RNS Number : 3010C
Merrill Lynch FTSE100 Stpd Gwth&Inc
29 August 2008
Merrill Lynch FTSE 100 Stepped Growth and Income Limited
Interim Report and Unaudited Financial Statements
Investment Manager's Report
Growth Shares
The Growth Shares are designed to offer investors a capital growth amount of 70.00 pence per growth share and to return a capital amount
of 100.00 pence per growth share, as long as the underlying Index has not fallen by more than 40.00% of the Initial Index Reference Level.
If the Index has fallen more than 40.00% an amount of 5.00% is reduced from 70.00% for each of the remaining six monthly periods (first six
month period ended on 16th December, 2002, and so on until 16th June, 2009) to the Final Reference Date.
As of 30th June, 2008, the FTSE 100 Index closed at 5,625.90, a decrease of 12.87% from the level of the Index at the beginning of the
period. The Net Asset Value of the Growth Shares was �1.58 as of 30th June, 2008, resulting in an increase of 3.95% for the period (relative
to a Net Asset Value of �1.52 as at 31st December, 2007), and an increase of 64.58% since inception (relative to the initial Net Asset Value
of �0.96).
Income Shares
The Income Shares pay a fixed dividend of 4.00 pence per Income Share, semi-annually in arrears as long as the underlying Index has not
fallen by more than 40.00% of the Initial Index Reference Level at any time up to the close of trading on the Final Reference Date. If the
Index has fallen by more than 40.00% of the Initial Index Reference Level at any time up to the close of trading on the Final Reference Date
then all the subsequent coupons (4.00 pence) will cease after that date.
As of 30th June, 2008, the FTSE 100 Index closed at 5,625.90, a decrease of 12.87% from the level of the Index at the beginning of the
period. The Net Asset Value of the Income Shares was �0.99 as of 30th June, 2008, resulting in an increase of 1.02% for the period (relative
to a Net Asset Value of �0.98 as at 31st December, 2007), and an increase of 3.13% since inception (relative to the initial Net Asset Value
of �0.96).
Market Review
The start of 2008 saw the continued squeeze on liquidity across the global economy and the FTSE 100 Index followed the downward and
volatile trend in global equity markets and closed on 5,879.80 on the 31st January, 2008 down 8.94% from the 31st December, 2007 level of
6,456.90.
February and March saw further declines, with the low of the period being reached on 17th March, 2008 when the Index closed at 5,414.40
until finally in April there were signs that the bottom might have been reached, as at 30th April, 2008 the Index closed at 6,087.30 up
6.76% for the month. Unfortunately as rumours of second quarter performances filtered down the Index again retreated finishing the six
monthly period at 5,625.90 down a further 7.62% from the end of April.
The obvious losers to focus on are the Financials which all continued the downward trends started in 2007, as news of further and larger
write downs came to light. HBOS Ltd closed the period down 62.41%, Barclays down 40.61%, Lloyds TSB closed down 34.16%, Legal and General
down 18.19%.
With the commercial property market significantly slowing British Land finished the period down 25.03% and Land Securities down 18.19%.
Royal Bank of Scotland announced record losses and closed down 43.58%.
The impact of these financial losers undoubtedly drove the rest of the market and as fears over inflation and recession arose across
Europe there were very few gains in the first half of the year.
In looking for gains the starting point has to be the Energy and Materials sectors with inflation being primarily driven by the rise in
raw material prices. However despite some gains, BP (down 5.16%) and Royal Dutch Shell (down 2.27%) showed that the energy companies were
not having it all their own way. Tullow Oil was the largest energy gain up 46.58% closely followed by Petrofac closing up 34.27%.
Materials all gained and the largest gainer in the Index was Eurasian Natural Resources which closed up 108.28%. Other double digit
gainers were Anglo American (14.48%), BHP Billiton (24.19%), Rio Tinto (13.01%) and Xstrata (13.35%).
Other notable drivers of the Index generally all performed badly, the Consumer Discretionary sector was driven down by Marks & Spencer
(down 41.34%), Thomas Cook (down 17.02%) and Whitbread (down 12.00%), all experiencing declines in sales as the British public endeavoured
to tighten their purse strings.
Even the Consumer Staples were not immune with Sainsbuy (down 25.16%) and Tesco (down 22.62%).
Industrials saw some gains, Invensys up 14.76%, but the big loser was British Airways whose bottom line was hit by both declining demand
and rising oil prices, they closed the period on 215.25 down 30.51%.
The three big telecommunication companies all suffered during the period with BT down 26.71%, Cable & Wireless down 18.92% and Vodafone
down 20.58%.
Looking ahead to the remainder of 2008, there are predictions that the Index will close as low as 4,900 or as high as 6,200, but what
does seem certain is that the Index along with global equity markets will continue to experience high levels of volatility and in turn
uncertainty. The initial starting level on 16th December, 2002 was 3,984 and even with the uncertainties in the market it is expected that
the Index will remain comfortably above this level through until maturity.
