rated instruments: Variable rate Thstmments: Credit linked debt securities EUR Credit linked debt securities EUR 112, ,367 Credit linked debt securities JPY 7,677 6,985 Credit linked debt securities USD 170, , , ,698 Eirles Two Limited Credit linked debt securities USD 17,837 81, ,497

40 Eirles Two Limited 22 Financial instruments (continued) (c) Market risk (continued) (ii) Interest rate risk (continued) Sensitivity analysis A 100 basis point increase or decrease represents managemenfs assessment of a reasonable, potential change in interest rates. A 100 basis point increase in interest rates (assuming all other variables are held constant) would have resulted in an increase of coupon expenditure payable on the debt securities issued of EUR 5,675k for the year (2014: EUR 7,735k). Under the same conditions, the coupon income receivable from investment securities would have increased by EUR 2,043k for the same period (2014: EUR 2,257k). A similar 100 basis point decrease in interest rates would have resulted in an equal, but opposite effect on coupon expenditure and coupon income, respectively. There is no interest rate risk for fixed and zero coupon rate instruments as these instruments will render the same amount of interest throughout the years until maturity. The Company does not bear any interest rate risk as the interest rate risk associated with the floating and variable rate financial assets and liabilities is neutralised by entering into swap agreements whereby the swap counterparty pays the Company amounts equal to the interest payable to the holders of the debt securities issued in return for the interest earned by the company on its investment securities and TRS. Therefore any change in the interest rates would not affect the equity or the Statement of comprehensive Income of the company. The Company does not bear any interest rate risk for the company s fixed rate financial assets and liabilities at fair value through profit or loss, any changes in interest rates would affect the fair value of the fixed rate financial assets and liabilities which in turn would impact on the Statement of comprehensive Income and the equity of the Company. However, the company has neutralised this risk by entering into swap agreements whereby all fair value changes are borne by the swap counterparty. 53

41 repayment risk (i.e. the ilsk that one party to a financial asset will incur a financial loss swaps held by the Company is borne by the holders of debt securities issued. swaps at the reporting date is: swaps at the reporting date. Other price risk is the risk that value of the instruments will fluctuate as a result of changes instruments traded in the market. Other price risk may include risks such as equity price risk, commodity price risk, Company itself, as any fluctuation in the value of investment securities and total return The following is the breakdown of the Company s investment securities and total return 504, ,329 The table above also shows the listing status of the investment securities and total return Credit linked debt securities Unlisted 110, ,344 because the other party repays earlier or later than expected), and residual value risk. caused by factors specific to an individual investment, its issuer or all factors affecting all credit linked debt securities Listed ,675 class of debt securities Unlisted OOO 000 Listed I (c) Market risk (continued) (iii) Other price risk in market prices (other than those arising from interest rate risk or currency risk), whether In relation to the Company s portfolio of investment securities and TRS, this is not subject to equity price risk, commodity price risk and residual value risk. In relation to prepayment risk, the Directors do not consider this to be significant risk from the prespective of the 22 Financial instruments (continued) Zero coupon notes Unlisted Zero coupon notes Listed EirIes Two Limited 54 Inflation linked debt securities Listed 88,624 82,055 Fixed rated secured notes Listed 94, ,096 Fixed rated secured notes Unlisted 2,112 80,383 58,664

