Volta Finance Ltd. - Annual Report 2012

==> picture [76 x 87] intentionally omitted <==

VOLTA FINANCE LIMITED ANNUAL REPORT AND ACCOUNTS 2012

==> picture [375 x 543] intentionally omitted <==

VOLTA FINANCE LIMITED IS A CLOSED-ENDED LIMITED LIABILITY INVESTMENT COMPANY THAT PURSUES A MULTI-ASSET CLASS INVESTMENT STRATEGY.

FORWARD-LOOKING STATEMENTS

This annual report includes statements that are, or may be considered, “forward-looking statements”. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes”, “estimates”, “anticipates”, “plans”, “expects”, “targets”, “aims”, “intends”, “may”, “will”, “can”, “can achieve”, “would” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this annual report, including in the Chairman’s Statement. They include statements regarding the intentions, beliefs or expectations of the Company or the Investment Manager concerning, among other things, the investment objectives and investment policies, financing strategies, investment performance, results of operation, financial condition, liquidity prospects, dividend policy and targeted dividend levels of the Company, the development of its financing strategies and the development of the markets in which it, directly and through special purpose vehicles, will invest in and issue securities and other instruments. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not guarantees of future performance. The Company’s actual investment performance, results of operations, financial condition, liquidity, dividend policy and dividend payments and the development of its financing strategies may differ materially from the impression created by the forward-looking statements contained in this document. In addition, even if the investment performance, results of operations, financial condition, liquidity, dividend policy and dividend payments of the Company and the development of its financing strategies are

consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods. Important factors that may cause differences include, but are not limited to, changes in economic conditions generally and in the structured finance and credit markets particularly; fluctuations in interest and currency exchange rates, as well as the degree of success of the Company’s hedging strategies in relation to such changes and fluctuations; changes in the liquidity or volatility of the markets for the Company’s investments; declines in the value or quality of the collateral supporting many of the Company’s investments; legislative and regulatory changes and judicial interpretations; changes in taxation; the Company’s continued ability to invest its cash in suitable investments on a timely basis; the availability and cost of capital for future investments; the availability of suitable financing; the continued provision of services by the Investment Manager and the Investment Manager’s ability to attract and retain suitably qualified personnel; and competition within the markets relevant to the Company.

These forward-looking statements speak only as at the date of this annual report. Subject to its legal and regulatory obligations (including under the rules of Euronext Amsterdam), the Company expressly disclaims any obligations to update or revise any forward-looking statement (whether attributed to it or any other person) contained herein to reflect any change in expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.

The Company qualifies all such forward-looking statements by these cautionary statements.

annual report and accounts 2012 VOLTA FINANCE LIMITED 01

KEY POINTS 2012

NET ASSET VALUE (“NAV”) OF €171.0 MILLION (€5.45 PER SHARE) AT 31 JULY 2012, AN INCREASE OF 19.9% FROM €142.6 MILLION AT 31 JULY 2011. OVERALL, AFTER TAKING INTO ACCOUNT THE AMOUNT OF DIVIDENDS PAYABLE IN CASH DURING THE FINANCIAL YEAR (€12.4 MILLION), THIS REFLECTS A STRONG POSITIVE PERFORMANCE OF 28.6% FOR THE FINANCIAL YEAR
A PROPOSED DIVIDEND OF €0.26 PER SHARE FOR THE SEMI-ANNUAL PERIOD FROM 1 FEBRUARY 2012 TO 31 JULY 2012 WILL BE PROPOSED AT THE DECEMBER AGM, IN ADDITION TO THE €0.22 DIVIDEND PAID FOR THE SEMI-ANNUAL PERIOD FROM 1 AUGUST 2011 TO 31 JANUARY 2012
NET PROFIT OF THE COMPANY FOR THE FINANCIAL YEAR WAS €50.6 MILLION, OR €1.63 PROFIT PER SHARE, TAKING INTO ACCOUNT RECOGNITION OF THE FOLLOWING SIGNIFICANT ITEMS: EFFECTIVE INCOME OF €25.5 MILLION; A POSITIVE ADJUSTMENT OF €6.1 MILLION TO PREVIOUS ESTIMATES OF EFFECTIVE INCOME; A NET POSITIVE IMPAIRMENT ADJUSTMENT OF €19.3 MILLION ON PREVIOUSLY IMPAIRED ASSETS; A NET GAIN OF €7.1 MILLION ON FOREIGN EXCHANGE RETRANSLATION AND REVALUATION OF FOREIGN EXCHANGE DERIVATIVES; A MARK-TO-MARKET LOSS OF €2.6 MILLION ON FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS; NET REALISED GAINS ON SALES AND PARTIAL REDEMPTIONS OF €1.3 MILLION; AND NET OPERATING EXPENSES OF €6.1 MILLION
THE INVESTMENTS HELD BY THE COMPANY GENERATED €30.7 MILLION OF INTEREST OR COUPON RECEIPTS DURING THE FINANCIAL YEAR
OVER THE FINANCIAL YEAR, THE INVESTMENT STRATEGY HAS BEEN TO INVEST CASH MAINLY IN UNDERLYING CORPORATE CREDIT RISK THROUGH CLO[1] TRANCHES AND SYNTHETIC CORPORATE CREDIT[2] DEALS. THE CASH HOLDINGS WERE €5.2 MILLION AT THE END OF THE ANNUAL PERIOD AGAINST €8.9 MILLION AT THE BEGINNING OF THE PERIOD
DURING THE FINANCIAL YEAR, THE COMPANY PURCHASED ASSETS FOR €27.6 MILLION, SOLD ASSETS FOR €12.1 MILLION AND REDEEMED ASSETS FOR €1.1 MILLION, WHICH CONTRIBUTED TO AN INCREASE IN ITS ASSET BASE
AS AT 31 JULY 2012, THE COMPANY HELD INVESTMENTS IN FOUR UNDERLYING ASSET CLASSES: CLOS (63.3%)[3] ; SYNTHETIC CORPORATE CREDIT DEALS (19.8%)[3] ; CASH CORPORATE CREDIT[2] DEALS (9.7%)[3] ; AND ABS[4] (5.0%)[3]
THE COMPANY INTENDS TO CONTINUE PURSUING INVESTMENT OPPORTUNITIES THAT ARE CONSISTENT WITH ITS OBJECTIVE OF PAYING A DIVIDEND IN LINE WITH THE ANNUAL 10% OBJECTIVE DESCRIBED IN THE CHAIRMAN’S STATEMENT, WHILST AT THE SAME TIME INCREASING ITS ASSET BASE

THE COMPANY INTENDS TO CONTINUE PURSUING INVESTMENT OPPORTUNITIES THAT ARE CONSISTENT WITH ITS OBJECTIVE OF PAYING A DIVIDEND IN LINE WITH THE ANNUAL 10% OBJECTIVE DESCRIBED IN THE CHAIRMAN’S
STATEMENT, WHILST AT THE SAME TIME INCREASING ITS ASSET BASE	Contents
OPERATING EXPENSES AS A PERCENTAGE OF AVERAGE NAV FOR THE	Corporate StatementIFC Key Points 201201
FINANCIAL YEAR ENDED 31 JULY 2012 WERE 3.90%, COMPARED TO 3.42%	Corporate Summary02
FOR THE FINANCIAL YEAR ENDED 31 JULY 2011. THE INCREASE IN OPERATING EXPENSES AROSE PRIMARILY AS A RESULT OF HIGHER FEES PAYABLE TO THE	Chairman’s Statement04 Investment Manager's Report06 Board of Directors18
INVESTMENT MANAGER AS A RESULT OF IMPROVED PERFORMANCE	Management, Administration and Advisors20
Defnitions: 1Collateralised Loan Obligations ("CLOs" or “CLO”) 2Synthetic Corporate Credit and Cash Corporate Credit deals are structured credit positions predominantly exposed to corporate credit risks materialised respectively by synthetic contracts such as credit default swaps (“CDS”) or cash (loans and/or bonds) 3Expressed as a percentage of originally reported Gross Asset Value (“GAV”) as at 31 July 2012 4Asset-Backed Securities (“ABS”)	Report of the Directors21 Corporate Governance Report23 Directors’ Remuneration Report26 Statement of Directors’ Responsibilities27 Financial Contents28 Independent Auditors’ Report29 Income Statement30 Statement of Comprehensive Income31
	Statement of Financial Position32 Statement of Changes In Shareholders’ Equity33 Statement of Cash Flows34 Notes to the Financial Statements35 Distribution Income Calculation (Unaudited)63 Notice of Meeting67

02 VOLTA FINANCE LIMITED annual report and accounts 2012

CORPORATE SUMMARY FOR THE YEAR ENDED 31 JULY 2012

THE COMPANY

Volta Finance Limited (the “Company”, “Volta Finance” or “Volta”) is a closed-ended limited liability company registered in Guernsey under The Companies (Guernsey) Law, 2008 (as amended).

The Company is an authorised closed-ended collective investment scheme.

ongoing cash flows. The assets that the Company may invest in either directly or indirectly include but are not limited to: corporate credits; sovereign and quasi-sovereign debt; residential mortgage loans; commercial mortgage loans; automobile loans; student loans; credit card receivables; leases; and debt and equity interests in infrastructure projects (the “Primary Underlying Assets”). There can be no assurance that the Company will achieve its investment objectives.

INVESTMENT OBJECTIVES

The Company’s investment objectives are to seek to preserve capital and to provide a stable stream of income to its shareholders through dividends that it expects to distribute on a semi-annual basis. Subject to the risk factors that were described in the Company's Initial Public Offering (“IPO”) Prospectus and the risk factors that are described in Note 21, it seeks to attain its investment objectives by pursuing a multi-asset class investment strategy, although investments made during the financial year were predominantly concentrated in assets leveraging corporate credit exposures. The investment strategy focuses on direct and indirect investments in, and exposures to, a variety of assets selected for the purpose of generating cash flows for the Company. Whilst the Company's investment objectives remain unchanged, as stated in the Chairman's Statement and the Investment Manager's Report, considering the discount to par at which most of these assets could be purchased, part of the expected return for most of the recent and future investments may come from back loaded cash flows corresponding to principal payments in addition to expected

The Company’s approach to investments in these Primary Underlying Assets is through vehicles and arrangements that essentially provide exposure to portfolios of Primary Underlying Assets. In this regard, the Company instructed AXA Investment Managers Paris (the “Investment Manager” or “AXA IM”) to pursue the Company’s investment strategy for the financial year covered by this report by concentrating on the following underlying asset classes: CLO, Synthetic Corporate Credit, Cash Corporate Credit and ABS. As at the financial year end and throughout the financial year, the Company held assets in its portfolio classified within each of these main asset classes.

THE INVESTMENT MANAGER

The Investment Manager is authorised by the Autorité des Marchés Financiers as an investment management company and its activities are governed by article L. 532-9 of the French Code Monétaire et Financier. AXA IM is an investment manager with a team of experts concentrating on the structured finance markets.

annual report and accounts 2012 VOLTA FINANCE LIMITED 03

ASSET VALUES

At 31 July 2012, the Company’s NAV was €171.0 million, with the NAV per share amounting to €5.45. The Company publishes its NAV on a semi-annual basis and its Gross Asset Value (“GAV”) monthly.

NAV is an expression of the total value of the Company that takes into account the current fair value of the Company’s investments, accruals for debtors and the amount of the Company’s liabilities. The Company’s NAV at 31 July 2012 can be seen in the Statement of Financial Position on page 32 (“Total shareholders' equity” line).

GAV is an expression of the Company’s value that only takes into account the fair value of the Company’s assets. GAV, which is published by the Company on a more frequent basis than NAV, may be a useful point of reference as the Company has no debt financing and its NAV is published only semi-annually.

DURATION

The Company has a perpetual life.

WEBSITE

The Company’s website address is www.voltafinance.com.

LISTING INFORMATION

The Company’s ordinary shares are listed on the NYSE Euronext Amsterdam Stock Exchange (“Euronext Amsterdam”) (website: www.euronext.com).

The ISIN number of the Company’s listed shares is GG00B1GHHH78.

The closing price of the Company’s listed shares quoted on Euronext Amsterdam at 31 July 2012 was €4.39 per share.

The average closing price of the Company’s listed shares quoted on Euronext Amsterdam over the financial year ended 31 July 2012 was €3.58 per share.

PROVISIONAL FINANCIAL CALENDAR

22 October 2012 Announcement of results for the financial year ended 31 July 2012 and publication of the 2012 annual report 3 December 2012 Annual General Meeting 5 December 2012 Ex-dividend date 7 December 2012 Dividend record date 28 December 2012 Dividend payment date

==> picture [375 x 78] intentionally omitted <==

04 VOLTA FINANCE LIMITED annual report and accounts 2012

CHAIRMAN’S STATEMENT

==> picture [257 x 123] intentionally omitted <==

During the financial year ended 31 July 2012, Volta continued to demonstrate its ability to create value for shareholders in these still challenging times for financial markets and the global economy.

The value of the Company’s assets significantly increased, as well as cash generation from its assets. Over the period, the NAV increased from €142.6 million as at 31 July 2011 to €171.0 million as at 31 July 2012 and the Company paid, in the meantime, two dividends of €0.22 per share each, of which a total of €12.4 million was payable in cash and €1.3 million was paid in shares.

During the financial year the Company continued to focus its investments predominantly on assets that are principally exposed to corporate credit risk.

Actual interest and coupons collected from Volta’s assets increased from €23.2 million to €30.7 million over the financial year, which is equivalent to €0.99 per share.

The Company’s profit was €50.6 million (or €1.63 per share) for the financial year ended 31 July 2012, compared to a profit of €31.0 million (or €1.01 per share) for the previous financial year ended 31 July 2011.

During the financial year, the Company’s investment strategy was to take advantage of market opportunities to invest most of the cash that was available as well as executing some asset switches in order to increase or stabilise Volta’s expected asset cash flows. Through this investment strategy, the Company was able to increase its asset base by €40.9 million (€1.19 per share) over the financial year from €208.3 million to €249.2 million (please refer to table 8 and the related comments in Section 6 of the Investment Manager's Report ("IMR") for more details on the computation of “asset base”).

€5.2 million was held in cash at the end of the financial year, compared with €8.9 million at the end of July 2011.

The Board remains committed to transparency and it continues to offer a high level of information on the Company’s assets and investment strategy. In addition, over the financial year, the Company had regular contact with equity analysts in order to improve the coverage of the Company by the financial community and signed a liquidity enhancement contract in order to improve the liquidity of its shares.

The Board remains, as usual, available to address shareholders’ questions via conference calls such as the one to be held after the release of this report.

annual report and accounts 2012 VOLTA FINANCE LIMITED 05

DIVIDEND

The Board of Directors of Volta is proposing a dividend of €0.26 per share, which amounts to €8.2 million for the semi-annual period ended 31 July 2012. This dividend is in addition to the €0.22 per share interim dividend paid in April 2012. These payments are based on the Company’s current general objective to pay, to the extent possible and reasonable, a dividend of approximately 10% per annum of the Company’s NAV excluding cash at the end of the relevant period. The payment of any dividend by the Company is subject to the satisfaction of a solvency test as required by The Companies (Guernsey) Law, 2008 (as amended).

==> picture [103 x 280] intentionally omitted <==

Shareholders will have the option of receiving this dividend payment in either cash or Volta shares.

OUTLOOK

At the time of writing, taking account of the proposed dividend payment, the Company can be considered as almost fully invested. Considering the current economic and financial situation, the Company will focus on re-investing ongoing cash flows when they are received, whilst managing its cash or near-cash position for dividend payment purposes as well as to honour other financial commitments.

In accordance with the Investment Manager's advice, the Company intends to favour assets that are expected to have ongoing stable cash flows at the time of purchase. Volta will continue to consider investments for which redemption of principal is expected to form a significant portion of the anticipated total return. It should be expected that most of the investments will be into assets leveraging corporate credit exposures through CLO tranches, cash or synthetic bespoke transactions. However, some investments in other areas, including structured mortgage loans, also may be considered, from time to time.

==> picture [86 x 40] intentionally omitted <==

JAMES GILLIGAN CHAIRMAN 19 OCTOBER 2012

06 VOLTA FINANCE LIMITED annual report and accounts 2012

==> picture [340 x 70] intentionally omitted <==

INVESTMENT MANAGER'S REPORT

1. OVERVIEW

During the financial year, Volta continued to invest predominantly in assets that give access to Corporate Credit exposures, increased cash flow generation and increased its asset base. The NAV of the Company increased from €142.6 million (€4.63 per share) to €171.0 million (€5.45 per share) over the year and in the meantime the Company paid two dividends in January 2012 and April 2012 of €0.22 per share each.

GENERATION OF CASH FLOWS

Volta’s assets generated €30.7 million of interest or coupons over the financial year, representing 21.6% of Volta’s beginning of period NAV, compared to €23.2 million in the previous financial year.

Volta should continue to receive a significant amount of interest and coupons relative to its NAV in the forthcoming financial year. Furthermore, it should be noted that 54% of Volta’s end of period GAV consists of debt assets bought at a significant discount to par, for which redemption of principal amount, rather than ongoing coupons, are expected to account for a significant portion of the anticipated return on the assets.

DIVIDEND PAYMENTS INCREASED IN LINE WITH THE VALUE OF THE ASSETS

For the semi-annual period ended 31 July 2012, Volta’s Board has decided to propose a dividend of €0.26 per share (€8.2 million) in December 2012, an 18.2% increase relative to the latest dividend paid in April 2012 for the semi-annual period ended 31 January 2012.
Volta shareholders will have the choice to receive this dividend either in shares or in cash.
During the financial year, the amount of actual coupons and interest payments received by Volta represented 2.2 times the dividend payments paid and proposed for the financial year, demonstrating Volta’s ability to pursue an investment strategy that facilitates a consistent dividend policy coupled with an increase in the total asset base of the Company.

VOLTA HAS BEEN ABLE TO INVEST IN HIGH EXPECTED IRR ASSETS

Volta purchased the equivalent of €27.6 million in investments (€37.8 million of nominal), sold the equivalent of €12.1 million of assets (€12.6 million of nominal) and received partial redemption of principal amounts for the equivalent of €1.1 million.
Under standard and reasonable assumptions made at the time of purchase, the average expected internal rate of return (“IRR”) of Volta’s purchases during the financial year was 15.3%.

During the period, Volta diversified its investments through 18 different investments. Assets exposed to underlying corporate credits represented 97% of purchases.

Thanks partly to the ability of Volta to purchase assets at significant discounts during the financial year, the total nominal amount of Volta’s assets, including cash, increased by €40.9 million from €208.3 million (€6.76 per share) to €249.2 million (€7.94 per share), including a positive foreign exchange retranslation effect from US dollar to euro of €21.3 million (please refer to table 8, Section 6 for details).

All investments in debt assets were of assets for which, under a reasonable default scenario run at the time of purchase, full principal payment was expected at maturity. This assumption is still valid at the time of writing. Considering current opportunities in the market and assuming no heightened economic crisis, Volta’s ability to increase the principal amount of its assets is likely to slow down but is anticipated to remain in the area of €15 million to €25 million for the next financial year (excluding the potential impact of US dollar/euro exchange rate movements).

THE NAV OF THE COMPANY SIGNIFICANTLY INCREASED DESPITE RISING UNCERTAINTIES

During the financial year, Volta’s NAV increased from €142.6 million, or €4.63 per share, at the end of July 2011 to €171.0 million, or €5.45 per share, at the end of July 2012.

This strong performance, in addition to the two €0.22 per share dividend payments made during the financial year, reflects the decision of the Company to re-invest predominantly in debt assets that demonstrated their ability to perform through difficult times as well as the still strong cash flows received from its Equity CLO positions.

This outcome reflects the good fundamental performance of Volta’s assets. The choice of the Company to re-invest predominantly in assets where performance relies mostly on corporate credit exposures currently seems to be appropriate. Any further improvement concerning the eurozone sovereign crisis or generally the overall global economic picture should be reflected in Volta’s NAV as well. On average, fundamental measures of Volta’s asset quality (WARF of the underlying corporate credit portfolio or overcollateralisation tests for example) did not deteriorate during the financial year under review, despite a weak economic environment.

According to various default scenarios (detailed in Section 4 hereafter) linked to the ratings of the underlying portfolios, it can be considered that Volta’s end of July 2012 NAV still reflected stressed scenarios in terms of default and a significant discount rate on the cash flows resulting from these scenarios.

This situation reflects the capability of the Investment Manager to source assets in line with Volta’s objectives.

VOLTA FINANCE LIMITED 07

annual report and accounts 2012

==> picture [33 x 70] intentionally omitted <==

NEAR TERM EXPECTATIONS

At the end of the period, the prevailing situation in Europe and in the US was somewhat different. Twelve-month rolling default rates for US-based corporate entities stabilised at a historically low level, however they were increasing for European high yield names. At the time of writing, rating agencies and most market participants anticipate that such a situation could carry on for a few years, forecasting for European speculative names default rates 2-3% above the respective US forecasts. This situation is fully reflected in Volta’s asset prices. For example and on average, Volta’s European debt of CLO, an asset class for which no loss would be expected under current rating agencies’ central scenarios, was priced at 56%, against 74% for US dollar debt of CLO at the end of July 2012. Hence, any improvement in the European situation should be positive for Volta’s assets in terms of valuation. Considering that defaults in the US are still expected to stay below or at the historical average, cash flows received from Volta’s assets should continue to be significant, similar to those observed during the financial year under review.

Given the current economic and financial situation, the Board has instructed the Investment Manager to focus its attention on two main objectives for the coming financial year:

maintain the expected cash flows from the Company’s investments through various asset switches whilst considering the diversity of assets held by the Company; and
re-invest the ongoing cash flows generated by the portfolio in order to pursue diversification and increase the asset base whilst keeping in mind the need to finance future dividend payments.

An indication of important events that have occurred since the end of the financial year is provided in Note 24 of the Notes to the financial statements.

PAST PERFORMANCES

As a listed company investing mainly in US dollar and euro corporate assets, Volta’s performance bears comparison with both equity and high yield bonds indices. As of the end of July 2012 the performance was as follows[1] :

	1 year	2 years	3 years	5 years
	%	%	%	%
GAV performance (including
dividend payments not
re-invested)	26.3	93.9	234.8	(17.2)
Share performance (including dividends but not re-invested)*	23.5	117.1	491.3	(20.6)
Share performance (dividends re-invested in the share)* S&P 500 (dividends re-invested in shares) MSCI Europe (dividends re-invested in shares) US High Yield Bonds (H0A0 index on Bloomberg) European High Yield Bonds (HE00 index on Bloomberg)	27.8 9.1 (6.9) 7.2 6.7	129.0 30.6 (3.1) 21.1 15.7	579.1 48.6 6.7 50.5 48.2	38.2 5.8 (31.0) 55.8 45.5

Figures given by Bloomberg using the TRA function.

