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BAKER STREET USD FINANCE LIMITED

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BAKER STREET USD FINANCE LIMITED Directors' report and audited financial statements for the year ended Bedell Trust Company Limited PO Box 75, 26 New Street St. Helier, Jersey Channel Islands, JE4 8PP
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BAKER STREET USD FINANCE LIMITED Directors' report and audited financial statements for the year ended Bedell Trust Company Limited PO Box 75, 26 New Street St. Helier, Jersey Channel Islands, JE4 8PP Contents Page Directors' report 2 Independent auditor's report 6 Audited statement of comprehensive income 8 Audited statement of financial position 9 Audited statement of changes in equity 10 Audited statement of cash flows 11 12 Directors' report The directors present their report together with the audited financial statements for Baker Street USD Limited (the 'Company') for the year ended. Incorporation The Company was incorporated as a public company in Jersey, Channel Islands on 9 February Principal activities The Company was formed for the purpose of participating in a synthetic credit default swap transaction (the 'Transaction') arranged by KBC Financial Products Brussels N.V. ('KBC'). The Company raised monies pursuant to the issuance of class Al-USD, A2-USD, B-USD, C-USD, D-USD, E-USD, F-USD, G-USD and H-USD floating rate credit-linked notes (together, the 'Notes'), which were listed on the Irish Stock Exchange. The total principal amount of the Notes raised was US$45,500,000 divided into US$8,400,000 class A-1-USD Notes, US$8,200,000 class A-2-USD Notes, US$8,100,000 class B-USD Notes, US$6,250,000 class C-USD Notes, US$5,000,000 class D-USD Notes, US$3,600,000 class E-USD Notes, US$2,200,000 class F-USD Notes, US$2,000,000 class G-USD Notes and US$1,750,000 class H-USD Notes. The Notes were subordinated in payment of principal and interest in accordance with the order of seniority. Any amounts by which the adjusted principal balance of the Notes was to be reduced without payment to the noteholders was in accordance with the reverse order of seniority. Initially the Company entered into a reverse repo agreement (the 'Reverse Repo Agreement) with KBC Bank N.V. (the 'Repo Counterparty') whereby under the agreement the Company acquired eligible investments at a purchase price of US$45,500,000 as collateral (the 'Collateral'), purchased with the proceeds of the Notes. All income received on the Collateral was paid to the Repo Counterparty in consideration of a repo premium paid to the Company by the Repo Counterparty. Upon the maturity or early redemption of the Notes, the Repo Counterparty would deliver to the Company the purchase price of US$45,500,000 or such proportion of the Collateral to match the Notes to be redeemed. On 2 April 2007 the Company transferred to the Repo Counterparty the Collateral and the funds realised thereby (a 'Repo to GIC Transfer Amount') were invested in a guaranteed investment contract (a 'GIC' and hereafter referred to as the 'Amounts due under the Investment Agreement') pursuant to an investment agreement (the 'Investment Agreement') between the Company and KBC Investments Hong Kong Limited (the 'Eligible GIC Provider'). On 7 January 2011 KBC Bank N.V. was appointed as the new Eligible GIC Provider. The Company also entered into a credit default swap arrangement (the 'Swap') with KBC Investments Cayman V, Ltd (the 'Swap Counterparty') pursuant to the terms of which the Company had, in return for a fee, taken on the mezzanine level credit and market risk of a diversified reference portfolio (the 'Portfolio'). The Portfolio was up to US$250,000,000 in size. The Company had the mezzanine level credit risk for a maximum amount of US$45,500,000 above the first loss tranche of US$3,764,000. As security for its obligations, the Company charged the Amounts due under the Investment Agreement to BNY Corporate Trustee Services Limited as trustee (the 'Trustee') for the secured parties (those transactional creditors to whom security was provided under the security trust deed (the 'Trust Deed')). The Trustee had also been appointed as trustee on behalf of the noteholders pursuant to a note trust deed and held the benefit of certain covenants made by the Company in relation to the repayment of principal and interest on the Notes on trust for the noteholders. By way of protecting the Company from the risks of the Transaction arising from the Company's exposure to the Swap Counterparty under the Swap, the Transaction