42 Eirles Two Limited 22 Financial instruments (continued) (c) Market risk (continued) (Ni) Other price risk (continued) Sensitivity analysis The market price of the investment securitities will generally fluctuate with, among other things, the liquidity and volatility of the financial markets, general economic conditions, political events, developments or trends in a particular industry and the financial conditions of the securities issuer. Fixed / Floating / Variable Rated debt securities If the market value of the collateral increases, the swap counterparty is entitled to the resulting gains, and if the market value of the collateral decreases the swap counterparty and the noteholders bear the losses. This split is dependant on who has priority of payment in these circumstances as disclosed in the agreements. Any changes in the quoted prices or unquoted prices of the investment securities held by the Company would not have any effect on the equity or profit or loss of the Company as any fair value fluctuations are ultimately borne by either the Swap Counterparties and/or the holders of the debt securities issued by the Company. If the market prices of the investment securities and total return swaps held by the Company had increased or decreased by 10% with all other variables held constant, this would have increased or reduced the carrying value of the debt securities issued by EUR 50,442k (2014: EUR 86,033k). (d) Specific instruments (i) Reference Obligations The Company entered into a credit default swap agreements as disclosed in detail in note 6. The reference obligation for these transactions are disclosed in the following: (a) Credit Default Swaps As part of certain series programmes the company has entered into a number of Credit Default Swap Agreements with Deutsche Bank AG, London Branch. See note 6 for details of series which holds a credit default swap. In exchange for the receipt of premium income for the relevant series, the company has sold credit protection on a number of reference entities, the Reference Obligations. In the event of an issuance of a credit event notice with respect to the Reference Portfolio, the company will pay an amount as defined in the Credit Default Swap Agreements from the assets of that series to which the credit Default Swap Agreement relates. The aggregate liability of the Company under the Credit Default Swap Agreements for individual series shall not exceed the aggregate of the Eligible investment securities and TRS for those Series. No payment calls under the credit Default Swaps were made during the year. 55

43 56 terms of the notes due to sufficient headroom in place. Rate Secured debt securities, linked to a pool of reference entities. As a consequence relevant debt securities issued. However, this will only occur when subordinate The credit events with respect to reference entities to which the notes are credit default swap agreement or early redemption in whole or in part in accordance with the linked did not result in the occurrence of any payment under the relevant credit reference entities reference entities. Tranche 91 24,000 class A YES Tsar7 Portfolio YES NO agreement Dec credit The Reference Obligations for each series in issue at the year end under Credit tranches within the corresponding portfolio have been fully reduced. of defaults in reference obligations, the nominal is proportionally reduced by the In various series, as detailed below, the Company has issued Fixed and Floating obligations Default swap (I) Reference Obligations (continued) 22 Financial instruments (continued) (a) Credit Default Swaps (continued) Default Swaps were as follows: (c) Specific instruments (continued) EirIes Two Limited 367 USD 10,000 N/A YES Mizuho Bank Limited NO NO 319 USD 155,350 A NO Set of named NO NO 316 USD N/A NO Set of named NO NO Series CCY ccy reference under Credit held existence as occur Nominal of Notes Description of required Payment. Headroom in Event... by Noteholder at 31 Dec ences to

44 57 Zero Coupon Total % % % 1, % 3,759 structures % notes Secured Notes 0,00% notes 0.00% Zero Coupon 000% 0.08% 0.00% Credit linked debt securities % 86, % % debt securities % 309, % 4, % 320,826 Inflation linked Secured Notes % % % 94,973 Fixed Rated OOO 000 ( 000 transaction of series securities in Cash securities issue Collateral and total Type of Number Debt Cash and Investment (iv) Profile of the series of debt securities issued by the Company Passthrough (d) Specific instruments (continued) 22 Financial instruments (continued) 0.00% 0.05% Fixed Rated % 000 % 000 % 000 % ( 000 transaction assets liabilities assets liabilities Type of Derivative Derivative Other Other structures 0.00% 0.00% debtsecuhties 63.19% % 25, % % 611 Inflation linked.04% 41, % % % Passthrough debt securities 36.81% ,71% 14, % % 2,960 Total % 449, % 27, % 504,423 Credit linked 0.00% Eirles Two Limited % % % return swaps

45 Eirles Two Limited For the year ended 31 December Financial instruments (continued) (d) Specific instruments (continued) (iv) Profile of the series of debt securities issued by the Company (continued) The following are the broad categories as at 31 December 2014: Type of Number Debt Cash and Investment transaction of series securities in Cash securities issue Collateral and total % CODa Fixed Rated Secured Notes % 131, % 3, % 191,209 Inflation linked debt securities % 77, % 19, % 82,055 Credit linked debt securities % 570, % 82, % 448,019 Passthrough structures % 0.03% % Zero Coupon notes % 311, % 172, % 139,046 Total % 1.091, % 277, % 860,329 Type of Derivative Derivative Other Other transaction assets liabilities assets liabilities % 000 % 000 Fixed Rated Secured Notes 0.00% 46.81% 59, % % 986 Inflation linked debt securities 0.11% % 24, % % 602 Credit linked debt securities 77.03% 63, % 24, % % 1,830 Passthrough structures 0.00% 0.00% 5.80% % 48 Zero Coupon notes 22.86% 18, % 18, % % 40 Total % 81, % 127, % 2, % 3,506 58

