XELO V PLC DIRECTORS' REPORT AND FiNANCiAL … · portfolio and the Notes value would be equal to...

COMPANY REGISTRATION NUMBER: 363802

XELO V PLC

DIRECTORS' REPORT AND FiNANCiAL STATEIVIENTS FOR THE YEAR ENDED 31 DECEMBER 2012

XELOV PLC

TABLE OF CONTENTS Page

COMPANY INFORMATION 2

DIRECTORS' REPORT AND STATEMENT OF DIRECTORS' RESPONSIBILITIES 3 - 6

INDEPENDENT AUDITORS' REPORT 7 - 8

PROFIT AND LOSS ACCOUNT 9

BALANCESHEET 10

STATEMENT OF CHANGES IN EQUITY 11

CASH FLOW STATEMENT 12

NOTES TO THE FINANCIAL STATEMENTS 13-29

XELOV PLC

COMPANY INFORMATION

DIRECTORS Ronan Reilly Imran Khan (Pakistani national)

COMPANY SECRETARY AND REGISTERED OFFICE

TMF Administration Services Limited 53 Merrion Square Dublin 2 Ireland

AUDITORS PricewaterhouseCoopers Chartered Accountants and Statutory Auditors One Spencer Dock North Wall Quay Dublin 1 Ireland

BANKERS Bank of Ireland La Touche House Customs House Dock International Financial Services Centre Dublin 1 Ireland

SOLICITORS

The Bank of New York Mellon One Canada Square London E15 5AL United Kingdom

A&L Goodbody Solicitors 25-28 North Wall Quay International Financial Services Centre Dublin 1 Ireland

TRUSTEE BNY Mellon Corporate Tmstee Services Limited One Canada Square London E15 5AL United Kingdom

SWAP COUNTERPARTY Barclays Bank Plc 5 The North Colonade Canary Wharf London EI4 4BB United Kingdom

XELO V PLC

DIRECTORS' REPORT AND STATEMENT OF DIRECTORS RESPONSIBILITIES

The directors present their annual report and audited financial statements of Xelo V Plc (the "Company") for the year ended 31 December 2012.

PRINCIPAL ACTIVITIES

The Company is a bankruptcy-remote special purpose company with limited liability, which was incorporated on 14 November 2002 under the laws of Ireland.

The Company has issued listed Notes, the proceeds of which have been invested in credit default swap transactions (the "Swaps") referenced to a portfolio of investments (the "Reference Portfolio") and collateral (the "Collateral"). The Swap results in the Company swapping all inflows from the Collateral with Barclays Bank Plc (the "Swap Counterparty") in exchange for actual sums equal to the interest and principal due to the investors ("Noteholders") on Retriever Series 4 Notes, Kara B1 Notes, Kara B3 Notes, Kara B5 Notes and Kara B6 Notes (together the "Notes").

REVIEW OF BUSINESS AND FUTURE DEVELOPMENTS

The notional value ofthe Swaps and Collateral as at 31 December 2012 was €28,897,164 (2011: €32,102,924). The notional amount outstanding can be reduced if credit events in excess of a stated buffer amount occur in respect of the reference portfolios. The payment dates for the Swaps fall quarteriy on day 20 of March, June, September and December each year for each series of Notes except for the Retriever Series 4 whose payment dates fall on day 25 of February, May, August and November. The payments are made in arrears and the scheduled termination date of all the Swaps is 20 June 2013 except Retriever Series 4 which is 25 August 2013. The series of Notes issued and redeemed to date are part of the Company's established $5,000,000,000 programme for the issuance of Notes. The Noteholders recourse is limited to the Company's interest in the respective Swaps and the Collateral securing each series of Notes.

The fair values of the Notes outstanding have increased, due to the gain on revaluation, partially offset by the redemption of the Kara B6 Notes. The value of the Retriever Series 4 has increased substantially during the year as there have been no defaults, credit markets have improved and the remaining time to maturity is short.

On 22 June 2012, following the purchase of the Notes by Barclays Bank plc from the original Noteholders, the company redeemed €2,744,022 of Kara B6 Notes,

On 15 November 2012, following the partial repurchase of the Notes by Barclays Bank plc from the original Noteholders, the company partially redeemed €32,000 of Kara B5 Notes.

At the same time the Collateral and Swaps to which the Noteholders had recourse were partially/fully unwound as appropriate. There was no gain or loss to the Company as a result of these transactions as the repurchased Notes were redeemed against the value ofthe Collateral and Swaps in place.

Notes Issued

The Notes disclosed below are listed on the Irish Stock Exchange and are subject to its regulations.

Series description Categories of Notes issued Currency Notional value

Kara Bl Note Secured Limited Recourse Credit-Linked Notes EUR 10,000,000

Kara B3 Note 0.25 % Protected Interest and Contingent Interest Secured Limited Recourse Credit-Linked Notes EUR 4,000,000

Kara B5 Note D.25 % Protected Interest and Contingent Interest Secured Limited Recourse Credit-Linked Notes EUR 2,202,000

Retriever series 4 Note Secured Limited Recourse Credit-Linked Notes USD 16,750,000

The Notes issued by the Company are due to mature on 20 June 2013 except Retriever series 4 which is due to mature on 25 August 2013, At present the directors are considering the options available to the Company, which may include a further issuance of Notes in the future. The directors are in contact with the relevant transaction parties to consider appropriate next steps.

3

XELO V PLC

DIRECTORS' REPORT AND STATEMENT OF DIRECTORS' RESPONSIBIUTIES (CONTINUED)

REVIEW OF BUSINESS AND FUTURE DEVELOPMENTS (CONTINUED)

a) Secured Limited Recourse Credit - Unked Notes

This category includes the Kara B1 Notes and Retriever Series 4 Notes. The recourse ofthe Noteholders to the Company is limited to the Company's interest in the Swaps and the Collateral securing the Notes. The Retriever Series 4 is a first loss protection on a reference pool of corporate loans. The reference portfolio size is USD 2.1 billion, and the tranche protection is USD 67 million.

b) 0.25% Protected Interest and Continpent Interest Secured Limited Recourse Credit-Linked Notes

This category is made up of the Kara 83 Notes and Kara 85 Notes. The recourse of the Noteholders to the Company is limited to the Company's interest in the Swaps and the Collateral securing the Notes.

All payments to be made by the Company in respect of the Notes of each series are only due and payable from and to the extent of the sums received or recovered from time to time by or on behalf of the Company or the Trustee in respect ofthe Swaps and Collateral in respect ofsuch series.

The interest income eamed by the assets held as Collateral is swapped for a fixed amount of 0.25% except for Retriever Series which is based on the 3 month LIBOR rates plus a margin of 5.689%. Due to the existence of the Swap, the Company's results are not directly affected by the increase or decrease in interest rates on the Collateral.

The holders of the Notes are exposed to the credit risk of the reference portfolios. In addition, the holders of the Notes are exposed to the associated credit/counterparty risk of the Swaps and associated Collateral. Therefore, the ability of the Company to meet its obligations under the Notes will be dependent inter alia on the creditworthiness of the Swap Counterparty,

If the Swap Counterparty does not make a payment when and where it is due under the charged agreement, this may affect the Company's ability to pay the Noteholders (and the other parties in favour of which the Company has granted security under the Trust Deed) amounts owing to them on a timely basis or at all. Consequently, payments of interest or principal due to the Noteholders may not be paid by the Company or payment may be delayed. In such an event the Noteholders will only have recourse to the Swap Counterparty through the Notes Tmstee acting on their behalf as unsecured creditors of the Swap Counterparty.

