M&G CREDIT INCOME INVESTMENT TRUST PLC Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company invests in illiquid public and private Debt Instruments. Such investments may be difficult to value or realise (if at all) and therefore the market price that is achievable for such investments might be lower than the valuation of these assets and as reflected in the Company's published NAV per Ordinary Share.
The contractual maturities of the financial liabilities at the year end, based on the earliest date on which payment can be required are as follows:
Three months Total Three months Total
or less or less
2020 2020 2019 2019
GBP'000 GBP'000 GBP'000 GBP'000
Creditors: amounts falling due within one year
Purchases awaiting settlement 1,354 1,354 - -
Other creditors 957 957 1,053 1,053
2,311 2,311 1,053 1,053
Credit risk
Credit risk is the risk that one party to a financial instrument or contract will cause a financial loss for the other party by failing to discharge an obligation. In the case of invested assets this is the potential for the reduction in the value of investments which relates to the risk of an issuer being unable to meet its obligations, whilst for trading activities this relates to the risk that the counterparty to any contract the Company enters into being unable to meet its obligations causing loss.
The Investment Manager maintains a credit risk policy and standards which set out the assessment and measurement of credit risk, compliance with which is monitored, and exposures and breaches are reported daily by the Risk team. The policy is reviewed on an annual basis to ensure that it remains fit for purpose and relevant to changes in the risk environment.
Investment mandates specify explicitly the counterparty risk appetite for cash on deposit, foreign exchange and OTC trading whilst other counterparty risk is taken for the purposes of efficient portfolio management and reduction in risk.
Management of counterparty risk
To mitigate counterparty risk the AIFM follows the standards below: ? Preference for 'high-quality' rated counterparties, mainly banks with short-term A1/P1 ratings and banks rated A or
better. ? Limited exposure to each counterparty to diversify risk. ? Collateral taken from counterparties and posted against their default where appropriate. ? Regular monitoring of counterparty rating. ? Capability to rapidly reduce exposure on adverse market intelligence. ? Trading on Delivery Versus Payment (DVP) basis.
Credit risk exposure
The following amounts shown in the statement of financial position represent the maximum exposure to credit risk at the year/period end.
Balance Maximum Balance Maximum
sheet exposure sheet exposure
2020 2020 2019 2019
GBP'000 GBP'000 GBP'000 GBP'000
Fixed assets
Investments held at fair value through profit or loss 140,091 141,602 126,793 126,793
Current assets
Other receivables 1,345 2,834 1,092 2,222
Cash and Cash Equivalents 7,278 11,362 4,877 38,966
Cash at bank and in hand 148,714 155,798 132,762 167,981 No debtors are past their due date and none have been written down or deemed to be impaired.
Fair values of financial assets and financial liabilities
All financial assets and liabilities are either carried at fair value or the amount in the Statement of Financial Position is a reasonable approximation of fair value.
15 Fair value hierarchy
Under FRS 102 an entity is required to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have the levels stated below. ? Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. ? Level 2: other significant observable inputs (including quoted prices for similar investments, interest rates,
prepayments, credit risk, spread premium, credit ratings etc). ? Level 3: significant unobservable inputs (including the Company's own assumptions in determining the fair value of
investments, discounted cashflow model or single broker quote).
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability.
The determination of what constitutes 'observable' requires significant judgement by the Company. The Company considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary and provided by independent sources that are actively involved in the relevant market.
The financial assets measured at FVTPL are grouped into the fair value hierarchy as follows:
As at 31 December 2020 As at 31 December 2019
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Financial assets at FVTPL
Debt Instruments - 87,572 35,232 122,804 - 96,068 16,706 112,774
Investment in funds - 17,287 - 17,287 - 14,019 - 14,019
Financial liabilities at FVTPL
Derivatives (369) 594 - 225 154 369 - 523
Net fair value (369) 105,453 35,232 140,316 154 110,456 16,706 127,316
Valuation techniques for Level 3
The debt investments within the Company utilise a number of valuation methodologies such as a discounted cash flow model, which will use the relevant credit spread and underlying reference instrument to calculate a discount rate. Unobservable inputs typically include spread premiums and internal credit ratings.
Some debt instruments are valued at par and are monitored to ensure this represents fair value for these instruments. On a monthly basis these instruments are assessed to understand whether there is any evidence of market price movements, including impairment or any upcoming refinancing.
In addition, some are priced by a single broker quote, which is typically the traded broker, who provides an indicative mark.
Level 3 reconciliation
The following table shows a reconciliation of all movements in a fair value of financial instruments categorised within Level 3 between the beginning and the end of the financial year:
Level 3 Level 3
31 December 2020 31 December 2019
GBP GBP
Financial assets at FVTPL
Opening balance 16,706 -
Net realised gains/(losses) (112) (265)
Purchases 21,312 17,006
Sales (2,161) (35)
Transfer in/(out) Level 3a (513) -
Closing balance 35,232 16,706 aDuring the year ended 31 December 2020, following a review of the levels for some of the bonds, they have moved from Level 2 to Level 3.
16 Capital commitments
There were outstanding unfunded investment commitments of GBP3,494,000 (2019: GBP2,675,000) at the year end.
As at As at
31 December 2020 31 December 2019
GBP'000 GBP'000
Lewisham Var. Rate 12 Feb 2023 1,198 -
Jamshid Ventures Var. Rate 23 Jul 2023 786 -
Westbourne 2016 1 WR Senior Var. Rate 30 Sep 2023 598 598
Sonovate Var. Rate 12 Apr 2021 560 560
Valentine Senior Var. Rate 7 Mar 2022 133 -
Gate 1 Var. Rate 4 Jun 2022 (Junior) 110 223
Gate 1 Var. Rate 4 Jun 2022 (Senior) 94 245
Greensky Var. Rate 11 Dec 2023 15 -
Gate 2 Var. Rate 4 Jun 2021 - 275
Microfinance Enhancement Var. Rate 8 Nov 2024 - 774
3,494 2,675 17 Capital management policies and procedures
The Company's capital management objectives are: ? to ensure that the company will be able to continue as a going concern; and ? to generate a regular and attractive level of income with low asset value volatility by investing in a diversified
portfolio of public and private debt instruments.
The capital of the company consists of equity, comprising issued capital, reserves and retained earnings.
The Board monitors and reviews the broad structure of the company's capital on an ongoing basis.
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