Annual report: Period Ended 31 December 2012 - Invesco Perpetual

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52 City Merchants High Yield Trust Limited Notes to the Financial Statements continued 18. Financial Instruments continued (b) Interest Rate Risk continued Management of Interest Rate Risk The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account as part of the portfolio management and borrowings processes of the Manager. The Board reviews on a regular basis the investment portfolio and borrowings. This encompasses the valuation of fixed-interest and floating rate securities and gearing levels. When the Company has cash balances, they are held in variable rate bank accounts yielding rates of interest dependant on the base rate of the custodian. The Company has a £20 million multi-currency facility with the Bank of New York Mellon which is renewable on 10 May 2013. This facility allows the Company to draw down amounts in sterling, euros or US dollars to maximum sterling equivalent of £20 million. Drawings under this facility are subject to the restriction that the Company’s total financial indebtedness must not exceed 30% of total assets and that the assets must be in excess of £50 million. At the period end there were no drawings. The Company uses the facility when required at levels approved and monitored by the Board. Interest Rate Exposure At 31 December the exposure of financial assets and financial liabilities to interest rate risk is shown by reference to: – floating interest rates (giving cash flow interest rate risk) – when the interest rate is due to be re-set; – fixed interest rates (giving fair value interest rate risk) – when the financial instrument is due for repayment. 2012 Within More than one year one year Total £’000 £’000 £’000 Exposure to floating interest rates: Investments at fair value through profit or loss — 35,263 35,263 Cash and cash equivalents 5,094 — 5,094 5,094 35,263 40,357 Exposure to fixed-interest rates: Investments at fair value through profit or loss 3 69,587 69,590 Net exposure to interest rates 5,097 104,850 109,947 The nominal interest rates on the investments at fair value through profit or loss are shown in the portfolio statement on pages 10 to 13. The weighted average effective interest rate on these investments is 6.9%. The weighted average effective interest rate on cash and cash equivalents is 0.25%. Interest Rate Sensitivity The following table illustrates the sensitivity of the profit after taxation for the year to a 1% increase in interest rates in regard to the Company’s monetary financial assets and financial liabilities. As future changes cannot be estimated with any degree of certainty, the sensitivity analysis is based on the Company’s monetary financial instruments held at the balance sheet date, with all other variables held constant.
City Merchants High Yield Trust Limited 53 19 December 2011 to 31 December 2012 £’000 Effect on income statement Revenue profit 51 Capital loss (4,393) Effect on net asset value (4,342) If interest rates had decreased by 1%, this would have had an equal and opposite effect. The above exposure and sensitivity analysis are not representative of the period as a whole, since the level of exposure changes frequently as borrowings are drawn down and repaid throughout the period. (c) Other Price Risk Other price risks (i.e. changes in market prices other than those arising from interest rate risk or currency risk) may affect the value of the investment portfolio. It is the business of the portfolio managers to manage the portfolio and borrowings to achieve the best returns. Management of Other Price Risk The Directors manage the market price risks inherent in the investment portfolio by meeting regularly to monitor on a formal basis compliance with the Company’s stated investment policy and objective and to review investment performance. The Company’s portfolio is the result of the portfolio managers investment process and as a result is not correlated with the markets in which the Company invests. The value of the portfolio will not move in line with the markets but will move as a result of the performance of the underlying portfolio. The Company can hedge all or part of its investment portfolio denominated in foreign currency by using borrowings under its revolving credit facility in the same currency. It can also hold derivative positions in options and futures to hedge movements in the stocks to which the portfolio has an exposure. The Company’s exposure to other changes in market prices at 31 December on its quoted equity investments and fixed interest investments was as follows: 2012 £’000 Fixed asset investments at fair value through profit or loss – Bonds 104,853 – Equity 12,674 117,527 Concentration of Exposure to Other Price Risks The Company’s investment portfolio on pages 10 to 13 is not concentrated to any single country of domicile, however, it is recognised that an investment’s country of domicile or listing does not necessarily equate to its exposure to the economic conditions in that country. Other Price Risk Sensitivity At the period end, the Company held equity investments of £12,674,000. The effect of a 10% increase or decrease in the fair values (including equity exposure through derivatives) on the profit after taxation for the period is £1,267,000. This level of change is considered to be reasonably possible based on the observation of current market conditions. The sensitivity analysis is based on the Company’s equities and equity exposure through derivatives at the balance sheet date with all other variables held constant.
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Annual report: Period Ended 31 December 2012 - Invesco Perpetual

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