1 No statement in this comparative table is intended to be nor may be construed as a profit forecast. The figures provided relate to previous months or years and past performance is neither a guide to future returns nor a reliable indicator to the future performance of the Company or the Investment Manager.

Overall, since Volta’s launch in December 2006, the performance of an investor re-investing their dividend in the share can be favourably compared to the average performance of the large equity indices and the high yield bond indices referenced in the table above. Considering the fact that structured finance assets were the hardest and the first to be hit in 2007/2008, the performance of Volta over the last five years was respectable, particularly relative to large equity indices, thanks largely to its re-investment programme.

As a result of the significant performance of Volta’s assets over the latest semi-annual period and over the last two years, the Investment Manager will receive €3.3 million of Performance Fees for the financial year, as the performance is above the required performance threshold. Performance Fees are based on the performance of the assets, as measured by the Distribution Income, and depend upon semi-annual and bi-annual performance measures (for more details about the Distribution Income calculation please refer to pages 63 to 66 and for more detail on the calculation of Performance Fees please refer to Note 22 of the financial statements).

==> picture [370 x 63] intentionally omitted <==

08 VOLTA FINANCE LIMITED annual report and accounts 2012

==> picture [340 x 70] intentionally omitted <==

INVESTMENT MANAGER'S REPORT CONTINUED

1. OVERVIEW CONTINUED GENERAL OUTLOOK

When conducting the investment strategy during the financial year under review, the Company pursued the following objectives:

increase the diversification of its portfolio (from 63 assets at the beginning of the financial year to 75 assets at the end of the period) with investments mainly exposed to corporate credit underlying risk through various formats (CLO, synthetic and cash structures);
increase the nominal amount of Volta’s assets;
increase the ability of the portfolio to better resist economic or financial stress (most of the investments during the period concerned tranches of structured finance transactions that have subordination to losses);
increase the level and the stability of ongoing interest and coupons received by the Company (€30.7 million of interest and coupon payments received during the financial year); and
maintain a level of expected return in line with the Company’s objectives.

At the time of writing it appears that discount margins of structured finance assets are still high relative to intrinsic underlying risks. This situation facilitates a wide range of investments that could be targeted by the Investment Manager. As in the past, Volta should be well placed to exploit such a situation given its experienced investment teams, few constraints in terms of ratings and little liabilities.

A description of the principal risks and uncertainties that the Company faces is provided in Note 21 of the Notes to the financial statements but it should be noted that if the current sovereign debt crisis, especially in the eurozone, degenerates into a more general and profound economic crisis, the positioning of the Company predominantly toward corporate credit exposures could generate significant losses.

2. INVESTMENTS

In line with previous financial years, the high level of discount margins during the financial year on mezzanine tranches of structured finance assets and the necessity for banks to limit regulatory capital enabled the Company to purchase assets in various formats. The Company purchased 18 different assets for a total of the equivalent of €27.6 million over the course of the financial year ended 31 July 2012 with an expected average IRR of 15.3%:

€10.5 million was used to purchase nine CLO Debt tranches;
€7.0 million was invested in two Bank Balance Sheet transactions;
€2.0 million was used to purchase one Synthetic Corporate Credit Equity position;
€1.8 million was invested in two ABS Debt positions; and
€0.5 million was used to purchase an interest in a fund of residual tranches of CLOs.

During the financial year, Volta sold €12.1 million of assets. The rationale behind these sales was to improve Volta’s capability to generate cash flows through re-investment in higher yielding assets, to reduce the exposure to some specific risks and to disengage from debt tranches at rates of return that were lower than Volta’s general target.

In addition to re-investments made during the financial year, important variations in the relative performance of asset classes have also changed the Company’s asset allocation since 31 July 2011.

TABLE 1 – VOLTA FINANCE ASSET ALLOCATION BASED ON MARK-TO-MARKET PRICES (BASED ON GAV)*

	31 July 2012	31 July 2012	31 July 2011
Main asset class	Sub-classifcation	%	%
CLO	USD Equity tranches	21.1	19.3
	EUR Equity tranches	1.7	3.1
	USD Debt tranches	24.6	21.2
	EUR Debt tranches	15.9	20.9
Synthetic Corporate Credit	Equity tranches	5.5	7.6
	Debt tranches	10.2	8.1
	Bank Balance Sheet transactions4.1		—
Cash Corporate Credit	Equity tranches	7.9	9.7
	Debt tranches	1.8	1.7
ABS Cash	Mortgage residual positions Debt tranches	3.2 1.8 2.3	0.2 1.8 6.5

GAV of €145.2 million as at 31 July 2011 and GAV of €173.2 million as at 31 July 2012. The valuation of each asset class takes into account the valuation of the individual assets and of the derivatives hedging the asset class. Figures do not add up to 100% due to rounding.

One of the benefits of the investment programme conducted during the latest period has been to improve the diversification of the Company’s portfolio by re-investing mainly in assets that give Volta a leveraged exposure to both US and European corporate credit markets.

The increased exposure to ABS Mortgage Residual positions is mostly due to an upward revision of existing positions.

Overall, the investment strategy aims to invest in assets able to deliver an adequate return (on average, assets purchased during the financial year were expected to deliver close to 15% return under a base case scenario).

€5.9 million was used to purchase three Synthetic Corporate Credit Debt positions;

annual report and accounts 2012 VOLTA FINANCE LIMITED 09

==> picture [33 x 70] intentionally omitted <==

3. INVESTMENT PORTFOLIO

As at 31 July 2012, Volta held assets divided amongst four asset classes: CLOs, Synthetic Corporate Credit deals, Cash Corporate Credit transactions and ABS.

It should be noted that the vast majority of the portfolio’s assets as at 31 July 2012 had exposure to underlying portfolios of corporate credit positions (loans, bonds and CDS issued by or on corporate entities).

Before going into detail regarding each main asset class it should be noted that almost half of the cash flows generated by Volta’s assets are currently received from the CLO Equity positions:

==> picture [253 x 177] intentionally omitted <==

----- Start of picture text -----

Total
CLO Equity
18 Synth Corp Credit
16 CLO Debt
ABS
14 Cash Corp Credit
12
10
8
6
4
2
0
€ million
August 09 October 09 December 09 February 10 April 10 June 10 August 10 October 10 December 10 February 11 April 11 June 11 August 11 October 11 December 11 February 12 April 12 June 12
----- End of picture text -----

This situation is anticipated to continue for the coming financial year, whilst we expect the amount of interest and coupons collected by the Company to stabilise around the latest figures unless Libor or Euribor short term rates increase.

CLO

All the positions in this asset class are equity or debt tranches of CLOs.

EQUITY TRANCHES OF CLO

As at 31 July 2012 the Company held twelve positions in residual tranches of loan portfolios:

eleven classic equity tranches of CLOs (equity tranches typically represent between 8% and 12% of the capital structure of the deal and give access with an eight to twelve times leverage to the excess cash flows of the structure); and
one position in a structured vehicle (Prelude) managed by AXA IM Paris that gives access to the payments of approximately 30 different CLO equity positions.

RESILIENCE OF PAYMENTS FROM RESIDUAL TRANCHES OF CLO

During the financial year, the residual tranches of CLO held by Volta generated €13.8 million of interest payments (from assets valued at €32.5 million at the end of July 2011).

The eight classic US dollar residual positions held since early/mid 2007 had accumulated payments of $53.0 million at the end of July 2012, representing 110% of their nominal value ($48 million). The two euro residual positions held since early/mid 2007 had accumulated payments of €6.5 million at 31 July 2012, representing 69% of their nominal value (€9.0 million). Altogether, these cash flows are 25% higher than the cash flows that were projected at the purchase date using the weighted average rating factor (“WARF”) of each underlying portfolio at that time (between 2% and 3% of defaults per year was projected depending on each transaction). See below the comparison, period after period, between projected cash flows (at purchase date) and actual cash flows for the eight US dollar residual positions held since inception. During the financial year under review, actual cash flows were almost double those which were projected five years ago at purchase.

==> picture [226 x 192] intentionally omitted <==

----- Start of picture text -----

8 Initial Projection
Actual
7
6
5
4
3
2
1
0
€ million
Feb 07 - July 07 Aug 07 - Jan 08 Feb 08 - July 08 Aug 08 - Jan 09 Feb 09 - July 09 Aug 09 - Jan 10 Feb 10 - July 10 Aug 10 - Jan 11 Feb 11 - July 11 Aug 11 - Jan 12 Feb 12 - July 12 Average
----- End of picture text -----

CLOs, being term leveraged structures at a fixed margin, can generate more excess payments through re-investments when markets are under stress than under normal circumstances. Overall, for these ten transactions, US dollar and euro transactions altogether, held since early/mid 2007, the effective cash flows available for the owner of the residual positions have increased by more than 40% throughout the crisis as a result of the significant increase of the weighted average spread of the underlying portfolios.

10 VOLTA FINANCE LIMITED

annual report and accounts 2012

==> picture [340 x 70] intentionally omitted <==

INVESTMENT MANAGER'S REPORT CONTINUED

TABLE 2 – LIST OF CLO EQUITY HOLDINGS AS 31 JULY 2012

					Principal
	%	Main	Sub- Description of	Manager/	geographical		Arranging
Issuer	GAV	asset class	classifcation underlying asset	Servicer	exposure	ISIN	institution
Northwoods Capital Limited*	4.66	CLO	Equity Broadly syndicated loans	Angelo Gordon	USA	USG6666RAB18	JP Morgan
Wasatch CLO Ltd*	2.89	CLO	Equity Broadly syndicated loans	Invesco	USA	USG94608AB57	JP Morgan
Goldentree Loan opportunities IV Ltd*	2.86	CLO	Equity Broadly syndicated loans	GoldenTree	USA	USG39607AC37	Deutsche Bank
Battalion CLO 2007-1 Ltd- Equity*	2.69	CLO	Equity Broadly syndicated loans Brigade Capital Management		USA	USG08887AA27	Deutsche Bank
Carlyle HY Part IX*	2.11	CLO	Equity Broadly syndicated loans	Carlyle	USA	KYG1908R1048	Lehman Brothers
Sands Point Funding Ltd*	1.89	CLO	Equity Middle market loans	Guggenheim	USA	USG7800DAA93	Deutsche Bank
Lightpoint CLO V, Ltd*	1.58	CLO	Equity Broadly syndicated loans	Neuberger Berman	USA	USG5487GAG31	Credit Suisse
Galaxy VII CLO Ltd*	1.28	CLO	Equity Broadly syndicated loans	AIG	USA	USG25796AB20	Morgan Stanley
Oak Hill European Credit	0.90	CLO	Equity Broadly syndicated loans	Oak Hill	Europe	XS0300349700	Deutsche Bank
Partners PLC*					non-UK
Prelude Credit Alpha plc	0.89	CLO	Equity Fund of CLO Equity tranches	AXA IM Paris	USA	XS0213954802	Wachovia
							Bank N.A.
Lightpoint Pan-European CLO 2006 PLC*	0.76	CLO	Equity Broadly syndicated loans	Neuberger Berman	Europe	XS0282169803	Credit Suisse
Denali Capital CLO V Ltd*	0.24	CLO	Equity Broadly syndicated loans	Denali Capital LLC	USA	US24821MAB46	JP Morgan

Subordinated Notes.

Table 2 of the Investment Manager's Report forms an integral part of the financial statements. Refer to Note 21.

3. INVESTMENT PORTFOLIO CONTINUED

RESILIENCE OF PAYMENTS FROM RESIDUAL TRANCHES OF CLO CONTINUED

portfolios (defaulted loans are valued at their market value) that exceeds the principal amount of the outstanding CLO debt tranches at any point in time. The average remaining principal amount of the eleven classic residual positions held by Volta was 100% at the end of July 2012, up 7% over the last year, according to the latest CLO reports available at this time. It illustrates the ability of the underlying portfolio managers to re-build principal value for the residual holder.

All of the positions in this bucket are negatively exposed to an increase in default rates or in the percentage of assets rated CCC or below and to a significant decrease in underlying loan prices. However, they strongly benefit from an historically cheap cost of leverage, locked-in pre the 2008 crisis and also benefit from some of their intrinsic features, mainly the ability to re-invest diverted amounts and prepayments.

As at 31 July 2012, the average price of the Company’s eleven classic residual positions held over the financial year (74% of par for US dollar assets and 32% of par for euro assets) reflects a reasonable scenario of defaults with still a significant level of discount margin. These deals are generally priced at two and a half years cash flows for assets that are supposed to pay excess cash flows for a remaining period of at least three years and to receive ultimately some par amount later.

DEBT TRANCHES OF CLOS

As at 31 July 2012, the Company held 42 positions in debt tranches of CLOs accounting for 40.5% of Volta’s end of period GAV. With the exception of one investment that is unrated but could be considered equivalent to a BB-rated tranche taking into account its level of subordination, the investments in debt tranches of CLOs have been in tranches initially rated between BB (second loss position) and A (generally fourth loss position).

TABLE 3 – LIST OF CLO DEBT HOLDINGS AS AT 31 JULY 2012

					Principal
	%	Main	Sub- Description of	Manager/	geographical		Arranging
Issuer	GAV	asset class	classifcation underlying asset	Servicer	exposure	ISIN	institution
Battalion CLO 2007-1 Ltd – E-BB debt 2.57		CLO	Debt Broadly syndicated loans Brigade Capital Management		USA	USG08889AF79	Deutsche Bank
McDonnell Loan Opportunity	2.35	CLO	Debt Broadly syndicated loans	McDonnell	USA	USG6016MAA11	Deutsche Bank
Mezzanine SPV Ltd				Investment Mgt LLC
Cheyne Credit Opportunity.	2.00	CLO	Debt Broadly syndicated loans	Nomura	Europe	XS0243225728	Cheyne Capital
CDO I BV– BBB debt					non-UK		Management Ltd
Boyne Valley BV – C1-A debt	2.00	CLO	Debt Broadly syndicated loans	GSO Blackstone	Europe	XS0235642971	JP Morgan
					non-UK
Madison Park Funding	1.86	CLO	Debt Broadly syndicated loans	Credit Suisse	USA	USG5744QAA34	Merrill Lynch
VI – E – BB debt				Alternative Capital

annual report and accounts 2012 VOLTA FINANCE LIMITED 11

==> picture [33 x 70] intentionally omitted <==

TABLE 3 – LIST OF CLO DEBT HOLDINGS AS AT 31 JULY 2012 CONTINUED

						Principal
	%	Main	Sub-	Description of	Manager/	geographical		Arranging
Issuer	GAV	asset class	classifcation	underlying asset	Servicer	exposure	ISIN	institution
Ballyrock CLO 2006-1 – D - BBB debt	1.79	CLO	Debt	Broadly syndicated loans	Ballyrock	USA	USG0717JAD75	Goldman Sachs
Adagio III CLO PLC – E –BB debt	1.59	CLO	Debt	Broadly syndicated loans	AXA Investment	Europe	XS0262683971	Lehman Brothers
					Managers Paris	non-UK
Regatta Funding - B1L – BBB debt	1.46	CLO	Debt	Broadly syndicated loans	Citi Capital Advisor	USA	USG7476XAF71	Bear Stearns
Limerock CLO I – D – BB debt	1.40	CLO	Debt	Broadly syndicated loans	Invesco	USA	US532623AH83	Credit Suisse
Oak Hill European Credit Partners II	1.39	CLO	Debt	Broadly syndicated loans	Oak Hill	Europe	XS0300349379	Deutsche Bank
PLC – E – BB deb						non-UK
Battalion CLO 2007-1 Ltd	1.39	CLO	Debt	Broadly syndicated loans	Brigade Capital Management	USA	US071322AE14	Deutsche Bank
– D – BBB debt
LightPoint CLO V Ltd – C – BBB debt	1.31	CLO	Debt	Broadly syndicated loans	Neuberger Berman	USA	USG5487GAD00	Credit Suisse
Cent CDO 10 – E – BB debt	1.27	CLO	Debt	Broadly syndicated loans	River Source Investments LLC	USA	US15132PAA12	Morgan Stanley
Sierra CLO II – B2L – BB debt	1.19	CLO	Debt	Broadly syndicated loans	Apidos Capital Management	USA	XS0276546065	Bear Stearns
Duane Street CLO III – D – BBB debt	1.18	CLO	Debt	Broadly syndicated loans	Citi Capital Advisor	USA	US26358BAL27	Morgan Stanley
Oryx European CLO BV	1.06	CLO	Debt	Broadly syndicated loans	AXA IM	Europe	XS0230415373	UBS
– D – BBB debt						non-UK
Laurelin II BV – D1 – BBB debt	0.98	CLO	Debt	Broadly syndicated loans	GoldenTree Asset	Europe	XS0305010711	Barclays Capital
					Management LP	non-UK
Harvest CLO I SA – C – A debt	0.90	CLO	Debt	Broadly syndicated loans	3i Debt Management	Europe	XS0189775249	Merrill Lynch
						non-UK
Apidos CDO III – C – BBB debt	0.90	CLO	Debt	Broadly syndicated loans	Apidos Capital Management	USA	US03761KAG31	Morgan Stanley
Tara Hill 1X – III – BBB debt	0.88	CLO	Debt	Broadly syndicated loans	GSO Blackstone	Europe	XS0122499931	Morgan Stanley
						non-UK
1776 CLO I – D – BBB debt	0.87	CLO	Debt	Broadly syndicated loans	W.R.Huff Asset Management	USA	US81806PAE07	Deutsche Bank
Adagio III CLO PLC – C – A debt	0.75	CLO	Debt	Broadly syndicated loans	AXA Investment	Europe	XS0262682148	Lehman Brothers
					Managers Paris	non-UK
Black Diamond CLO 2006-1	0.74	CLO	Debt	Broadly syndicated loans	Black Diamond	USA	XS0282504280	Bear Stearns
– E – BB debt					Capital Management LLC
Leveraged Finance Europe	0.70	CLO	Debt	Broadly syndicated loans	BNP Paribas	Europe	XS0269248398	BNP Paribas
Capital IV BV – IV – BBB debt						non-UK
Clare Island BV – IVB – BB debt	0.69	CLO	Debt	Broadly syndicated loans	GSO Blackstone	Europe	XS0143896875	Morgan Stanley
						non-UK
Merrill Lynch CLO 2007-1	0.68	CLO	Debt	Broadly syndicated loans	Denali Capital LLC	USA	USG60283AK75	Merrill Lynch
– D – BBB debt
Euro-Galaxy CLO BV – E – BB debt	0.67	CLO	Debt	Broadly syndicated loans	AIG Global Investments	Europe	US29871UAG31	Morgan Stanley
						non-UK
Duane Street CLO III – E – BB debt	0.66	CLO	Debt	Broadly syndicated loans	Citi Capital Advisor	USA	USG29281AA33	Morgan Stanley
Galaxy VIII CLO – E – BB debt	0.54	CLO	Debt	Broadly syndicated loans	AIG	USA	US36317KAA51	Morgan Stanley
Apidos Quattro CDO – E – BB debt	0.52	CLO	Debt	Broadly syndicated loans	Apidos Capital Management	USA	US03761NAA00	Morgan Stanley
Alpstar CLO 2 PLC – E – BB debt	0.51	CLO	Debt	Broadly syndicated loans	Alpstar Management	Europe	XS0291723079	Bank of America
						non-UK
Skellig Rock BV – C – A debt	0.45	CLO	Debt	Broadly syndicated loans	GSO Blackstone	Europe	XS0273474444	JP Morgan
						non-UK
Tara Hill BV – IV – BB debt	0.43	CLO	Debt	Broadly syndicated loans	AIB Capital Markets plc	Europe	XS0122500027	Morgan Stanley
						non-UK
Adagio II CLO PLC – D1 – BBB debt	0.43	CLO	Debt	Broadly syndicated loans	AXA Investment	Europe	XS0237058424	Merrill Lynch
					Managers Paris	non-UK		International
Atrium III – D1 – BB debt	0.40	CLO	Debt	Broadly syndicated loans	CSAS	USA	US049629AF50	CSFB
Cent CDO 14 – E – BB debt	0.40	CLO	Debt	Broadly syndicated loans	Lightpoint	USA	US15134UAA88	Credit Suisse
BlackRock Senior Income Series	0.35	CLO	Debt	Broadly syndicated loans	BlackRock	USA	US09249DAA19	JP Morgan
– D1 – BB debt
CoLTS 2007-1 – D – BBB debt	0.31	CLO	Debt	Middle market loans	Ares Management	USA	USG23108AD83	Wachovia
								Bank N.A.
Regent’s Park CDO BV – E – BB debt	0.29	CLO	Debt	Broadly syndicated loans	GSO Blackstone	Europe	XS0268111126	JP Morgan
						non-UK
Octagon Investment Partners XI	0.26	CLO	Debt	Broadly syndicated loans	Octagon Investment Partners	USA	USG67245AF09	Citigroup/GS
– D – BB debt
Black Diamond CLO 2005-2	0.20	CLO	Debt	Broadly syndicated loans	Black Diamond Capital	USA	XS0232465202	Bear Stearns
– E1 – BB debt					Management LLC
Leopard CLO IV BV – E – BB debt	0.15	CLO	Debt	Broadly syndicated loans	M&G Investment	Europe	XS0251752472	RBS
					Management Ltd	non-UK

Table 3 of the Investment Manager's Report forms an integral part of the financial statements. Please refer to Note 21.

