Half-year Report

Invesco Enhanced Income Ltd - Half-year Report

PR Newswire

London, May 15

Invesco Enhanced Income LimitedHalf-Yearly Financial Report Announcement for the Six Months to 31 March 2020

Key Facts

Invesco Enhanced Income Limited is a closed-end investment company with limited liability incorporated in Jersey. The Company’s ordinary shares are listed on the London Stock Exchange.

Investment Objective of the Company

The Company’s principal objective is to provide shareholders with a high level of income whilst seeking to maximise total return through investing in a diversified portfolio of high yielding corporate and government bonds. The Company may also invest in equities and other instruments that the Manager considers appropriate. The Company seeks to balance the attraction of high yield securities with the need for protection of capital and to manage volatility. The Company generally employs gearing in its Investment Policy.

Full details of the Company’s Investment Policy (incorporating the Company’s investment objective, investment policy and risk and investment limits) can be found on pages 9 and 10 of the Company’s 2019 annual financial report.

Performance Statistics

(1) For the period to 31 March 2020, 3,750,000 ordinary shares were issued for net proceeds, after issue costs, of £2,865,000 (2019: nil).

(2) Alternative Performance Measures (APM) see page 7 for the explanation and calculation of APMs. Further details are provided in the Glossary of Terms and Alternative Performance Measures in the 2019 annual financial report.

(3) Source: Refinitiv.

Interim management report incorporating the Chairman’s Statement

Chairman’s Statement

The period running up to and since our year end has been one of the most challenging in recent times. So, I would firstly like to say thank you to you, our shareholders, for your support and, as importantly, to everyone involved in the management and operation of this Company. Our portfolio manager, Rhys, has been working very hard to make good investment decisions and remains diligent in keeping the Board apprised of market changes and their impact on the Company. Operationally, the move to remote working has been accomplished by all of our service providers in a seamless manner and as a Board we would like to reassure you that we remain confident that the Company is in good hands.

Results for the six months to 31 March 2020

Turning now to the six months under review, the Company has delivered a total net asset value return of –13.4%. This compares to 3 month LIBOR of +0.4%. The share price premium decreased from 1.3% to a discount of 9.2%. Since the end of the reporting period, the Company has returned to a premium and has recommenced issuance of shares. This reflects not only the improving market environment but also the Company’s strong performance relative to both its peers and 3 month LIBOR. On behalf of the Board, I would like to thank the portfolio managers for their continued hard work on behalf of shareholders.

The Portfolio Managers’ Report which follows continues the cautionary tone of much of their recent reporting. Borrowing at the period end was 19% gross and 14% net of cash balances.

Outlook

During this extremely challenging time, there has been no material change in portfolio strategy. The Company’s closed ended structure means the Manager does not have to realise investments in these volatile markets to meet redemptions. It enables the Manager to utilise borrowings to take advantage of opportunities to purchase bonds at attractive prices and enhance income as and when they present themselves. The Company has material revenue reserves available to support the payment of the quarterly dividend. The Company’s dividend policy remains unchanged and, whilst the Board is closely monitoring developments throughout the COVID-19 crisis, it remains confident that the portfolio is in good hands.

Kate Bolsover

Chairman

15 May 2020

Portfolio Managers’ report

Market background

The performance of the high yield bond market over the six months to the 31 March 2020 was dominated by the market’s reaction to the impact of Covid-19 in late February and March 2020. The deterioration in sentiment was further compounded by a collapse in the oil price. This had a significant impact on the US high yield market, which has a high number of energy companies.

By end of March, most countries across the world had, in response to the virus, introduced some form of lockdown. Economic activity has been significantly curtailed and many companies shuttered.

The world’s central banks have responded to these shocks with unprecedented stimulus, slashing interest rates and restarting Quantitative Easing programmes. In the US, the Federal Reserve has committed to direct support of the corporate bond market including the unprecedented step of announcing it will purchase high yield bonds under certain conditions. After a very sharp market correction from late February, these announcements sparked the biggest rally in high yield bonds since the global financial crisis in 2008.