46 Eirles Two Limited 22 Financial instruments (continued) (e) Fair values The Company s investment securities and total return swaps, derivative financial instruments and debt securities issued are carried at fair value on the statement of financial position. Usually the fair value of the financial instruments can be reliably determined within a reasonable range of estimates. The carrying amounts of all the Company s financial assets and financial liabilities carried at amortised cost at the reporting date approximate their fair values. Their fair values together with carrying amounts shown in the statement of financial position are disclosed in Note 12. These disclosures supplement the commentary on financial risk management (see Note 4). Determining fair values The determination of fair value for financial assets and liabilities for which there is no observable market price requires the use of valuation techniques as described in accounting policy Note 3(b) under the sub heading Fair value measurement principles. For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. The Company s accounting policy on fair value measurements is discussed under Note 3(b) under the sub heading Fair value measurement principles. Critical accounting judgements made in applying the Company s accounting policies in relation to valuation of financial instruments are as follows: Valuation of financial instruments The financial instruments carried at fair value have been categorized under the three levels of the IFRS fair value hierarchy as follows: Level 1 Instruments valued using quoted prices in active markets are instruments where the fair value can be determined directly from prices which are quoted in active and liquid markets. Level 2 Instruments valued with valuation techniques using observable market data are instruments where the fair value can be determined by reference to similar instruments trading in active markets, or where a technique is used to derive the valuation but where all inputs to that technique are observable. Level 3 Instruments valued using valuation techniques using market data which is not directly observable are instruments where the fair value cannot be determined directly by reference to marketobservable information, and some other pricing technique must be employed. Instruments classified in this category have an element which is unobservable and which has a significant impact on the fair value. 59

47 EirIes Two Limited 22 Financial instruments (continued) (e) Fair values (continued) Valuation Techniques The following is an explanation of the valuation techniques used in establishing the fair value of the different types of financial instruments of the Company. Investment securities: Where there are no recent transactions then fair value may be determined from the last market price adjusted for all changes in risks and information since that date. Where a close proxy instrument is quoted in an active market then fair value is determined by adjusting the proxy value for differences in the risk profile of the instruments. Where close proxies are not available then fair value is estimated using more complex modelling techniques. These techniques include discounted cash flow models using current market rates for credit, interest, liquidity and other risks. For equity securities modelling techniques may also include those based on earnings multiples. Derivative Financial Instruments: Market standard transactions in liquid trading markets, such as interest rate swaps, foreign exchange forward and option contracts in G7 currencies, and equity swap and option contracts on listed securities or indices are valued using market standard models and quoted parameter inputs. Parameter inputs are obtained from pricing services, consensus pricing services and recently occurring transactions in active markets wherever possible. More complex instruments are modelled using more sophisticated modelling techniques specific for the instrument and are calibrated to available market prices. Where the model output value does not calibrate to a relevant market reference then valuation adjustments are made to the model output value to adjust for any difference. In less active markets, data is obtained from less frequent market transactions, broker quotes and through extrapolation and interpolation techniques. Where observable prices or inputs are not available, management judgment is required to determine fair values by assessing other relevant sources of information such as historical data, fundamental analysis of the economics of the transaction and proxy information from similar transactions. Debt securities issued at fair value through profit and loss: The fair value of debt securities issued at fair value through profit and loss is dependent upon the fair value of investment securities and derivative financial instruments. Any changes in the valuation have direct impact to the fair value of debt securities issued. 60