The Notes issued are initially recorded at the value of the net proceeds received. Subsequent to intemal recognition the Notes are carried at fair value through profit or loss. The ultimate amount to be repaid to the Noteholders will depend on the proceeds from the Swaps which depends on the reference portfolio.

The valuation methodology of Swaps valuation has changed in June 2012 and some important factors are as follows:

a. Pre-June 2012, Swap Counterparty used to value the Retriever Notes using an Expected Loss methodology. The Expected Loss approach calculated the expected loss on the impaired names in the portfolio and the Notes value would be equal to Par minus the expected loss.

b. Post-June 2012, the Swap Counterparty have moved to a new valuation methodology which is the current methodology used now known as the Indexed Coupon valuation. This is based on the weighted average credit spread of each individual name in the portfolio. The change in valuation model is approved by the independent model committee.

The key performance indicators for the Company are as follows:

2012 2011 0 /

/o Change

(a) Remaining investments term in years 1 2 n/a (b) Interest income earned in € 831,523 756,905 9.85% (c) Interest expenses paid in € (831,523) (756,905) 9.85% (d) Unrealised gain/(loss) on Reference Portfolio and derivative

financial instruments - in € 5,831,783 (4,071,231) N/A (e) Total unrealised (loss)/gain on Notes in € (5,831,783) 4,071,231 N/A

The interest income has increased in comparison to the prior year. This is mainly due to an improvement in LIBOR rates. The increase in the LIBOR rates has an equal and opposite effect, which has resulted in an increase in the interest expense paid to the Noteholders.

4

XELO V PLC

DIRECTORS' REPORT AND STATEMENT OF DIRECTORS' RESPONSIBILITIES (CONTINUED)

FINANCIAL RISK MANAGEMENT

The disclosures in relation to the Company's policies for financial risk management including, currency risk, interest rate risk, liquidity risk, cashflow risk, and the nature of the instruments used during the year to mitigate exposure to these risks, are discussed in Note 16 to the financial statements.

TRANSACTIONS INVOLVING DIRECTORS

TMF Administration Services Limited (the "Administrator") provide corporate administration sen/ices to the Company at arm's length commercial rates. Ronan Reilly and Imran Khan, both directors of the Company, were also directors of the Administrator during the year and in that capacity had a material interest in transactions conducted with the Company.

There were no other contracts ofany significance in relation to the business ofthe Company in which the directors had an interest as defined in the Companies Act, 1990, at any time during the year.

SIGNIFICANT SUBSEQUENT EVENTS

There were no other significant subsequent events after the year-end until the date of signing of this report that would require adjustment to or disclosure in the financial statements.

BOOKS OF ACCOUNT

The directors believe that they have complied with requirements of section 202 of the Companies Act, 1990 with regard to books of account by employing a sen/ice provider with appropriate expertise and by providing adequate resources to the financial function. The books of account of the Company are maintained at the registered office, 53 Merrion Square, Dublin 2.

CORPORATE GOVERNANCE REVIEW

The board of directors (the "Board") of the Company is responsible for establishing and maintaining adequate intemal control and risk management systems of the Company in relation to the financial reporting process. Such systems are designed to manage rather than eliminate the risk of failure to achieve the Company's financial reporting objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.

The Board has established processes regarding intemal control and risk management systems to ensure its effective monitoring of the financial reporting process. These include appointing the Administrator to maintain the accounting records of the Company independently. The Administrator is contractually obliged to maintain proper books and records as required pursuant the Administration agreement. The Administrator is also contractually obliged to prepare for review and approval by the Board the annual report including financial statements intended to give a true and fair view of the Company. The Board evaluates and discusses significant accounting and reporting issues as the need arises. From time to time, the Board also examines and evaluates the Administrator financial accounting and reporting routines and monitors and evaluates the external auditors' performance, qualifications and independence. The Administrator has operating responsibility for internal control in relation to the financial reporting process and the Administrator reports to the Board.

The Administrator is contractually obliged to design and maintain control structures to manage the risks which the Board judges to be signiflcant for internal control over flnancial reporting. These control structures include appropriate division of responsibilities and specific control activities aimed at detecting or preventing the risk of significant deficiencies in financial reporting for every significant account in the financial statements and the related notes in the Company's annual report.

The Company's policies and the Board's instructions with relevance for financial reporting are updated and communicated via appropriate channels, such as e-mail, correspondence and meetings to ensure that all financial reporting information requirements are met in a complete and accurate manner. The Board has an annual process to ensure that appropriate measures are taken to consider and address the shortcomings identified and measures recommended by the independent auditors.

Given the contractual obligations of the Administrator, the Board has concluded that there is currently no need for the Company to have a separate internal audit function in order for the board to perform effective monitoring and obser/ation of the internal control and risk management systems of the Company in relation to the financial reporting process. The principal duties of an audit committee are completed by the Board. Therefore the Company has taken the exemption available for Section 110 Companies set out under Statutory Instruments 220 of 2010, section 91(9) not to have a separate audit committee.

5

XELO V PLC

DIRECTORS' REPORT AND STATEMENT OF DIRECTORS' RESPONSIBILITIES (CONTINUED)

CORPORATE GOVERNANCE REVIEW (CONTINUED)

No person has a significant direct or indirect holding of securities in the Company. No person has any special rights of control over the Company's share capital.

There are no restrictions on voting rights.

With regard to the appointment and replacement of directors, the Company is governed by its Articles of Association which empower the existing directors to appoint and (if necessary) replace the directors. The Articles of Association themselves may be amended by special resolution of the shareholders.

POWERS OF DIRECTORS

The Board is responsible for managing the business affairs of the Company in accordance with the Articles of Association, which allow them to enter into contracts and perform all tasks necessary to conduct the business of the Company. The directors may delegate certain functions to the Administrator and other parties, subject to the supervision and direction by the directors. The Board of directors consists of two executive directors.

SHAREHOLDER MEETINGS

The shareholders' rights and operations of shareholders meetings are defined in the Articles of Association and comply with the Companies Acts, 1963 to 2012. The Company holds a general meeting each year as its annual general meeting in addition to any other meeting in that year. The annual general meeting is specified in the notice sent out for the meeting.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors are responsible for preparing the directors' report and the financial statements in accordance with applicable Irish law and generally accepted accounting practise in Ireland including the accounting standards issued by the Financial Reporting Council ("FRC") and published by the Chartered Accountants Ireland ("CAI").

irish Company law requires the directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the directors are required to;

• select suitable accounting policies and then apply them consistently; » make judgments and estimates that are reasonable and prudent; » prepare the financial statements on the going concem basis unless it is inappropriate to presume that the

Company will continue in business.

The directors confirm that they have complied with the above requirements in preparing the financial statements.

The directors are responsible for keeping proper books of accounts which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements are prepared in accordance with accounting standards generally accepted in Ireland and comply with the Irish Companies Acts, 1963 to 2012. They are also responsibie for safeguarding the assets ofthe Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

INDEPENDENT AUDITORS

The auditors, PricewaterhouseCoopers, have expressed their willingness to continue in office in accordance with section 160 (2) ofthe Companies Act, 1963.