Merrill Lynch International
Responsibility Statement
For the period from 1st January, 2008 to 30th June, 2008
Responsibility statement of the directors in respect of the Interim Report and Unaudited Financial Statements
We confirm to the best of our knowledge that:
* the Interim Report and Unaudited Financial Statements have been prepared in accordance with applicable United Kingdom accounting
standards.
* the Interim Report includes information detailed in the Investment Manager's Report and Notes to the Financial Statements which
provides a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six
months of the financial year and their impact on the Interim set of financial statements; and a description of the principal risks and
uncertainties for the remaining six months of the year; and
(b) DTR 4.2.7R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months
of the current financial year and that have materially affected the financial position or performance of the entity during that period; and
any changes in the related party transactions described in the last annual report that could do so.
Christopher Hill )
) Directors
Trevor Ash )
28 August, 2008
Total Statement of Operations
For the period from 1st January, 2008 to 30th June, 2008
Total Total
01.01.2008 01.01.2007
to 30.06.2008 to
30.06.2007
Notes � 000's � 000's
Income on medium term notes
- Interest (Libor + margin) 1,128 999
Receipts under "Swap and Option" transaction
- Payment in lieu of distributions 970 970
- Money due for distributor and sponsor fees 99 99
Payments under "Swap and Option" transaction
- Interest (Libor + margin) (1,128) (999)
Distributor and sponsor fees 2 (99) (99)
Other bank interest received 32 10
Net realised gains on investment activities 1,002 980
Movement in unrealised gains on "Swap and
Option" transactions 6 192 (84)
Movement in unrealised losses on debt securities 6 766 8
Movement in net unrealised gains/(losses) on investments 958 (76)
Net gains on investment activities 1,960 904
Finance costs
Distributions to holders of preference shares 5 (970) (970)
Retained gain/(loss) for the period 990 (66)
Growth Growth Income
Shares Shares Shares
01.01.2008 01.01.2007 01.01.2008
to 30.06.2008 to 30.06.2007 to 30.06.2008
Notes � 000's � 000's � 000's
Income on medium term notes
- Interest (Libor +margin) 444 393 684
Receipts under "Swap and Option" transaction
- Payment in lieu of distributions - - 970
- Money due for distributor and sponsor fees 39 39 60
Payments under "Swap and Option" transaction
- Interest (Libor + margin) (444) (393) (684)
Distributor and sponsor fees 2 (39) (39) (60)
Other bank interest received 13 4 19
Net realised gains on investment activities 13 4 989
Movement in unealised gains on "Swap and
Option" transactions 6 553 433 (361)
Movement in unrealised losses on
debt securities 6 302 3 464
Movement in net unrealised gains/losses on investments 855 436 103
Net gains on investment activities 868 440 1,092
Finance costs
Distributions to holders of preference shares 5 - - (970)
Retained gain/(loss) for the period 868 440 122
Total Statement of Assets and Liabilities
As at 30th June, 2008
Total Total
30.06.08 31.12.07
Notes � 000's � 000's
ASSETS
Investments at fair value through profit or loss
Debt securities 6 35,486 34,720
Swap and option contract 6 13,211 13,019
Debtors 7 166 277
Cash 639 52
Total assets 49,502 48,068
EQUITY
Ordinary share capital 10 - -
LIABILITIES
Creditors 8 721 277
Total liabilities (Excluding net assets
attributable to holders of preference shares) 721 277
Net assets attributable to holders
of preference shares 48,781 47,791
Total equity and liabilities 49,502 48,068
Christopher Hill )
)
Directors
Trevor Ash )
Growth Growth Income Income
Shares Shares Shares Shares
30.06.08 31.12.07 30.06.08 31.12.07
Notes � 000's � 000's � 000's � 000's
ASSETS
Investments at fair value through profit or loss
- Debt securities 6 13,973 13,671 21,513 21,049
- Swap and option contract at fair value 6 10,797 10,244 2,414 2,775
Debtors 7 35 78 131 199
Cash 254 23 385 29
Total assets 25,059 24,016 24,443 24,052
EQUITY
Ordinary share capital 10 - - - -
LIABILITIES
Creditors 8 253 78 468 199
Total liabilities (Excluding net assets
attributable to holders of preference shares) 253 78 468 199
Net assets attributable to holders
of preference shares 24,806 23,938 23,975 23,853
Total equity and liabilities 25,059 24,016 24,443 24,052
Total Statement of Changes in Net Assets Attributable to Holders of Preference Shares
For the period from 1st January, 2008 to 30th June, 2008
Total Total
01.01.2008 to 01.01.2007
to
30.06.2008 30.06.2007
Notes � 000's � 000's
From Operations
Net realised gains on investment activities
applicable to holders of preference shares 11 1,002 980
Net unrealised gains/losses on investments
applicable to holders of preference shares 6 958 (76)
Distributions payable to holders
of preference shares 5 (970) (970)
Net increase/(decrease) resulting from operations 990 (66)
Total increase/(decrease) in net assets attributable to
holders of preference shares for the period 990 (66)
Net assets attributable to holders of
preference shares at beginning of the period 47,791 48,563
Total net assets attributable to holders
of preference shares at the end of the period 48,781 48,497
Growth Growth Income
Shares Shares Shares
01.01.2008 to 01.01.2007 to 01.01.2008 to
30.06.2008 30.06.2007 30.06.2008
Notes � 000's � 000's � 000's
From Operations
Net realised gains on investment activities
applicable to holders of preference shares 11 13 4 989