48 Eirles Two Limited 22 Financial instruments (continued) (e) Fair values (continued) Valuation Techniques (continued) For more complex Level 3 instruments, more sophisticated modelling techniques are required which usually are developed from recognised valuation models. Some or all of the significant inputs into these models may not be observable in the market, and are derived from market prices or rates or are estimated based on assumptions or more complex parameters. Examples of instruments involving significant unobservable inputs include correlations, prepayments speeds, default rates and loss severity, certain over the counter derivatives and certain securities for which there is no active market. Where no observable information is available to support the valuation models then they are based on other relevant sources of information such as prices for similar transactions, historic data, economic fundamentals, and research information, with appropriate adjustment to reflect the terms of the actual instrument being valued and current market conditions. Valuation models that employ significant unobservable inputs require a higher degree of management judgement and estimation in the determination of fair value. When determining the appropriate valuation model to be used, management selects which valuation technique makes the least adjustment to the inputs used, analyse the range of values indicated by the techniques used and whether they overlap and check the reasons for the differences in value under different techniques. Depending on the circumstances, one valuation model might be more appropriate than another. Management decides the valuation model to be used based on the provisions indicated in the swap agreements. Some factors that are considered includes information that is reasonably available, the market conditions, the type of investment, expected future cash flows on the financial instrument being valued, determination of probability of counterparty default and discount rates. Level 3 valuations are reviewed quarterly and disclosed yearly in the financial statements. 61

49 62 for similar instruments. derivative financial instruments and debt securities issued by the Company where fair values Debt securities issued Debt securities issued swaps swaps determined using valuation techniques are as follows: Investment securities and total return Derivative financial assets Derivative financial liabilities Investment securities and total return were determined directly, in lull or in part, by reference to published price quotations and At the reporting date, the carrying amounts of investment securities and total return swaps, (e) Fair values (continued) 22 Financial instruments (continued) Derivative financial assets Derivative financial liabilities 504, , , , ,120 value measurements were based on unobservable inputs and no active market data available (449,621) (80,949) 1, (52,429) (165,676) (28,520) 110, ,665 OOO OOO Total Level I Level 2 Level ,850 74,968 6,882 (127,647) collateralised debt obligations, and other over the counter derivative instruments where the fair Derivative financial instruments classified as Level 3 involves credit default swap, (1,091,000) (468,859) valuation technique that involves significant unobservable inputs and no active market Total return swaps consists of underlying asset backed financial instruments, credit debt (35.786) (91861) ( ) Total Level I Level 2 Level 3 For the year ended 31 December2015 (25,036) ,988 (283,945) (201,004) (276,468) 21 0,867 (170,692) (316,643) obligations and cash collateral were classified as level 3. The instruments are valued using a available Eirles Two Limited

50 exists for these, the Directors have concluded that the debt securities issued are not actively traded due to the limited liquidity that exists in the market. end have been obtained from market sources. Notwithstanding that a quoted market price 22 Financial instruments (continued) For the year ended 31 December2015 Debt securities issued are traded in the institutional market and the prices for these at year (e) Fair values (continued) 63 swaps in the statement of comprehensive income. Fair value movements are recognised under gain from investment securities and total return Series 49 which is a fixed rated secured note matured during the year while series 254 which observable inputs and unavailability of market data for similar instrument) in to level 3 (2014: series 91 was transferred from Level 2 into Level 3 due to lack of is a zero coupon note was fufly redeemed (2014: series 91). No series have been transferred closing balance 110, ,120 Fair value movements (9,307) (8,101) Transfers in 17,393 Disposal (58,940) (264,454) Maturities (2,115) (17,397) Opening balance 181, ,679 OOO OOO swaps classified under valuation techniques unobservable parameter (Level 3): The below table shows the rollforward movements for investment securities and total return on the instruments as they have been transferred at the beginning of the year. Transfers in and out of Level 3 are recorded at the beginning of the year. For instruments transferred in and out of Level 3, the below table shows no gains and losses and cash flows between Level 1 and Level 2). These require little management judgement and estimation. No transfers between Level 1 and Level 2 has occurred during the year (2014: no transfers classified as either Level 2 or Level 3. series by series basis. As no derivatives are classified as Level 1, debt securities have been Debt securities are classified in the lowest level observed of the assets and derivatives on a securities, total return swaps, cash and cash collateral and derivative financial instruments. As a result, the levelling of debt securities is dependent on the levelling of the investment Eirles Two Limited