This report was approved by the Board on 22 May 2013 and signed on its behalf:

Imran Khan Director

I I I Ronan Reilly Director

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pwc

INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF XELO V PLC

We have audited the financial statements of Xelo V Plc for the year ended 31 Deeember 2012 which comprise the Profit and Loss Account, the Balance Sheet, the Statement of Cash flows and the related notes. The financial reporting framework that has been applied in their preparation is Irish law and accounting standards issued by the Financial Reporting Council and promulgated by the Institute of Chartered Accountants in Ireland (Generally Accepted Accounting Practice in Ireland).

Respective responsibilities of directors and auditors

As explained more fully in the Directors' Responsibilities Statement set out on page 6, the directors are responsible for the preparation of the financial statements giving a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with Irish 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.

This report, including the opinions, has been prepared for and only for the company's members as a body in accordance with Section 193 of the Companies Act, 1990 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

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 in accordance with Generally Accepted Accounting Practice in Ireland of the state of the company's affairs as at 31 December 2012 and of its profit and cash flow for the year then ended; and

• have been properly prepared in accordance with the requirements of the Companies Acts, 1963 to 2012.

PricewaterhouseCoopers, One Spencer Dock, North Wall Quay. Dublin 1, Ireland, I.D.E. Bax No. 137 T: +353 (o) 1 792 6000, F: +353 (o) 1 792 6200, www.pivc.com/ie

chartered Accountants

/

pwc

INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF XELO V PLC

Matters on whieh we are required to report by the Companies Acts, 1963 to 2012

• We have obtained all the information and explanations which we consider necessary for the purposes of our audit.

• In our opinion proper books of account have been kept by the company. • The financial statements are in agreement with the books of account. • In our opinion the information given in the Directors' Report is consistent with the financial

statements. • The net assets of the company, as stated in the Balance Sheet, are more than half of the amount of

its called-up share capital and, in our opinion, on that basis there did not exist at 31 December 2012 a financial situation which under Section 40 (1) of the Companies (Amendment) Act, 1983 would require the convening of an extraordinary general meeting of the company.

Matters on which we are required to report by exception

We have nothing to report in respect of the provisions in the Companies Acts, 1963 to 2012 which require us to report to you if, in our opinion, the disclosures of directors' remuneration and transactions specified by law are not made.

John BUgh for and on behalf of PricewaterhouseCoopers Chartered Accountants and Statutory Audit Firm Dublin 22 May 2013

8

XELOV PLC PROFIT AND LOSS ACCOUNT

FOR THE YEAR ENDED 31 DECEMBER 2012

Notes

31 December 2012

€

31 December 2011

€

Interest receivable and similar income Interest payable and similar charges Unrealised gains/(losses) on financial instruments

Net Interest Income

Other operating income Operating expenses

Profit on ordinary activities before taxation

3 4 5

831,523 (831,523)

46,275 (45,519)

756

756,905 (756,905)

56,864 (55,899)

965

Corporation tax

Profit after tax

Balance at the beginning of the year

Balance at the end of the year

(189)

567

4,034

4,601

(241)

724

3,310

4,034

The Company has no recognised gains or losses other than those included in the profit and loss account and therefore no separate statement of total recognised gains and losses has been presented. All of the above profits are in respect of continuing operations.

The notes on pages 13 to 29 form part of these financial statements.

The fmancial statements were approved by the Board on 22 May 2013 and signed on its behalf:

Imran Kfian Director

Ronan Reilly Director

9

XELOV PLC BALANCE SHEET

AS AT 31 DECEMBER 2012

Financial assets

Financial instruments

Notes 31 December 31 December 2012 2011

€ €

10 - 25,148,087

25,148,087

Current assets Financial instruments Cash and cash equivalents Other debtors

10 28,203,848 8,449,251

165,402

36,818,501

59,327 133,190

192,517

Creditors - amounts falling due within one year

Trade and other payables

Debt securities issued - Notes

11

12

(8,570,052)

(28,203,848)

(148,483)

Total assets less current liabilities

Creditors - amounts falling due after more then one year

Debt securities issued - Notes 12

(36,773,900) (148,483)

44,601 25,192,121

(25,148,087)

Net assets 44,601 44,034

Capital and reserves Called up share capital Profit and loss account

Equity shareholders' funds

13

14

40,000

4,601

44,601

40,000

4,034

44,034

The notes on pages 13 to 29 form part of these financial statements.

The financial statements were approved by the Board on 22 May 2013 and signed on its behalf:

/ Imran Khan Director

Ronan Reilly / Director /

10

XELOV PLC

STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2012 Share Capitai €

Retained earnings

€

Total €

Balance as at 1 January 2012 40,000 4,034 44,034

Shares issued during year Profit for the year

Balance as at 31 December 2012 40,000

567

4,601

567

44,601

For the year ended 31 December 2011 Share Capital Retained eamings € €

Total €

Baiance as at 1 January 2011 40,000 3,310 43,310

Shares issued during year Profit for the year 724 724

Balance as at 31 December 2011 40,000 4,034 44,034

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XELOV PLC

CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2012

31 December 31 December

Operating activities

Profit on ordinary activities

Increase in debtors lncrease/(decrease) in creditors

NET CASH INFLOW/{OUTFLOW) FROM OPERATIONS

2012 €

567

(32,212)

8,421,569

8,389,924

2011 €

724 (42,750) (43,698)

(85,724)

Investing activities Disposal of financial instruments 2,776,022

Financing activities Redemption of Notes

lncrease/(decrease) in cash

(2,776,022)

8,389,924 (85,724)

Cash and cash equivalents at the start of the year 59,327 145,051

Cash and cash equivalents at the end of the year 8,449,251 59,327

12

XELOV PLC

NOTES TO THE FINANCIAL STATEMENTS

1. CORPORATE INFORMATION

The Company was incorporated on 14 November 2002, under the laws of Ireland with registration number 363802. The Company is a special purpose Company with limited liability and qualifies for the regime contained in Section 110 of the Irish Taxes Consolidation Act, 1997 (the "TCA"). This provides that a qualifying Company will be liable to corporation tax at the rate of 25% under Case III of Schedule D of the TCA in respect of taxable profits.

2. ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated.

Basis of preparation

The financial statements are prepared in accordance with Irish GAAP and comply with financial reporting standards of the the FRC, as promulgated by the CAI. Due to the nature of the Company's business and the type of transactions the Company is engaged in, the directors have adapted the Profit and Loss Account to suit the circumstances ofthe business in accordance with Section 4(13) ofthe Companies (Amendment) AcL 1986.

The format and certain wording of the financial statements have been adapted from those contained in the Companies (Amendment) Act 1986 and FRS 3 "Reporting Financial Performance" so that, in the opinion ofthe directors, they more appropriately reflect the nature of the Company's business. In the opinion of the directors, the financial statements with the noted changes provide the information required by the Companies Acts, 1963 to 2012.

The accounting policies have been applied consistently by the Company. The financial statements have been prepared under the historical cost convention as modified to include the fair value of certain financial instruments.

Use of estimates and judgements

The preparation of the financial statements requires management to make judgments, estimates and assumptions that may affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. The key area of estimate and judgement for the Company is determining the fair value of derivative financial instruments and financial liabilities. The fair value of the derivatives where there is no active market is detennined using valuation techniques, including using recent arm's length market transactions; reference to the current value of another instrument that is substantially the same; discounted cash flow analysis or other valuation models.