Net unrealised gains/losses on investments
applicable to holders of preference shares 6 855 436 103
Distributions payable to holders
of preference shares 5 - - (970)
Net increase/(decrease) resulting from operations 868 440 122
Total increase/(decrease) in net assets attributable
to holders of preference shares for the period 868 440 122
Net assets attributable to holders of
preference shares at beginning of the period 23,938 23,184 23,853
Total net assets attributable to holders
of preference shares at the end of the period 24,806 23,624 23,975
Total Statement of Cash Flows
For the period from 1st January, 2008 to 30th June, 2008
Total
01.01.2008 to
30.06.2008
Notes � 000's
Operating Activities
Investment income 1,139
Income from counterparty for Distributor
and Sponsor fees 2 199
Net Swap Option receipts/(payments) 386
Distributor and Sponsor fees 2 (199)
Other interest income 32
Net cash inflow from Operating Activities 11 1,557
Distributions paid to holders of preference shares (970)
Increase in cash 587
Cash at start of period 52
Cash at end of period 639
Growth Growth Income Income
Shares Shares Shares Shares
01.01.2008 to 01.01.2007 to 01.01.2008 to
01.01.2007 to
30.06.2008 30.06.2007 30.06.2008
30.06.2007
Notes � 000's � 000's � 000's � 000's
Operating Activities
Investment income 448 393 691 605
Income from counterparty for Distributor
and Sponsor fees 2 78 78 121 121
Net Swap Option (payments)/receipts (230) (393) 616 365
Distributor and Sponsor fees 2 (78) (78) (121) (121)
Other interest income 13 4 19 6
Net cash inflow from
Operating Activities 11 231 4 1,326 976
Distributions paid to holders
of preference shares - - (970) (970)
Increase in cash 231 4 356 6
Cash at start of period 23 190 29 286
Cash at end of period 254 194 385 292
Notes to the Financial Statements
For the period from 1st January, 2008 to 30th June, 2008
1. Principal Accounting Policies
The following accounting policies have been applied consistently in dealing with items which are considered to be material in relation
to the Company's Financial Statements.
Basis of Accounting
These Financial Statements have been properly prepared in accordance with applicable United Kingdom accounting standards and under the
historical cost convention as modified by the revaluation of investments and Swap and Option Transactions.
The Profit and Loss Account is referred to as the Total Statement of Operations and the Balance Sheet as the Total Statement of Assets
and Liabilities.
Unrealised profits and losses are shown in the Total Statement of Operations as in the opinion of the Directors this treatment fairly
presents the results of the Company.
All items dealt within the Total Statement of Operations relate to continuing operations.
The Financial Statements have been prepared showing the Total Statement of Operations, the Total Statement of Assets and Liabilities,
the Total Statement of Changes in Net Assets Attributable to Holders of Preference Shares and the Total Statement of Cash Flows for the
Company as a whole. These primary Financial Statements have also been split to show each class of shares' allocation of income and
expenditure, assets and liabilities and cash flows. Amounts in the Financial Statements have been rounded off to the nearest thousand pound
except where noted.
Fair value of financial instruments
All financial instruments are initially recognised at their fair value.
After initial measurement, the Company measures financial instruments which are classified as at fair value through profit or loss at
fair value. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties
in an arm's length transaction.
The fair value of financial instruments traded in active markets at the balance sheet date is based on their quoted price or dealer
price quotations, without any deduction for transaction costs.
For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation
techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices
exist, options pricing model and other relevant valuation models.
Receivables and payables are measured at amortised cost. Receivables and payables are non-derivative financial instruments with fixed or
determinable payments that are not quoted in an active market. Receivables are included in current assets and payables are included as
current liabilities.
Investments at fair value through profit or loss
The Company invests in a number of Debt Securities comprising medium term notes issued by financial institutions that have a rating of
at least A-, as determined by Standards & Poor's and/or Moody's Investor Service Inc. These Securities are valued on the basis of market
prices prevailing at the Statement of Net Assets and Liabilities date.
The "unrealised gains/losses" resulting from the marking to market of these investments are reflected in the Total Statement of
Operations. It is the intention of the Company to hold these investments until the redemption date i.e. 17th June, 2009 and consequently to
date there has been no sale of investments.
Income
Investment income is recognised on an accruals basis.
Derivative Financial Instruments and Hedging Activities
Derivatives are initially accounted and measured at fair value. Any gain or loss on re-measurement is taken to the Statement of
Operations, except where the derivatives are a designated cash flow hedging instrument. The Company's derivative instruments do not qualify
for hedge accounting and changes in fair value are recognised immediately in the Statement of Operations.