documents contained limited recourse and bankruptcy remoteness (non-petition) provisions pursuant to which each party recognised the limited financial resources of the Company and the intended bankruptcy remoteness of the Company. The Amounts due under the Investment Agreement were secured by way of support for the Company's exposure under the Swap and thereafter its obligations under the Notes. Certain of the Company's day to day obligations and powers in respect of the Transaction were performed on its behalf by KBC Bank N.V, as administrator pursuant to an administration and cash management agreement. Functions performed by the Irish paying agent, the transfer agent, the listing agent and the registrar were provided by JP Morgan entities prior to January 2012 when they were novated to Bank of New York Mellon entities. On 8 July 2013 the Swap Counterparty exercised its right to terminate the Transaction and the Transaction parties terminated and discharged their obligations and accordingly, the Transaction was terminated. -2- Directors' report Directors The directors of the Company, who served during the year and subsequently, are: Shane Michael Hollywood Alasdair James Hunter Secretary The secretary of the Company during the year and subsequently is: Bedell Secretaries Limited Results and dividends The results for the year are shown in the statement of comprehensive income The directors have paid a final dividend during 2012 of 750 (US$1,158) in respect of the financial year ended 31 December 2011, being the 2011 Transaction fee (2011: 750 (US$1,163) in respect of the financial year 31 December 2010, being the 2010 Transaction fee). The directors recommend the payment of a final dividend in the sum of 750 (US$1,199) in respect of the financial year ended, being the 2012 Transaction fee (2011: 750 (US$1,158) being the 2011 Transaction fee). Independent auditor Ernst &Young LLP has previously been appointed and has expressed willingness to continue in office until the termination of the Transaction. A resolution to reappoint Ernst &Young LLP as auditor will be proposed at the next annual general meeting. Going concern The optional termination date was April 2011, following which time and on any subsequent payment date, the Swap Counterparty'had the right to terminate the Transaction. On 8 July 2013 the Company redeemed the remaining Amounts due under the Investment Agreement and used the proceeds to repay, in full, the remaining class Al-USD Notes. Following the repayment of the Notes the Company and the other Transaction parties terminated and discharged their obligations in respect of the Transaction and accordingly, the Transaction was terminated. As the purpose for which the Company was incorporated no longer exists it is the intention of the directors to proceed with the dissolution of the Company prior to 31 December The financial statement have therefore been prepared on a basis other than going concern. No material adjustments arose as a result of ceasing to apply the going concern basis and the financial statements do not include any costs relating to the dissolution of the Company as these costs will be met by KBC. Post statement of financial position events At the date of approving these financial statements there is considerable uncertainty in the financial markets following the global liquidity and credit crisis. As a consequence there have been significant rating downgrades and write downs in residential mortgage backed and other asset backed securities held or issued by banking and financial institutions. Credit events have occurred in the Portfolio in the form of a) bankruptcy credit events, b) ABS ratings downgrade credit events, c) permanent reduction of capital credit events, and d) restructuring credit events (together, the 'Credit Events') with a claim date during the year ended and subsequently, for the following corporate obligations and asset backed securities: -3- Directors' report Post statement of financial position events (continued) a) bankruptcy credit events: Overseas Shipholding Group, Inc., Sino-Forest Corporation, and The PMI Group, Inc. b) ABS ratings downgrade credit events: BSABS 2006-HE10 1M2, CMLTI 2006-WFH3 M2, CMLTI 2006-WFH4 M2, CWCI A A, GSAMP 2006-HE7 M2, LBMLT M7, MLMI 2005-WMC1 63, MLMI 2006-HE2 M1, OWNIT M1, SVHE 2006-OPT3 M1, and SVHE 2006-OPT5 M1. c) permanent reduction of capital credit events: AHMA A32, ACE 2006-FM2 M1, CWCI A A, HASC 2006-HE1 M1, JPMAC 2006-CW2 MV6, and LUM A3. d) restructuring credit events: Bankia SA - restructured default, Irish Life &Permanent Public Limited