Interest income and expense

Interest income and expense are recognised in the Profit and Loss Account for all instruments measured at amortised cost using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Company estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contact that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Cash and cash equivaients

Cash and cash equivalents include cash in hand and cash held at call with banks.

Foreign currency transactions

Transactions in foreign currencies are translated to the functional currency of the Company at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss.

13

XELOV PLC

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

2. ACCOUNTING POLICIES (CONTINUED)

Taxation

The tax expense represents the sum of the tax payable for the current reporting period. The tax currently payable is based on taxable profit for the period as calculated in accordance with Irish Tax Laws. Taxable profit differs from profit before tax as reported in the Profit and Loss Account because it excludes items of income or expense that are not taxable or deductible. The Company's liability for current tax is calculated using tax rates and laws that have been enacted or substantively enacted at the end of the reporting period date. Deferred income tax is provided in full, using the liability method, on timing for Irish GAAP differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of reporting period date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised where it is probable that future taxable profit will be available against which the timing differences can be utilised.

Financial assets at fair value through profit and loss

The Company classifies its financial assets at fair value through profit and loss ("FVTPL"). Management determines the classification of its investments at initial recognition. Purchases and sales of financial assets are recognised on a trade-date basis which is the date on which the Company commits to purchase or sell the asset Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Company has transferred substantially all risks and rewards of ownership.


Various factors influence the availability of observable inputs and these may vary from product to product and change over time. Factors include, for example, the depth of activity in the relevant market, the type of product, whether the product is new and not widely traded in the marketplace, the maturity of market modelling and the nature of the transaction (bespoke or generic). To the extent that valuation is based on models or inputs that are not observable in the market, the determination of fair value can be more subjective, dependant on the significance of the unobservable input to the overall valuation. Unobservable inputs are determined based on the best infonnation available, for example by reference to similar assets, similar maturities or other analytical techniques.

Where the classification of a financial instrument requires it to be stated at fair value, fair value is determined by reference to a quoted market price for that instrument or by using a valuation model. Where the fair value is calculated using valuation models, the methodology is to calculate the expected cash flows under the terms of each specific contract and then discount these values back to a present value. These models use as their basis independently sourced market parameters including, for example, interest rate yield curves, equities and commodities prices, option volatilities and currency rates.

Derivatives are included in assets when their fair value is positive and liabilities when their fair value is negative, unless there is the legal ability and intention to settle net. Gains and losses arising from changes in the fair value of derivatives are included in the profit and loss account in the year in which they arise.

Financial liabilities - Notes Issued at fair value through profit and loss

Notes issued are recognised inifially at fair value, and are subsequently measured at FVTPL. A liability may be designated at FVTPL when it eliminates or significantly reduces a measurement or recognifion inconsistency i.e. "an accounfing mismatch" that would otherwise arise from measuring assets or liabilifies or recognising gains and losses on them on a different basis. The Company derecognises a financial liability (or a part ofthe financial liability) from its Balance Sheet when the obligation specified in the contract is discharged or cancelled or expires. Whilst this accounfing treatment is in accordance with FRS 26, the Companies (Amendment) Act, 1986 does not permit financial liabilities to be valued at fair value, the directors consider that adoption of the FRS 26 option to fair value liabilifies is required in order to give a true and fair view of the flnancial performance ofthe Company.

14

XELOV PLC


2. ACCOUNTING POLICIES (CONTINUED)

Valuation of financial instruments

The Company measures fair values using the following hierarchy of methods:

• Level 1 - Quoted market price in an active market for an identical instrument.

• Level 2 - Valuation techniques based on observable inputs. This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.

• Level 3 - Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs could have a significant effect on the instrument's valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

Limited recourse and receivable/payable from/to Noteholders

If the net proceeds of realisation of the Swaps and Collateral secured against the Notes are less than the aggregate amount payable by the Company to the Noteholders the obligations of the Company will be limited to such net proceeds, which shall be applied in accordance with the prospectus. In such circumstances, the assets (if any) of the Company will not be available for payment of such shortfali which shall be borne by the Noteholders, and the other secured parties in accordance with the prospectus applied at the time of final settlement. The retums made to the Noteholders over the life of the Company would include the effect of capital gains/losses as well as interest. At each reporting date, when the results of operations are computed, this gain or loss is recognised in the Profit and Loss Account and added to or set off against the principal amounts due to Noteholders.

Offsetting financial instrument

Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the Company has a legal right to set off the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions.

Share Capital

Ordinary shares are classified as equity as per the Company's Articles of Association.

3. INTEREST RECEIVABLE AND SIMILAR INCOME

Interest on Swaps transactions

31 December 2012

€ 831,523

31 December 2011

€

756,905

4. INTEREST PAYABLE AND SIMILAR CHARGES

Interest payable on Kara B-3 Note Interest payable on Kara B-5 Note Interest payable on Kara B-6 Note Interest payable on Retriever series 4 Note

Kara B1 Notes are interest free secured credit linked Notes due 2013.

5. GAINS/(LOSSES) ON FINANCIAL INSTRUMENTS

Unrealised gain/(loss) on financial instruments Unrealised (loss)gain on Notes at FVTPL

31 December 2012

€ 10,167 5,655 3,254

812,447

831,523

31 December 2012

5,831,783 (5,831,783)

31 December 2011

€ 10,139 5,663 6,377

734,726

756,905

31 December 2011

€ (4,071,231)

4,071,231

15

XELOV PLC


6. OTHER OPERATING INCOME

Transaction fees Reimbursed expenses

7. PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION

This is stated after charging:

Directors' remuneration Auditors' remuneration (excluding VAT) -Statutory Auditors -Other assurance services -Taxation advisory services -Other non-audit services

31 December 2012

€ 756

45,519

46,275

31 December 2012

€

14,000

5,000

31 December 2011

€ 965

55,899

56,864

31 December 2011

€

14,000

5,000

19,000 19,000

8. EMPLOYEE INFORMATION

The Company has no employees during the year 2012 (2011; Nil). Accounting and other services have been outsourced to the Administrator.

9. CORPORATION TAX

Irish corporation tax charge on profits for the year

31 December 2012

€

189

31 December 2011

€

241

Factors affecting tax charge for year The current tax charge for the year is higher than the current charge that would result from applying the standard rate of corporation tax of 25% to profits on ordinary activities. The differences are explained below:

Profit on ordinary activities before tax

Profit on ordinary activities multiplied by the standard rate of Irish corporation tax forthe year 12.5%

31 December 2012

€ 756

94

31 December 2011

€ 965

120

Effects of: Higher rate tax applicable under Section 110 TCA, 1997 95 121

Current tax charge for year 189 241

The Company is a qualifying Company within the meaning of Section 110 of the Taxes Consolidation Act, 1997. As such the profits are chargeable to corporation tax under Case 111 of Schedule D at a rate of 25 % but are computed in accordance with the provisions applicable to Case I of Schedule D.

16

XELOV PLC


10. FINANCIAL INSTRUMENTS

Kara B-1

Kara B-3

Kara B-5

Kara B-6

Retriever series 4

Fair value adjustment

Total

31 December 2012

€

10,000,000

4,000,000

2,202,000

12,695,164 (693,316)

28,203,848

31 December 2011

€

10,000,000

4,000,000

2,234,000

2,744,022

13,124,902 (6,954,837)

25,148,087

The net proceeds from the issuance ofthe Notes were used to purchase from the Swaps Counterparty the initial Collateral in respect of the Notes. Under the total return swaps the Company pays the proceeds received from its assets held as Collateral to the Swaps Counterparty in exchange for sums equal to interest and principal due on the Notes issued.