==> picture [370 x 63] intentionally omitted <==

12 VOLTA FINANCE LIMITED

annual report and accounts 2012

==> picture [340 x 70] intentionally omitted <==

INVESTMENT MANAGER'S REPORT CONTINUED

TABLE 4 – LIST OF SYNTHETIC CORPORATE CREDIT HOLDINGS AS AT 31 JULY 2012

						Principal
	%	Main	Sub-	Description of	Manager/	geographical		Arranging
Issuer	GAV	asset class	classifcation	underlying asset	Servicer	exposure	ISIN	institution
Jazz III CDO (Ireland) PLC –	5.66	Synthetic	Debt	Majority investment	AXA Investment	USA	US47215CAB19	Merrill Lynch
A1 – junior AAA debt		Corporate		grade corporate credit	Managers Paris			International
		Credit
ARIA CDO III (tranche 0%–3%)	2.95	Synthetic	Equity	Majority investment	AXA Investment	USA	XS0375442307	JP Morgan
		Corporate		grade corporate credit	Managers Paris
		Credit
Bank Capital Opportunity Fund	2.94	Synthetic	Bank	Majority investment	AXA Investments	Europe	LU0648070216	AXA IMP
		Corporate	Balance	grade corporate credit	Managers Paris	non-UK
		Credit	Sheet
Dryden XVII (Reve SPC)	1.61	Synthetic	Debt	Majority investment	Prudential IM	USA	USG7546RAP40	UBS
– junior AAA Debt		Corporate		grade corporate credit
		Credit
Cadenza (ELM BV)	1.51	Synthetic	Debt	Majority investment	AXA Investments	Europe	XS0672066908	UBS
		Corporate		grade corporate credit	Managers Paris	non-UK
		Credit
Jazz III CDO (Ireland) PLC	1.26	Synthetic	Equity	Majority investment	AXA Investment	USA	XS0263617374/	Merrill Lynch
– Subordinated Notes		Corporate		grade corporate credit	Managers Paris		XS0263615675	International
		Credit
Cheyne Total Return Credit Fund 1	1.25	Synthetic	Equity	Majority investment	Cheyne Capital	USA	KYG2101X1951	Credit Suisse
		Corporate		grade corporate credit	Management
		Credit
Alpine-Taurus (ELM BV)	1.17	Synthetic	Bank	Majority investment	Major	Europe	XS0791159758	Major
		Corporate	Balance	grade corporate credit	European Bank	non-UK		European Bank
		Credit	Sheet
Corsair (Jersey) No. 7 Limited	0.80	Synthetic	Debt	Majority investment	JP Morgan	USA	XS0280348572	JP Morgan
		Corporate		grade corporate credit
		Credit
Jazz III CDO (Ireland) PLC	0.40	Synthetic	Debt	Majority investment	AXA Investment	USA	XS0262646697	Merrill Lynch
– C1 – A debt		Corporate		grade corporate credit	Managers Paris			International
		Credit
Start VI CLO Limited	0.25	Synthetic	Debt	Majority investment	Standard Chartered	USA	XS0562803758	Standard
		Corporate		grade corporate credit				Chartered
		Credit

Table 4 of the Investment Manager's Report forms an integral part of the financial statements. Please refer to Note 21.

3. INVESTMENT PORTFOLIO CONTINUED DEBT TRANCHES OF CLOS CONTINUED

These positions were purchased between March 2008 and June 2012. Each asset, at the time of purchase, was expected to repay its principal in full at maturity and should be able to sustain a certain level of stress. Depending on the ability to find opportunities in the market and on the timing of the purchases, the Company has been able to purchase assets with different levels of initial subordination and IRR. On average, the expected IRR of these assets was 14% at the time of purchase under a base case scenario.

These positions, as for the residual holdings, have cash flows that are sensitive to the level of defaults and to the percentage of assets rated CCC or lower in the underlying loan portfolio. Nevertheless, these tranches are structured to be able to absorb a higher level of defaults in the underlying loans portfolio than residual holdings, given their second, third and even higher loss ranking.

As at the end of the financial year, all 42 debt tranches of CLOs were paying their coupons.

Considering the current market and economic circumstances, some of these positions could suffer delays in their payments from time to time. However, with a reasonable economic scenario at the end of the financial year, delayed payments are expected to be met in full for all the mezzanine tranches of CLOs. The average price of the 42 positions, at 66% of par at the end of the period (74% of par for US dollar assets, 56% of par for euro assets), does not reflect the most likely scenario that the vast majority of assets should meet their expected payments in due time. This level of pricing does not reflect, either, the probability to have some of these positions (mainly USD ones) called at par in the coming years instead of being repaid in five to seven years time.

Six of these positions (Adagio III, Alpstar II, Centurion, Apidos, Black Diamond, Tara Hill) have structural features that could generate some

annual report and accounts 2012 VOLTA FINANCE LIMITED 13

==> picture [33 x 70] intentionally omitted <==

TABLE 5 – LIST OF CASH CORPORATE CREDIT TRANSACTIONS AS AT 31 JULY 2012

						Principal
	%	Main	Sub-	Description of	Manager/	geographical		Arranging
Issuer	GAV	asset class	classifcation	underlying asset	Servicer	exposure	ISIN	institution
Tennenbaum Opportunities Fund V	5.32	Cash	Equity	Fund of high yield	Tennenbaum Capital	USA	N/A	Wachovia
		Corporate		bonds and loans	Partners, LLC			Bank, N.A.
		Credit
Promise-I Mobility 2006-1 GmbH	2.57	Cash	Equity	German SME loans	IKB	Europe	DE000A0LDYP7	Deutsche Bank
		Corporate				non-UK
		Credit
ICE 1: EM CLO – A3 – AA debt	1.82	Cash	Debt	Corporate emerging debt	ICE Canyon LLC	Other	USG4746PAD09	CitiGroup
		Corporate
		Credit

Table 5 of the Investment Manager's Report forms an integral part of the financial statements. Please refer to Note 21.

early payments of principal that should be beneficial to the Company, considering these positions were bought significantly below par. During the period, one of Volta’s mezzanine debt tranches paid part of its principal early.

SYNTHETIC CORPORATE CREDIT DEALS

The Company invests in the equivalent of first loss or junior second loss investment exposures to diversified portfolios of investment grade and sub-investment grade CDS (predominantly CDS on corporate entities).

During the financial year under review the Company entered into six Synthetic Corporate Credit deals. Three deals were purchased in the secondary market (Corsair, Start and Cheyne TRCF), whilst the three others (Cadenza, BCOF and Alpine-Taurus) are primary deals.

Corsair, Start, Cheyne and Cadenza are classic bespoke tranches of corporate credit exposures. BCOF is a fund that aims to benefit from the necessity for banks to save capital (Bank Balance Sheet deal) by selling derivative credit exposures coming from their mainstream loan business with corporates. Alpine-Taurus is also a Bank Balance Sheet deal.

As at 31 July 2012, the exposure to Synthetic Corporate Credits deals comprised eleven investments representing 19.8% of the end of period GAV. Approximately half of these (ARIA III, BCOF, Alpine-Taurus, Cheyne TRCF and Jazz III euro and Jazz III US dollar residual positions) are first loss positions in credit portfolios, whilst the others are senior or mezzanine debt tranches of corporate credit portfolios.

Three of the six first loss positions (ARIA III and the two Jazz III equity positions, which are presented in a single line in table 4 above) suffered credit events on Seat Pagine Gialle and Greece

during the financial year, which were roughly priced in at the end of July 2011. Indeed these deals were collectively valued at €11.0 million at the end of July 2011, paid €4.3 million of interest during the year and are priced at €7.3 million at the end of July 2012, having collectively, despite these two defaults, a modest but positive contribution in terms of financial performance.[2]

Credit default swap market prices are generally considered to give an indication of the financial market's estimation of the probability of default by the underlying name. Considering the current market prices of four names within the underlying portfolios of certain of the Company's Synthetic Corporate Credit deals, the following names appear to have a high possibility of default: Alpha Bank, EFG, Clear Channel and Supervalu. We simulated a default of these four names when projecting base case cash flows for these assets and it appeared that the high possibility of such defaults was already priced in as at 31 July 2012. Under this base case scenario, the aggregate projected IRR of these four positions is 138% when measured against their valuation as at 31 July 2012.[2]

More details are given regarding projected IRR on these assets in Section 4 of this report.

As illustrated above, the four equity positions and two Bank Balance Sheet positions are first loss positions and their remaining principal as well as their coupons are sensitive to any future defaults.[2]

The debt positions in the Synthetic Corporate Credit asset class had, at the end of the period, a level of subordination such that they were expected by the Company to pay all their coupons and their full principal.[2]

2 The paragraphs annotated above form an integral part of the financial statements. Please refer to Note 21.

14 VOLTA FINANCE LIMITED

annual report and accounts 2012

==> picture [340 x 70] intentionally omitted <==

INVESTMENT MANAGER'S REPORT CONTINUED

TABLE 6 – LIST OF ABS HOLDINGS AS AT 31 JULY 2012

						Principal
	%	Main	Sub-	Description of	Manager/	geographical		Arranging
Issuer	GAV	asset class	classifcation	underlying asset	Servicer	exposure	ISIN	institution
Alba 2007-1 plc	1.77	ABS	Residual UK non-conforming RMBS		Oakwood	United	XS0301709621	Credit Suisse
						Kingdom
Pangaea 2007–1 ABS BV	1.34	ABS	Debt	European	Investec	Europe	XS0287257280	Bear Stearns
– A – AAA debt				ABS		non-UK
Alba 2006-2 plc	0.80	ABS	Residual UK non-conforming RMBS		Oakwood	United	XS0271780651	Credit Suisse
						Kingdom
St Bernard Opportunity Fund I, LTD	0.47	ABS	Debt	Fund of US mortgages	AXA Investment	USA	QS0002021028	AXA IMP
					Managers Paris
Alba 2006-1 plc	0.46	ABS	Residual UK non-conforming RMBS		Oakwood	United	XS0255043050	Credit Suisse
						Kingdom
Eurosail 2006-1 PLC	0.13	ABS	Residual UK non-conforming RMBS		SPML	United	XS0254441081	Lehman Brothers
						Kingdom
Newgate Funding PLC	0.00	ABS	Residual UK non-conforming RMBS		Mortgage Plc	United	XS0259286101	Merrill Lynch
						Kingdom		International

Table 6 of the Investment Manager’s Report forms an integral part of the financial statements. Please refer to Note 21.

3. INVESTMENT PORTFOLIO CONTINUED CASH CORPORATE CREDIT TRANSACTIONS

There are three transactions in this bucket:

ICE, an original AA tranche of a CDO of credit positions from emerging countries;
Tennenbaum, a loan fund with low leverage. The investment manager, Tennenbaum, reduced the leverage of the fund before and in the midst of the financial crisis. They tend to manage the portfolio so as to take advantage of the various investment opportunities that were allowed by the very nature of the fund. For example, this fund has the possibility to invest in debtor-in-possession or bankruptcy exit loans, or even to take equity ownership when loans default; and
Promise Mobility, a first loss position on a highly diversified portfolio (more than 1,000 positions according to the latest report) of loans made to German SMEs. This deal was impaired at the end of July 2011 considering the significant increase in defaults that occurred in June 2011 as well as the poor record in terms of recovery. Since then a second but more modest set of credit events occurred in June 2012 that affected the situation slightly. Since its purchase, in December 2006, this asset paid cash flows representing 74% of the amount invested.

ABS

As at 31 July 2012, the Company has seven positions in this asset class: five residual income positions backed by UK non-conforming residential loans, one original AAA tranche of a CDO of ABS (Pangaea), being currently the first-pay tranche of the structure (receiving every quarter a portion of its principal back) and a position in a US ABS fund (St Bernard).

The five UK non-conforming residual positions have been seeing their value revised upwardly during the financial year as they resumed paying cash flows and as it was becoming more probable that such cash flows might last for a while. One UK non-conforming residual position was sold during the period with a significant gain. The five remaining ones are valued, at the end of July 2012, on the basis of two years of projected cash flows discounted at 20%. In aggregate, these five positions were valued at €5.5 million at the end of July 2012, whilst they generated €4.8 million of cash flows during the financial year.

4. UNDERSTANDING THE GAV OF THE COMPANY

According to Volta’s valuation policy, GAV is calculated using prices received by banks or brokers for all but a few assets representing 14% of Volta’s assets. The exceptions being: Promise Mobility and the UK non-conforming positions which are model-based using a discount rate of 20% on projected cash flows; Tennenbaum, Bank Capital Opportunity Fund and Cheyne Total Return Credit Fund, each of which is a fund that is valued using the value of its underlying assets; and St. Bernard Opportunity Fund, a fund that will also be valued using the value of its underlying assets, but which is valued at cost as at 31 July 2012 since it was purchased only in July 2012.

In order to give shareholders an understandable and comparable perspective regarding Volta’s asset valuations, a grid of projected returns has been provided for Volta’s assets where there are classic analytic tools that permit linking the prices to simple underlying assumptions (mainly the expected level of default and recovery). In line with market practice, the Weighted Average Rating Factor ("WARF") of the underlying portfolios has been considered as the standard measure of the probability of default.

VOLTA FINANCE LIMITED 15

annual report and accounts 2012

==> picture [33 x 70] intentionally omitted <==

TABLE 7 – STANDARD PROJECTED IRR ON CLASSIC CORPORATE DEALS*

TABLE 7 – STANDARD PROJECTED IRR ON CLASSIC CORPORATE DEALS*
Mark to Par Remaining market Average amount principal value price € (million) € (million) € (million) %	Projected IRR Defaults Defaults Defaults at at 1.5 at 2 WARF WARF WARF % % %** 137.9% 38.9% 0.6% 24.4% 24.4% 24.4% 18.3% 12.8% 5.4% 57.8% 40.9% 22.9% 12.1% 12.0% 11.9% 20.8% 20.9% 20.9% 26.7% 18.1% 13.0%
Synthetic Corporate Credit Equity 35.4 18.9 9.4 26.5% Synthetic Corporate Credit Debt 24.3 24.3 17.7 72.8%
USD CLO Equity 48.9 50.3 36.6 74.8% EUR CLO Equity 9.0 4.6 2.9 32.0%
USD CLO Debt and USD Cash Corporate Credit 57.6 57.6 42.5 73.9% EUR CLO Debt and EUR Cash Corporate Credit 49.3 49.3 27.6 55.9%
Total/average 224.5 205.0 136.7 60.9%

These simulations are for illustrative purposes only, are based on a number of assumptions and should not be regarded as profits or earnings forecasts. In addition, changes to current market conditions may cause changes to certain of the assumptions which could produce different results, less favourable to investors. Accordingly, no representation or warranty is made that any simulation will happen or any asset will perform or will be sold in accordance with the tables set forth.

In order to generate a range of scenarios, WARFs have been multiplied by 1, 1.5 and 2 times to give shareholders an idea of how Volta’s assets behave when considering defaults at a higher rate than the standard measure. Other assumptions included a constant prepayment rate of 15% for European loans, 20% for US loans and a recovery rate of 65% for loans as well as a recovery rate of 30% for corporate credit exposures.

To illustrate these scenarios, constant annual default rates have been simulated for the underlying loans portfolio of Volta’s CLO positions, on average, at 3% (WARF), 4.5% (1.5 x WARF) and 6% (2 x WARF). These three figures are greater than the average default rate for these deals during the recent years (including the 2008/2009 crisis).

Thus, for all Volta’s assets, except Bank Capital Opportunity Fund, Tennenbaum, Promise Mobility, the UK non-conforming residuals, St. Bernard Opportunity Fund, Cheyne Total Return Credit Fund, Pangaea, ICE 1 and Alpine-Taurus, it has been possible to generate projected cash flows and IRR (Internal Rate of Return considering end of July 2012 valuation and projected cash flows) under these scenarios using appropriate tools (for example Intex for CLOs). These simulations concerned assets, representing €136.7 million of assets (81% of Volta’s assets excluding cash at the end of July 2012).

It should be noted when considering this table that the Company’s CLO Debt tranches, Cash Corporate Credit deals and Synthetic Corporate Credit Debt deals, representing 51% of Volta’s GAV, were insensitive to the default scenarios proposed herein and are, however, priced with discount rates ranging from 12% to 24% from mezzanine

debt of US CLO to mezzanine debt of Synthetic Corporate Credit deals, reflecting potential losses for very extreme scenarios.

It should also be noted that first loss tranches of Synthetic Corporate Credit are highly sensitive to the pace of default that is projected but this high sensitivity seems to be incorporated in the end of period prices.

The figures in table 7 highlight the difference between euro deals and US dollar deals, for example through the projected IRR on equity or debt tranches of CLOs. They are higher on euro deals relative to US dollar deals with a greater sensitivity to default for first loss euro deals. This difference in pricing reflects a greater uncertainty in Europe relative to the US to any projected path of cash flows, most probably in line with the eurozone sovereign debt crisis. This difference in pricing comforts the vision of Volta not to exclude euro deals from its portfolio despite the uncertainties that exist concerning systemic risk.

According to such calculations, the GAV of Volta as at 31 July 2012 corresponds to an IRR close to 25% when considering the standard assumption that ratings and hence WARF of a portfolio of corporate credit exposures appropriately reflects the probability of default.

This high level of IRR illustrates how Volta’s GAV could be considered conservative.

Section 4 of the Investment Manager’s Report, including table 7, forms an integral part of the financial statements. Please refer to Notes 4 and 21.

==> picture [370 x 63] intentionally omitted <==

16 VOLTA FINANCE LIMITED

annual report and accounts 2012

==> picture [340 x 70] intentionally omitted <==

INVESTMENT MANAGER'S REPORT CONTINUED

5. FOREIGN EXCHANGE HEDGE OF US DOLLAR INVESTMENTS

As outlined in previous reports, the Company faces the risk of being forced to sell assets to face margin calls on its foreign exchange hedge transactions if the US dollar was to appreciate significantly. In order to limit this risk the Company decided to use currency options to reduce the level of cash that could be called by its currency swap (and options) counterparties when the dollar appreciates and also to reduce the amount of dollars sold forward. This change in the hedging strategy was successful in avoiding the Company being forced to sell assets to face increases in margin calls despite more than a 10% appreciation of the US dollar, against the euro, experienced during the financial year under review.

This strategy enabled the Company to continue investing in US dollar assets with a partial hedge against depreciation of the US dollar and allowed the Company to invest more widely.

The contracts used to apply this strategy are collateralised (a net balance of €2.5 million was posted by the Company to its counterparties at the end of July 2012) and are in place with two different counterparties in order to minimise the counterparty risk incurred by the Company through these contracts.

Since it was implemented in November 2008, this strategy has been successful in providing a certain level of currency hedge. It should be noted that the hedge of the currency exposure generated by non-euro assets could be affected where there is significant volatility in the US dollar/euro exchange rate. As a consequence, some gains came from the US dollar exposure during the period under review.

As of the end of July 2012 the Company’s US dollar assets (including cash) were valued at $135 million, US dollar forward sales represented $67.5 million and US dollar call options (financed by selling out of the money US dollar put options) represented $50 million. Overall, taking into account the delta on the options, Volta could be considered as having a $90 million long unhedged position.

The Company has maintained during the last two years a dual exposure to US assets and to European assets. Considering the difficulties faced by European governments to roll their debt, a specific risk exists for assets directly linked to the eurozone. This risk is partially hedged by the long US dollar exposure of the Company described above.

6. OUTLOOK

During the financial year, the overall investment strategy of the Company has been successfully adjusted in line with the changing market environment whilst pursuing the Company’s objectives. The Company pursues the increase and the diversification of its asset base mostly through investments in deals for which the main underlying exposure is corporate credit.

This strategy contributed significantly to the increase of interest and coupon amounts received by the Company.

During the financial year, the Company paid dividends representing 10% of the NAV excluding cash. Considering the high level of cash flows generated by Volta's assets, this means that roughly half of the interest and coupons have been re-invested during the period.

As a consequence, the Company should be able to increase its asset base gradually, as has been the case for more than three years. That said, the pace at which ongoing cash flows will be re-invested could be adjusted if some significant financial or economic stress occurs.

Between July 2011 and July 2012, the Company was able to increase the nominal amount of its assets by €40.9 million through re-investments including a positive contribution (€21.3 million) from the conversion of US dollar assets into euro at the end of period cross currency rate.

At the time of writing, discount margins are still attractive in most areas of the structured credit markets. The Company’s investment strategy for the coming period is mainly to seek investments in what could be viewed, at the time of purchase, as structures producing ongoing cash flows. For example, BBB or BB-rated tranches of CLOs, debt tranches of Corporate Credit deals, debt tranches of ABS and Bank Balance Sheet transactions would all be considered. From time to time, some investments in equity or first loss positions could be considered as well.

Considering the current market conditions and the volatility of prices of some of Volta’s assets, it can be expected that the Company will disengage from some positions to re-invest in positions that, at the time of purchase, could be considered to offer a better risk/return trade off.

The investment strategy will focus on re-investing sale proceeds and ongoing cash flows in order to maintain the projected IRR of Volta’s portfolio above 10%.

annual report and accounts 2012 VOLTA FINANCE LIMITED 17

==> picture [33 x 70] intentionally omitted <==

TABLE 8 – NOMINAL AMOUNTS OF VOLTA’S ASSETS (€MILLION)

TABLE 8 – NOMINAL AMOUNTS OF VOLTA’S ASSETS (€MILLION)
	End of period nominal amounts
	January 2010 July 2010 January 2011 July 2011 January 2012 July 2012
Synthetic Corporate Credit Equity Synthetic Corporate Credit Debt Synthetic Corporate Credit - Bank Balance Sheet transactions CLO Equity CLO Debt Cash Corporate Credit equity Cash Corporate Credit debt ABS Cash per originally reported GAV	25.3 25.4 26.3 26.2 23.3 18.9 14.7 15.6 14.9 14.2 23.4 24.3 — — — — 5.0 7.0 33.8 38.7 41.6 44.1 51.5 54.9 61.2 73.2 90.6 87.1 94.0 106.9 22.8 22.4 20.9 20.0 21.1 18.5 — 3.8 3.7 3.5 3.8 4.1 3.7 3.1 1.8 5.0 4.8 10.7 4.2 5.5 1.7 8.1 3.8 3.9
Total Nominal (including cash)	165.7 187.7 201.5 208.3 230.7 249.2
Change from previous date due to US dollar variation	1.4 5.8 (2.8) (5.3) 11.4 9.9
Nominal per share	5.47 6.19 6.55 6.76 7.46 7.94

Table 8 of the Investment Manager’s Report forms an integral part of the financial statements. Please refer to Note 21.

Table 8 takes into account losses of nominal amounts that could not be recouped for Cash or Synthetic Corporate Credit Equity and ABS; provided there is no loss expected on debt tranches (for all asset classes), debt tranches are accounted for at their principal amount; residual tranches of CLOs are accounted for at their remaining principal amount as described in Section 3; and US dollar nominal amounts are translated to euro using the end of period cross rate.

At the time of writing, our general view on the current economic and financial crisis is that recent developments in the eurozone should help to limit uncertainties for the coming quarters. However, the imbalances that exist amongst countries that collectively form the eurozone have not been resolved.

Overall, the composition of Volta’s assets, combining US dollar and euro assets, can constitute an option on a positive outcome in the eurozone sovereign crisis. However, in order to limit the negative impact of a disappointing outcome, Volta should maintain a significant US dollar exposure as has been the case during the most recent periods.

The Company has demonstrated its ability to adapt its investment strategy. The experience of the teams in the structured finance department of AXA IM Paris and their ability to seize investment opportunities across the different segments of the structured finance markets should provide encouraging prospects for the future of Volta.

