INVESCO Leveraged High Yield Fund Limited
Preliminary Announcement of Interim Results
For the Six Months ended 31 March 2003
Performance Statistics
At At
31 March 30 %
September
2003 2002 Change
Capital
Shareholders' funds (�'000) 11,029 7,482 47.4
Net asset value per ordinary 13.8p 9.4p 47.4
share
Mid-market price per ordinary 13.0p 12.5p 4.0
share
Discount/(premium) per 6.1% (33.1%)
ordinary share
Total Returns
Merrill Lynch Global High
Yield
European Issuers Index - 95.0 78.6 20.9
Total Return
Total return on portfolio 12.5
Interim Period Ended
31 March 31 March
2003 2002
Interim Period
Net revenue (�'000) 1,965 819
Revenue return per ordinary 2.47p 2.56p
share
Dividends per ordinary share 1.00p 2.75p
Chairman's Statement
There has been a substantial improvement in the high yield markets over the
last six months. It appears that these markets hit bottom in late October and
that after several false dawns it must be acknowledged that there is a serious
credit market rally taking place. This rally has encompassed all elements of
the corporate bond markets - spreads in investment grade and high yield sectors
have tightened dramatically.
After several years of reporting difficult and disappointing news it is
therefore encouraging to be able to report on such positive developments. Of
course this must be put in the context of the Fund's long-term performance
which has been poor. Although there has been a sharp recovery in the NAV of the
Fund from a low in October of just over 6p to over 17p at the time of writing,
we must recognize that the portfolio has suffered over the last three years as
the excess leverage of the late 1990s has been unwound. Capital has been lost
through default and the forced sale of securities in order to meet banking
covenants. As a result of this capital erosion the portfolio's sustainable
level of income generation has fallen and the board took the difficult decision
early in the new year to reduce the dividend payable to 2p per share. We have
every confidence that this dividend level will be sustainable going forwards.
The Fund remains in compliance with all of its banking covenants.
The strength of the credit markets has been based on improving fundamental and
technical factors. The process of deleveraging that we have discussed
previously has been evident in anecdotal terms (more below) and is beginning to
come through in aggregate data. The growth rate of corporate borrowing has
fallen from some 16% in the late 1990s to flat. A similar pattern has occurred
in Europe where additionally there has been a marked change in the maturity
profile of borrowing. Companies are intensely focused on balance sheet
improvement which means running businesses for cash, reducing debt wherever
possible and managing liabilities to avoid a cash crisis. In addition, the
markets have been supported by strong demand for income and significant fund
flows - particularly in the US. Over this period credit markets have also
decoupled from equity markets. Through the first four months of 2003, high
yield has gained over 10% and yet equity markets have struggled.
Notably the credit rally we have seen since October has been achieved against a
complex and problematic macroeconomic background and during a period of high
geo-political risk. Markets have had to contend with a sub par recovery in
growth in the US and continued weakness in Japan and Germany. Central banks
have stressed concerns about growth and deflation above any thoughts about
inflationary pressures. Iraq, SARS, and the debate over corporate governance
have continued to undermine a philosophy that has served the global economy
since the Second World War.
At the portfolio level there have been many positive credit developments.
Corporations have repurchased bonds in the secondary markets. Colt telecom is
one of the most high profile examples of this type of liability management,
however, we have also seen British Airways, Big Food and Travelex buying back
debt. There have also been tenders made for outstanding bonds - Focus, William
Hill, Gala, Coral, Alfa Laval and HMV are among these issuers. When this leads
to the complete retirement of an issue it can mean the loss of a valuable
income stream although in aggregate deleveraging is the objective of the
market. We continue to see companies streamlining businesses and selling
non-core assets - ABB and Carmeuse fall into this category. And, companies are
using the improved liquidity in the markets to restructure term debt and
improve the maturity profile of their debt - TRW and CCK are two multinational
issuers that were able to accomplish this in the first quarter. In Europe one
of the most heavily oversubscribed bond issues of the year was brought by
Vivendi. The company successfully used the markets to put in place finance
enabling it to pursue its divestiture programme. This is the new dynamic in
which the balance sheet comes first. Finally, although not directly applicable
to the portfolio, France Telecom completed its long awaited rights issue.