The combined notional value ofthe financial instruments (comprising Swaps and Collateral) as at 31 December 2012 was €28,897,164 (2011: €32,102,924) and the fair value was €28,203,848 (2011: €25,148,087). The scheduled termination date ofthe Kara Series swaps is 20 June 2013 and Retriever series 4 swaps is 25 August 2013. The notional amount outstanding can be reduced if credit events in excess of a stated buffer amount occur in respect of the Reference Portfolio.

Following the purchase of Kara B6 Notes by the Swap Counterparty from the original Noteholders during the year, the Company redeemed its Kara B6 Notes. At the same time the Collateral and Swaps to which the Noteholders had recourse were unwound. There was no gain or loss to the Company as a result of this transaction as the repurchased Notes were redeemed against the value ofthe Collateral and Swaps in place.

11. TRADE AND OTHER PAYABLES

Accrued interest payable on the Notes

Other creditors

Accruals

Corporation tax

31 December 2012

€

74,400

8,449,483

45,980

189

8,570,052

31 Deceml 2011

€

80,812

44,440

22,990

241

148,483

Other creditors comprise bank balances received as cash Collateral and are due back to the Swap Counterparty.

17

XELOV PLC


12. DEBTSECURITIES ISSUED Credit Types of Notes 31 December SiDecember Rating 2012 2012 2011

€ €

Kara B-1 Note A2

Kara B-3 Note A2

Kara B-5 Note A2

Kara B-6 Note A2

Secured Limited Recourse Credit-Linked Notes 10,000,000 10,000,000

Protected Interest and Contingent Interest Secured Limited Recourse

Credit-Linked Notes 4,000,000 4,000,000


Credit-Linked Notes 2,202,000 2,234,000


Credit-Linked Notes - 2,744,022

Secured Limited Recourse Credit-Linked Notes 12,695,164 13,124,902

Retriever series 4 Note A2

Fair Value Adjustments (693,316) (6,954,837)

Total 28,203,848 25,148,087

Tiie Company tiad 4 series of Notes in issue as at 31 December 2012, all ofwhich are listed on the Irish Stock Exchange.

The Notes in issue can be categorised as follows:

• Secured Limited Recourse Credit-Linked Notes • 0.25% Protected Interest and Contingent Interest Secured Limited Recourse Credit-Linked Notes

a) Secured Limited Recourse Credit - Unked Notes

This category includes the Kara Bl Notes and Retriever series 4 Notes. The recourse of the Noteholders to the Company is limited to the Company's interest in the Swaps and the Collateral securing the Notes. The Retriever series 4 is a first loss protection on a reference pool of corporate loans. The portfolio size is USD 2.1 billion, and the tranche protection is USD 67 million.

b) 0.25% Protected Interest and Contingent Interest Secured Limited Recourse Credit-Linked Notes

This category is made up ofthe Kara B3 Notes and Kara B5 Notes. The recourse ofthe Noteholders to the Company is limited to the Company's interest in the Swaps and the Collateral securing the Notes.

All payments to be made by the Company in respect of the Notes of each series are only due and payable from and to the extent of the sums received or recovered from time to time by or on behalf of the Company or the Trustee in respect of the Swaps and the Collateral in respect of such series.

The interest income earned by the assets held as Collateral is swapped for a fixed amount of 0.25% except for Retriever Series which is based on the 3 month LIBOR rates plus a margin of 5.689 percent. Due to the existence of the Swap, the Company is not affected by the increase or decrease in interest rates on the Collateral.

The holders of the Notes are exposed to the credit risk of the reference portfolios. In addition, the holders of the Notes are exposed to the associated credit/counterparty risk ofthe Swaps. Therefore, the ability ofthe Company to meet its obligations under the Notes will be dependent inter alia on the creditworthiness of the Swap Counterparty.

If Swap Counterparty does not make a payment when and where it is due under the charged agreement, this may affect the Company's ability to pay the Noteholders (and the other parties in favour of which the Company has granted security under the Tmst Deed) amounts owing to them on a timely basis or at all. Consequently, payments of interest or principal due to the Noteholders may not be paid t̂ y the Company or payment may be delayed. In such an event the Noteholders will only have recourse to the Swap Counterpari:y through the Notes Trustee acting on their behalf as unsecured creditors of Swap Counterparty.

The Notes issued are initially recorded at the value of the net proceeds received. Subsequent to initial recognition the Notes are carried at fair value through profit or loss. The ultimate amount to be repaid to the Noteholders will depend on the proceeds from the Swaps which depends on the performance ofthe reference portfolio and Collateral.

Credit rating

In July 2012 Moody's downgraded the credit rating of the Notes from Aa3 to A2 because of the concern regarding the creditworthiness of the Swap Counterparty following a methodology change. The Moody's credit rating for all the above listed Notes at the year ended 31 December 2011 was Aa3.

18

XELOV PLC


13. SHARE CAPITAL

Authorised 40,000 ordinary shares of €1 each

Allotted, called up and fully paid 40,000 ordinary shares of €1 each

31 December 2012

€

40,000

40,000

31 December 2011

€

40,000

40,000

On 14 September 2005, the Company issued 39,994 EUR 1 ordinary shares to TMF Management (Ireland) Limited. These shares are held by TMF Management (Ireland) Limited on behalf of Xelo V Trust. The remaining six shares are held by six individuals on behalf of TMF Management (Ireland) Limited, who in turn, holds them on behalf of Xelo V Trust. All shares have been fully paid up.

14. RECONCILIATION OF MOVEMENT IN SHAREHOLDERS' FUNDS

Opening shareholders' funds Profit for the year

Closing shareholders' funds

15. ANALYSIS OF CHANGES IN NET DEBT

As at 31 December 2012

Cash at bank and in hand

Debt due within one year/after more than one year

1 January 2012

€

59,327

(25,148,087)

31 December 2012

€ 44,034

567

44,601

Cash flow Other non-cash changes

€ € 8,389,924

(3,055,761)

31 December 2011

€ 43,310

724

44,034

31 December 2012

€

8,449,251

(28,203,848) (25,088,760) 8,389,924 (3,055,761) (19,754,597)

As at 31 December 2011

Cash at bank and in hand

Debt falling due after more than one year

1 January 2011

€ 145,051

(29,219,318)

(29,074,267)

Cash flow Other non-cash changes

€ € (85,724)

(85,724)

4,071,231

4,071,231

31 December

2011 €

59,327

(25,148,087)

(25,088,760)

16. RISK MANAGEMENT

The Company is exposed to a variety of financial risks: market rate risk, credit risk and liquidity risk. The Company's overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Company. The Company's exposure to market risk is comprised mainly of the movement in the fair value of its Swaps, which is linked to the value and performance of the Reference Portfolio. The risk management of the Company is the responsibility of the directors. The directors seek to assess, monitor and manage the potential adverse effects of these risks on the Company's financial performance by appropriate methods as discussed below.

19

XELOV PLC


16. RISK MANAGEMENT (CONTINUED)

Categories of financial instruments

Jhe Company's financial instruments include cash at banl<, financial assets, Notes issued and other accruals that arise directly from its operations.