AXA INVESTMENT MANAGERS PARIS 19 OCTOBER 2012

The coming quarters should continue to be impacted by the eurozone sovereign crisis and the deleveraging of banks should continue. This last point has been a source of opportunities for Volta in the financial year under review and should continue being so for the coming periods. Such an environment should continue to be favourable for corporate credit exposures relative to other kinds of exposures (sovereign or consumer debt) as long as it does not degenerate into a profound economic crisis. The contagion we are seeing in certain areas of investment markets could also be a source of opportunities.

18 VOLTA FINANCE LIMITED

annual report and accounts 2012

==> picture [340 x 70] intentionally omitted <==

BOARD OF DIRECTORS

==> picture [525 x 250] intentionally omitted <==

----- Start of picture text -----

01 03
02 04
----- End of picture text -----

annual report and accounts 2012 VOLTA FINANCE LIMITED 19

==> picture [33 x 70] intentionally omitted <==

01. JAMES GILLIGAN

CHAIRMAN AND INDEPENDENT DIRECTOR

Mr Gilligan began his career with the Civil Service in his native Scotland, then moved to Guernsey in 1970, joining the Guernsey Income Tax office. In 1974 he joined the private bank Kleinwort Benson in Guernsey. He undertook various roles during his long career at the bank and he was Managing Director of the Guernsey Branch at the time of his retirement towards the end of 2006. Mr Gilligan is a Fellow of the Chartered Institute of Bankers and an ex-President of the Guernsey Centre of the Chartered Institute of Bankers. He is also an ex-Chairman of the Guernsey Association of Banks. He is a member of The Society of Trust and Estate Practitioners (retired). Mr Gilligan is Chairman of Guernsey Finance LBG, the entity charged with the promotion of Guernsey as an International Finance Centre, and also in this capacity he sits on the Finance Sector Group dealing with the strategic development of the finance sector in Guernsey.

03. JOAN MUSSELBROOK

INDEPENDENT DIRECTOR

Ms Musselbrook was Managing Director at MBIA UK Insurance Limited, a leading financial guarantor and provider of other specialised financial services. She was responsible for most of MBIA’s Structured Finance business in Europe, including CDOs and ABS. She began her career at NatWest International Division in 1985 and remained with the NatWest Group in various positions until 2000, at which time she was a Director of the Asset Securitisation Group at Greenwich NatWest, with particular responsibility for CDOs. She joined MBIA Assurance S.A. as a Director in 2000 and was Managing Director of MBIA UK Insurance Limited from 2004 to 2006. Ms Musselbrook is a member of the institute of Directors and holds a degree from Oxford University.

02. CHRISTIAN JIMENEZ

SENIOR INDEPENDENT DIRECTOR

Mr Jimenez is Founder and Chief Executive Officer of Diamant Bleu Gestion, an asset management company based in Paris. Mr Jimenez was Chief Financial Officer of Ecureuil Vie, the insurance company subsidiary of the Caisse d’Epargne Group from 2004 to 2007. Prior to that, he was Chief Financial and Risk Officer of Compagnie Financière EULIA from 2002 to 2003. Mr Jimenez was Chief Executive Officer of SURASSUR, the reinsurance company subsidiary of the Caisse d’Epargne Group from 1995 to 2002, part of which time (2000 to 2001) he was also Chief Investment Officer of Caisse Nationale de Caisses d’Epargne et de Prévoyance. Prior to this, he was Deputy Chief Financial Officer of Caisse d’Epargne Group from 1994 to 1999 and held other positions at Banque Nationale de Paris and Banque de France. He was also a professor of Economics from 1979 to 1984. Mr Jimenez is also Honorary Chairman of Association Française des Gestionnaires d’Actif-Passif (“AFGAP”), having been a member of AFGAP since 1991, Chairman of AFGAP from 1997 to 1999 and Chairman of its Scientific Committee from 1999 to 2002 and Regional Director for France and Member of the Board of Professional Risk Managers’ International Association (“PRMIA”), since 2002.

04. PAUL VAROTSIS INDEPENDENT DIRECTOR

Mr Varotsis was a partner at Reoch Credit Partners LLP until March 2011 where he worked as a consultant for financial institutions and advised investors, asset managers, intermediaries and software vendors on structured credit solutions. Mr Varotsis was Director of CDOs at Barclays Capital from 2002 to 2004. Prior to that, he was Executive Director, Structured Credit Trading, at Lehman Brothers from 2000 to 2002 and spent approximately ten years (1991 to 2000) at Chase Manhattan Bank and its predecessors; his last position at Chase was head of Credit and Capital Management (Europe Africa Middle East). He was European Chairman of the ISDA committee that participated in the drafting of the 2003 Credit Derivatives Definitions and advised the Bank of England and other regulators on the appropriate framework for the market’s development. Mr Varotsis holds an MBA from the Stanford Graduate School of Business, a diplôme from the Institut d’Études Politiques de Paris and a diplôme from the Institut Supérieur de Gestion.

==> picture [370 x 63] intentionally omitted <==

20 VOLTA FINANCE LIMITED annual report and accounts 2012

MANAGEMENT, ADMINISTRATION AND ADVISORS

VOLTA FINANCE LIMITED

Company registration number: 45747 (Guernsey, Channel Islands)

REGISTERED OFFICE

First Floor Dorey Court Admiral Park St Peter Port Guernsey GY1 6HJ Tel: +44 (0)1481 749610 E-mail: [email protected] Website: www.voltafinance.com

AUDITORS

KPMG Channel Islands Limited 20 New Street St Peter Port Guernsey GY1 4AN Channel Islands

COMPANY SECRETARY, ADMINISTRATOR AND REGISTRAR

State Street (Guernsey) Limited First Floor Dorey Court Admiral Park St Peter Port Guernsey GY1 6HJ Channel Islands

INVESTMENT MANAGER

AXA Investment Managers Paris Coeur Défense Tour B-La Défense 4 100, Esplanade de Général de Gaulle 92932 Paris La Défense Cedex France

LISTING AGENT AND PAYING AGENT ING Bank N.V. Bijlmerplein 888 1102 MG Amsterdam The Netherlands

LIQUIDITY PROVIDER

Kepler Corporate Finance Chemin de Joran 10 c/o Kepler Holding SA 1260 Nyon Switzerland

DEPOSITARY AND ADMINISTRATOR OF THE LIQUIDITY ACCOUNT

Deutsche Bank AG, Amsterdam Branch De Entrée 99-197 1101 HE Amsterdam The Netherlands

CUSTODIAN AND PORTFOLIO ADMINISTRATOR

Deutsche Bank AG, London Branch Winchester House 1 Great Winchester Street London EC2N 2DB United Kingdom

VOLTA FINANCE LIMITED 21

annual report and accounts 2012

REPORT OF THE DIRECTORS

The Directors present their report and the audited financial statements for the year ended 31 July 2012.

INCORPORATION

The Company is a closed-ended limited liability company registered in Guernsey under The Companies (Guernsey) Law, 2008 (as amended) with registered number 45747.

ACTIVITIES

The Company is a closed-ended investment company with the objective of investing, amongst other asset classes, in the following main asset classes: CLO, Synthetic Corporate Credit, Cash Corporate Credit and ABS.

RESULTS AND DIVIDENDS

The International Financial Reporting Standards (“IFRS”) net profit for the year amounted to €50.6 million.

The Directors consider recommendation of a dividend on a semi-annual basis. These payments are based on the Company’s current general objective to pay, to the extent possible and reasonable, a dividend of approximately 10% per annum of the Company’s net assets excluding cash at the end of the relevant period. The payment of any dividend by the Company is subject to the satisfaction of a solvency test as required by The Companies (Guernsey) Law, 2008 (as amended).

The Directors recommend the payment of a final dividend for the year of €0.26 per share to those shareholders on the register on 7 December 2012.

LIQUIDITY ENHANCEMENT CONTRACT

As announced on 11 June 2012, Kepler Corporate Finance (“Kepler”) has been appointed as Liquidity Provider to the Company. The Company funded the Liquidity Account with €250,000 and Kepler commenced liquidity operations during September 2012. The Liquidity Provider has been appointed to trade on behalf of the Company and for the Company’s account and risk on Euronext Amsterdam, so as to facilitate the liquidity and regular trading (buying and selling) of the Company’s shares, in order to promote and support the normal trade in such shares and to avoid trading price fluctuations that are not justified by market trends or solely due to the lack of regular trading.

The Companies (Guernsey) Law, 2008 (as amended) prohibits the payment of dividends in respect of any shares held by a company as treasury shares. Consequently, in accordance with that law, no dividends will be paid by the Company on any shares held on the Liquidity Account.

GOING CONCERN

The Directors have considered the impact of the market conditions at the financial year end date and subsequently. During the financial year the fair values of the Company’s assets have risen by a significant amount. The Company has no debt financing. The Company’s current cash holdings and projected cash flows are sufficient to cover current liabilities and projected liabilities. The Directors are therefore of the opinion that the Company is a going concern and the financial statements have been prepared on this basis.

DIRECTORS

The Directors who held office during the financial year and up to the date of approval of this report were:

James Gilligan Christian Jimenez Joan Musselbrook

Paul Varotsis

The Directors’ interests in the Company’s share capital as at the financial year end were:

	31 July 2012	31 July 2011
	Number of shares	Number of shares
James Gilligan	21,646	10,238
Christian Jimenez	92,049	73,805
Joan Musselbrook	93,095	74,043
Paul Varotsis	100,797	80,757

ROTATION PROVISIONS

Joan Musselbrook’s current term of office expires at the 2012 Annual General Meeting (“AGM”). James Gilligan’s and Paul Varotsis’ current terms of office both expire at the 2013 AGM. Christian Jimenez’s current term of office expires at the 2014 AGM.

In accordance with the rotation provisions set out in the Company’s Memorandum and Articles of Incorporation and IPO Prospectus dated 4 December 2006, in the years in which the Directors’ terms of office expire, the Chairman and each of the Directors may stand for re-election for a further three-year term.

On the recommendation of the Board, Ms Musselbrook will be standing for re-election for a further three-year term at the forthcoming AGM scheduled to be held on 3 December 2012.

22 VOLTA FINANCE LIMITED annual report and accounts 2012

REPORT OF THE DIRECTORS CONTINUED

DISCLOSURE OF INFORMATION TO AUDITORS

The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s Auditors are unaware and each Director has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company’s Auditors are aware of that information.

AUDITORS

KPMG Channel Islands Limited served as Auditors during the financial year and have expressed their willingness to continue in office. A resolution to reappoint KPMG Channel Islands Limited as Auditors will be put to the forthcoming AGM on 3 December 2012.

COMPANY SECRETARY

The Company Secretary is State Street (Guernsey) Limited of First Floor, Dorey Court, Admiral Park, St Peter Port, Guernsey GY1 6HJ, Channel Islands.

By order of the Board

Authorised Signatory

==> picture [105 x 38] intentionally omitted <==

STATE STREET (GUERNSEY) LIMITED COMPANY SECRETARY 19 OCTOBER 2012

annual report and accounts 2012 VOLTA FINANCE LIMITED 23

CORPORATE GOVERNANCE REPORT

As a Guernsey limited liability company with shares listed on Euronext Amsterdam, the Company is not subject to The UK Corporate Governance Code (as revised September 2012) (the “UK Code” or the “Code”). Similarly, the Dutch Corporate Governance Code also does not apply to the Company. On 30 September 2011, the Guernsey Financial Services Commission (“GFSC”) issued a Code of Corporate Governance (the “GFSC Code”), which applies to the Company effective from 1 January 2012. The GFSC Code replaces the existing GFSC guidance, “Guidance on Corporate Governance in the Finance Sector”. The GFSC Code provides a framework that applies to all entities licensed by the GFSC, or which are registered or authorised as a collective investment scheme under the Protection of Investors (Bailiwick of Guernsey) law, 1987. Any company, such as Volta, which voluntarily complies with the UK Code, is deemed to also comply with the GFSC Code. The Directors have determined that the Company should continue to voluntarily apply the UK Code, with certain exceptions as detailed below.

STATEMENT OF HOW THE PRINCIPLES OF THE UK CODE ARE APPLIED

Throughout the financial year ended 31 July 2012 the Company has been in compliance with the provisions set out in the UK Code, except as already explained or as set out below:

Sections A–C: The Company does not have Executive Directors or a Chief Executive Officer. Accordingly, provisions of the Code relating to Executive Directors and the Chief Executive Officer do not apply to the Company.
Explanation: As the Code itself states, investment companies typically have a Board structure that differs from those of other companies and this affects the relevance of particular provisions of the Code. Due to the nature of the Company’s business and the structure of its relationships with its Administrator, Portfolio Administrator and Investment Manager, the Directors do not believe it would be at present cost-effective or advisable to have full-time Executive Directors. The Directors intend to submit any future proposed increases in their remuneration to the Company’s shareholders for approval.
Section B.1.1: The Company has established its own criteria for assessing the independence of the Board (as detailed below).
Explanation: The Directors believe that these criteria are more appropriate to the Company’s circumstances.
Section C.3.5: The Company does not have an internal audit function.
Explanation: The Directors believe that this requirement of the Code was intended for companies with internal accounting departments. The Company does not expect to have more than a single employee, who in any event would not be trained in audit matters. The Company will rely on its Administrator for assistance in drawing up its accounts and reports to shareholders.
Section E.2: The Company will call and conduct its AGM of shareholders in accordance with the requirements of Guernsey law and with Euronext Amsterdam requirements, rather than in accordance with the UK Code.
Explanation: As a Guernsey domiciled company with a listing in Amsterdam, rather than a UK listed company, the Company follows Guernsey and Euronext Amsterdam requirements relating to AGMs of shareholders, rather than those of the Code or any other authority. In this way the Company avoids potential unanticipated conflicts of procedural requirements.
Section C.2.1: The Board should, at least annually, conduct a review of the effectiveness of the Company’s risk management and internal control systems and should report to shareholders that they have done so. The review should cover all material controls, including financial, operational and compliance records.
Explanation: Whereas the Company reviews and updates its risk ratings on an ongoing basis, the internal control environment of the Company is the product of control systems operated by its third-party service providers together with oversight by the Audit Committee.
Section B.4: All Directors should receive induction on joining the Board and should regularly update and refresh their skills and knowledge.
Explanation: A formal induction process did not initially exist. However, a formal induction process has now been approved by the Board for any new Directors and the Directors confirm that they do update and refresh their skills, knowledge and familiarity with the Company.
Section D.1: The Remuneration Committee should judge where to position their company relative to other companies. However, they should each use such comparisons with caution, in view of the risk of an upward ratchet of remuneration levels with no corresponding improvement in performance. They should also be sensitive to pay and employment conditions elsewhere in the Group, especially when determining annual salary increases.
Explanation: The Board has considered comparable companies and has decided that, due to the differences between these companies and Volta, it will not take into consideration other companies’ remuneration policies when setting its own. The Company has a Remuneration Committee that consists of the Directors, which submits any proposed changes in the Directors’ remuneration to the Company’s shareholders for approval.
Section C.3.4: The Audit Committee should review arrangements by which staff of the Company may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. The Audit Committee’s objective should be to ensure that arrangements are in place for the proportionate and independent investigation of such matters and for appropriate follow-up action.
Explanation: The Company does not employ staff, other than its Directors, and therefore relies on the Company Secretary and other third-party service providers to address any concerns raised.

24 VOLTA FINANCE LIMITED annual report and accounts 2012

CORPORATE GOVERNANCE REPORT CONTINUED

THE BOARD

The Board is responsible for the determination of the Company’s investment objective, investment guidelines and dividend policy and has overall responsibility for overseeing the Company’s activities. Mr Gilligan acts as Chairman of the Board. Mr Jimenez acts as the Senior Independent Director. Mr Gilligan, Mr Jimenez, Ms Musselbrook and Mr Varotsis are independent from the Investment Manager and satisfy the independence criteria established by the Board as follows:

the independent Board members may not be Directors, employees, partners, officers or professional advisors to other funds that are managed by the Investment Manager or managed by any other company in the AXA Group;
the independent Board members may not be Directors, employees, officers, partners or professional advisors to the Investment Manager or any AXA Group companies;
the independent Board members may not have a business relationship with the Investment Manager or any AXA Group companies that is material to the members (although they may acquire and hold AXA Group insurance, investment and other products on the same terms as those available to other parties unaffiliated with AXA Group); and
the independent Board members may not receive remuneration from the Investment Manager or any AXA Group companies (although they may acquire and hold AXA Group insurance, investment and other products in the same terms as those available to other parties unaffiliated with the AXA Group and they may accept commissions or other payments from parties entering into transactions with AXA Group companies as long as those commissions and payments are on market terms and are not material to the members).

The Board reviews at least annually whether there are other factors that potentially affect the independence of the independent members of the Board or involve meaningful conflicts of interest for them with the Company. Prospective investors in the Company’s shares should note that other companies may define “independence” differently.

The composition of the Board in this respect is in accordance with the policy adopted by the Board and published in the Company’s IPO Prospectus. The individual independence status of the Directors was last reviewed and confirmed by the Board on 19 October 2012.

All of the Directors are non-executive and the Company’s day-to-day activities are delegated to third parties, including the Administrator, the Investment Manager and the Portfolio Administrator. The Company has entered into an Investment Management Agreement with the Investment Manager under which the Investment Manager is responsible for the management of the Company’s investment portfolio subject to the Company’s investment guidelines and the overall supervision of the Board.

COMMITTEES OF THE BOARD

Audit, Nominations and Remuneration Committees have been established by the Board and each Committee has formally delegated duties, responsibilities and terms of reference, which are available upon request from the Company Secretary, but these are not currently available on the Company’s website.

The Audit Committee comprises Mr Gilligan, Mr Jimenez (Chairman), Ms Musselbrook and Mr Varotsis. Only Independent Directors serve on the Audit Committee and members of the Committee have no links with the Company’s Auditors. The Audit Committee meets at least twice each year and normally meets with the Auditors on each such occasion. In any event, the Audit Committee ensures that it meets with the Auditors at least once each year. The Audit Committee is responsible for making recommendations to the Board on the appointment, reappointment or removal of the Auditors and their remuneration. The Audit Committee considers the independence and objectivity of the Auditors and reviews any non-audit services that are to be provided by the Auditors. When the Auditor is engaged to perform non-audit work, the Audit Committee safeguards the Auditors’ objectivity and independence by ensuring that the staff members who perform such work are separate from the staff members who perform the audit. Where it is considered to be necessary, this is achieved by engaging staff from a different office to that of the audit staff.

The Audit Committee receives and reviews the Company’s financial statements and the reports of the Investment Manager and the Auditors. The Audit Committee focuses on ensuring that effective systems of internal financial and non-financial control are maintained and works closely with the Company’s third-party service providers in this regard. As the Company’s accounting functions are delegated to third parties, the Company does not have an internal audit function. The internal control environment of the Company is the product of control systems operated by its third-party service providers, together with oversight exercised by the Audit Committee. To satisfy itself as to the existence and efficacy of material controls affecting the Company, the Audit Committee has sought certain comfort and explanations from key third-party service providers. Other than the Interim Review completed at a fee of €50,000, professional tax services provided at a fee of £2,975 and an independent KPMG review of the DI calculation at a fee of £25,000, no other non-audit services have been provided to the Company by the Auditors or its affiliates during the year.

The Nominations Committee comprises Mr Gilligan (Chairman), Mr Jimenez, Ms Musselbrook and Mr Varotsis. Only Independent Directors will serve on the Nominations Committee. The Committee meets twice each year and considers the size, structure and composition of the Board. The Committee considers retirements, re-appointments and appointments of additional or replacement Directors and makes recommendations to the Board in this respect with particular consideration to the rotation provisions set out in the Company’s Memorandum and Articles of Incorporation and IPO Prospectus dated 4 December 2006.

VOLTA FINANCE LIMITED 25

annual report and accounts 2012

COMMITTEES OF THE BOARD CONTINUED

Ms Musselbrook’s current term of office expires at the forthcoming AGM. At the Nominations Committee meeting held on 10 September 2012, the Chairman confirmed that he had conducted a formal performance evaluation and that he had concluded that Ms Musselbrook’s performance continues to be effective and that she continues to demonstrate her commitment to the Company. Accordingly the Nominations Committee recommended that the Board should propose Ms Musselbrook for re-election to the Board at the forthcoming AGM for a further three-year term.

The Remuneration Committee comprises Mr Gilligan, Mr Jimenez (Chairman), Ms Musselbrook and Mr Varotsis. Only Independent Directors serve on the Remuneration Committee. The Committee meets twice each year to review the remuneration of the Directors and any employees of the Company and make recommendations to the Board in this respect. The remuneration of the Directors was last reviewed by the Committee on 10 September 2012 and it was proposed that the Board continue with the temporary 10% reduction to the Director’s remuneration and that this be notified to shareholders at the AGM to be held on 3 December 2012. This reduction will remain in place until the conclusion of the seventh AGM of the Company.

The composition of the aforementioned Committees and their terms of reference are kept under periodic review. The terms of reference of the Committees require that appointments to the Committee shall be for a period of up to three years. On 9 September 2010 the Committees and the Board resolved to elect Mr Gilligan to the Committees for a three-year period and to re-elect Mr Varotsis, Mr Jimenez and Ms Musselbrook to the Committees for a further three-year period.

ATTENDANCE

There were seven Board meetings held during the financial year ended 31 July 2012. The attendance record of each of the Directors was as follows:

as follows:
	Number of attendances
J Gilligan	7
C Jimenez	6
J Musselbrook	7
P Varotsis	7

There were four Audit Committee meetings and two Remuneration and Nominations Committee meetings held during the financial year ended 31 July 2012. The attendance record of each of the Committee members was as follows:

	Number of attendances
	Audit Committee Nominations Committee Remuneration Committee
J Gilligan C Jimenez J Musselbrook P Varotsis	4 2 2 3 2 2 4 2 2 4 2 2

PERFORMANCE

The Chairman has reviewed the performance of each of the Directors and the Board as a whole, by conducting individual performance review meetings and presenting a report of his findings to the Board. This performance review was last conducted on 10 September 2012. The Chairman’s report found the performance of the individual Directors and the Board as a whole over the review period to be excellent.

The Directors, other than the Chairman, led by the Senior Independent Director, have reviewed the performance of the Chairman by group appraisal and subsequent presentation of a report to the Board by the Senior Independent Director. This performance review was last conducted on 10 September 2012. The Senior Independent Director’s report found the performance of the Chairman over the review period to be very satisfactory.