Company - restructured default, The Governor and Company of the Bank of Ireland - restructured default, and Victor Company of Japan, Limited - restructured default. Credit protection valuations were verified by an independent verification agent in respect of the Credit Event claims which resulted in settlements being made under the Swap. The payment of Credit Event claims resulted in the utilisation of the cash reserve amount (the 'Cash Reserve Amount'), in full, the reduction of the Amounts due under the Investment Agreement and an equal reduction to the principal amounts due to the noteholders. On the cash settlement date of 7 January 2013, the Amounts due under the Investment Agreement and the principal balance of the class Al-USD Notes were reduced by US$399,140. The adjusted principal balance of the class Al-USD Notes was US$7,302,677. On the cash settlement date of 8 April 2013, the Amounts due under the Investment Agreement and the principal balance of the class Al-USD Notes were reduced by US$911,118. The adjusted principal balance of the class A1- USD Notes was US$6,391,559. On the termination date the adjusted principal balance of the class Al-USD Notes was repaid, in full, in the sum of US$6,391,559. The adjusted principal balance of the class Al-USD Notes was US$nil. -4- Directors' report Statement of directors' responsibilities with regard to the financial statements The directors are required by the Companies (Jersey) Law 1991, as amended, to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company as at the end of the financial year and of the profit or loss for that period. In preparing these financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and appropriate; state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The directors are responsible for keeping accounting records that are sufficient to show and explain the Company's transactions. These records must disclose with reasonable accuracy at any time the financial position of the Company and to enable the directors to ensure that any financial statements prepared comply with the Companies (Jersey) Law 1991, as amended. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud, error and non-compliance with law and regulations. By order of the board S~~ ~-- l i ~refary~- Bedell Secretaries~Limited 3 0 JUL Date Registered office 26 New Street St Helier Jersey JE2 3RA -5- ~III~IIIIIiII I~~~'~~~ ~ ERNST&YOUNG INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF BAKER STREET USD FINANCE LIMITED We have audited the financial statements of Baker Street USD Finance Limited for the year ended which comprise Statement of comprehensive income, Statement of financial position, Statement of changes in equity, Statement of cash flows and the related notes 1 to 18. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards. The financial statements have been prepared on a break up basis. This report is made solely to the company's members, as a body, in accordance with Article 113A of the Companies (Jersey) Law Our audit work has been undertaken so that we might state to the company's members those matters 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. Respective responsibilities of directors and auditors As explained more fully in the Statement of directors' responsibilities with regards to the financial statements set out on page 5, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors. Scope of the audit of the financial statements An audit 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 non-financial information in the Directors' report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the financial statements: give a true and fair view of the state of the company's affairs as at and of its result for the year then ended; have been properly prepared in accordance with International Financial Reporting Standards; and have been prepared in accordance with the requirements of the Companies (Jersey) Law 1991. IIIill~~~ I~IIIIIIIfll411~1 ~ ERNST&YOUNG INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF BAKER STREET USD FINANCE LIMITED Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies (Jersey) Law 1991 requires us to report to you if, in our opinion: proper accounting records have not been kept, or proper returns adequate for our audit have not been received from branches not visited by us; or the financial statements are not in agreement with the accounting records and returns; or we have not received all the information and explanations we require for our audit. ~~ ~~ Kirsty Mackay for and on behalf of Ernst &Young LLP Jersey, Channel