Due to limited recourse nature ofthe Notes issued the amount repayable to the Noteholders is limited to the amounts received under the Sw/ap agreement and related Collateral attributed to that particular series of Note. As at 31 December 2012 the fair value of the reference portfolio and Swaps, by class of Notes, is as follows:

Series of Notes Series 2006 KARA

B-1 Series 2006 KARA

B-3 Series 2006 KARA

B-5 Series 2006

(Retriever 4)

Notes € € € €

Nominal value of the Notes 10,000,000 4,000,000 2,202,000 12,695,164

Fair value of the Notes 9,995,151 4,005,387 2,202,876 12,000,434

Credit rating Moody's downgraded credit rating on July 2012

from Aa3 to A2

Moody's downgraded credit rating on July 2012

from Aa3 to A2

Moody's downgraded credit rating on July 2012

from Aa3 to A2

Moody's downgraded credit

rating on July 2012 from Aa3to

A2

Swaps

Nominal value of the Swaps 10,000,000 4,000,000 2,202,000 12,695,164 Fair Value of the Swaps and Collateral 9,995,151 4,005,387 2,202,876 12,000,434

Reference Portfolio Notional value of the Reference Portfolio 10,000,000 4,000,000 2,202,000 12,695,164

Retriever Series 4 is a first loss protection on reference pool of corporate loans. The portfolio size is USD 2.1 billion, and the tranche protection is USD 67 million.

(a) Operational risl<

Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Company's processes, personnel and infrastructure, and from external factors other than credit, markets and liquidity issues such as those arising from legal and regulatory requirements and generally accepted standards to corporate behaviour.

Operational risk arises from all of the Company's operations. The Company was incorporated with the purpose of engaging in those activities outlined in the preceding paragraphs. All management and administration functions are outsourced to the Administrator.

(b) Capital risk management

The Company manages its capital to ensure that it is able to continue as a going concem. The capital managed by the Company comprises of ordinary shares and the Notes outstanding as at the year-end. The objective of the Company is to provide the Noteholders with returns over the medium to long term through both capital growth and income. The Company also uses derivatives for risk management purposes. The Company is not subject to externally imposed capital requirements. There were no changes to the policies and procedures during the year with respect to the Company's approach to its capital management program.

(c) Financial rislc

The Company's activities expose it to a variety of financial risks listed below. The Company's overall risk management programme focuses on the unpredictability of financial mari<ets and seeks to minimise potential adverse effects on the financial performance of the Company. However, all the risks affecting the Company are ultimately borne fully by the Noteholders. The Company has exposure to the following risks from its use of financial instalments:

• Price risk including other price risk • Interest rate risk • Currency risk • Liquidity risk • Credit risk • Concentration risk

20

XELOV PLC



(c) Financial risk (Continued)

(i) Price risk including otlier price risk

Ttiis is tiie risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk and currency risk), whether those changes are caused by factors specific to individual financial instrument or its Company, or other factors affecting similar flnancial instruments traded in the market. Noteholders are exposed to investment price risk and derivative price risk on the Collateral and Swaps acquired from the proceeds of the Notes issued. The financial assets and liabilities are exposed to price risk including other price risk on the Reference Portfolio, Swaps and Notes issued. The classiflcafion of the financial instruments between these levels has been discussed on page 16.

The following table below shows the analysis of financial assets and liabilifies designated at fair value according to three Levels as at 31 December 2012 and 31 December 2011.

31 December 2012 Levei 1 Level 2 Level 3 Total € € € €

Financial instruments - - 28,203,848 28,203,848

28,203,848 28,203,848

31 December 2012 Level 1 Level 2 Level 3 Total € € € €

Financial liabilifies at FVTPL - Notes . . (28,203,848) (28,203,848)

(28,203,848) (28,203.848)

31 December 2011 Level 1 Level 2 Levei 3 Totai € € € €

Financial instruments - - 25,148,087 25,148,087

25,148,087 25,148,087

31 December 2011 Levell Level 2 Levei 3 Totai € € € €

Financial liabilities at FVTPL - Notes . . (25,148,087) (25,148,087)

(25,148,087) (25,148,087)

The following table shows the year on year movement of the financial liabilifies classified as level 3; there were no transfers between Levels during the year.

Level 3 reconciliation of Swaps and Collateral

Balance at 1 January Total gains and losses recognised - in profit or loss

Transfers into or out of Level 3 Balance at 31 December

31 December 2012

€ 25,148,087

5,831,783 (2,776,022)

31 December 2011

€ 29,219,318 (4,071.231)

28,203,848 25,148,087

Level 3 reconciliation of listed Notes

Balance at 1 January

Total gains and losses recognised - in profit or loss Transfers into or out of Level 3 Balance at 31 December

31 December 2012

€ (25,148,087)

(5,831,783) 2,776,022

31 December 2011

€ (29,219,318)

4,071,231

(28,203,848) (25,148,087)

21

XELOV PLC



(c) Financial rislc (continuecl)

(i) Price risk including other price risk (continued)

The other price risl< exposure of each class of Notes issued is limited to the price risk of the reference securities under the Swaps with Barclays.

Market price fluctuations are one of the key drivers in the investment allocations agreed between the Company and the Noteholders at inception of the Notes issued. At inception, each Noteholder agrees with the Company the type of concentration of investments underpinning each series of Note issued. Thereafter, limited trading or substitutions of investment securities occur. Barclays Bank Asset Management monitors price fluctuations on the investments; however there is limited scope to manage other price risk given the long-term nature of investment in the Notes issued by the Company. Market price is obtained from independent price sources by Barclays Capital. Barclays bank also monitors the Company's exposure to countries and industries. The Company and ultimately Noteholders exposure to countries and industries is set out in Note 16(vii), concentration risk

Price Sensitivitv

Series Notes

Movement in fair value of debt instruments held for a 7% change In Notes prices €

Kara B1 699,661

Kara B3 280,377

Kara B5 154,201

Retriever series 4 840,030

(ii) Interest rate risk

The risk is defined as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Longer term obligations are usually more sensitive to interest rate changes. Interest rates on financial assets and liabilities are matched. Only the Retriever series 4 Noteholders are subject to variable interest rates.

31 December 2012 31 December 2011 Assets € €

Floating interest rate derivative financial instruments/Reference Portfolio 12,695,164 12,934,300

Total assets 12,695,164 12,934,300

Liabilities

Floating interest rate financial liabilities at FVTPL 12,695,164 12,934,300

Total liabilities 12,695,164 12,934,300

Interest rate sensitivity

If the prevailing interest rate increases by 5% the impact on the interest income due solely to the Retriever series 4 Noteholders would be €634,758. There would also be an equal but opposite impact on the interest expense due solely to the Retriever Series 4 Noteholders, The reverse would apply if the prevailing interest rate decreased by 5%.

22

XELOV PLC



(c) Financial risk (continued)

(iii) Currencyrisk

Currency risk is tiie risk tliat the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. This risk arises on financial instruments that are denominated in a currency other than the functional currency in which they are measured. The Notes issued by the Company are denominated in Euro with the exception of the Retriever Series 4 Notes and the associated Swaps and reference portfolio which is in US Dollar. All the Company assets and liabilities are matched. The Company is not exposed to material currency fluctuations in the profit and loss account.