INVESTOR RELATIONS

Shareholders are able to contact the Company directly through its dedicated e-mail address or by correspondence sent to the Company Secretary or to the Investment Manager. As a consequence, the Board received appropriate updates from the Company Secretary and from the Investment Manager relative to such correspondence to keep it informed of shareholders’ sentiment or analysts’ views. The Company also holds periodic investor calls in which members of the Board participate and which the Board subsequently discusses at its Board meetings. The next investor call is due to be held on 13 November 2012.

26 VOLTA FINANCE LIMITED annual report and accounts 2012

DIRECTORS’ REMUNERATION REPORT

Each of the Directors has signed a letter of appointment with the Company setting out the terms of their appointment. Under the terms of these letters the Chairman is normally entitled to receive an annual fee of €120,000. Each of the other Directors is usually entitled to receive an annual fee of €60,000, in each case payable quarterly in equal instalments in arrears, plus in each case an additional fee of €10,000 per meeting for each of the first four meetings of the Board attended in person by such Director in any calendar year.

The Board of Directors decided on 9 September 2012 to continue the temporary 10% reduction to their remuneration. This temporary reduction will remain in place until the conclusion of the seventh AGM of the Company. As such, the Chairman will receive an annual fee of €108,000 and each of the other Directors will receive an annual fee of €54,000 which will in each case remain payable quarterly in equal instalments in arrears, plus in the case of the other Directors an additional fee of €9,000 per meeting for each of the first four meetings of the Board attended in person by such Director in any calendar year.

Each Director receives 30% of his or her Director’s fee in respect of any year in the form of newly issued shares at a share price equal to the average per share closing price of the shares on Euronext Amsterdam over the 60 consecutive Euronext Amsterdam trading days preceding the date of issuance. The Directors are obliged to retain those shares for a period of no less than six months from their respective dates of issuance.

In addition to these fees, the Company reimburses all reasonable travel and other incidental expenses incurred by the Directors in the performance of their duties.

The total amounts for the Directors’ remuneration for the financial year ended 31 July 2012 were as follows:

	Cash	Shares	Total
Director	€	€	€
J Gilligan	75,600	32,400	108,000
C Jimenez	56,700	24,300	81,000
J Musselbrook	63,000	27,000	90,000
P Varotsis	63,000	27,000	90,000
Total Directors’ remuneration	258,300	110,700	369,000

Please note that the above table represents Directors’ remuneration for the financial year which may vary to the agreed remuneration in the calendar year due to the timing of when Directors attend meetings.

The share element of the Directors’ remuneration, amounting to €110,700, was issued as follows:

	Shares	Shares
	issued during	issued after
Director	theperiod	theperiod end	Total
J Gilligan	7,075	2,056	9,131
C Jimenez	5,083	1,713	6,796
J Musselbrook	5,857	1,713	7,570
P Varotsis	5,857	1,713	7,570
Total	23,872	7,195	31,067

The Directors continue to hold these shares and no disposals of shares have been made by the Directors to date.

All remuneration of the Directors was in the form of fees. There was no performance related compensation.

None of the Directors has any personal financial interest in any of the Company’s investments.

==> picture [87 x 37] intentionally omitted <==

JAMES GILLIGAN CHAIRMAN 19 OCTOBER 2012

annual report and accounts 2012 VOLTA FINANCE LIMITED 27

STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE FINANCIAL STATEMENTS

The Directors are responsible for preparing the Directors’ Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with IFRS and applicable law.

The financial statements are required by law to 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 judgements and estimates that are reasonable and prudent;
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 proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with The Companies (Guernsey) Law, 2008 (as amended). They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

The Directors confirm that they have complied with the above requirements in preparing the financial statements and that to the best of our knowledge and belief:

(a) this annual report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that the Company faces; and
(b) the financial statements, prepared in accordance with IFRS, adopted by the International Accounting Standards Board (“IASB”) and interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”) give a true and fair view of the assets, liabilities, financial position and results of the Company.

==> picture [74 x 45] intentionally omitted <==

==> picture [88 x 37] intentionally omitted <==

JAMES GILLIGAN CHAIRMAN 19 OCTOBER 2012

CHRISTIAN JIMENEZ SENIOR INDEPENDENT DIRECTOR

28 VOLTA FINANCE LIMITED annual report and accounts 2012

Independent Auditors’ Report 29 Income Statement 30 Statement of Comprehensive Income 31 Statement of Financial Position 32 Statement of Changes In Shareholders’ Equity 33 Statement of Cash Flows 34 Notes to the Financial Statements 35 Distribution Income Calculation (Unaudited) 63 Notice of Meeting 67

annual report and accounts 2012 VOLTA FINANCE LIMITED 29

INDEPENDENT AUDITORS’ REPORT

TO THE MEMBERS OF VOLTA FINANCE LIMITED

We have audited the financial statements of Volta Finance Limited (the “Company”) for the year ended 31 July 2012 which comprise the Income Statement, the Statement of Comprehensive Income, the Statement of Financial Position, the Statement of Changes in Shareholders’ Equity, the Statement of Cash flows and the related Notes 1 to 24. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards as issued by the IASB.

This report is made solely to the Company’s members, as a body, in accordance with Section 262 of The Companies (Guernsey) Law, 2008 (as amended). 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 set out on page 27, 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 (“APB’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 Board of Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual 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 31 July 2012 and of its results for the year then ended;
are in accordance with International Financial Reporting Standards as issued by the IASB; and
comply with The Companies (Guernsey) Law, 2008 (as amended).

MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION

We have nothing to report in respect of the following matters where the Companies (Guernsey) Law 2008 (as amended) requires us to report to you if, in our opinion:

the Company has not kept proper accounting records; or
the financial statements are not in agreement with the accounting records; or
we have not received all the information and explanations, which to the best of our knowledge and belief are necessary for the purpose of our audit.

DERMOT A. DEMPSEY FOR AND ON BEHALF OF KPMG CHANNEL ISLANDS LIMITED CHARTERED ACCOUNTANTS AND RECOGNISED AUDITORS 19 OCTOBER 2012

ADDENDUM TO AUDIT REPORT

a) The maintenance and integrity of the Volta Finance Limited website is the responsibility of the Directors; the work carried out by the Auditors does not involve consideration of these matters and, accordingly, the Auditors accept no responsibility for any changes that may have occurred to the financial statements or review report since they were initially presented on the website.
b) Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

30 VOLTA FINANCE LIMITED

annual report and accounts 2012

INCOME STATEMENT FOR THE YEAR ENDED 31 JULY 2012

		1 August 2011	1 August 2010
		to 31 July 2012	to 31 July 2011
	Notes	€	€
OPERATING INCOME
Income on available-for-sale securities – effective interest income and dividend income		22,251,579	19,774,723
Income on available-for-sale securities – recognition of revised cash fow estimates		6,064,940	6,366,063
Income on investments at fair value through proft or loss – effective interest income		3,254,240	2,844,862
Deposit interest income		11,943	14,028
Income from interest rate swaps		—	550,000
Net foreign exchange loss on settlement of foreign exchange
derivatives and retranslation of cash and cash equivalents		(1,110,132)	(1,465,520)
Net realised gain on available-for-sale securities and investments
at fair value through proft or loss		1,002,345	1,783,661
Net realised gain on available-for-sale securities, previously recognised in equity
in prior periods as a net unrealised gain, transferred to the income statement		256,975	909,997
Reversal of impairment recognised on available-for-sale debt securities	5	20,530,378	14,181,286
Impairment recognised on available-for-sale debt securities	5	(1,271,565)	(5,508,753)
Loss on revaluation of fnancial assets designated at fair value through proft or loss		(2,556,586)	(2,280,207)
Foreign exchange gain/(loss) on retranslation of available-for-sale securities
and investments at fair value through proft or loss		11,142,869	(5,378,727)
Net (loss)/gain on revaluation of foreign exchange derivatives		(2,895,241)	3,286,559
		56,681,745	35,077,972
OPERATING EXPENDITURE
Legal fees		(85,298)	(25,455)
Audit and audit related fees		(240,000)	(215,120)
Investment Management Fees	22	(1,892,641)	(1,623,361)
Investment Manager Incentive Fees	22	(2,897,357)	(1,389,010)
Custodian fees		(27,905)	(23,434)
Portfolio valuation and administration fees		(43,942)	(48,944)
Company secretarial, administration and accountancy fees	7	(304,512)	(258,400)
Directors’ remuneration	8	(380,832)	(378,871)
Insurance		(53,964)	(70,920)
Other operating expenses		(186,004)	(86,586)
		(6,112,455)	(4,120,101)
OPERATING PROFIT BEFORE FINANCE COSTS		50,569,290	30,957,871
FINANCE EXPENSES
Liquidity facility fee		—	38,125
PROFIT FOR THE YEAR		50,569,290	30,995,996
EARNINGS PER SHARE
Basic	10	€1.6282	€1.0136
Diluted	10	€1.6282	€1.0136
		Number	Number
		of shares	of shares
Weighted average number of shares outstanding
Basic	10	31,058,407	30,579,333
Diluted	10	31,058,407	30,579,333

The Notes on pages 35 to 62 form part of these financial statements.

annual report and accounts 2012 VOLTA FINANCE LIMITED 31

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 JULY 2012

	1 August 2011	1 August 2010
	to 31 July 2012	to 31 July 2011
	€	€
PROFIT FOR THE YEAR	50,569,290	30,995,996
OTHER COMPREHENSIVE INCOME
Net unrealised (loss)/gain on available-for-sale securities recognised in the year	(10,162,881)	28,194,095
Impairment of available-for-sale debt securities previously
recognised as an unrealised loss in prior year	—	(4,209,484)
Net realised gain on available-for-sale securities, previously recognised in equity
in prior periods as a net unrealised gain, transferred to the income statement	(256,975)	(909,997)
OTHER COMPREHENSIVE INCOME FOR THE YEAR	(10,419,856)	23,074,614
TOTAL COMPREHENSIVE INCOME FOR THE YEAR	40,149,434	54,070,610
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO:
Shareholders	40,149,434	54,070,610

The Notes on pages 35 to 62 form part of these financial statements.

32 VOLTA FINANCE LIMITED annual report and accounts 2012

STATEMENT OF FINANCIAL POSITION

AS AT 31 JULY 2012

		31 July	31 July
		2012	2011
	Notes	€	€
ASSETS
Available-for-sale securities	11	151,851,743	124,984,793
Financial assets at fair value through proft or loss	12	13,006,966	6,203,728
Open foreign exchange swaps and options	13	972,651	377,843
Trade and other receivables	14	5,132,642	4,779,231
Cash and cash equivalents	15	5,168,807	8,877,091
TOTAL ASSETS		176,132,809	145,222,686
EQUITY AND LIABILITIES
Capital and reserves
Share capital	17	—	—
Share premium	18	3,969,938	2,066,515
Warrants	19	1,410,000	1,410,000
Other distributable reserves	20	231,418,043	245,071,649
Net unrealised fair value movements on available-for-sale securities	20	(1,962,076)	8,457,780
Accumulated loss	20	(63,869,482)	(114,438,772)
TOTAL SHAREHOLDERS’ EQUITY		170,966,423	142,567,172
LIABILITIES
Current liabilities
Trade and other payables	16	5,166,386	2,655,514
TOTAL EQUITY AND LIABILITIES		176,132,809	145,222,686
Net asset value per share outstanding
Basic		€5.4502	€4.6297
Diluted		€5.4502	€4.6297

These financial statements on pages 30 to 62 were approved by the Board of Directors on 19 October 2012 and were signed on its behalf by:

==> picture [85 x 41] intentionally omitted <==

JAMES GILLIGAN CHRISTIAN JIMENEZ CHAIRMAN SENIOR INDEPENDENT DIRECTOR

The Notes on pages 35 to 62 form part of these financial statements.

annual report and accounts 2012 VOLTA FINANCE LIMITED 33

STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 JULY 2012

FOR THE YEAR ENDED 31 JULY 2012
								Available-for-
						Other		sale securities
			Ordinary	Share		distributable	Accumulated	unrealised
			shares	premium	Warrants	reserves	loss	losses	Total
		Notes	€	€	€	€	€	€	€
Balance at 31 July 2010			—	523,561	1,410,000	256,700,276	(145,434,768)	(14,616,834)	98,582,235
Net unrealised gain on available-for-sale
securities recognised in the year		20	—	—	—	—	—	28,194,095	28,194,095
Impairment of available-for-sale debt
securities previously recognised as
an unrealised loss in prior period		20	—	—	—	—	—	(4,209,484)	(4,209,484)
Net realised gain on available-for-sale
securities, previously recognised
in equity in prior years as a net
unrealised gain, transferred to the
income statement		20	—	—	—	—	—	(909,997)	(909,997)
Total other comprehensive income
for the year			—	—	—	—	—	23,074,614	23,074,614
Proft for the year		20	—	—	—	—	30,995,996	—	30,995,996
Total comprehensive income
for the year		—	—	—	—	30,995,996	23,074,614	54,070,610
Issue of ordinary shares to Directors		17, 18	—	105,449	—	—	—	—	105,449
Scrip dividend paid	17,	18, 20	—	1,437,505	—	(1,437,505)	—	—	—
Dividend paid		9, 20	—	—	—	(10,191,122)	—	—	(10,191,122)
Balance at 31 July 2011			—	2,066,515	1,410,000	245,071,649	(114,438,772)	8,457,780	142,567,172
Net unrealised loss on available-for-sale
securities recognised in the year		20	—	—	—	—	—	(10,162,881)	(10,162,881)
Net realised gain on available-for-sale
securities, previously recognised
in equity in prior years as a net
unrealised gain, transferred to the
income statement		20	—	—	—	—	—	(256,975)	(256,975)
Total other comprehensive income
for the year			—	—	—	—	—	(10,419,856)	(10,419,856)
Proft for the year		20	—	—	—	—	50,569,290	—	50,569,290
Total comprehensive income
for the year		—	—	—	—	50,569,290	(10,419,856)	40,149,434
Issue of ordinary shares to Directors		17, 18	—	110,700	—	—	—	—	110,700
Issue of Class C shares		17, 18	—	533,610	—	—	—	—	533,610
Scrip dividend paid	17,	18, 20	—	1,259,113	—	(1,259,113)	—	—	—
Dividend paid		9, 20	—	—	—	(12,319,209)	—	—	(12,319,209)
Dividend payable		9, 20	—	—	—	(75,284)	—	—	(75,284)
Balance at 31 July 2012			—	3,969,938	1,410,000	231,418,043	(63,869,482)	(1,962,076)	170,966,423

The Notes on pages 35 to 62 form part of these financial statements.

34 VOLTA FINANCE LIMITED annual report and accounts 2012

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 JULY 2012

		1 August 2011	1 August 2010
		to 31 July 2012	to 31 July 2011
	Notes	€	€
Cash fows generated from operating activities
Proft for the year		50,569,290	30,995,996
Adjustments for:
Income on available-for-sale securities – effective interest income
and dividend income		(22,251,579)	(19,774,723)
Income on available-for-sale securities – recognition of revised cash fow estimates		(6,064,940)	(6,366,063)
Income on investments at fair value through proft or loss		(3,254,240)	(2,844,862)
Net loss/(gain) on revaluation of foreign exchange derivatives		2,895,241	(3,286,559)
Loss on revaluation of fnancial assets designated at fair value through proft or loss		2,556,586	2,280,207
Coupons received		29,473,197	21,930,849
Dividends received		1,185,088	1,229,872
Foreign exchange (gain)/loss on retranslation of available-for-sale securities and
investments at fair value through proft or loss		(11,142,869)	5,378,727
Reversal of impairments recognised on available-for-sale debt securities		(20,530,378)	(14,181,286)
Impairments recognised on available-for-sale debt securities		1,271,565	5,508,753
Net realised gain on available-for-sale securities and investments
at fair value through proft or loss		(1,002,345)	(1,783,661)
Net realised gain on available-for-sale securities, previously recognised in equity
in prior years as a net unrealised gain, transferred to the income statement		(256,975)	(909,997)
Net foreign exchange (gain)/loss on retranslation of cash and cash equivalents		(531,281)	362,836
Increase in trade and other receivables		(4,350)	(1,284,945)
Increase in trade and other payables		2,435,588	1,698,973
Directors’ fees paid in the form of shares		110,700	105,448
Investment Manager’s Incentive Fee paid in the form of Class C shares		533,610	—
Cash generated from operating activities		25,991,908	19,059,565
Cash fows used in investing activities
Net (payments)/receipts (to)/from margin accounts from foreign
exchange derivative activities		(3,490,048)	3,230,000
Purchase of investments		(27,610,373)	(34,275,977)
Proceeds from sales and redemptions of investments		13,188,157	28,088,529
Net cash used in investing activities		(17,912,264)	(2,957,448)
Cash fows used in fnancing activities
Dividends paid		(12,319,209)	(10,191,122)
Net cash used in fnancing activities		(12,319,209)	(10,191,122)
Net (decrease)/increase in cash and cash equivalents		(4,239,565)	5,910,995
Cash and cash equivalents at the beginning of the year		8,877,091	3,335,471
Effect of exchange rate fuctuations on cash and cash equivalents		531,281	(369,375)
Cash and cash equivalents at the end of the year	15	5,168,807	8,877,091

CASH GENERATED FROM OPERATIONS

Cash generated from operations for the year of €25,991,908 (2011: €19,059,565) includes the following interest receipts:

	1	August 2011	1 August 2010
	to	31 July 2012	to 31 July 2011
		€	€
Deposit interest		11,943	14,028

The Notes on pages 35 to 62 form part of these financial statements.

annual report and accounts 2012 VOLTA FINANCE LIMITED 35

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2012

1. REPORTING ENTITY

The Company is a closed-ended limited liability company registered under The Companies (Guernsey) Law, 2008 (as amended) with registered number 45747. The Company’s IPO closed on 20 December 2006 and its shares are listed on Euronext Amsterdam. The registered office of the Company is Dorey Court, Admiral Park, St Peter Port, Guernsey GY1 6HJ, Channel Islands.

As at 31 July 2012 the principal activity of the Company was investment in a diversified portfolio of mortgage-backed and other asset-backed securities, loans and equity instruments. The Company’s investment objectives are to seek to preserve capital and to provide a stable stream of income to its shareholders through dividends that it expects to distribute on a semi-annual basis. Subject to the risk factors that were described in the Company’s IPO Prospectus and the risk factors that are described in Note 21, the Company’s strategy focuses on direct and indirect investment in, and exposures to, a variety of assets selected for the purpose of generating cash flows for the Company. The Company’s basic approach to investment in the Primary Underlying Assets, as defined in the Company’s IPO Prospectus, is to invest in vehicles and arrangements that essentially provide exposure to portfolios of Primary Underlying Assets. There can be no assurance that the Company will achieve its investment objectives.

The Directors have chosen not to present quarterly financial statements. Semi-annual unaudited condensed interim financial statements are prepared in addition to annual audited financial statements. The Directors of the Company also publish an interim management statement covering the period from the beginning of each interim period to the date of publication of such interim management statement, in accordance with the EU Transparency Directive.

2. BASIS OF PREPARATION

A) STATEMENT OF COMPLIANCE

The financial statements, which give a true and fair view, have been prepared in accordance with International Financial Reporting Standards (“IFRS”) adopted by the International Accounting Standards Board (“IASB”) and interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”) and are in compliance with The Companies (Guernsey) Law, 2008 (as amended).

New accounting standards, amendments to existing accounting standards and/or interpretations of existing accounting standards (separately or together “New Accounting Requirements”) adopted during the current year

The Directors have assessed the impact, or potential impact, of all New Accounting Requirements. In the opinion of the Directors, except for the amendments to IFRS 7 referred to below, there are no mandatory New Accounting Requirements applicable in the current period that had any material effect on the reported performance, financial position, or disclosures of the Company. Consequently, no mandatory New Accounting Requirements are listed. The Company has not early adopted any New Accounting Requirements that are not mandatory.

IFRS 7 – “Financial Instruments: Disclosures” (amendments)

The main change resulting from these amendments that is relevant to the Company is a requirement that qualitative disclosures should be made with reference to each quantitative disclosure to enable users to better evaluate an entity’s exposure to risks arising from financial instruments.

The revised standard is effective for accounting periods commencing on or after 1 January 2011. In the opinion of the Directors, adoption of the amendments to IFRS 7 has resulted in no material changes to the Company’s financial statements.

Non-mandatory New Accounting Requirements not yet adopted

The following applicable New Accounting Requirements have been issued. However, these New Accounting Requirements are not yet mandatory and have not yet been adopted by the Company. All other non-mandatory New Accounting Requirements are either not yet permitted to be adopted, or would have no material effect on the reported performance, financial position, or disclosures of the Company and consequently have neither been adopted, nor listed.

IAS 1 – “Presentation of Financial Statements” (amendments)

The main change resulting from these amendments that is relevant to the Company is a requirement for entities to group items presented in other comprehensive income (“OCI”) on the basis of whether they may potentially be reclassified to profit or loss subsequently (reclassification adjustments). The amendments do not address which items are presented in OCI.

The revised standard is effective for accounting periods commencing on or after 1 July 2012 but early adoption is permitted at any time prior to this date.

IFRS 9 – “Financial Instruments” (Replacement of IAS 39 – “Financial Instruments: Recognition and Measurement”)

IFRS 9 is an incomplete standard that currently addresses the recognition, classification and measurement of financial assets and financial liabilities and may be adopted to replace the relevant parts of IAS 39. Those parts of IAS 39 that relate to impairment and hedge accounting have not yet been addressed by IFRS 9. It is the IASB’s intention that IFRS 9 will ultimately replace IAS 39 in its entirety. The standard is mandatory for accounting periods commencing on or after 1 January 2015 but early adoption is permitted at any time prior to this date.

36 VOLTA FINANCE LIMITED annual report and accounts 2012

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 JULY 2012

2. BASIS OF PREPARATION CONTINUED

A) STATEMENT OF COMPLIANCE CONTINUED

Non-mandatory New Accounting Requirements not yet adopted continued

IFRS 9 – “Financial Instruments” (Replacement of IAS 39 – “Financial Instruments: Recognition and Measurement”) continued IFRS 9 requires financial assets to be classified into two measurement categories: (i) those measured at fair value; and (ii) those measured at amortised cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument.

For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The standard also results in one impairment method replacing the numerous impairment methods in IAS 39 that arise from the different classification categories.

IFRS 13 – “Fair Value Measurement”

IFRS 13 was issued in May 2011 and aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRS.

The standard is mandatory for accounting periods commencing on or after 1 January 2013 but early adoption is permitted at any time prior to this date. IFRS 13 also requires certain additional disclosures for financial instruments categorised within Level 3 of the fair value hierarchy.