Islands Date: 31 July 2013 Audited statement of comprehensive income Notes US$ 2012 US$ 2011 US$ US$ Income Movement in fair value of the Swap through profit or loss Swap premium Investment income Transaction fee Bank interest Cash reserve income Movement in fair value of the Notes through profit or loss ,909, ,584 53,277 1, ,169, ,758 71,681 1, , ,154,892 19,698,821 Expenses Settlement of Credit Event claims Movement in fair value of the Notes through profit or loss Operating expenses Interest payable on the Notes 6 5,988, , , , ,377, , ,186 (7.153,693) ( ) Total comprehensive income for the year 1,199 1,158 The Company has no other items of income or expense for the year and accordingly the profit for the year represents total comprehensive income. The notes on pages 12 to 27 are an integral part of these financial statements. -8- Audited statement of financial position Notes US$ US$ Assets Current assets Amounts due under the Investment Agreement 6 7,701,817 13,690,759 Trade and other receivables 7 6,251 12,433 Cash and cash equivalents ,500 Total assets ,692 Equity and liabilities Equity attributable to owners of the Company Called up share capital Retained earnings 1, Total equity ,161 Liabilities Current liabilities Swap at fair value through profit or loss 6,162,728 13,072,428 Notes at fair value through profit or loss 10 1,531, ,246 Trade and other payables Total liabilities 7, Total equity and liabilities ,740,692 The financial statements on pages 8 to 27 were approved by the board of directors and authorised for issue on 30 July 2013, and signed on its behalf by: irector - Alasdair~James Hunter ~C_ --~~ Alterna e director- Ariel~Pinel The notes on pages 12 to 27 are an integral part of these financial statements. -9- Audited statement of changes in equity Called up share Retained capital earnings Total US$ US$ US$ Balance at 1 January 2011 Profit for the year Total comprehensive income for the the year ended 31 December 2011 Transactions with owners: Equity dividend paid Balance at 37 December ,163 1, , _ (1,163) (1,163) Called up share Retained capital earnings Total US$ US$ US$ Balance at 1 January 2012 Profit for the year Total comprehensive income for the the year ended 31 December 2012 Transactions with owners: Equity dividend paid Balance at 3 1,158 1, ,199 - (1,158) (1.158) 3 1,199 1,202 The notes on pages 12 to 27 are an integral part of these financial statements. -10- Audited statement of cash flows Notes US$ US$ Net cash used in operating activities 12 ( ) (96,155) Cash flows generated from investing activities Swap premium 188, ,478 Cash reserve income 156,250 Investment income 59,440 81,816 Bank interest Redemption of Amounts due under the Investment Agreement ,995 Net cash flows generated from investing activities 6,236, Cash flows used in financing activities Interest payable on the Notes (127,884) (266,162) Settlement of Credit Event claims 6 (5,988,942) (19,377,245) Equity dividend (1.158) (1.163) Net cash flows used in financing activities (6.111,984) (19, 644, 570) Net decrease in cash and cash equivalents (18,948) (78,984) Cash and cash equivalents at 1 January 8 37, ,484 Cash and cash equivalents at 31 December The notes on pages 12 to 27 are an integral part of these financial statements. -11- 1 General information The Company is a public limited company incorporated in Jersey, Channel Islands. The principal activities of the Company are described in the directors' report. 2 Accounting policies Statement of compliance The financial statements for the year ended on pages 8 to 27 have been prepared in accordance with the International Financial Reporting Standards ('IFRS'). Basis of measurement The financial statements are prepared in accordance with accounting principles generally accepted in the island of Jersey, incorporating IFRS and have been prepared under the historical cost convention, except for the revaluation of certain financial instruments. The Transaction terminated on 8 July 2013 and it is the directors' intention to proceed with the dissolution of the Company within the next twelve months. These financial statements are presented in US Dollars ('US$'), which is the Company's functional and reporting currency. A summary of the more important policies in dealing with items that are considered material to the Company are shown below: Going concern The optional termination date was April 2011, following which time and on any subsequent payment date, the Swap Counterparty had the right to terminate the Transaction. On 8 July 2013 t
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