Swap and Option Transactions
The Company entered into swap and option transactions (the "Swap and Option Transactions") for the share classes comprising each of the
Growth Shares and the Income Shares.
The purpose of the Swap and Option Transactions is to enable the Company on behalf of each share class to match more efficiently the
cash flow on the Portfolio to the payments intended to be made under the investment objectives of the Company and each share class and also
to generate part of the intended Capital Return to Shareholders following the redemption date.
The Company's ongoing cash payment obligations under the Swap and Option Transactions will be equal to the aggregate interest received
from the holding of Debt Securities. The obligations arising from the "Swap and Option Transactions" are as follows:
Growth Shares
The Company is obliged to pay Merrill Lynch International ("the Counterparty") an initial payment of 3.0% of the gross proceeds of the
Offer of Growth Shares in respect of the commission payable to the Authorised Intermediaries. Under the terms of the Growth Swap and Option
Transactions, the Company is required to make floating rate payments, expressed as a margin above Sterling 3-month LIBOR rates payable to
the Counterparty every three months in arrears, and the amounts of such payments will be equal to the aggregate interest received under the
Sterling medium term note ("MTN") Instruments comprising the Growth Portfolio.
The Counterparty is obliged to pay approximately 1.0% of the gross proceeds of the Offer of the Growth Shares to the Company so as to
enable the Company to pay the amount payable to the Distributor and Sponsor in terms of the Distribution and Sponsorship agreement in
respect of initial fees.
The Counterparty is also required to make annual payments to the Company of an amount equal to 0.5% of the gross proceeds of the Offer
of the Growth Shares so as to enable the Company to make the proposed annual payments to the Distributor and Sponsor under the Distribution
and Sponsorship Agreement in respect of annual costs and expenses of the Company.
The Counterparty is required to make a payment on 17th June, 2009 to the Company equal to 70.0% of the gross proceeds of the Offer of
the Growth Shares unless the Index Level is lower than 60% of the Index Level on the initial Index Valuation Date thus causing an Index
Barrier Breach, in which case this payment will be reduced as described in Note 12.
The Counterparty is also obliged to make a payment to the Company on 17th June, 2009 of 10% of the gross proceeds of the Offer of the
Growth Shares.
Income Shares
The Company is obliged to make an initial payment of 3.0% of the gross proceeds of the Offer of Income Shares in respect of the
commission payable to the Authorised Intermediaries. Under the terms of the Income Swap and Option Transactions, the Company is required to
make floating rate payments, expressed as a margin above Sterling 3-month LIBOR rates payable to the Counterparty every three months in
arrears, and the amounts of such payments will be equal to the aggregate interest received under the Sterling MTN Instruments comprising the
Income Portfolio.
The Counterparty was obliged to pay approximately 1.0% of the gross proceeds of the Offer of the Growth Shares to the Company so as to
enable the Company to pay the amount payable to the Distributor and Sponsor in terms of the Distribution and Sponsorship agreement in
respect of initial fees.
The Counterparty is also required to make annual payments to the Company of an amount equal to 0.5% of the gross proceeds of the Offer
of the Growth Shares so as to enable the Company to make the proposed annual payments to the Distributor and Sponsor under the Distribution
and Sponsorship Agreement in respect of the annual costs and expenses of the Company.
The Counterparty is also required to make semi-annual payments to the Company of an amount equal to 4.0% of the gross proceeds of the
Offer of the Income Shares so as to enable the Company to make the proposed semi-annual distributions to holders of preference shares under
the Income Shares.
The Counterparty is also obliged to make a payment to the Company on 17th June, 2009 of 10% of the gross proceeds of the Offer of the
Income Shares.
Swap and Option Transactions are valued monthly by the relevant counterparties to the swap transactions. The valuation of the Swap and
Option Transactions is reflected at a fair value, based on prevailing market conditions. When valuing the Swap and Option Transaction the
following criteria are used:
* the exercise price;
* the performance of any securities or securities index to which the Swap and Option Transactions are linked;
* the degree of volatility;
* the remaining maturity;
* the interest receivable; and
* the expected yield of the underlying investments and prevailing UK interest rates or other relevant rates.
The movement on the unrealised gains/losses resulting from carrying these investments at fair value is reflected in the Total Statement
of Operations.
The Company has contracted with an independent valuer to provide valuations of the Derivative Contracts at the year end. Where the
valuations provided by the counterparties to the Derivative Contracts and the independent valuer are significantly different (a level set by
the Directors at 5% of Contract value), the Derivative Contracts are stated at the arithmetic mean of the valuations provided. As at June
30, 2008, there was no significant differences between the valuation provided by the counterparties to the derivative contracts and the
independent valuer.
Distributions to holders of preference shares
Distributions payable to holders of Income Shares are accrued on a daily basis.
Preference Shares
As the Company's preference shares are redeemable, they are required to be classified as debt instruments under FRS 25. The preference
shares are listed on the London Stock Exchange and their trading values are based on their quoted price, may or may not equal to the actual
Net Asset Value of the Company.