The Directors are currently assessing the potential impact of early adoption of all of the standards listed above. In the Directors’ opinion, early adoption of any of these standards would have no material effect on the reported performance, financial position, or disclosures of the Company.

B) BASIS OF MEASUREMENT

These financial statements have been prepared on a historical cost basis except for the following:

derivative financial instruments are measured at fair value, with movements in fair value being recognised in the income statement;
available-for-sale financial assets are measured at fair value, with movements in fair value being taken directly to the Statement of Comprehensive Income;
financial instruments designated at fair value through profit or loss are measured at fair value and changes therein are recognised in the income statement; and
the methods used to measure fair value are further disclosed in Note 4. All other financial instruments are measured at amortised cost.

C) FUNCTIONAL AND PRESENTATION CURRENCY

These financial statements are presented in euro (rounded to the nearest whole euro), which is the Company’s functional and presentation currency. In the Directors’ opinion, the euro is the Company’s functional currency as the Company has issued its share capital denominated in euro and the Company partially hedges the projected cash flows from its US dollar investments such that its principal exposure is to the euro.

D) USE OF ESTIMATES AND JUDGEMENTS

The preparation of financial statements in accordance with IFRS requires the Board to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities and income and expense. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on a semi-annual basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are included in the following:

estimation uncertainty: Note 4 (Determination of fair values);
estimation uncertainty and critical judgements in applying accounting policies: Note 5 (Provisions for impairment, recognition of reversals of impairment, recognition of revised cash flow estimates and the effect on the distribution income calculation; and
estimation uncertainty and critical judgements in applying accounting policies: Note 21 (Financial risk management).

E) CHANGES IN PRESENTATION

The presentation within the income statement has been amended to bring it more in line with standard practice. Previously, the Company presented only those items that it considered to represent revenue items under the heading of “Operating Income”, with all other gains and losses other than operating expenses being presented under the heading of “Realised and Unrealised Gains and Losses”. In these financial statements, the Company has now presented all gains and losses that were previously presented under the heading of “Realised and Unrealised Gains and Losses” under the heading of “Operating Income” The prior period presentation has been modified to maintain comparability.

VOLTA FINANCE LIMITED 37

annual report and accounts 2012

3. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been applied consistently to all periods presented in these financial statements.

A) FOREIGN CURRENCIES

Transactions in foreign currencies are initially translated at the foreign currency exchange rate ruling at the date of the transaction. Monetary assets and monetary liabilities denominated in foreign currencies are retranslated to euro at the foreign currency closing exchange rate ruling at the reporting date.

Foreign currency exchange differences arising on retranslation of monetary items are recognised in the income statement under the heading of: “Net foreign exchange gain/(loss) on settlement of foreign exchange derivatives and retranslation of cash and cash equivalents”; or “Net gain/(loss) on revaluation of foreign exchange derivatives”; or “Foreign exchange gain/(loss) on retranslation of available-for-sale securities and investments at fair value through profit or loss”, as appropriate.

Non-monetary assets and liabilities denominated in foreign currencies are recognised at the exchange rate ruling on the relevant transaction date.

For the purposes of foreign currency retranslation, all of the Company’s investments are considered to represent monetary items as all such investments are considered to be readily convertible into money, or money’s worth.

B) FINANCIAL INSTRUMENTS

Recognition

Financial assets and financial liabilities are initially recognised in the Company’s Statement of Financial Position when the Company becomes party to the contractual provisions of a given instrument. Regular way purchases and sales of financial instruments are recognised on the trade date. Gains and losses are recognised from that date.

Derecognition

Financial assets are derecognised when the contractual rights to cash flows from the assets expire or the Company transfers the financial assets and substantially all of the risks and rewards of ownership have been transferred. Financial liabilities are derecognised when the liabilities are extinguished. The Company uses the weighted average method to determine realised gains and losses on derecognition.

Classification and measurement

(i) Non-derivative financial instruments

Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents and trade and other payables.

Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs. Subsequent to initial recognition, non-derivative financial instruments are measured as described in the next page.

Cash and cash equivalents

Cash comprises cash balances and call deposits with banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, are subject to an insignificant risk of changes in value and are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes.

Available-for-sale financial assets

The Company’s investments in equity and certain debt securities are classified as either available-for-sale financial assets or financial assets at fair value through profit or loss. Available-for-sale financial assets are measured initially at fair value plus transaction costs that are directly attributable to the acquisition of the asset. Subsequent to initial recognition they are measured at fair value and changes therein, other than impairment losses and foreign exchange gains and losses on available-for-sale monetary items, are recognised directly in the Statement of Comprehensive Income. When an investment is derecognised, the cumulative gain or loss in equity is transferred to the income statement.

Financial assets and liabilities at fair value through profit or loss

An instrument is classified at fair value through profit or loss if it is held for trading or designated as such upon initial recognition. Financial instruments are designated at fair value through profit or loss if the host contract contains one or more embedded derivatives as permitted by IAS 39. Upon initial recognition, attributable transaction costs are recognised in profit or loss when incurred. Financial assets at fair value through profit or loss are measured at fair value and changes therein are recognised in the income statement.

Other

Other non-derivative financial instruments, such as trade and other receivables and trade and other payable, are measured at amortised cost using the effective interest rate method, less any impairment losses.

38 VOLTA FINANCE LIMITED annual report and accounts 2012

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 JULY 2012

3. SIGNIFICANT ACCOUNTING POLICIES CONTINUED

B) FINANCIAL INSTRUMENTS CONTINUED

Classification and measurement continued

(ii) Derivative financial instruments

The Company holds derivative financial instruments to minimise its exposure to foreign exchange, interest rate and market risks as well as for economic leveraging. Derivatives are initially recognised at fair value; attributable transaction costs are recognised in the income statement when incurred. Subsequent to initial recognition, derivatives are measured at fair value and changes therein are recognised in the income statement. The fair values of foreign exchange swaps and options are measured at their quoted market prices at the reporting date.

(iii) Embedded derivatives

Embedded derivatives in financial instruments and other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contract and the host contracts are not carried at fair value with unrealised gains and losses reported in the income statement.

C) SHARE CAPITAL

Ordinary shares

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction in equity, net of any tax effects. The initial set up costs of the Company and the expenses directly relating to the IPO have been charged to the share premium account.

D) IMPAIRMENT

In accordance with IAS 39, a financial asset is assessed on a semi-annual basis to determine whether there is any objective evidence that it is impaired. Such evidence that a financial asset is impaired includes observable data that comes to the attention of the Company about any of the following loss events:

significant financial difficulty of the issuer or obligor;
a breach of contract, such as a default or delinquency in interest or principal payments, granting to the borrower a concession that the lender would not otherwise consider;
it becomes probable that the borrower will enter bankruptcy, administration or other analogous financial reorganisation; or
the disappearance of an active market for that financial asset because of financial difficulties.

In addition, IAS 39 permits collective impairment assessment on a portfolio basis for financial assets where the underlying assets share similar credit risk characteristics. Such collective impairment assessment considers the “risk conditions” that may give rise to impairment and the observed effects of historic changes in such risk conditions. The Company invests in many financial assets underlying which are portfolios of assets that share similar credit risk characteristics. Accordingly, the Company carries out a collective impairment assessment on a portfolio basis for each such financial asset at the end of each semi-annual period.

The Company considers a wide range of risk conditions applicable to the assets underlying such investments when considering whether or not an impairment should be recognised on any individual investment, including the following non-exhaustive list of indicators:

changes in observed historical default rates;
changes in observed historical recovery rates;
changes in observed historical prepayment rates; and
failure or deterioration in the results of over collateralisation tests or other conditions specified under the relevant investment documentation.

A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a material negative effect on the estimated future cash flows of that asset. Loss events and/or changes in any of the risk conditions listed above may impact upon the projected cash flows for an investment.

If any such indication exists, an impairment loss in relation to an available-for-sale financial asset is recognised in the income statement as the difference between its amortised cost and its current fair value. The current fair values of the available-for-sale assets that are impaired as at the reporting date were determined as disclosed in Note 4.

An impairment loss in respect of a financial asset measured at amortised cost is recognised in the income statement, calculated as the difference between its carrying amount and the present value of the future estimated cash flows discounted at the original effective interest rate.

Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.

VOLTA FINANCE LIMITED 39

annual report and accounts 2012

3. SIGNIFICANT ACCOUNTING POLICIES CONTINUED

D) IMPAIRMENT CONTINUED

Subsequent to recognition of impairment, effective income is measured at the rate used to measure the impairment, i.e. the current market IRR underlying the fair value. For available-for-sale financial assets that are equity securities, any increase in the fair value after impairment loss has been recognised is treated as a revaluation and is recognised directly in the Statement of Comprehensive Income.

An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. Reversal events may include any event that reverses an amount that was included in the measurement of the original impairment and has a positive impact on the estimated future cash flows of the asset, in addition to reversals of credit events that gave rise to the impairment.

If any such indication exists, a reversal of impairment in relation to an available-for-sale financial asset is recognised in the income statement as the difference between its amortised cost and its current fair value. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of amortisation, if no impairment loss had been recognised. For available-for-sale financial assets that are debt securities, the reversal is recognised in the income statement.

E) RECOGNITION OF REVISED CASH FLOW ESTIMATES ON AVAILABLE-FOR-SALE DEBT SECURITIES

Similar to impairment, available-for-sale debt securities are assessed on a semi-annual basis to determine whether any objective evidence exists that adjustments for revised cash flow estimates on available-for-sale debt securities should be recognised. When considering whether or not it would be appropriate to recognise adjustments for revised cash flow estimates on any particular asset, the Company considers the same risk conditions that it considers for recognition of impairment.

The Company applies IAS 39 Application Guidance number 7 (“IAS 39: AG7”) when measuring adjustments to the carrying amount resulting from changes to projected cash flows caused by changes in market interest rates. The Company applies IAS 39 Application Guidance number 8 (“IAS 39: AG8”) when measuring adjustments to the carrying amount resulting from changes to projected cash flows caused by all other changes.

In accordance with IAS 39: AG8, the difference between the amortised cost and the net present value (“NPV”) of revised expected future cash flows discounted at the original IRR is adjusted against amortised cost and is recognised immediately within the income statement under the heading of: “Income on available-for-sale securities – recognition of revised cash flow estimates”. Subsequent to recognition of revised cash flow estimates, effective income is measured at the rate used to measure the revised cash flow estimates, i.e. the original IRR.

F) PROVISIONS

A provision is recognised if, as a result of a past event, the Company has a legal or constructive obligation that can be reliably estimated and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to that liability.

G) INCOME AND EXPENSES

Income comprises interest income on funds invested, including recognition of revised cash flow estimates on available-for-sale financial assets, dividend income, realised gains on disposal of financial assets, positive changes in the fair value of financial assets at fair value through profit or loss, reversals of impairment losses recognised on financial assets and foreign exchange retranslation gains.

Effective interest income is recognised as it accrues in the income statement, using the effective interest rate method. Effective interest income is calculated by multiplying the projected internal rate of return (“IRR”) applicable to each individual asset against its amortised cost at each coupon date. Dividend income is recognised in the income statement on the date the Company’s right to receive payments is established, which is usually the ex-dividend date.

Expenses comprise realised losses on disposal of financial assets, negative changes in the fair value of financial assets held at fair value through profit or loss, impairment losses recognised on financial assets, foreign exchange retranslation losses and operating expenses.

Foreign exchange gains and losses are reported in the income statement on a net basis. Operating expenses are accounted for on an accruals basis.

Operating expenses are accounted for on an accruals basis.

H) EARNINGS PER SHARE

The Company presents basic and diluted earnings per share (“EPS”) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. The diluted EPS is calculated by adjusting the profit or loss attributable to ordinary shareholders for the effects of all dilutive potential ordinary shares, which comprise the warrants issued to the Investment Manager. For further details please see Note 10.

I) TAXATION

The Company is classified as exempt for taxation purposes under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 (as amended) and as such incurs a flat fee (presently £600 per annum). No other taxes are incurred in Guernsey.

40 VOLTA FINANCE LIMITED annual report and accounts 2012

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 JULY 2012

3. SIGNIFICANT ACCOUNTING POLICIES CONTINUED

J) DIVIDENDS PAYABLE

Dividends payable on ordinary shares are recognised in the Statement of Changes in Shareholders’ Equity when approved by the shareholders.

The Directors consider recommendation of a dividend on a semi-annual basis, having regard to various considerations, including the financial position of the Company.

The payment of any dividend by the Company is subject to the satisfaction of a solvency test as required by the Companies (Guernsey) Law, 2008 (as amended).

K) DISTRIBUTION INCOME

The Company’s definition of Distribution Income, together with the calculation of Distribution Income for the year and a description of the objective of such calculation may be found on pages 63 to 66.

L) OFFSETTING

Financial assets and liabilities are offset and the net amount is reported within assets and liabilities where there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

M) SEGMENT REPORTING

The Board has considered the requirements of IFRS 8 – “Operating Segments”. The Board is of the view that the Company is engaged in a single segment of business, being investment in a diversified portfolio of collateralised debt obligations, asset-backed securities, Corporate Credits and other equity instruments. The Board, as a whole, has been determined as constituting the chief operating decision maker of the Company.

N) SHARE-BASED PAYMENT TRANSACTIONS

Directors receive 30% of their fees in respect of any period in the form of newly issued shares. The share-based payment awards vest immediately as the Directors are not required to satisfy a specified vesting period before becoming unconditionally entitled to the instruments granted. The fair value of equity-settled share-based payment awards is based on the average closing share price for the 60 Euronext Amsterdam trading days preceding the date of issuance. These are recognised as a Directors’ fee, with a corresponding increase in liability when the Directors become unconditionally entitled to the awards. Equity is subsequently increased once the shares are issued.

If the Distribution Income of the Company for a semi-annual period exceeds the Hurdle Amount, which is currently calculated at a rate of 8% per annum (4% per semi-annual period) on the weighted average number of shares outstanding at their weighted average issue price, dependant upon the performance of the Company during the “look-back” period of 18 months prior to the start of such period, the Investment Manager may be entitled to receive an incentive fee of 25% of the Distribution Income in excess of the Hurdle Amount. If an incentive fee is payable, 50% of any such fee is payable in the form of newly issued Class C shares, which are recognised in equity immediately upon issue.

4. DETERMINATION OF FAIR VALUES

A number of the Company’s accounting policies and disclosures require the determination of fair values for financial assets and liabilities. Fair values have been determined based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the Notes specific to that asset or liability.

Financial assets for which quoted prices are available from a third party in a liquid market are valued monthly on the basis of quoted market prices. In this regard, for liquid assets, an external pricing service may be the source of the price quotations.

In the case of investments where the fair value of the investment can be readily ascertained by reference to the market values of liquid underlying assets, the arranging bank, or another market participant, generally provides the valuation of the investment position using the mark-to-market valuations of the underlying assets (minus, where applicable, the investment’s internal funding or other liabilities).

In the absence of an active market for an investment, a mark -to- model approach has been adopted by the Investment Manager, which may be sourced from the arranging bank, or another market participant, or developed internally, to determine the valuation. Such pricing models generally involve a number of valuation assumptions, many of which are based on subjective judgements. Key model inputs include: asset spreads; expected defaults; expected recovery rates; and the price of uncertainty or liquidity through the interest rate at which expected cash flows are discounted. These inputs are derived by reference to a variety of market sources. The method of valuation depends on the nature of the asset.

VOLTA FINANCE LIMITED 41

annual report and accounts 2012

4. DETERMINATION OF FAIR VALUES CONTINUED

Where a financial asset involves an arranging bank, or another market participant, that provides valuations on a monthly basis, the valuation is sourced from such arranging bank. In many cases, the arranging bank determines the valuation based on pricing models, which may or may not produce values that correspond to the prices that the Company could obtain if it sought to liquidate such positions. Such valuations generally involve subjective judgements on key model inputs, particularly default and recovery rates, and may not be uniform. Banks and other market participants may be unwilling to disclose all or any of the key model inputs or discount rates that have been used to produce such valuations and it is currently standard market practice to withhold such information. In such circumstances, the valuation continues to be sourced from such arranging bank, or other market participant, despite the lack of valuation assumptions.

Where a financial asset does not involve an arranging bank, or another market participant that is willing to provide valuations on a monthly basis, or if an arranging bank is unwilling to provide valuations, the Investment Manager will provide a monthly valuation based on a pricing model and/or comparable asset prices.

Third parties have reviewed the valuations and/or valuation assumptions as at 31 July 2012 and have concluded that they were fair and reasonable. In the event that a third party were to challenge the Investment Manager’s valuations, the Company will consider engaging the third party (or one or more other third parties such as, for example, an investment bank or the seller of the underlying assets) to provide a valuation, or will adopt some other method of valuing the position.

The fair value of non-derivative financial liabilities is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date.

The fair value calculations for the residual and debt tranche investments in securitisation vehicles are sensitive to the following key model inputs: default rates, recovery rates and prepayment rates. The initial model assumptions are reviewed on a regular basis with reference to both current and projected data. In the case of a material change in the actual key model inputs from the historical ones, then the model assumptions will be adjusted accordingly as well as the discount rate used when establishing the fair value.

If, over the lifetime of an individual deal, defaults and recoveries diverge from their long-term historical norms, then the actual returns may differ from the current levels projected by the model, which would impact upon the net assets of the Company and its distributable income.

There is no liquid market for the Company’s investments. Consequently, no quoted market prices exist for these assets. Therefore, the fair values of Volta’s investments have been determined using the mark-to-model approach as described above.

In accordance with Volta’s valuation policy, GAV is calculated using prices received from arranging banks or brokers for all but a few assets representing 14.0% of Volta’s assets. The exceptions being: Promise Mobility (2.6% of Volta’s GAV), which is model-based using a discount rate of 20% on projected cash flows; Tennenbaum (5.3% of Volta’s GAV), Bank Capital Opportunity Fund (2.9% of Volta’s GAV) and Cheyne Total Return Credit Fund (1.25% of Volta’s GAV), each of which is a fund that is valued using the net asset value as provided by the fund manager and used in good faith by the Directors; St. Bernard Opportunity Fund (0.5% of Volta’s GAV), a fund that will also be valued using the net asset value as provided by the fund manager, but which is valued at cost as at 31 July 2012 since it was purchased only in July 2012 and the UK non-conforming residual positions (3.2% of Volta’s GAV), which are valued at their projected cash flows until 31 July 2014, after which it is considered that any projected cash flows are too uncertain to be taken into account in the valuation, using a discount rate of 20%.

For the majority of investments targeted by the Company, the secondary trading market may sometimes become illiquid. As a result, at such times there may be no regularly reported market prices for these investments. In addition, there may not be an agreed industry standard methodology for valuing the investments (e.g. in the case of residual income positions of asset-backed securitisations).

Additional disclosures on fair value estimation, including assumptions applied in determining fair value where available, are presented in Section 4, including table 7, of the Investment Manager’s Report.

5. PROVISIONS FOR IMPAIRMENT, RECOGNITION OF REVERSALS OF IMPAIRMENT, RECOGNITION OF REVISED CASH FLOW ESTIMATES AND THE EFFECT ON THE DISTRIBUTION INCOME CALCULATION AVAILABLE-FOR-SALE DEBT SECURITIES

Recognition of reversal of impairment and impairment

No new impairments were recognised during the year. The aggregate net reversal of impairment of €19,258,813 relates to impairment adjustments on previously impaired assets.

During the year, the prices of assets rated CCC or below generally increased, the number of assets rated CCC or below within underlying portfolios generally decreased and there were few occurrences of default at the underlying portfolio levels. These facts, confirmed by significant increases in the fair values of the majority of Volta’s investments in Subordinated Notes of CLOs, caused the Company to recognise such increases in value of the previously impaired assets as reversals of impairment, as required by IAS 39. Also during the year, the fair values of some of the UK non-conforming residual positions held by the Company increased significantly, mainly due to unexpected payments of arrears at the underlying mortgage pool level. These fair value changes were confirmed through the sale of one of these positions by the Company. As required by IAS 39, the Company recognised the increases in value of these residual positions previously impaired as reversals of impairment.

42 VOLTA FINANCE LIMITED

annual report and accounts 2012

NOTES TO THE FINANCIAL STATEMENTS CONTINUED

FOR THE YEAR ENDED 31 JULY 2012

5. PROVISIONS FOR IMPAIRMENT, RECOGNITION OF REVERSALS OF IMPAIRMENT, RECOGNITION OF REVISED CASH FLOW ESTIMATES AND THE EFFECT ON THE DISTRIBUTION INCOME CALCULATION CONTINUED AVAILABLE-FOR-SALE DEBT SECURITIES CONTINUED

Recognition of reversal of impairment and impairment continued

The table below details the amount of net reversal of impairments recognised during the year:

	Year ended	Year ended
	31 July 2012	31 July 2011
	€	€
Carlyle HY Part IX	2,092,045	221,059
LightPoint Pan-European CLO 2006 plc	(1,026,823)	2,093,539
Northwoods Capital VIII Limited	869,605	4,901,845
Oak Hill Europe Credit Partners II plc	23,156	1,088,285
RMAC 2007 NS1 Mercs & Residuals	7,545,994	—
Alpstar CLO 2 PLC – E BB debt	(244,720)	776,089
Eurosail 2006-1 PLC	637,858	510,753
Promise Mobility 2006-1	173,387	(5,508,753)
Alba 2007-1 plc	5,246,356	231
Alba 2006-1 plc	1,202,585	—
Alba 2006-2 plc	2,739,391	10
Battalion CLO 2007-1 Ltd – Equity	—	1,128,859
Wasatch CLO Ltd	—	1,036,475
Lightpoint CLO V Ltd	—	907,553
Galaxy VII CLO Ltd	—	763,832
Sands Point Funding Ltd	—	752,445
Other net reversals	(21)	311
	19,258,813	8,672,533

As at 31 July 2012, the following assets remained impaired:

As at 31 July 2012, the following assets remained impaired:
	31 July 2012	31 July 2012
	Cumulative impairment	Fair value
	€	€
LightPoint Pan-European CLO 2006 plc	(1,531,579)	1,320,000
Alba 2006-1 plc	(4,046,064)	800,512
Alba 2006-2 plc	(8,036,852)	1,384,958
Eurosail 2006-1 PLC	(7,113,876)	218,456
Newgate Funding PLC 2006-2	(6,795,689)	125
Promise Mobility 2006-1	(5,335,366)	4,339,645
Alba 2007-1 plc	(4,952,874)	3,070,248
Oak Hill Europe CP 2	(796,718)	1,414,875
Alpstar CLO 2 PLC	(393,548)	857,391
	(39,002,566)	13,406,210

Interest income on available-for-sale securities that remained impaired as at the end of the financial year amounted to €1,914,538 (year ended 31 July 2011: €3,177,222).