51 under valuation techniques unobservable parameter (Level 3): The below table shows the rollforward movements for derivative financial assets classified (e) Fair values (continued) 22 Financial instruments (continued) For the year ended 31 December the statement of comprehensive income. Fair value movements are recognised under net loss from derivative financial instruments in derivative financial liabilities (2014: nil). swap of series 91 have been reclassified to derivative financial assets and transferred out to corresponding derivative financial liability were settled with the swap counterparty. The asset During the year, series 176, 215, and 216 were fully disposed (2014: series 334) and the Closing balance (28,520) (35,786) Fair value movements 4,360 9,161 Transfers out (93) Sum of settlements 2,999 13,190 Opening balance (35,786) (58,137) under valuation techniques unobservable parameter (Level 3): The below table shows the rollforward movements for derivative financial liabilities classified instruments in the statement of comprehensive income. Fair value movements are recognised under net (loss) / gain from derivative financial unavailability of market data for similar instrument. habilities to derivative financial assets (2014: nil). This series lack of observable inputs and caused the asset swap for series 91 to be reclassified and transferred from derivative financial was changed from per series basis to per classification of derivative and per series basis. This During the year, the treatment for unobservable parameter for derivative financial instruments closing balance 703 6,882 Fair value movements (6,272) 806 Transfers in 93 Opening balance 6,882 6, Eirles Two Limited

52 valuation techniques unobservable parameter (Level 3): The below table shows the rollforward movements for debt securities issued classified under (e) Fair values (continued) 22 Financial instruments (continued) 65 Where the value of financial instruments is dependent on unobservable valuation models, Company would increase or decrease the fair value as at 31 December 2015 by EUR 28,607k (2014: EUR 46,886k). appropriate models and inputs are chosen so that they are consistent with prevailing market evidences. A 10% change in the price of the financial assets under Level 3 held by the Sensitivity Analysis in the statement of comprehensive income. Fair value movements are recognised under net finance gain I (loss) on debt securities issued financial instruments which affects the levelling of debt securities. securities issued for that series. Refer to 22 (e) for levelling of financial assets and derivative derivatives liabilities will have a direct impact on the classification of the debt securities. using unobservable parameters, this will result in the classification to Level 3 of related debt Therefore, if any of the associated financial assets or derivative financial instruments is valued Any change in the classification of the investment securities and TRS, derivatives assets and Closing balance (283,945) (468,859) Transfers in Transfers out 63,738 49,833 (32.290) Maturities ,395 Fair value movements 12,552 (47,313) Opening balance (468859) (703,944) Redemption 106, ,460 0OO Eirles Two Limited

53 the debt securities value is reliant on unobservable paramenters as well. of these are classified as using unobservable parameters (Level 3) it will automatically mean derivatives liabilities will have a direct impact on the classfication of the debt securities. If any Any change in the classification of the investment securities and TRS, derivatives assets and (e) Fair values (continued) 22 Financial instruments (continued) 66 cannot be determined with precision. unobservable inputs used have been noted above and therefore their associated fair value fair value estimates are made at a specific point in time, based on market conditions and involve uncertainties and mailers of significant judgement. Details in relation to the information about the financial instrument. These estimates are subjective in nature and Although the Directors believe that their estimates of fair value are appropriate, the use of different methodologies or assumptions could lead to different measurement of fair value as (26,034) (44,526) Derivative financial instruments 3,057 9,970 Debt securities issued ( ) (51.644) Investment securitites and total return swaps (9,586) (2652) ( 000 ( period: significant unobservable data (Level 3) for assets and liabilities held at the end of the reporting The total amount of change in fair value estimated using valuation techniques based on 1,333 (45,447) Debt securities issued (47,313) Derivative financial instruments (1,912) 9,967 Investment securitites and total return swaps (9307) (8,101) OOO OOO comprehensive income for the year is as follows: based on significant unobservable data (Level 3) that was recognised in statement of The total amount of realised and unrealised gain I loss estimated using a valuation technique EirIes Two Limited