2. Fees and Expenses
The Company entered into a Distribution and Sponsorship Agreement with the Distributor and Sponsor, Merrill Lynch International, dated
23rd April, 2002 whereby the Distributor and Sponsor agreed to:
i) Promote the issue of the Company's shares and procure subscribers for those shares.
ii) Discharge all of the formation and issue costs of the Company, including registration fees, printing costs, legal and accounting
fees and marketing and distribution expenses.
A commission of 3.0% of the Issue Price of Shares was paid to authorised intermediaries by the individual share classes who were
reimbursed by Merrill Lynch International.
Under the Distribution and Sponsorship Agreement, the Distributor and Sponsor has agreed to discharge the costs payable by the Company
under the Investment Management Agreement, the Administration Agreement, the Transfer and Paying Agency Agreement and the Custodian
Agreement, together with the legal, secretarial, auditing and other professional expenses of the Company incurred throughout its Planned
Life and up to its winding up (including winding up expenses) as well as the Directors' remuneration and expenses. In return, the company
has agreed to pay 0.5% of the gross proceeds of the Offer, payable on each anniversary of 16th June until 2009. This payment will be
financed by the payment to the Company of an equivalent amount by the Counterparty under the Swap and Option Transactions.
3. Directors' Remuneration
The Articles of Association provide that the Directors shall be entitled to a fee in remuneration for their services at a rate to be
determined from time to time by the Directors. The aggregate amount of the Directors' remuneration in any one year shall not exceed �10,000.
The remuneration of the Directors and Auditors is borne by the Investment Adviser in accordance with the Investment Advisory Agreement.
4. Taxation
The Company is exempt from Guernsey income tax under the Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 and accordingly is charged
an annual exemption fee of �600, which is borne by the Investment Adviser in accordance with the Investment Advisory Agreement. With effect
from 1 January, 2008, Guernsey's tax regime has changed. The Company will however remain tax exempt.
5. Distributions to holders of preference shares
The Income Shares pay a fixed distribution of 4 pence per Share semi-annually in arrears on 17th June and 17th December of each year for
the life of the Company. At 30th June, 2008 an amount of �77,068 (30th, June 2007: �77,068) was shown as a creditor in respect of
distributions accrued but not yet payable on the Income Shares. Distributions of �970,000 (30th June, 2007: �970,000) were declared and paid
on the Income Shares during the year. The fixed distributions on the income shares may not be met and are subject to the performance of the
FTSE 100 Index. A more detailed description of the risks to the income return of investors is contained in Note 12. No distributions were
proposed for the period in respect of the Growth Shares.
6. Investments at fair value through profit or loss Total
Growth Income
30.06.2008
Shares Shares
� 000's �
000's � 000's
Cost of Debt Securities at 30th June, 2008 36,000
14,175 21,825
Cumulative unrealised loss on revaluation of Debt Securities (514)
(202) (312)
Fair Value of Debt Securities at 30th June, 2008 35,486
13,973 21,513
Fair Value of Debt Securities at 31st December, 2007 34,720
13,671 21,049
Cumulative unrealised gain on revaluation of Swap and Options 13,211
10,797 2,414
Fair Value of Swap and Option contracts at 30th June, 2008 13,211
10,797 2,414
Fair Value of Swap and Option contracts at 31st December, 2007 13,019
10,244 2,775
Cumulative unrealised loss on revaluation of Debt Securities
at 1st January, 2008 (1,280)
(504) (776)
Cumulative unrealised loss on revaluation of Debt Securities
at 30th June, 2008 (514)
(202) (312)
Movement in unrealised loss on revaluation of Debt
Securities in the period 766 302
464
Cumulative unrealised gain on revaluation of Swap and Options
at 1st January, 2008 13,019
10,244 2,775
Cumulative unrealised gain on revaluation of Swap and Options
at 30th June, 2008 13,211
10,797 2,414
Movement in unrealised gains on revaluation of Swap
and Option contracts in the period 192 553
(361)
Total movement on unrealised loss on investments 958 855
103
7. Debtors Total Growth
Income
30.06.2008 Shares
Shares
� 000's � 000's
� 000's
Investment income receivable 79 31
48
Amounts due from swap and option Counterparty 87 4
83
166 35
131
Total Growth
Income
31.12.2007 Shares
Shares
� 000's � 000's
� 000's
Investment income receivable 90 35
55
Amounts due from swap and option Counterparty 187 43
144
277 78
199
8. Creditors Total Growth
Income
30.06.2008 Shares
Shares
� 000's � 000's
� 000's
Amounts due to swap and option Counterparty 644 253
391
Distributions payable 77 -
77
721 253
468
Total Growth
Income
31.12.2007 Shares
Shares
� 000's � 000's
� 000's
Amounts due to swap and option Counterparty 200 78
122
Distributions payable 77 -
77
277 78
199
IncomeShares
Growth
Shares
9. Net Assets attributable to holders of preference shares
NAV per Share at end of the period for valuation purposes:
- at 30th June, 2008 � 1.575 � 0.992
- at 30th June, 2007 � 1.500 � 1.029
NAV per Share at end of the period attributable to holders of preference shares:
- at 30th June, 2008 � 1.575 � 0.989
- at 30th June, 2007 � 1.500 � 1.026
The difference in NAV per share for valuation and accounting purposes is due to the accrual of distributions, not yet payable at the end of
the period.