Spreads on their bonds have tightened markedly over the last six months as the
company's credit profile has improved.
So, the markets are better and we can see strong fundamental reasons for this.
Of course, markets are likely to remain volatile and subject to external
shocks. Nevertheless, it is beginning to feel like the worst of the credit bear
market that has overshadowed the life of this Fund has passed. Our objective
going forward will be to attempt to capitalise on the opportunities that the
improving credit markets offer to us.
George Baird
Chairman
30 May 2003
Statement of Total Return
(Incorporating the Revenue Account)
Six Months to 31 March 2003
(Unaudited)
Revenue Capital Total
�'000 �'000 �'000
Gains/(losses) on investments
- realised - (1,098) (1,098)
- unrealised - 6,265 6,265
Exchange differences - 77 77
Currency gains/(losses)
- realised - (1,038) (1,038)
- unrealised - (770) (770)
Income
Unfranked investment income 3,072 - 3,072
Deposit interest 39 - 39
Investment management fee - note (91) (91) (182)
1
Other expenses (89) - (89)
Net return before finance costs 2,931 3,345 6,276
Interest payable and similar
charges (966) (966) (1,932)
Return on ordinary activities
for
the financial period
(attributable
to equity shareholders) 1,965 2,379 4,344
Dividends in respect of
equity shares - note 2 (797) - (797)
Transfer to/(from) reserves 1,168 2,379 3,547
Return per ordinary share
Basic - note 3 2.47p 2.99p 5.45p
The revenue column of this statement is the profit and loss account of the
Company. All revenue and capital items in the above statement derive from
continuing operations. No operations were acquired or discontinued in the
period.
Statement of Total Return
(Incorporating the Revenue Account)
Year
Ended
30
September
Six Months to 31 March 2002
2002
(Unaudited) (Audited)
Revenue Capital Total Total
�'000 �'000 �'000 �'000
Loss on investments
- realised - (11,302) (11,302) (15,646)
- unrealised - 9,077 9,077 4,529
Exchange differences - (26) (26) 48
Currency gains/(losses)
- realised - 368 368 1,010
- unrealised - (233) (233) (222)
Income
Unfranked investment 2,970 - 2,970 5,978
income
Deposit interest 45 - 45 98
Other income - - - 4
Investment management
fee - note 1 (172) - (172) (352)
Other expenses (98) - (98) (207)
Net return before finance 2,745 (2,116) 629 (4,760)
costs
Interest payable and
similar
charges (1,926) - (1,926) (3,868)
Return on ordinary
activities for
the financial period
(attributable
to equity shareholders) 819 (2,116) (1,297) (8,628)
Dividends in respect of
equity shares - note 2 (880) - (880) (2,474)
Transfer to/(from) (61) (2,116) (2,177) (11,102)
reserves
Return per ordinary share
Basic - note 3 2.56p (6.62)p (4.06)p (15.47)p
Balance Sheet
At At At
31 March 30 31 March
September
2003 2002 2002
(Unaudited) (Audited) (Unaudited)
�'000 �'000 �'000
Fixed assets
Investments at market value 55,435 50,007 47,060
Current assets
Amounts due to brokers - - 315
Forward currency contracts
- unrealised gain - 249 239
Prepayments and accrued 2,095 2,041 2,034
income
Cash at bank 1,024 3,885 3,140
3,119 6,175 5,728
Creditors: amounts falling due within one
year
Amounts due from brokers - 1,680 801
Proposed dividend 797 797 320
Forward currency contracts
- unrealised loss 521 - -
Accruals 157 173 211
1,475 2,650 1,332
Net current assets 1,644 3,525 4,396
Total assets less current 57,079 53,532 51,456
liabilities
Creditors: amounts falling
due
after more than one year 46,050 46,050 46,050
Total net assets 11,029 7,482 5,406