54 more assumptions used to reasonably possible alternative assumptions would not have any Company. of debts securities issued due to the limited recourse nature of debt securities issued by the effect on the profit or loss or on equity as any change in fair value will be borne by the holders 22 Financial instruments (continued) (e) Fair values (continued) For recognised fair values measured using significant unobservable inputs, changing one or 67 will ultimately receive less cash. depending upon the asset being assessed), that a bond holder would require to allow for the estimate of the amount a lender would receive in the case of a default of a loan, or a bond Rate (CDR) and Constant Prepayment Rate (CPR) allow more complex loan and debt assets repayments and coupons, or whether the borrower is making additional (usually voluntary) prepayments. These parameters are particularly relevant when forming a fair value opinion for the primary reflection of creditworthiness, and represents the premium or yield return above the benchmark reference instrument (typically LIBOR, or relevant Treasury Instrument, mortgage or other types of lending, where repayments are delivered by the borrower through mortgages). Higher CDR will lead to lower valuation of a given loan or mortgage as the lender probability of default and resulting losses of a default to be represented. The credit spread is Credit Parameters are used to assess the creditworthiness of an exposure, by enabling the time, or where the borrower may prepay the loan (seen for example in some residential to be assessed, as these parameters estimate the ongoing defaults arising on scheduled credit quality difference between that entity and the reference benchmark. Higher credit valuation for a given bond position, if other parameters are held constant, Constant Default holder would receive in the case of default of the bond. Higher recovery rates will give a higher loanasset that is to be repaid to the Bank by the borrower. Recovery Rates represent an spreads will indicate lower credit quality, and lead to a lower value for a given bond, or other capture the relevant market dynamics. There follows a brief description of each of the principle Level 3 contains the less liquid fair value instruments, the wide ranges of parameters seen is to be expected, as there is a high degree of pricing differentiation within each exposure type to spreads then the less liquid, nonperforming positions which will have higher credit spreads. As that make up the disclosure is significant and therefore the ranges of certain parameters can used to value the significant exposures within Level 3. The diversity of financial instruments parameter types, along with a commentary on significant interrelationships between them. The range of values shown on the following table represents the highest and lowest inputs be large. The range of credit spreads represents performing, more liquid positions with lower equity, credit or commodity indices or foreign exchange rates) can also have effects. to the fair value of a given instrument, are explicitly captured via correlation parameters, or are necessarily independent, and dynamic relationships often exist between the other unobservable parameters and the observable parameters. Such relationships, where material technique utilizes more than one input, the choice of a certain input will bound the range of The behavior of the unobservable parameters on Level 3 fair value measurement is not otherwise controlled via pricing models or valuation techniques. Frequently, where a valuation possible values for other inputs. In addition, broader market factors (such as interest rates, Quantitative Information about the Sensitivity of Significant Unobservable inputs: Eirles Two Limited

55 Interest rates, credit spreads, inflation rates, foreign exchange rates and equity prices are For the year ended 31 December2015 Quantitative information about the Sensitivity of Significant Unobservable Inputs (continued): holder of the derivative will receive is dependent upon the behavior of these underlying referenced in some option instruments, or other complex derivatives, where the payoff a (e) Fair values (continued) 22 Financial instruments (continued) 68 underlying instrument, and the volatility of that instrument, representing the size of the payoff, credit derivatives and equity basket derivatives, for example. credit correlations are used to this will lead to an increase in value of a longcorrelation derivative. Negative correlations price of one underlying reference will lead to a reduction in the price of the other. suggest that the relationship between underlying references is opposing, i.e., an increase in More specific relationships can exist between credit references or equity stocks in the case of see a higher option value as there is greater probability of positive returns. A higher option outcome occurring. The underlying references (interest rates, credit spreads etc.) have an and the probability of that payoff occurring. Where volatilities are high, the option holder will where a derivative or other instrument has more than one underlying reference. Behind some groups of commodities, or the pricing parity effect of interest rates on foreign exchange rates. of these relationships, for example commodity correlation and interest rate4oreign exchange a measure of probability, with higher volatilities denoting higher probabilities of a particular from the option. Therefore the value of a given option is dependent upon the value of the enabling the variability of returns of the underlying instrument to be assessed. This volatility is effect on the valuation of options, by describing the size of the return that can be expected value will also occur where the payoff described by the option is significant. correlations, typically lie macroeconomic factors such as the impact of global demand on stock correlations are used to estimate the relationship between the returns of a range of equities. A derivative with a correlation exposure will be either long or shortcorrelation. A high correlation suggests a strong relationship between the underlying references is in force, and references through time. Volatility parameters describe key attributes of option behaviour by correlations are used to describe influential relationships between underlying references estimate the relationship between the credit performance of a range of credit names, and Eirles Two Limited