As at 31 July 2011, the following assets remained impaired:

(year ended 31 July 2011: €3,177,222). As at 31 July 2011, the following assets remained impaired:
	31 July 2011	31 July 2011
	Cumulative impairment	Fair value
	€	€
Carlyle HY Part IX	(2,092,045)	1,530,923
LightPoint Pan-European CLO 2006 plc	(504,756)	2,595,993
Alba 2006-1 plc	(5,248,648)	114
Alba 2006-2 plc	(10,776,244)	111
Eurosail 2006-1 PLC	(7,751,734)	286,189
Newgate Funding PLC 2006-2	(6,795,666)	112
Promise Mobility 2006-1	(5,508,753)	4,655,027
Alba 2007-1 plc	(10,199,230)	114
Northwoods Capital	(869,605)	5,327,163
Oak Hill Europe CP 2	(819,874)	1,537,257
RMAC 2007 NS1 Mercs & Residuals	(7,545,994)	114
Alpstar CLO 2 PLC	(148,828)	1,135,387
	(58,261,377)	17,068,504

VOLTA FINANCE LIMITED 43

annual report and accounts 2012

5. PROVISIONS FOR IMPAIRMENT, RECOGNITION OF REVERSALS OF IMPAIRMENT, RECOGNITION OF REVISED CASH FLOW ESTIMATES AND THE EFFECT ON THE DISTRIBUTION INCOME CALCULATION CONTINUED

RECOGNITION OF REVISED CASH FLOW ESTIMATES ON AVAILABLE-FOR-SALE DEBT SECURITIES

The Board reviews the projected cash flows from the Company’s available-for-sale debt securities on a semi-annual basis. If the projected cumulative cash flows on any asset are significantly different from those projected on purchase of such an asset, the Board will consider the evidence supporting the revised cash flow estimates and will assess whether or not such revised cash flow estimates should be recognised in the Company’s financial statements.

During the financial year, the number of defaults stayed at very low level for most of the CLO positions held by the Company and the nature of the underlying portfolios improved through the actions of portfolio managers and/or thanks to rating agencies’ upgrades at the underlying loan level. As a consequence, actual cash flows received during the year have exceeded previous projections, causing the Company to upwardly revise the expected future cash flows on several of its holdings in Subordinated Notes of CLOs, resulting in revised projected aggregate cumulative IRRs on such assets.

As at 31 July 2012, the revised projected aggregate cumulative cash flows on the Company’s investments in Subordinated Notes issued by Lightpoint CLO V Ltd and Prelude Credit Alpha plc, as measured by the revised projected aggregate cumulative IRRs on these assets, were estimated to be significantly in excess of the original projected aggregate cumulative IRRs. The Board determined that the evidence supporting the revised cash flow estimates was sufficiently strong to justify recognition of such revised cash flow estimates in the Company’s financial statements. The recognition of revised cash flow estimates on these available-for-sale debt securities positively affected the income statement of the Company by €3.8 million. These revised cash flow estimates were recognised in addition to the €2.3 million positive revision recognised as at 31 January 2012 on the Company’s investment in Subordinated Notes issued by Battalion CLO. The aggregate amount of €6.1 million (2011: €6.4 million) is presented within income on available-for-sale securities in the income statement.

FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

Under IFRS, a change in the mark-to-market value of assets designated as “financial assets at fair value through profit or loss” affects the income statement, regardless of whether or not such a change is indicative of a change in the expected cash flows from these assets. Consequently, no impairments of the Company’s investments classified as “financial assets at fair value through profit or loss” are required to be recognised in the income statement.

EFFECT ON THE DISTRIBUTION INCOME CALCULATION

Cash flows received during the year from the six (five as at 31 July 2012 after the sale of one position in June 2012) UK non-conforming assets previously impaired, together with upward revaluations on four of the remaining five positions, positively affected the Distribution Income by €17.4 million. Revisions to the expected cash flows from three previously impaired CLO Equity positions also positively affected the Distribution Income by €2.4 million. A further impairment was recognised on Aria III for the purpose of establishing the Distribution Income, negatively affecting the Distribution Income by €3.8 million.

Since originally recognising an impairment on the Company’s investment in Tennenbaum Opportunities Fund, the Company had subsequently recognised significant partial reversals of that original impairment. However, during the current financial year the Company recognised an increase in the amount of impairment, negatively affecting the Distribution Income by €1.6 million.

The recognition of revised cash flow estimates on Battalion CLO, Lightpoint CLO V Ltd and Prelude Credit Alpha plc positively affected Distribution Income by €4.2 million.

6. OPERATING SEGMENTS

The Board is charged with setting the Company’s investment strategy in accordance with the IPO Prospectus. The Board has delegated the day-to-day implementation of this strategy to its Investment Manager but retains responsibility to ensure that adequate resources of the Company are directed in accordance with their decisions. The Investment Manager has been given full authority to act on behalf of the Company, including the authority to purchase and sell securities and other investments on behalf of the Company and to carry out other actions as appropriate to give effect thereto.

Whilst the Investment Manager may take investment decisions on a day-to-day basis regarding the allocation of funds to different investments, any changes to the investment strategy or major allocation decisions have to be approved by the Board, even though they may be proposed by the Investment Manager. The Board therefore retains full responsibility as to the major allocation decisions made on an ongoing basis. The Investment Manager will act under the terms of the IPO Prospectus, which cannot be radically changed without the approval of the Board and the shareholders. Accordingly, the Board is deemed to be the “Chief Operating Decision Maker” as defined under IFRS 8 – “Operating Segments”. The Board is of the view that the Company is engaged in a single segment of business, being investment in a diversified portfolio of collateralised debt obligations, asset-backed securities, Corporate Credits and other equity instruments.

44 VOLTA FINANCE LIMITED annual report and accounts 2012

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 JULY 2012

6. OPERATING SEGMENTS CONTINUED

The key measure of performance used by the Board to assess the Company’s performance and to allocate resources is the revaluation of GAV, which is prepared on a monthly basis by Deutsche Bank AG. The GAV reported by Deutsche Bank AG includes all assets known to Deutsche Bank AG, adjusted for any amounts due to/from brokers and revaluation of any open derivative positions but excludes the Company’s liabilities. This GAV is published monthly by the Company. The table below shows a reconciliation between the measure of GAV used by the Board and that contained in the financial statements:

contained in the fnancial statements:
	31 July 2012
	€
Published GAV as at 31 July 2012	173,227,713
Adjustments:
– valuation error on revaluation of forward foreign exchange positions	948,793
– delay in transfer of coupons received by sub-custodian to principal custodian	698,332
– RBSI cash accounts	558,115
– RBSI security deposit	8,078
– coupons receivable prior to the period end received after the period end	644,919
– partial redemption proceeds receivable prior to the period end received after the period end	15,547
– insuranceprepayments	31,312
GAV asper Statement of Financial Position at 31 July 2012	176,132,809

The published GAV was understated by €1,647,125 due to the following errors: one of the Company’s forward foreign exchange positions was undervalued by €948,793; and there was a delay in transferring coupons received on Alba 2006-1 and Alba 2006-2 amounting to €698,332 from the sub-custodian to the principal custodian, causing such coupons not to be recognised in the Company’s GAV as at 31 July 2012.

The published GAV does not include cash held at RBSI, as this cash is primarily held to cover expenses payable.

The published GAV does not include coupons receivable prior to the period end received after the period end. As at 31 July 2012 the following coupons were not recognised in the Company’s GAV: a coupon due on Lightpoint Pan-European of €138,483; and a coupon due on Northwoods of $609,177 (€495,017). These coupons were receivable in July 2012 but were received only in August 2012. These amounts were treated as accrued interest in the financial statements as at 31 July 2012.

The published GAV also excluded an aggregate amount of €26,966 that has been accrued in the financial statements, which relates to coupons and partial redemption proceeds on Prelude Credit Alpha plc that were due on this investment but which had not yet been received.

The published GAV does not include any adjustments for prepaid expenses.

The Company’s assets held as at the period end and income recognised from investments during the period per geographical areas in which the Company is invested are presented in the table below:

		31 July 2012		31 July2011
	Assets held*	Income recognised	Assets held*	Income recognised
	%	€	%	€
UK	3.16	311,716	0.20	758,617
USA	64.31	23,650,843	62.20	11,266,349
Europe (excluding UK)	27.08	7,316,752	29.13	10,594,619
Emergingmarkets	3.18	291,448	1.69	—
Total	97.73	31,570,759	93.22	22,619,585

Assets held are shown as a percentage of GAV.

The Company is domiciled in Guernsey. However, none of the Company’s investments are domiciled in Guernsey. Consequently no investment income is derived from Guernsey sources.

The Company does not hold any non-current assets other than financial instruments.

The Company did not hold any investments that individually represented more than 10% of the Company’s effective interest income.

VOLTA FINANCE LIMITED 45

annual report and accounts 2012

6. OPERATING SEGMENTS CONTINUED

Volta’s effective income recognised on each asset class according to the Company’s classification of its investments for investor reporting purposes is presented in the table below:

reporting purposes is presented in the table below:
	31 July 2012	31 July 2011
	€	€
USD CLO Equity	12,239,470	11,067,422
USD CLO Debt	4,635,206	4,006,956
EUR CLO Equity	590,950	502,912
EUR CLO Debt	5,353,724	4,799,329
CLO total	22,819,350	20,376,619
Synthetic Corporate Credit Equity	3,262,718	3,792,097
Synthetic Corporate Credit Debt	2,808,624	1,588,808
Synthetic Corporate Credit – Bank Balance Sheet transactions	37,067	—
Synthetic Corporate Credit total	6,108,409	5,380,905
Cash Corporate Credit Equity	2,039,837	2,407,368
Cash Corporate Credit Debt	291,447	—
Cash Corporate Credit total	2,331,284	2,407,368
ABS – Mortgage Residual positions	311,716	778,904
ABS Debt	—	41,850
ABS total	311,716	820,754
Total effective income	31,570,759	28,985,646

The Company adopted the revised classifications as set out above in its investor reporting from June 2012 onwards, as announced on 6 July 2012.

7. COMPANY SECRETARIAL, ADMINISTRATION AND ACCOUNTANCY FEES

State Street (Guernsey) Limited (“SSGL”) acts as Company Secretary, Administrator and Registrar. Company secretarial, administration and accountancy fees are incurred and billed on a time cost basis in accordance with State Street (Guernsey) Limited’s standard fee scales, subject to an annual cap of £220,000 with respect to the activities and responsibilities as set out in the Administration, Registrar and Secretarial Agreement. The amount charged to the Company under the terms of this agreement during the financial year was €304,512 (2011: €258,400). This amount includes €31,833 relating to fees payable to SSGL for additional work outside the scope of the Administration, Registrar and Secretarial Agreement, specifically work carried out to assist the Board to review and simplify the Distribution Income calculation.

8. DIRECTORS’ REMUNERATION

	1 August 2011	1 August 2010
	to 31 July 2012	to 31 July 2011
	€	€
Directors’ fees (cash element)	258,300	260,396
Directors’ fees (equity element, settled during the year)	82,350	83,249
Directors’ fees (equity element, settled after the year end)	28,350	28,350
Directors’ expenses	11,832	6,876
	380,832	378,871

None of the Directors has any direct personal financial interest in any of the Company’s investments other than indirectly through their shareholding in the Company.

9. DIVIDENDS

The following dividends have been proposed and/or paid during the period ended 31 July 2012 and during prior periods:

	Dividend per share
	€
Dividend for the semi-annual period ended 31 July 2012 (proposed)	0.26
Dividend for the semi-annual period ended 31 January 2012 (paid 19 April 2012)	0.22
Dividend for the semi-annual period ended 31 July 2011 (paid 16 January 2012)	0.22
Dividend for the semi-annualperiod ended 31 January2011(paid 11 April 2011)	0.22

10. EARNINGS PER SHARE (“EPS”)

The calculation of the basic and diluted EPS is based on the following information:

10. EARNINGS PER SHARE (“EPS”) The calculation of the basic and diluted EPS is based on the following information:
	1 August 2011 to	1 August 2010
	31 July 2012	31 July 2011
	€	€
Proft for thepurposes of basic EPS being netproft attributable to equity holders	50,569,290	30,995,996
	Number	Number
Weighted average number of ordinary shares for the purposes of basic earnings per share	31,058,407	30,579,333
Dilutive effect of ordinary shares subject to warrants	—	—
Warrants(exercisable at €10per share)	—	—
Weighted average number of ordinary shares for thepurposes of diluted earnings per share	31,058,407	30,579,333

The average market price, based on closing prices quoted on Euronext Amsterdam, for one ordinary share during the year ended 31 July 2012 was €3.58 (2011: €3.57).

46 VOLTA FINANCE LIMITED

annual report and accounts 2012

NOTES TO THE FINANCIAL STATEMENTS CONTINUED

FOR THE YEAR ENDED 31 JULY 2012

11. AVAILABLE-FOR-SALE SECURITIES

11. AVAILABLE-FOR-SALE SECURITIES
		Unrealised
	Amortised cost	(losses)/gains	Fair value
31 July 2012	€	€	€
Available-for-sale debt securities
USD CLO Equity	33,690,628	2,468,986	36,159,614
USD CLO Debt	40,805,795	1,360,194	42,165,989
EUR CLO Equity	2,734,875	—	2,734,875
EUR CLO Debt	31,494,055	(5,440,641)	26,053,414
CLO total	108,725,353	(1,611,461)	107,113,892
Synthetic Corporate Credit Equity	5,374,639	(3,511,019)	1,863,620
Synthetic Corporate Credit Debt	12,028,989	592,837	12,621,826
Synthetic Corporate Credit total	17,403,628	(2,918,182)	14,485,446
Cash Corporate Credit Equity	4,339,645	—	4,339,645
Cash Corporate Credit Debt	2,707,314	319,179	3,026,493
Cash Corporate Credit total	7,046,959	319,179	7,366,138
ABS – Mortgage Residual positions	5,474,301	(1)	5,474,301
ABS Debt	3,052,041	(772,055)	2,279,986
ABS total	8,526,342	(772,055)	7,754,287
Available-for-sale debt securities total	141,702,282	(4,982,519)	136,719,763
Available-for-sale equity securities
Cash Corporate Credit Equity	6,298,937	2,924,943	9,223,880
Synthetic Corporate Credit – Bank Balance Sheet transactions	5,000,000	95,500	5,095,500
ABS Debt	812,600	—	812,600
Available-for-sale equity securities total	12,111,537	3,020,443	15,131,980
Total available-for-sale securities	153,813,819	(1,962,076)	151,851,743
		Unrealised
	Amortised cost	(losses)/gains	Fair value
31 July2011	€	€	€
Available-for-sale debt securities
USD CLO Equity	27,864,358	(374,192)	27,490,166
USD CLO Debt	27,176,380	3,102,169	30,278,549
EUR CLO Equity	4,133,250	—	4,133,250
EUR CLO Debt	26,940,008	2,202,219	29,142,227
CLO total	86,113,996	4,930,196	91,044,192
Synthetic Corporate Credit Equity	6,270,960	(2,640,766)	3,630,194
Synthetic Corporate Credit Debt	8,823,948	2,348,042	11,171,990
Synthetic Corporate Credit total	15,094,908	(292,724)	14,802,184
Cash Corporate Credit Equity	4,655,027	—	4,655,027
Cash Corporate Credit Debt	2,090,677	237,998	2,328,675
Cash Corporate Credit total	6,745,704	237,998	6,983,702
ABS – Mortgage Residual positions	286,756	—	286,756
ABS Debt	2,896,747	(355,281)	2,541,466
ABS total	3,183,503	(355,281)	2,828,222
Available-for-sale debt securities total	111,138,111	4,520,189	115,658,300
Available-for-sale equity securities
Cash Corporate Credit Equity	5,388,902	3,937,591	9,326,493
Synthetic Corporate Credit – Bank Balance Sheet transactions	—	—	—
ABS Debt	—	—	—
Available-for-sale equity securities total	5,388,902	3,937,591	9,326,493
Total available-for-sale securities	116,527,013	8,457,780	124,984,793

Amortised cost is calculated after deduction of impairment losses recognised.

On 6 July 2012, the Company announced a revised classification of its assets, for investor reporting purposes only, in order to adapt its communications to current market practices and terminology and to be helpful to investors. The above analysis of the Company’s available-for-sale securities has been prepared using the revised investor reporting classification. The changes have had no effect on the categorisation of the Company’s assets for IFRS reporting purposes.

VOLTA FINANCE LIMITED 47

annual report and accounts 2012

12. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

As noted overleaf, financial instruments are designated at fair value through profit or loss if the host contract contains one or more embedded derivatives as permitted by IAS 39 – “Financial Instruments: Recognition and Measurement”. Financial instruments at fair value through profit or loss are measured at fair value and changes therein are recognised in the income statement.

	1 August 2011 to	1 August 2010 to
	31 July 2012	31 July 2011
	€	€
Fair value brought forward	6,203,728	8,134,604
Purchases	9,871,388	—
Coupons receivable	(2,364,367)	(2,579,655)
Interest income recognised	3,254,240	2,928,986
Sales proceeds received	(1,597,732)	—
Gains on sales	30,269	—
Foreign exchange retranslation	166,026	—
Unrealised movement in fair value	(2,556,586)	(2,280,207)
Fair value carried forward	13,006,966	6,203,728

13. OPEN FOREIGN EXCHANGE SWAPS AND OPTIONS

Foreign exchange swaps and options are classified as financial instruments at fair value through profit or loss and are held to hedge some of the currency exposure generated by non-euro assets held by the Company (see Note 21). The hedge has been put in place taking into account the fact that derivative positions, such as simple foreign exchange swaps, could cause the Company to require cash to fund margin calls on those positions. Considering this, the Company decided to use foreign exchange call and put options to limit the liquidity risk that could be created in the event of significant margin calls. As a consequence of this limitation, there is no certainty that hedging some of the currency exposure generated by non-euro assets could continue to be performed in the future in case of high volatility in the US dollar/euro cross rate.

The margin account balance is offset against open foreign exchange swaps and options. As at 31 July 2012, the margin account balance paid to the counterparty by the Company amounted to €2,490,049 (2011: €1,000,000 received from the counterparty by the Company).

14. TRADE AND OTHER RECEIVABLES

14. TRADE AND OTHER RECEIVABLES
	31 July 2012	31 July 2011
	€	€
Prepayments	31,312	27,808
Accrued income receivable	5,093,252	4,744,191
Securitydeposit	8,078	7,232
	5,132,642	4,779,231
15. CASH AND CASH EQUIVALENTS
	31 July 2012	31 July 2011
	€	€
Deposit accounts	5,168,807	8,877,091

Cash and cash equivalents (which are presented as a single class of asset on the face of the Statement of Financial Position) comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less at inception.

16. TRADE AND OTHER PAYABLES

16. TRADE AND OTHER PAYABLES
	31 July 2012	31 July 2011
	€	€
Investment management Fees	904,894	951,449
Investment Manager Incentive Fees	3,752,758	1,389,010
Dividends payable	75,284	—
Directors’ fees (cash payable)	66,150	66,150
Directors’ fees (shares payable)	28,350	28,350
Accrued expenses and otherpayables	338,950	220,555
	5,166,386	2,655,514

48 VOLTA FINANCE LIMITED annual report and accounts 2012

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 JULY 2012

17. SHARE CAPITAL AUTHORISED

17. SHARE CAPITAL AUTHORISED
	31 July 2012	31 July 2011
	Number of shares	Number of shares
Ordinary shares of no par value each	Unlimited	Unlimited
Class B convertible ordinary share of no par value	1	1
Class C non-votingconvertible ordinaryshares of nopar value each	Unlimited	Unlimited

The authorised share capital of the Company comprises: an unlimited number of voting, non-convertible ordinary shares with no par value each; a single voting, convertible Class B share of no par value; and an unlimited number of non-voting convertible Class C shares of no par value each.

With respect to voting rights at general meetings of the Company, the ordinary shares and Class B share confer on the holder of such shares the right to one vote for each share held, whilst the holders of Class C shares do not have the right to vote.

The Class B share is identical in all respects to the Company’s ordinary shares, except that it will entitle the holder of the Class B share (an affiliate of AXA S.A.) to elect a single Director to the Company’s Board of Directors. At such time as the holdings of the AXA Group investors decline to less than 5% of the Company’s equity capitalisation (with the Class B share and the other issued and outstanding ordinary shares and Class C shares taken together), the Class B share shall be converted to an ordinary share.

The Class C shares are non-voting shares but in all other respects have the same rights and entitlements as the ordinary shares. The Investment Manager has agreed with the Company in the Investment Management Agreement that it will retain any Class C shares issued to it for a period of at least two years from the date of issuance of such shares. If sold to a party unaffiliated with the Investment Manager, the Class C shares will be convertible into ordinary shares.

As stated in the Report of the Directors, The Companies (Guernsey) Law, 2008 (as amended) prohibits the payment of dividends in respect of any shares held by a company as treasury shares. Consequently, in accordance with that law, no dividends will be paid by the Company on any shares held on the Liquidity Account.

Except for those shares that may be held on the Liquidity Account, each class of share ranks pari passu with each other with respect to participation in the profits and losses of the Company. The Directors consider recommendation of a dividend on a semi-annual basis, having regard to various considerations, including the financial position of the Company. The Company may declare an interim dividend by ordinary resolution of the Directors and may declare a final dividend by ordinary resolution of the shareholders at a general meeting but no dividend shall exceed the amount recommended by the Board of Directors.

Issued and fully paid:

Issued and fully paid:
	Ordinary	B share	C shares	Warrants
	number	number	number	number
	of shares	of shares	of shares	of shares
Balance at 31 July 2010	30,310,670	1	—	3,000,000
Issued to Directors during the year	35,184	—	—	—
Scripdividendpaid	448,324	—	—	—
Balance at 31 July 2011	30,794,178	1	—	3,000,000
Issued to Directors during the year	30,941	—	—	—
Scrip dividends paid	403,700	—	—	—
Class C shares issued	—	—	139,914	—
Balance at 31 July 2012	31,228,819	1	139,914	3,000,000

The IPO of ordinary shares on 20 December 2006 was priced at €10 per share. Shares have subsequently been issued to the Directors on a quarterly basis in respect of 30% of their fees. During the financial year, shares were issued as follows: ordinary shares were issued to the Directors in respect of such fees at the following prices per share: €4.01; €3.50; €3.32; and €3.49; Class C shares were issued to the Investment Manager in settlement of 50% of the Investment Manager’s Incentive Fee payable at an average price of €3.81 per share; scrip dividends were paid whereby 122,868 shares were issued at €2.9981 per share; and 280,832 shares were issued at €3.1718 per share (year ended 31 July 2011: 448,324 shares were issued at €3.21 per share).