10. Share Capital
Authorised �
500,000,000 Ordinary Shares of 0.01 pence each 50,000
The Ordinary Shares are termed as such pending issue. Two classes of preference shares have been issued, Growth Shares and Income
Shares, each with a separate investment objective. All classes of shares carry a right to vote at general meetings.
Shareholders have no right to require the Company to repurchase nor redeem their shares. The Company may purchase shares in the
secondary market, but only at the discretion of the Directors.
The Growth Shares are designed to offer investors a capital growth amount of 70 pence per Growth share and to return a capital amount of
100 pence per Growth share upon the winding up of the Company following 17th June, 2009. No distributions will be paid on the Growth
shares.
The Income Shares are designed to offer investors a fixed distribution during the period of seven years commencing on 18th June, 2002
and ending on 17th June, 2009 of 8 pence per Income Share per annum, payable semi-annually in arrears in equal instalments on 17th June and
17th December each year, the first such distribution date falling on 17th December, 2002.
The above investment objectives on the Income Shares may not be met and are subject to the performance of the FTSE 100. A more detailed
description of the risks to the income and capital return of investors is contained in Note 12.
As at 30th June, 2008, all the preference shares in issue were held by Computershare Investor Services (Channel Islands) Limited.
Total Growth Income
30.06.2008 Shares Shares
Equity Share Capital � 000's � 000's � 000's
Ordinary Shares of 0.01 pence per share
Balance at 1st January, 2008 and balance at 30th June, 2008 - - -
Total Growth Income
30.06.2008 Shares Shares
Preference Share Liability - Capital � 000's � 000's � 000's
Issued Preference Shares of 0.01 pence per share
Balance at 1st January, 2008 and balance at 30th June, 2008 4 2 2
Total Growth Income
30.06.2008 Shares Shares
Preference Share Liability - Premium � 000's � 000's � 000's
Issued Preference Shares of 0.01 pence per share
Balance at 1st January, 2008 and balance at 30th June, 2008 38,396 15,118 23,278
Number of Preference Shares
Balance at 1st January, 2008 and balance at 30th June, 2008 40,000,000 15,750,000 24,250,000
11. Reconciliation of net realised gains on investment activities to net cash inflow from operating activities
Total
1.01.2008 to Growth Income
30.06.2008 Shares Shares
� 000's � 000's � 000's
Net realised gains on investment activities 1,002 13 989
Adjustment for non-cash items:
Decrease in debtors and creditors 555 218 337
Net cash inflow from operating activities 1,557 231 1,326
Total
1.01.2007 to Growth Income
30.06.2007 Shares Shares
� 000's � 000's � 000's
Net realised gains on investment activities 980 4 976
Net cash inflow from operating activities 980 4 976
12. Financial Risk Management
In pursuing the investment objective, the Company invests in securities with the aim of spreading investment risk. Each individual share
class in issue is constructed to follow a certain investment objective and the financial instruments held are determined in order to achieve
these stated objectives. Investments in securities and derivatives expose the Company to various risks, including market price (movements
in the value of investments holdings caused by factors other than interest rate movement), interest rate, liquidity and credit risks.
Descriptions of the specific risks and policies for managing these risks are included below. The securities in which the Company may invest
must be quoted or dealt in, on a regulated market as provided for in the Articles of Association. An analysis of these types of securities
held at the end of the year is contained in the Investment Portfolios.
The Company has the power to borrow up to 10 per cent of its assets.
Market risk
Market risk is the risk that the value of the investments will fluctuate as a result of changes in market prices, whether caused by
factors specific to an individual investment, its issuer or all factors affecting instruments in the traded market. The Investment Manager
monitors market fluctuations in pursuance of the investment objectives and policies. Adherence to investment guidelines and to investment
and borrowing powers as set out in the placing memorandum mitigates the risk of excessive exposure to any particular type of security or
issuer.
Market Price Risk
Market Price risk arises mainly from the uncertainty about future prices of financial instruments held. It represents the potential loss
the Company may suffer through holding market positions in the face of price movements. In the case of the Company, market risk will be
significant and is concentrated in derivative instruments held in swap and option transactions. These expose the Company to market risk
depending on the movement of the FTSE 100 Index as referred to in the investment objectives. These derivative instruments are held so as to
hedge the risks faced in delivering the anticipated returns to investors in respect of the share classes but may also expose both share
classes to capital losses.