56 EirIes Two Limited 22 Financial (e) instruments Fair values (continued) (continued) Quantitative Information about the Sensitivity of Significant Unobsewable inputs (continued): The table below sets out information about significant unobservable inputs used at 31 December 2015 in measuring financial instruments categorised as Level 3 in the fair value hierarchy: Fairvaluesat Type of financial 31 December Valuation instrument 2015 Technique 000 Investment securities and total return swaps Significant unobservable input Range of estimates for unobservab le input Mortgagebacked 0% securities 5 Price based Price (%) 100%* Discounted cash Credit spread 9921% Total return swaps 110,752 flow (bps) % 110,757 Derivative instruments financial Correlation pricing Credit 30.05% Credit default swap (28.520) model Correlation (%) 87.42% (28,520) *The security is included in a portfolio of securities with priority of payments. This resulted to a wider range of estimate to be received. 69

57 Eirles Two Limited 23 Interest in other entities (a) Disclosure of the nature, purpose, size and activities of the is financed. structured entity and how it The Company invested in debt securities issued by structured entities. These structured entities have the following business activities: BBVA Senior Finance, SA Unipersonal is incorporated for unlimited duration with limited liability under Spanish law. This entity issued several classes of notes with total aggregate principal amount of USD 2,000,000. This entity was established for the purpose of issuing Notes and onlending the proceeds. As at year end, the Company owns USD 30,000,000 of the notes issued by BBVA Senior Finance, SA Unipersonal which is due on 06 April Deco 14 Pan Europe 5 By, is a private company incorporated with limited liability under the laws of The Netherlands. This entity issued several classes of notes with total aggregate principal amount of EUR 540, This entity was formed for the limited purpose (i) offering, issuing and selling the notes, and (H) entering into a guaranteed investment contract, funding agreement or other similar agreement and swap contracts. As at year end, the Company owns EUR 50,000 of the note issued by DECO 14 Pan Europe 5 By, which is due on 27 October The Company has no contractual arrangements nor commitments or intentions to provide financial or other assistance to the unconsolidated structured entities. 70

58 Eirles Two Limited 23 Interest in other entities (continued) (b) Risk associated with unconsolidated structured entities The below table summarises the company s interest in unconsolidated structured entities included in the investment securities at fair value through profit and loss as at 31 December 2015: Series of Out. Number f Notional Fair Value Issuer cc standing Fair Value issued by Maximum Eiries Two of Nominal of of Debt exposure L imi ed the investment investment. securities to loss structured securities securities entity OOO BBVA Senior Finance, S.A. S0352 Unipersonal USD 30, % 27,702 27,666 27,702 Deco 14Pan S0355 Europe 5bv EUR % 5 2, ,707 30,628 27,707 The company has maximum exposure to the risk associated with the carrying value of the above investments. If these investments are deemed worthless, the Company will not receive anything. The company bears no risk and it is the swap counterparties and noteholders that bear all the risk. Refer to note 22 (a) for the details on credit risk. 24 Subsequent events Since the end of the reporting period, the company issued new series of debt securities as follows: Series January 2016 USD 10,000,000 The following series have been disposed after year end: Series January 2016 USD 10,000,000 Full Unwind Series April 2016 USD 30,000,000 Maturity Series April 2016 USD 30,000,000 Maturity 25 Approval of the financial statements The financial statements were approved and authorised for issue by the Board of Directors on 28 April