Capital and reserves
Called up share capital 797 797 320
Share premium account 40,553 40,553 30,029
Other reserves
Capital reserve - realised (30,470) (27,354) (22,672)
Capital reserve - (1,403) (6,898) (2,361)
unrealised
Revenue reserve 1,552 384 90
Equity Shareholders' funds 11,029 7,482 5,406
Net asset value per ordinary
share
Basic - note 4 13.8p 9.4p 16.9p
Cash Flow Statement
Six Months Year Six Months
to Ended to
31 March 30 to 31 March
September
2003 2002 2002
(Unaudited) (Audited) (Unaudited)
�'000 �'000 �'000
Cash inflow from operating 2,698 5,699 3,007
activities
Servicing of finance (1,896) (3,823) (1,886)
Capital expenditure and financial
investment
Purchase of investments (15,737) (40,169) (13,420)
Sale of investments 13,832 29,967 13,828
Equity dividends paid (797) (2,477) (1,360)
Net cash inflow/(outflow) before
management
of liquid resources and (1,900) (10,803) 169
financing
Management of liquid 2,885 (1,210) (195)
resources
Financing
Net proceeds from share - 11,001 -
issue
Increase/(decrease) in cash 985 (1,012) (26)
Cash outflow from increase
in liquid resource (2,885) 1,210 195
Translation difference (961) 1,058 342
Movement in net debt in the (2,861) 1,256 511
period
Net debt at beginning of (42,165) (43,421) (43,421)
the period
Net debt at end of the (45,026) (42,165) (42,910)
period
Reconciliation of Movement in Shareholders' Funds
Six months Year to Six Months
to
31 March 30 31 March
September
2003 2002 2002
(Unaudited) (Audited) (Unaudited)
�'000 �'000 �'000
Revenue return for the 1,168 233 (61)
period
Capital return for the 2,379 (11,335) (2,116)
period
Net proceeds from issue of - 11,001 -
shares
Net movement in 3,547 (101) (2,177)
Shareholders' funds
Opening Shareholders' funds 7,482 7,583 7,583
Closing Shareholders' funds 11,029 7,482 5,406
Notes to the interim accounts
1. As of 1 April 2002, investment management fees and finance costs are charged
equally to the revenue account and capital reserve realised. Prior to 1 April
2002, these were charged wholly to the revenue account.
2. The Directors have declared an interim dividend totalling 1.00p (2002:
2.75p) per ordinary share in respect of the year ending 30 September 2003. The
interim dividend of 1.00p will be paid on 30 April 2003.
3. Basic revenue and capital return per ordinary share is based on net gains on
ordinary activities after taxation and on 79,706,600 (30 September 2002:
55,787,447; 31 March 2002: 31,999,000) being the weighted average number of
shares in issue during the period.
4. The basic net asset value per ordinary share has been calculated on net
assets and on 79,706,600 (30 September 2002: 79,706,600 and 31 March 2002:
31,999,000) ordinary shares in issue.
5. The Company had the following loans at each period end under a facility with
Ben Nevis Fund Limited, an independent special purpose finance vehicle
sponsored by the Royal Bank of Scotland.
�'000
Loans falling due after more than five years,
not repayable by instalments
Seven year 7.48% loan due 16 October 2006 10,000
Seven year 7.22% loan due 16 October 2006 10,000
Seven year 7.335% loan due 16 October 200 610,000
Seven year 7.61% loan due 16 October 2006 10,000
Seven year 7.66% loan due 16 October 2006 6,050
46,050
6. The foregoing information at 30 September 2002 is an abridged version of the
Company's full Accounts which carry an unqualified Auditor's report and have
been filed with the Registrar of Companies.
By order of the Board
R&H Fund Services (Jersey)Limited
Secretaries
30 May 2003
END