Market Price Sensitivity Analysis
The Company's debt securities comprising medium term notes and swap and option contract are issued by financial institutions that have a
rating of at least A-, as determined by Standards & Poor's and/or Moody's Investor Service Inc. A 1 bps increase in the Interest rate Curve
at 30th June, 2008 and 30th June, 2007 would have decreased the net assets attributable to holders of preference shares by �1,100 (2007:
decrease of �2,219), an equal change in the opposite direction would have increased the net assets attributable to holders of preference
shares by an equal opposite amount. A 10% increase in the Bonds' credit Spread at 30th June, 2008 and 30th June, 2007 would have decreased
the net assets attributable to holders of preference shares by �62,542 (2007: decrease of �43,280), an equal change in the opposite
direction would have increased the net assets attributable to holders of preference shares by an equal opposite amount. A 1 unit increase in
the FTSE 100 at 30th June, 2008 and 30th June, 2007 would have increased the net assets attributable to holders of preference shares by �118,612 (2007: increase of �56,653), an equal change in the
opposite direction would have decreased the net assets attributable to holders of preference shares by an equal opposite amount.
The magnitude of any change in the net asset value of the portfolio arising from market price movements is increased by the Company's
policy of employing gearing. The above increase/decrease in the market prices of investments would have resulted in a net increase of 0.06%
and 0.10 % (2007: 0.07% and 0.10%), respectively in the net asset value per Preference Share for the Growth Shares and Income Shares as at
the balance sheet date.
Foreign Exchange Risks
The material financial instruments of the Company are denominated in Sterling, the base currency of the Company, hence no exposure to
foreign currency risk arises.
Interest Rate Risk
Where the Company invests in interest bearing securities, it is exposed to interest rate risk where the value of these securities may
fluctuate as a result of a change in interest rates. It is the intention of the Company to hold the portfolio of interest bearing securities
to maturity as these are intended, in normal circumstances, to provide the capital necessary to fund the capital payments of 100 pence per
share on winding up of the Company. The Company has various commitments in respect of stated distributions and the interest flows from the
portfolio of interest bearing securities is swapped for predetermined fixed rate flows in order to provide the necessary liquidity to meet
these commitments. The effect of the swaps is to enhance the fixed interest element of the income from the portfolio for the income share
classes.
The interest rate profile of the financial assets in the portfolios as at 30th June, 2008 was as follows:
Financial Assets (excluding net assets attributable to holders of preference shares)
As at 30th June, 2008 Fixed Interest Fixed Interest
No Interest Weighted Weighted
Fixed Floating Rate Average Average
Rate Rate Associated Total Interest Rate Period
� 000's � 000's � 000's � 000's % Weeks
Investments at fair value
through profit or loss 35,486 - 13,211 48,697 6.1000 11
Other net assets - - 84 84 - -
As at 31st December, 2007 Fixed Interest Fixed Interest
No Interest Weighted Weighted
Fixed Floating Rate Average Average
Rate Rate Associated Total Interest Rate Period
� 000's � 000's � 000's � 000's % Weeks
Investments at fair value
through profit or loss 34,720 - 13,019 47,739 6.5300 11
Other net assets - - 52 52 - -
The fair value of the Swap and Option contracts have been included under the "No Interest Rate Associated" category. There is however an
interest element to the Swap contracts which has the effect of fixing the overall annual interest rate on the portfolio of MTN's at 0% and
8% for the Growth and Income shares respectively. These interest rates have not been taken into account when calculating the Fixed Interest
Weighted Average Interest Rate above, which comprises only of the interest rate attached to the MTN's.
Liquidity Risk
Liquidity risk is the risk that the Company will encounter in realising assets or otherwise raising funds to meet financial commitments
on time or at reasonable price. Due to the closed ended nature of the Company there are no liquidity risks faced as a result of shareholder
redemption requests. The Company does face ongoing liquidity risks in meeting its annual running expenses and in generating the flows
necessary to support the pre-determined levels of dividends in certain of the share classes. These liquidity needs are satisfied by the
income flows from the portfolio of securities held and the derivative swap and option contracts entered into by the Company with Merrill
Lynch International. The portfolio of securities held are due to mature on or before the expected winding up of the company and therefore
the capital amounts received on maturity are intended, subject to the specified objectives and the risks stated above, to fund the
redemption payments to both shareholder classes. The swap and options contracts are also intended, subject to market risk, to provide any necessary additional liquidity to fund any additional capital amounts
payable to shareholders in excess of the paid up capital of the shares. The contractual maturity of the Company's financial liabilities are
as follows;
As at 30th June, 2008
Growth Shares On Demand 1-3 months 3-12 months Total
� 000's � 000's � 000's � 000's
Amounts due to swap and option Counterparty - 253 - 253
- 253 - 253
Income Shares On Demand 1-3 months 3-12 months Total
� 000's � 000's � 000's � 000's
Amounts due to swap and option Counterparty - 391 - 391
Distributions payable - 77 - 77
- 468 - 468
Total On Demand 1-3 months 3-12 months Total
� 000's � 000's � 000's � 000's
Amounts due to swap and option Counterparty - 644 - 644
Distributions payable - 77 - 77
- 721 - 721
As at 31st December, 2007
Growth Shares On Demand 1-3 months 3-12 months Total
� 000's � 000's � 000's � 000's
Amounts due to swap and option Counterparty - 78 - 78
- 78 - 78
Income Shares On Demand 1-3 months 3-12 months Total
� 000's � 000's � 000's � 000's
Amounts due to swap and option Counterparty - 122 - 122
Distributions payable - 77 - 77
- 199 - 199
Total On Demand 1-3 months 3-12 months Total
� 000's � 000's � 000's � 000's
Amounts due to swap and option Counterparty - 200 - 200
Distributions payable - 77 - 77
- 277 - 277
Credit Risk
Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with
the Company. The Company's exposure to credit risk is limited to the carrying amount of financial assets recognised at the balance sheet
date.