The below table summarise the Company's exposure to foreign exchange rate risk:

31 December 2012

Currency Euro US Dollar

Total


FVTPL €

16,203,414 12,000,434

28,203,848

Financial iiabilities at

FVTPL €

(16,203,414) (12,000,434)

(28,203,848)

Net Exposure

€

31 December 2011

Currency Euro US Dollar

Total


FVTPL €

16,273,595 8,874,492

25,148,087

Financial liabilities at

FVTPL €

(16,273,595) (8,874,492)

(25,148,087)

Net Exposure

€

Currency risk sensitivity

Ifthe prevailing USD to EUR foreign exchange rate increased by 5% the impact on the foreign exchange gain or loss would be a loss of €600,022. There would also be an equal but opposite impact on the fair value of the Notes. The reverse would apply ifthe prevailing foreign exchange rate decreased by 5%.

(iv) Liquidity risk

Liquidity risk is the risk that the Company is not able to meet its financial obligations as they fall due or can do so only at an unacceptably high cost If the Company cannot meet its obligations under the various debt arrangements or its capital commitments, it may be subject to contract breach damages and may even be unable to continue to operate on a going concern basis.

The ability of the Company to meet its obligations under the notes is dependent on the receipt of interest and principal from the credit default swap transactions. The interest earned on financial assets is received on quarterly basis and matches the interest payment dates and amounts for the Notes issued.

In the management of liquidity risk, the Company monitors and maintains a level of cash and cash equivalents deemed adequate by management to finance the Company's operations and mitigate the effects of fluctuations in cash flows. It monitors the risk to shortage of funds by regular analysis of cash flow movements, forecasts and adherence to all agreements.

23

XELOV PLC


16. RISK MANAGEMENT

(c) Financial risk (continued)

(iv) Liquidity risk (continued)

Tlie following table details the Company's liquidity analysis for its financial liabilities. The amounts disclosed in the table are the contractual undiscounted cash flows, whereas the Company manages the inherent liquidity risk based on expected undiscounted cash inflows.

Liquidity risk 2012 Less than 3 months 1 to 5 OverS 3 months to 1 year years years

Liabiiities € € € € Financial liabilities at FVTPL - 28,203,848 Accrued interest 74,400 Trade and other payables 8,495,652 Committed interest 193,558 313,302

Total 8,763,610 28,517,150

Less than 3 months Liquidity risk 2011 3 months to 1 year 1 to 5 years Over 5 years

Liabilities € € € € Financial liabilities at FVTPL - ~ 32,102,924 Accrued interest 148,483 Trade and other payables - - 7,004,659 Committed interest 207,964 623,891 182,546

Total 356,447 623,891 39,290,129

The ability of the Company to meet its obligations under the Notes is dependent on the receipt of interest and principal from the derivative financial instruments and assets held as Collateral.

(v) Credltrisk

This is the risk that one party to a financial instrument or transaction will cause a financial loss for the other party by failing to discharge an obligation when it falls due. The company is exposed to credit defaults by third parties in the reference portfolio through the credit default swaps. The total carrying value of assets exposed to credit risk was €36,818,501 (2011: €25,340,604). At 31 December 2012, the following financial assets were exposed to credit risk:

Description

Credit default Swaps/Collateral Cash at bank

Total expense

The Noteholders main exposure to credit risk is in respect ofthe following:

• Investment securities - Notes • Receivables from Swap Counterparties and

• Cash at bank

Investment securities - Notes

An analysis of the credit rating of the Notes as per Moody's is as follows:

2012 €

28,203,848 8,614,653

36,818,501

2011 €

25,148,087 192,517

25,340,604

24

XELOV PLC


16. RISK MANAGEMENT

(a) Financial risk (continued)

(v) Credit risl< (Continued)

Tiiere are no defaulted securities in the reference portfolio (2011: Nil) at the year ended 31 December 2012.

2012 2012 2012 2011 2011 2011 Reference Portfolio Credit Notional Fair Credit Rating Notional Fair

Rating Vaiues Values Values Vaiues € € € €

Kara B-1 A2 10,000,000 9,995,151 Aa3 10,000,000 10,000,000 Kara B-3 A2 4,000,000 4,005,387 Aa3 4,000,000 4,015,127 Kara B-5 A2 2,202,000 2,202,876 Aa3 2,234,000 2,242,449 Kara B-6 A2 - - Aa3 2,744,022 2,754,249 Retriever Series 4 A2 12,695,164 12,000,434 Aa3 13,124,902 6,120,244 Other Swaps Unrated - - Unrated - 16,018

Total 28,897,164 28,203,848 32,102,924 25,148,087

Receivables from Swap Counterparty

The ability of the Company to meet its obligations under the Notes will be dependent upon inter alia, the creditworthiness of the Swap Counterparty. The Notes are linked to the managed Reference Portfolios. The Notes offer protected interest and principal repayment at par on the maturity date, provided by the Swap Counterparty under the swap agreement and provide contingent interest and principal retums based on the performance of the Reference Portfolios. The credit exposure to Barclays Bank Plc as the total return Swap Counterparty, is mitigated through rating triggers and Collateral posting under a credit support annex.

If the Swap Counterparty does not make any payment when and where due by it under the charged agreement, this may affect the Company's ability to pay the Noteholders (and the other parties in favour of which the Company has granted security under the Tmst Deed) amounts owing to them on a timely basis or at all. The Swap Counterparty is obliged to post eligible credit support as set out below. Consequently, payments of interest or principal due to the Noteholders may not be paid by the Company or payment may be delayed. The Noteholders will have no recourse to the Swap Counterparty directly, other than through the Tmstee acting on their behalf as unsecured creditors of the Swap Counterparty.

The ability ofthe Company to meet its obligations underthe Notes will be dependent upon, inter alia, its receipts of payments from the Swap Counterparty. Consequently the Noteholders and the Company are relying not only on the creditworthiness of the issuers or obligors in respect of the Reference Portfolio, if any, but also on the full and timely performance by, and creditworthiness of, the Swap Counterparty in respect of its obligations.

If the short term senior unsecured rating assigned by S&P and Moody's to the Swap Counterparty is less than A1/P1 (the "Required Rating") and the Swap Counterparty has outstanding payment obligations or any future obligations in respect of Charged Agreement, then the Swap Counterparty will be obliged (until such times as the Swap Counterparty has the Required Rating) either to:

I. Post Collateral with the Company for an amount equal to the sum of (a) the (Adjusted Notional Amount less the market value of the Charged Reference Portfolio) multiplied by 1.05, and (b) the Buyer Payment Amount and ongoing series expenses for one Buyer Calculation Period only, in accordance with such terms as approved by S&P and Moody's and provided that if the Swap Counterparty is rated less than A3/P2, the Swap Counterparty shall post Collateral for an amount equal to the sum of (a) the (Adjusted Notional Amount less market value of the Charged Reference Portfolio) multiplied by 1.05, and (b) the Buyer Payment Amount, and ongoing series expenses for two Buyer Calculation Periods; or

II. Cause an entity with the Required Rating to guarantee or to provide and indemnity in respect of its obligations under the Charged Agreement, subject to Rating Agency confirmation; or

III. Transfer all rights and obligations under the Charged Agreement to another entity which has (or which is guaranteed by an entity which has) the Required Rating, provided that Noteholders consent is obtained; or

IV. Employ any other strategy subject to Initial Owner, S&P, and Moody's confirmation.

If the Swap Counterparty fails to take any applicable action available to it as described above within 30 calendar days following the date on which it no longer has the Required Rating (and provided the Swap Counterparty still does not have Required Rating), such failure shall be an Additional Termination Event with respect to which the Swap Counterparty shall be the affected party.