Large fiscal policy stimulus programmes have also been a part of the response of many governments. This has included loans and support for companies. Nonetheless, the period has been extremely difficult for many companies, in particular those in leisure, travel and parts of the retail sector. For many companies the impact of this crisis will be felt for some time.

The banking sector has also come under pressure and many banks have announced that they are stopping dividends, in-line with recommendations from both the European Central Bank and the Bank of England. The payment of interest on bank capital bonds, including additional tier 1 (AT1) bonds, is not affected. 

Unsurprisingly, this difficult environment for companies has led the rating agencies to revise their predictions of default rates higher. The market has also aggressively repriced the risk of default with large moves in credit spreads (the premium over government bonds that companies need to pay to borrow). By 31 March 2020 European high yield spreads had increased to 854 basis points (bps). This compares to a level of 405 bps at the 30 September 2019 and a low of 316 in mid-January 2020.

With a recessionary backdrop it is inevitable that default rates will rise, and indeed we have already observed several high yield issuers appoint financial advisors with a view to restructuring their debt.

Portfolio strategy

The Company entered the crisis on a relatively strong footing. The portfolio was cautiously positioned by the end of 2019, which was a natural response to yields having fallen so much and our sober view on valuations. At the very early stages of the virus outbreak we raised cash in the portfolio significantly. This defensive stance, combined with the closed-ended structure, meant that we were well positioned to take advantage of the re-pricing that occurred. Slowly and cautiously credit risk was added.

The focus of these purchases was on companies that we think have the balance sheet and business profile to survive the economic shock. Names added included Ziggo, Pinewood, IHO Schaeffler and Teva. The financial sector also provided some very attractive opportunities during March. Both Senior and AT1 bonds were added across multiple issuers with a focus on large European banks.

Following these purchases, subordinated financials remain the fund’s largest sectoral allocation. Despite European banks having been asked to halt dividends and share buy-backs, the current situation is very different to the 2008 crisis. Then, banks and other financial institutions were the problem. This is a real economy shock and banks have come into it with much stronger liquidity and higher capital levels and asset quality. The announcement to halt shareholder payments has no bearing on banks’ intentions to pay AT1 coupons and we believe they will continue to do so. Outside of subordinated financials, the three largest sectors in the portfolio are telecoms, food and utilities.

Over the period under review, the Company’s NAV fell from 74.2p to 62.1p. The NAV total return was –13.4%. The portfolio maintained gross borrowing of 19%.

Outlook

High yield bond markets have repriced to reflect the severe economic shock that the crisis is inflicting. A lack of market liquidity at the start of the crisis exacerbated price moves and created some very attractive opportunities for the Company. We were able to add positions to the portfolio, buying bonds from companies that we believe have a balance sheet and business profile that can survive.

Looking ahead, although markets have rallied from the lows of 23 March 2020, credit spreads still offer some of the best value we have seen for many years. That said, there are undoubtedly challenging times ahead for many companies and default rates are likely to increase. A thorough and comprehensive analysis of each issuer and maintaining a diversified portfolio remain a crucial part of our approach, as we seek to add exposure and lock in value for when markets do recover.

Paul Read/Paul Causer/Rhys Davies

Portfolio Managers

15 May 2020

Principal Risks and Uncertainties

The Board carries out a review, regularly, of the risk environment in which the Company operates, including consideration of emerging risks and now COVID-19. The principal risks and uncertainties relating to the Company can be summarised as:

– Investment Policy – the adopted investment policy and process may not achieve the Company’s published investment objective.

– Market Risk – a fall in the stock markets and/or a prolonged period of decline in the stock markets relative to other forms of investments will affect the performance of the portfolio, as well as the performance of individual portfolio investments.