Credit Risk Analysis
The Company will be exposed to a credit risk on the parties with whom it trades including the issuers of debt securities and
counterparties to the derivative contracts, and will also bear the risk of settlement default. The Company minimizes credit risk by
undertaking transactions with financial institutions that have received a credit rating of at least A- from Standard & Poor's and/or Moody's
Investor Service Inc.
The Company's maximum exposure to credit risk is as follows;
Total Growth Income
30.06.2008 Shares Shares
� 000's � 000's � 000's
Debt securities 35,486 13,973 21,513
Swap and option contract at fair value 13,211 10,797 2,414
Debtors 166 35 131
Cash 639 254 385
49,502 25,059 24,443
Total Growth Income
31.12.2007 Shares Shares
� 000's � 000's � 000's
Debt securities 34,720 13,671 21,049
Swap and option contract at fair value 13,019 10,244 2,775
Debtors 277 78 199
Cash 52 23 29
48,068 24,016 24,052
Fair value of financial assets and financial liabilities
In the opinion of the Directors all of the financial assets and liabilities of the Company are held at fair value. The realised and
unrealised gains and losses arising from the financial assets are shown in the Total Statement of Changes in Net Assets Attributable to
Holders of Preference Shares and in the Total Statement of Operations for the Company.
13. Investment Objectives
Growth Shares
The investment objective of the Growth Shares is to offer investors a return of a capital amount on the winding up of the Company which
is anticipated to be 170 pence per Growth Share. This capital amount is not guaranteed and is subject to additional market risk in respect
of the FTSE 100 Index held through the swap and options derivative transactions. This additional market risk is described below.
The return of the capital amount at 100 pence to investors on the winding up of the Company and the additional anticipated capital
return at 70 pence per Growth Share are exposed to market risk based on the level of the FTSE 100 Index throughout the life of the Company.
The additional capital return will be reduced by 5 pence for each incomplete or partial semi-annual period ending on 16th June or 16th
December that remains until the anticipated winding up of the Company around 17th June, 2009 should the level of the FTSE Index 100 be lower
than 60% of the index level on commencement of the investment period. The capital amount of 100 pence per share will be reduced by a
percentage equal to the percentage shortfall on the FTSE 100 Index where the final level of the Index on winding up of the Company is lower
than the Index level on commencement of the investment period and the Index has fallen below 60% of the index level on commencement of the
investment period at any point throughout the lifetime of the Company.
Index 18.06.2002 30.06.2008 Movement
Level Level %
FTSE 100 4,715.50 5,625.90 19.31
Income Shares
The investment objective of the Income Shares is to offer investors a fixed distribution of 8 pence per share per annum, payable
semi-annually in arrears in equal instalments on 17th June and 17th December in each year, the first such distribution being paid on 17th
December, 2002, and to return a capital amount on the winding up of the Company of 100 pence per share. Neither the fixed distribution nor
the capital amount are guaranteed and both are subject to additional market risk based on the level of the FTSE 100 Index throughout the
life of the Company. No further distribution shall become payable should the level of the FTSE 100 Index fall below 60% of the index level
on commencement of the investment period. The capital amount of 100 pence per share will be reduced by a percentage equal to the percentage
shortfall on the FTSE 100 Index where the final level of the Index on winding up of the Company is lower than the Index level on
commencement of the investment period and the Index has fallen below 60% of the index level on commencement of the investment period at any point throughout the lifetime of the Company.
Index 18.06.2002 30.06.2008 Movement
Level Level %
FTSE 100 4,715.50 5,625.90 19.31
14. Capital Management
The Company's objectives when managing capital are to safeguard the Company's ability to continue as a going concern in order to provide
returns for shareholders and benefits to other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
15. Related Parties
The Directors consider the following to be related parties:
* Northern Trust International Fund Administration Services (Guernsey) Limited (Administrator)
* Northern Trust (Guernsey) Limited (Custodian)
* Merrill Lynch Investment Managers (Investment Manager)
* Merrill Lynch International (Investment Adviser, Distributor and Sponsor)
The terms of specific transactions entered into with these related parties are disclosed in Notes 1, 2 and 3.
16. Subsequent Events
There have been no subsequent events.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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