25

XELOV PLC


16. RISK MANAGEMENT

(a) Financial risk (continued)

(v) Credit risk (Continued)

Ttie directors monitor tiie credit risk of ttie Swap Counterparty. If there is an issue in relation to the credit rating of the Swap Counterparty, the directors expect to be notified and liaise with the Swap Counterparty in relation to any actions that are necessary, under the transaction documents.

If the Swap Counterparty becomes insolvent or was otherwise unable to pay its debts, the Company would have the right to terminate the charged agreement. If it does so, a mandatory early redemption event will occur. In this respect, the ability of the Company to make payments under the Notes is directly linked to the ability of Barclays Bank PLC as Swap Counterparty to make its payments under the charged agreement.

The Swap Counterparty is required to post on the issue date (and thereafter maintain) with the Company eligible credit support under the charged agreement equal to the par amount of the Notes and the protected interest amounts for each interest payment date in order to de-link its rating from the anticipated rating of the Notes. If the Swap Counterparty is a defaulting party under the charged agreement and has not posted additional eligible credit support or the posted credit support has diminished in value due to market volatility, the proceeds thereof may be less than the par amount and the protected interest amount.

The credit rating of the Swap Counterparty, for the year ended 31 December 2012 was A2 (2011: A+). These ratings address the repayment of principal on the legal final maturity and protected interest amounts only. They do not address contingent interest or any amounts received above the par amount ofthe Notes.

It is evident that the structure relies on the Swap Counterparty to pay all amounts due to Noteholders under the total return swap. Therefore the rating on the Notes reflects the rating ofthe Swap Counterparty and this rating is expected to migrate with the rating of the Swap Counterparty. The principal methodology used by Moody's in this rating was "Moody's Approach to Rating Repackaged Securities" rating methodology published in April 2010.

Cash at bank

The credit risk on cash transactions and transactions involving derivative flnancial instruments is mitigated by transacting with counterparties that are regulated entities subject to prudential supervision, or with high credit ratings assigned by international credit rating agencies. Standard and Poor's credit rating of Bank of New York Mellon in which the Company has held 99.60% cash deposits is AA- (2011: Aa2) and credit rating of Bank of Ireland in which the Company has held balance of the cash deposits is A- (2011: A-2).

(vi) Concentration Risk

Concentration risk can arise from the type of investments held in the portfolio, the maturity of assets, the concentration of sources of funding, concentration of counterparties or geographical locations. Prudent risk management implies maintaining the exposure to various risks at a reasonable level.

The management monitors the exposure of the Company to various risks including geographical location. Counterparty, industry/sector and assets type. The Company has issued listed Notes, the proceeds of which have been invested in Swaps referenced to the Reference Portfolio, The Swaps results in the Company swapping all potential inflows from the Reference Portfolio with the Swap Counterparty in exchange for actual sums equal to the interest and principal due to the Noteholders on Retriever Series 4 Notes, Kara Bl Notes, Kara B3 Notes, Kara B5 Notes and Kara B6 Notes,

26

XELOV PLC


16. RISK MANAGEMENT

(c) Financial risl< (continued)

(vi) Concentration Risk (continued)

The exposure of Noteholders to industry sector concentrations was as follows:

Series

Kara Bl

Kara B3

Kara B5

Kara B6

Retriever Series 4

Industry/Sector

Banking

Banking

Banking

Banking

31 December 2012

Portfolio

100%

100%

100%

31 December 2011

Portfolio

100%

100%

100%

100%

Retail 13.70% 13.70%

Leisure 12.28% 12.28%

Energy 7.75% 7.75%

Chemicals / Pharmaceuticals 7.35% 7.35%

Mining & Metals 6.75% 6.75%

Transport 6.14% 6.14%

Media 6.04% 6.04%

Food & Drink Manufacture 5.57% 5.57%

Energy 4.26% 4.26%

Food & Drink Manufacture / Retail 4.26% 4.26%

Manufacturing 4.09% 4.09%

Services 2.96% 2.96%

Telecoms - Telecoms 2.56% 2.56%

Exchanges / Clearing Houses 2.45% 2.45%

Infrastructure 2.35% 2.35%

Technology 2.30% 2.30%

Aerospace 1.94% 1.94%

Tourism / Hotels 1.38% 1.38%

Forest Products 1.24% 1.24%

Other Financial Institution 0.91% 0.91%

Wholesale 0.84% 0.84%

Civil Engineering / Construction 0.66% 0.66%

Services 0.58% 0.58%

Airiine 0.52% 0.52%

Property 0.45% 0.45%

Healthcare 0.40% 0.40% Aerospace 0.27% 0.27%

100.00% 100.00% Total

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XELOV PLC


16. RISK MANAGEMENT

(c) Financial rislc (continued)

(vi) Concentration risk (continued)

Ttie exposure of the Noteholders to the geographical concentration was as follows:

Series Geographic location Portfolio Portfolio

Kara Bl Cayman Islands 100.00% 100.00%

Kara B3 Cayman Islands 100.00% 100.00%

Kara B5 Cayman Islands 100.00% 100.00%

Kara B6 Cayman Islands - 100.00%

Retriever Series 4

United Kingdom 38.85% 38.85%

France 12.22% 12.22%

United States of America 9.49% 9.49%

Denmark 5.51% 5.51%

Belgium 5.04% 5.04%

Abu Dhabi 4.26% 4.26%

Luxembourg 4.26% 4.26%

Australia 4.01% 4.01%

Germany 3.66% 3.66%

Spain 3.05% 3.05%

Finland 2.69% 2.69%

Sweden 2.42% 2.42%

Isle of Man 1.40% 1.40%

Austria 1.24% 1.24%

Netherlands 0.91% 0.91%

Cayman Islands 0.52% 0.52%

Norway 0.47% 0.47%

Total 100.00% 100.00%

17. SIGNIFICANT EVENTS SINCE THE YEAR END

There were no other significant subsequent events after the year-end until the date of signing ofthis report that would require adjustment to or disclosure in the financial statements.

18. CONTINGENT LIABILITIES AND COMMITMENTS

There were no contingent liabilities or commitments as of 31 December 2012 (2011: Nil). Contingent liabilities are assessed continually to determine whether transfers of economic benefits have become probable. Where future transfers of economic benefits change from previously disclosed contingent liabilities, provisions are recognised in the year in which the changes in probability occur.

19. RELATED PARTY TRANSACTIONS

There were no significant related party transactions other than those disclosed in the Directors' report.

20. CONTROLLING PARTY

TMF Management (Ireland) Limited holds 39,994 shares in the Company and the remaining six shares are held by six individuals on behalf of TMF Management (Ireland) Limited, who in tum, holds them on behalf of Xelo V Trust. All shares have been fully paid up.

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XELOV PLC


21. CHARGES

The JP IVIorgan Tmst Corporation Limited has rights over all the assets of the Company on behalf of the Noteholders. The charges are as follows:

• A charge for the purpose of securing any Issue of Debentures.

• A charge on Book Debts of the Company.

22. APPROVAL OF FINANCIAL STATEMENTS

The financial statements were approved by the Board and authorised for issue on 22 May 2013.

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XELO V PLC DIRECTORS' REPORT AND FiNANCiAL … · portfolio and the Notes value would be equal to...

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