– Investment Risk – the investment process employed by the Manager is likely to result, from time to time, in a more concentrated portfolio than those of other investment funds.

– Foreign Exchange Risk – the movement of exchange rates may have an unfavourable or favourable impact on returns as the Company holds non-sterling denominated investments and cash.

– Shares – share price is affected by market sentiment, supply and demand for the shares, dividends declared, portfolio performance as well as wider economic factors and changes in the law. The market value of, and the income derived from, the Company’s ordinary shares can fluctuate and may go down as well as up.

– Gearing Returns Using Borrowings – the net borrowing may not exceed, at the time of drawdown, 50% of shareholders’ funds. Borrowing levels may change from time to time in accordance with the Manager’s assessment of risk and reward. As a consequence, any reduction in the value of the Company’s investments may lead to a correspondingly greater percentage reduction in its NAV (which is likely to adversely affect the Company’s share price). The Company borrows principally using repo financing arrangements. In certain circumstances it may have to realise investments at short notice to repay amounts owing under those arrangements and may not be able to realise the expected market value of those assets.

– High Yield Corporate Bonds – corporate bonds are subject to credit, liquidity, duration and interest rate risk. Adverse changes in the financial position of the issuer of corporate bonds or in general economic conditions may impair the ability of the issuer to make payments of principal interest or may cause the liquidation or insolvency of the issuer.

– Derivatives – the Company may enter into derivative transactions for the purpose of efficient portfolio management. The Company will not enter into derivative transactions for speculative purposes.

– Reliance on External Service Providers – failure by any service provider to carry out its obligations to the Company could have a materially detrimental impact on the operation of the Company and affect the ability of the Company to successfully pursue its investment policy. The Company’s operations and reputation could be affected if any of its service providers suffered a major cyber security breach.

– Regulatory – whilst compliance with rules and regulations is closely monitored, breaches and changes could affect returns to shareholders.

– Pandemic (COVID-19) Risk – restrictions to movement of people and disruption to business operations are impacting portfolio company valuations and returns and could impact operational resilience of service providers. As the spread of COVID-19 continues, the Directors are monitoring the situation closely, together with the Manager and third-party service providers. A range of actions has been implemented to ensure that the Company and its service providers are able to continue to operate as normal, even in the event of prolonged disruption. The Manager’s business continuity plans are reviewed on an ongoing basis and the Directors are satisfied that the Manager has in place robust plans and infrastructure to minimise the impact on its operations so that the Company can continue to trade, meet regulatory obligations, report and meet shareholder requirements.

The Manager has mandated work from home arrangements and implemented split team working for those whose work is deemed necessary to be carried out on business premises. Any meetings are being held virtually or via conference calls.

Other similar working arrangements are in place for the Company’s third-party service providers. The Directors remain confident that with these measures in place, the Company is in a good position to continue operating largely as normal in these extreme market conditions. In addition, due to the nature of the Company being a closed end investment company, the Portfolio Manager is not presented with regular daily inflows and outflows that require managing.

Except for the pandemic risk above, a detailed explanation of these principal risks and uncertainties can be found on pages 12 to 16 of the Company’s 2019 annual financial report, which is available on the Company’s section of the Manager’s website at:

www.invesco.co.uk/enhancedincome

In the view of the Board, these principal risks and uncertainties are as much applicable to the remaining six months of the financial year as they were to the six months under review.

Going Concern

The half-yearly financial report has been prepared on a going concern basis. The Directors consider that this is the appropriate basis as they have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. In considering this, the Directors took into account the Company’s investment objective, risk management policies and capital management policies, the diversified portfolio, the liquidity of the securities which can be used to meet short-term funding commitments, and the ability of the Company to meet all of its liabilities, including its repo financing, and ongoing expenses from its assets.

RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH THE MANAGER

Under International Financial Reporting Standards, the Company has identified the Directors as related parties. Transactions with Directors are limited to their remuneration. Transactions with the Manager comprise management fees. The basis of these has not changed from that reported in the latest annual financial report.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

in respect of the preparation of the half-yearly financial report

The Directors are responsible for preparing the half-yearly financial report using accounting policies consistent with applicable law and International Financial Reporting Standards.

The Directors confirm that to the best of their knowledge:

– the condensed set of financial statements contained within the half-yearly financial report have been prepared in accordance with the International Accounting Standards 34 ‘Interim Financial Reporting’;

– the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R of the FCA’s Disclosure Guidance and Transparency Rules; and

– the interim management report includes a fair review of the information required on related party transactions.

The half-yearly financial report has not been audited or reviewed by the Company’s auditor.

Signed on behalf of the Board of Directors.

Kate Bolsover

Chairman

15 May 2020

BOND RATING ANALYSIS

At 31 March 2020

Standard & Poor’s (S&P) ratings. Where a S&P rating is not available, an equivalent average rating has been used. Investment grade is BBB– and above.

For the definitions of these ratings see the Glossary of Terms and Alternative Performance Measures on page 71 of the 2019 annual financial report.

INVESTMENT PORTFOLIO

At 31 March 2020

All investments are fixed interest bonds unless otherwise stated; floating rates notes are depicted by FRN.

Bonds and Equity Investments 

Derivative Instruments – Credit Default Swaps

(1) Moody/Standard & Poor’s (S&P)/Equivalent average rating.

Condensed Statement of Comprehensive Income

The total column of this statement represents the Company’s statement of comprehensive income, prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The (loss)/profit after taxation is the total comprehensive (loss)/income. The supplementary revenue and capital columns are both prepared in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the Company. No operations were acquired or discontinued in the period.

Condensed Balance Sheet

Registered number 75059

Condensed Statement of Cash Flows

* Formerly Short-Term Investment Company (Global Series) plc.

CONDENSED STATEMENT OF CHANGES IN EQUITY

Notes to the Condensed Financial Statements

1. Basis of Preparation

The condensed financial statements have been prepared using the same accounting policies as those adopted in the 2019 annual financial report. They have been prepared on an historical cost basis, in accordance with the applicable International Financial Reporting Standards (IFRS), as adopted by the European Union and, where possible, in accordance with the Statement of Recommended Practice for Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in October 2019.

2. Income

3. Management Fee, Performance Fees and Finance Costs

Investment management fees and finance costs are allocated equally to revenue and capital. The management fee is 0.8% on the first £80 million of shareholders’ funds; 0.7% on the next £70 million; and 0.6% on any excess of shareholders’ funds over £150 million.

The performance fee arrangements were removed with effect 1 October 2017. The deferred performance fee arising in the year ended 30 September 2017, continues to be recognised as a provision of £306,000 as at 31 March 2020 (30 September 2019: £306,000).

4. Taxation

The Company is subject to Jersey income tax at the rate of 0% (2019: 0%). The tax charge consists of irrecoverable withholding tax on overseas income.

5. Dividends Paid

The first interim for the quarter ended 31 December 2019 was paid on 31 January 2020 to Shareholders on the register on 3 January 2020. The second interim for the quarter ended 31 March 2020 was paid on 30 April 2020 to Shareholders on the register on 3 April 2020.

6. Share Capital, including Movements

Subsequent to the period end 650,000 ordinary shares were issued at an average price of 63.93p.

7. Classification under Fair Value Hierarchy

8. Status of Half-Yearly Financial Report

The financial information contained in this half-yearly report, which has not been reviewed or audited, does not constitute statutory accounts as defined in Article 104 of Companies (Jersey) Law 1991. The financial information for the half years ended 31 March 2019 and 2020 has not been audited. The figures and financial information for the year ended 30 September 2019 are extracted and abridged from the latest published accounts and do not constitute the statutory accounts for that year.

By order of the Board

JTC Fund Solutions (Jersey) LimitedCompany Secretary

15 May 2020