18. SHARE PREMIUM ACCOUNT

18. SHARE PREMIUM ACCOUNT
	Ordinary	B share	C shares	Total
	€	€	€	€
Balance at 31 July 2010	523,561	—	—	523,561
Issued to Directors during the year	105,449	—	—	105,449
Scripdividendpaid	1,437,505	—	—	1,437,505
Balance at 31 July 2011	2,066,515	—	—	2,066,515
Issued to Directors during the year	110,700	—	—	110,700
Scrip dividends paid	1,259,113	—	—	1,259,113
Class C shares issued	—	—	533,610	533,610
Balance as 31 July 2012	3,436,328	—	533,610	3,969,938

The share premium account represents the issue proceeds received, or value attributed, from the issue of share capital, except for the share premium amount of €285,001,174 arising from the Company’s initial issue of share capital upon its IPO, which was transferred to other distributable reserves on 26 January 2007, following approval by the Guernsey Royal Court.

VOLTA FINANCE LIMITED 49

annual report and accounts 2012

19. WARRANTS

19. WARRANTS
	31 July 2012	31 July2011
Number of warrants issued at IPO (1:1 exercisable for C shares)	3,000,000	3,000,000
Value of warrants at IPO	€1,410,000	€1,410,000
Exercise price	€10	€10
Exercise period – start date	01/12/2008	01/12/2008
Exercise period – end date	31/12/2016	31/12/2016
Closing price of ordinary shares at period end	€4.39	€3.91
Theoretical value per warrant if exercised at period end	—	—
Dilutive effect of warrants	—	—

The warrants were issued to the Investment Manager upon the closing of the IPO. The warrants give the Investment Manager the right to acquire an amount of Class C shares equivalent to 10% of the number of shares in issue immediately following the closing, at an exercise price per share equal to the offer price of €10 per share. The warrants became exercisable after 30 November 2008 and will cease to be exercisable after 31 December 2016.

20. RESERVES

20. RESERVES
		Other
	Accumulated	distributable	Unrealised
	loss	reserves	losses
	€	€	€
As at 31 July2010	(145,434,768)	256,700,276	(14,616,834)
Net proft for the year	30,995,996	—	—
Net unrealised fair value movement on available-for-sale securities	—	—	28,194,095
Impairment of available-for-sale debt securities previously recognised
as an unrealised loss in prior year	—	—	(4,209,484)
Net realised net gain on available-for-sale securities, previously
recognised in equity in prior periods as a net unrealised gain,
transferred to the income statement	—	—	(909,997)
Scrip dividend paid	—	(1,437,505)	—
Dividendpaid	—	(10,191,122)	—
As at 31 July2011	(114,438,772)	245,071,649	8,457,780
Proft for the year	50,569,290	—	—
Net unrealised fair value movement on available-for-sale securities	—	—	(10,162,881)
Net realised net gain on available-for-sale securities, previously
recognised in equity in prior periods as a net unrealised gain,
transferred to the income statement	—	—	(256,975)
Scrip dividend paid	—	(1,259,113)	—
Dividend paid	—	(12,319,209)	—
Dividendpayable	—	(75,284)	—
As at 31 July 2012	(63,869,482)	231,418,043	(1,962,076)

The accumulated loss reserve represents all profits and losses recognised through the income statement to date.

Other distributable reserves represent the balance transferred from the share premium account on 26 January 2007, less dividends paid. The initial purpose of this reserve was to create a reserve from which dividend payments could be paid under Guernsey company law prevailing at that time. However, The Companies (Guernsey) Law, 2008 (as amended) became effective from 1 July 2008. Under this law, dividends may now be paid from any source, provided that a company satisfies the relevant solvency tests and the Directors make the appropriate solvency declaration.

The net unrealised losses reserve represents the difference between the fair value of available-for-sale securities and their amortised cost.

21. FINANCIAL RISK MANAGEMENT

The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Company’s risk management policies are established to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies are reviewed regularly to reflect changes in market conditions and the Company’s activities. Below is a non exhaustive summary of the risks that the Company is exposed to as a result of its use of financial instruments:

MARKET RISK

Market risk is the risk of changes in market prices, such as foreign exchange rates, interest rates and equity prices, affecting the Company’s income and/or the value of its holdings in financial instruments.

The Company’s exposure to market risk comes mainly from movements in the value of its investments. Changes in credit spreads may further affect the Company’s net equity or net income directly through their impact on unrealised gains or losses on investments within the portfolio and therefore the Company’s ability to make gains on such investments, or indirectly through their impact on the Company’s ability to borrow and access capital (and its cost of capital).

50 VOLTA FINANCE LIMITED annual report and accounts 2012

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 JULY 2012

21. FINANCIAL RISK MANAGEMENT CONTINUED

MARKET RISK CONTINUED

The objective of market risk management is to manage and control market risk exposures within acceptable parameters while optimising the return on risk. The Company’s strategy for the management of market risk is driven by its investment objective to preserve capital and to provide a stable stream of income to its shareholders through dividends by investing in a variety of assets selected for the purpose of generating overall stable and predictable cash flows. The Company’s market risk is managed on a daily basis by the Investment Manager in accordance with policies and procedures in place.

The Company intends to mitigate market risk generally by pursuing a multi-asset class investment strategy involving direct and indirect investments in a number of asset classes that naturally tend to involve a diversification of underlying market risk. The Company generally intends to structure synthetic investment exposures so as to mitigate credit exposure to its counterparties. The Company’s market positions are monitored on a quarterly basis by the Board of Directors. The Company uses derivatives to manage its exposure to foreign currency, interest rate and equity market risks. The instruments used include interest rate swaps, forward contracts, futures and options. The Company does not apply hedge accounting.

FAIR VALUE ESTIMATION

The fair value of financial assets that are not traded in an active market is determined by using valuation techniques. The Company uses a variety of methods and makes assumptions that are based on market conditions existing at each period end date.

Where a financial asset involves an arranging bank, or another market participant, that provides valuations on a monthly basis, the valuation is sourced from such arranging bank. In many cases, the arranging bank determines the valuation based on pricing models, which may or may not produce values that correspond to the prices that the Company could obtain if it sought to liquidate such positions. Such valuations generally involve subjective judgements on key model inputs, particularly default and recovery rates, and may not be uniform. In the case of all of these assets, banks and other market participants are currently unwilling to disclose either the key model inputs or the discount rates that have been used to produce such valuations. In such circumstances, the valuation continues to be sourced from such arranging bank, or other market participant, despite the lack of valuation assumptions.

Where a financial asset does not involve an arranging bank, or if an arranging bank is unwilling to provide valuations, the Investment Manager will provide a monthly valuation based on a pricing model or through comparable asset prices.

The Company classifies fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:

level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities. Investments, whose values are based on quoted market prices in active markets, and therefore classified within level 1, include active listed equities. The quoted price for these instruments is not adjusted;
level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). Financial instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within level 2. As level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information; and
level 3 – inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs).

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.

VOLTA FINANCE LIMITED 51

annual report and accounts 2012

21. FINANCIAL RISK MANAGEMENT CONTINUED FAIR VALUE ESTIMATION CONTINUED

The following tables analyse, within the fair value hierarchy, the Company’s financial assets and liabilities (by class, excluding cash and cash equivalents, trade and other receivables and trade and other payables) measured at fair value at 31 July 2012 and 31 July 2011:

			31 July 2012
	Level 1	Level 2	Level 3	Total
	€	€	€	€
Available-for-sale securities:
– debt securities	—	—	136,719,763	136,719,763
– equity securities	—	—	15,131,980	15,131,980
Financial assets at fair value through proft or loss:
– securities	—	—	13,006,966	13,006,966
– open foreign exchange derivatives	—	972,651	—	972,651
	—	972,651	164,858,709	165,831,360
			31 July2011
	Level 1	Level 2	Level 3	Total
	€	€	€	€
Available-for-sale securities:
– debt securities	—	—	115,658,300	115,658,300
– equity securities	—	9,326,493	—	9,326,493
Financial assets at fair value through proft or loss:
– securities	—	—	6,203,728	6,203,728
– open foreign exchange derivatives	—	377,843	—	377,843
	—	9,704,336	121,862,028	131,566,364

All of the Company’s investments are classified within level 3 as they have significant unobservable inputs and they may trade infrequently. As observable prices are not available for these securities, the Company has used valuation techniques (see Note 4) to derive their fair value. Foreign exchange derivatives (open option positions and open foreign exchange swaps) are included within level 2 as their prices are not publicly available but are derived from information that is publicly available.

The following table represents the movement in level 3 instruments for the period ended 31 July 2012 by class of financial instrument:

			Financial
		Available-for	assets at fair
	Available-for-	sale equity	value through
sale debt securities		securities	proft or loss	Total
	€	€	€	€
Balance as at 31 July 2011	115,658,300	—	6,203,728	121,862,028
Transfer from level 2 to level 3 (Tennenbaum
Opportunities Fund V)	—	9,326,493	—	9,326,493
Purchases	11,945,759	5,793,226	9,871,388	27,610,373
Sales	(11,590,425)	—	(1,597,732)	(13,188,157)
Coupons receivable	(27,457,892)	(1,185,088)	(2,364,367)	(31,007,347)
Gains and losses recognised in the income statement:
– interest income recognised	27,131,431	1,185,088	3,254,240	31,570,759
– net reversal of impairments previously recognised	19,258,813	—	—	19,258,813
– net foreign exchange gain	10,047,433	929,410	166,026	11,142,869
– net realised gain on available-for-sale securities	1,229,051	—	30,269	1,259,320
– loss on revaluation of fnancial assets at fair value throughproft or loss	—	—	(2,556,586)	(2,556,586)
Subtotal	146,222,470	16,049,129	13,006,966	175,278,565
Gains and losses recognised in the Statement
of Comprehensive Income:
– net unrealised fair value movement on
available-for-sale securities	(9,502,707)	(917,149)	—	(10,419,856)
Balance as at 31 July 2012	136,719,763	15,131,980	13,006,966	164,858,709

The appropriate fair value level classification is reviewed for each of the Company’s investments at the end of each semi-annual period. Any transfers to or from level 3 are recognised at the beginning of the period following such re-classification at the fair value as at the date of re-classification.

The investment in Tennenbaum Opportunities Fund V was reclassified from level 2 to level 3 as at 31 January 2012. In the prior year the fair value estimation for this asset was classified as a level 2 valuation as it is obtained from a published NAV. However, the inputs and assumptions underlying such NAVs are not observable. Consequently, the Directors now believe that level 3 is the appropriate classification rather than level 2.

52 VOLTA FINANCE LIMITED annual report and accounts 2012

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 JULY 2012

21. FINANCIAL RISK MANAGEMENT CONTINUED

SENSITIVITY ANALYSIS

In the opinion of the Directors, the following analysis gives an approximation of the sensitivity of the different asset classes to market risk as at 31 July 2012 that seems reasonable considering the current market environment and the nature of the Company’s assets’ main underlying risks.

This sensitivity analysis presents an approximation of the potential effects of events that could have been reasonably expected to occur as at the reporting date.

The sensitivity of the fair values of most of the assets held by the Company to the traditional risk variables are not the most relevant in the current environment. For example, the sensitivity to interest rates is inter-dependent with other market variables.

The present analysis reflects the sensitivity to some of the most relevant determinants of the risks associated with each asset class.

Whilst every effort has been made to assess the pertinent risk factors, there is no assurance that all the risk factors have been considered. Other risk factors could become large determinants of the fair value. For additional information please refer to Section 4, including table 7, of the Investment Manager’s Report.

CLO tranches

All CLO tranches held by Volta are classified as available-for-sale debt securities.

One of the main determinants of the risks associated with CLO tranches is the occurrence of defaults in the underlying portfolio. The Directors believe it is reasonable to test the sensitivity of these assets to an increase and a decrease in the occurrence of defaults.

The base case scenario is to project defaults in accordance with the average rating of the underlying loans (WARF: Weighted Average Risk Rating of the underlying portfolio), on average 3% default per year. The test has been calibrated as an amount equivalent to one year of projected defaults, measured by the WARF, for the first year to come, keeping the projected future losses unchanged for the following years (i.e. an immediate “jump to default” equivalent to one year of defaults at the historical average default rate).

If defaults for the first year were to increase by such amount, the fair value of the residual tranches of CLOs (€36.5 million as of the end of July 2012) would decrease by 6% or €2.2 million. If defaults for the first year were to decrease by such amount, the fair value of the residual tranches of CLOs would increase by 6% or €2.2 million.

The fair value of the mezzanine tranches of CLOs (€73.1 million as at 31 July 2012) would be roughly unchanged if defaults for the first year were to increase or decrease by such amount. This low sensitivity is due to the seniority of these positions relative to losses that could occur in the underlying portfolio.

Cash Corporate Credit deals

As at 31 July 2012, the Company has three investments in this bucket. Two of these (Promise Mobility and ICE 1) are classified as available-for-sale debt securities and one (Tennenbaum) is a loan fund classified as available-for-sale equity.

These assets have exposures to diversified portfolios of investment grade and sub-investment grade corporate credits. One of the main determinants of the risks associated with these assets is the occurrence of defaults in the underlying portfolio. The Directors believe it is reasonable to test the sensitivity of these assets to a change in the occurrence of defaults for the year, keeping the expected future losses unchanged for the following years.

For Tennenbaum and ICE 1, the test has been calibrated as an amount equivalent to one year of projected defaults, measured by the WARF of the underlying portfolio; like the one applied to CLO tranches. Considering the subordination to losses of ICE 1, the fair value of this asset (€3.2 million as at 31 July 2012) would be almost unchanged if defaults for the first year were to increase or decrease by such amount. If defaults for the first year were to increase by one year of projected normalised default rate, the fair value of Tennenbaum (€9.2 million as at 31 July 2012) would decrease by 1.5% or €0.2 million. If defaults for the first year were to decrease by one year of projected normalised default rate, the fair value of Tennenbaum would increase by 1.5% or €0.2 million.

For the Promise Mobility position, considering the losses observed over the past financial year, the Directors believe it is reasonable to test an increase and a decrease of 25% in the projected annual losses of the underlying portfolio relative to the projected losses used to value the assets, as at 31 July 2012. If the expected losses on the underlying portfolio of this asset were to increase by 25%, the fair value of this asset (€4.4 million as at 31 July 2012) would decrease by 7% or €0.3 million. If the expected losses on the underlying portfolio of this asset were to decrease by 25%, the fair value of this asset would increase by 3% or €0.1 million.

VOLTA FINANCE LIMITED 53

annual report and accounts 2012

21. FINANCIAL RISK MANAGEMENT CONTINUED SENSITIVITY ANALYSIS CONTINUED

Synthetic Corporate Credit transactions

Assets in this bucket are classified in three accounting categories: available-for-sale debt securities, available-for-sale equity and fair value through profit and loss.

All the assets in this bucket are first loss or junior second loss exposures to diversified portfolios of investment grade and sub-investment grade corporate credits. One of the main determinants of the risks associated with these assets is the occurrence of defaults in the underlying portfolio. The Directors believe it is reasonable to test the sensitivity of these assets to a change in the occurrence of defaults for the year, keeping the projected future losses unchanged for the following years.

The test has been calibrated as an amount equivalent to one year of projected defaults, measured by the WARF of the underlying portfolio.

If defaults for the first year were to increase by such amount, the fair value of the available-for sale debt securities (€15.5 million as at 31 July 2012) would decrease by 1% or €0.2 million. If defaults for the first year were to decrease by such amount, the fair value of the available-for sale debt securities would increase by 1% or €0.2 million. This low sensitivity is due to the seniority of the majority of these positions relative to losses that could occur in the underlying portfolio and, although two assets are first loss positions, the valuations of these assets are already very low.

If defaults for the first year were to increase by such amount, the fair value of the securities classified as fair-value-through-profit-and-loss (€13.7 million as at 31 July 2012) would decrease by 29% or €4 million. If defaults for the first year were to decrease by such amount, the fair value of the securities classified as fair-value-through-profit-and-loss would increase by 29% or €4 million. This high sensitivity is due the fact that these positions are first loss positions.

For BCOF, a fund of bank capital opportunity trades with a fair value of €5.1 million as at 31 July 2012, being a complex and recently launched fund, it has been impossible for the Company to determine a simple stress that could be implemented or to give a meaningful measure of volatility. However it should be reasonable to expect that this fund would have a lower sensitivity to default than the other first loss positions in this bucket.

The fair value of some of these synthetic positions is mathematically linked to the mark-to-market spread of the underlying credit portfolio. The test has been calibrated to an increase and a decrease by approximately one-sixth of the spread of the underlying portfolio. This test is only adequate for ARIA CDO III and Cadenza. If the spreads of the underlying portfolio assets were to increase by such proportion, the fair value (€7.7 million as at 31 July 2012) would decrease by 10% or €0.8 million. If the spreads of the underlying portfolio assets were to decrease by such proportion, the fair value would increase by 10% or €0.8 million.

ABS

Except for one asset (St Bernard) which is classified as available-for-sale equity, the ABS assets are classified as available-for-sale debt (the five UK non-conforming transactions and one CDO of ABS).

The main determinant of the risks associated with the UK non-conforming positions held by the Company is the level of credit losses on the underlying collateral. Considering the losses observed over the past financial year, the Directors believe it is reasonable to test an increase and a decrease of 25% in the projected annual losses of the underlying portfolio relative to the projected losses used to value the assets. If the projected losses on the UK non-conforming underlying portfolio were to increase by such amount, the fair value of these assets (€5.5 million as at 31 July 2012) would decrease by 23% or €1.2 million. If the projected losses on the UK non-conforming underlying portfolio were to decrease by such amount, the fair value of these assets would increase by 23% or €1.2 million.

For the CDO of ABS position (Pangaea, €2.3 million fair value at 31 July 2012), the Directors believe it is reasonable to apply the same test as that applied to CLO debt tranches. Considering the seniority of this tranche, it is almost insensitive to such stress.

For St Bernard (€0.8 million fair value as at 31 July 2012), being a complex fund, it has been impossible for the Company to determine a simple stress test that could be implemented. However it should be noted that, as at 31 July 2012 and over the last twelve months, St Bernard’s volatility was 3.7% for an annual performance of 13.1% (the respective figures since inception of this fund are 6.4% volatility for an annualised performance of 13.8%). The Directors believe that this gives a reasonable indication of the risk profile of this investment.

54 VOLTA FINANCE LIMITED annual report and accounts 2012

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 JULY 2012

21. FINANCIAL RISK MANAGEMENT CONTINUED

VALUATION RISK

The markets for many of the Company’s investments, including residual income positions, are illiquid. Accordingly, many of the Company’s investments are or will be illiquid. In periods of market uncertainty or distress, the markets for the Company’s investments may become increasingly illiquid or even cease to function effectively for a period of time. In addition, investments that the Company may purchase in privately negotiated (also called “over the counter” or “OTC’’) transactions may not be registered under relevant securities laws or otherwise may not be freely tradable, rendering them less liquid than other investments. Tax or other attributes of securities or loans in which the Company invests may make them attractive to only a limited range of investors. There may also be contractual or other restrictions on transfers of the Company’s investments. As a result of these and other factors, the Company’s ability to vary its portfolio in a timely fashion and to receive a fair price in response to changes in economic and other conditions may be limited and the Company may be forced to hold investments for an indefinite period of time or until the maturity or early redemption thereof.

Furthermore, where the Company acquires investments for which there is not a readily available market, the Company’s ability to obtain reliable information about the resale value of such investments or risks to which such investment is exposed may be limited. Illiquidity contributes to uncertainty about the values ascribed to investments when NAV determinations are made, which can cause those determinations to vary from amounts that could be realised if the Company were to seek to liquidate its investments. The Company could also face some difficulties when collecting reliable information about the value of its assets if all or part of the contributors for such information was to experience significant business difficulties or were to suspend relative market activities. This could affect the timing and determination process when assessing the value of the Company’s investments.

Although the Company and its agents are able to refer to reported over-the-counter trading prices and prices from brokers when valuing its investments, for most investments the Company’s pricing sources frequently need to rely on financial pricing models based on assumptions concerning a number of variables, some of which involve subjective judgements and may not be uniform.

If the Company was unable to collect reliable information about the value of its assets the Investment Manager has agreed to provide a monthly valuation based on pricing models. The Company will use reasonable endeavours to engage an independent third party to review semi-annually the main assumptions employed by the Investment Manager and to report the fairness and reasonableness of those assumptions and valuations to the Portfolio Administrator and the Company.

INTEREST RATE RISK

Changes in interest rates can affect the Company’s net interest income, which is the difference between the interest income earned on interest earning investments and the interest expense incurred on interest bearing liabilities. Changes in the level of interest rates can also affect, among other things, the Company’s ability to acquire loans and investments, the value of its investments and the Company’s ability to realise gains from the settlement of such assets.

The Company may enter into hedging transactions for the purposes of efficient portfolio management, where appropriate, to protect its investment portfolio from interest rate fluctuations. These instruments may be used to hedge as much of the interest rate risk as the Investment Manager determines is in the best interests of the Company, given the cost of such hedges. The Company may bear a level of interest rate risk that could otherwise be hedged when the Investment Manager believes, based on all relevant facts, that bearing such risks is advisable.

Interest rate risk is analysed by the Investment Manager on a daily basis and is communicated and monitored by the Board through the quarterly business report.

The table overleaf summarises the effective interest rates applicable to the Company’s interest bearing financial assets and financial liabilities as at the end of the period. The effective interest rates presented for the Company’s investments have been determined from modelled expected future cash flows and should therefore not be considered to represent the actual coupon rates receivable.

annual report and accounts 2012 VOLTA FINANCE LIMITED 55

21. FINANCIAL RISK MANAGEMENT CONTINUED INTEREST RATE RISK CONTINUED Interest rate profile as at 31 July 2012

INTEREST RATE RISK CONTINUED Interest rate profle as at 31 July 2012
	Interest charging	Effective interest rate	Amount
	basis	%	€
Financial assets
Cash and cash equivalents:
EUR deposit accounts	Floating	Eonia – 25bp	2,289,772
USD deposit accounts	Floating	Libor USD Overnight – 25bp	1,731,740
GBP deposit accounts	Floating	SONIA Overnight – 40bp	1,147,295
			5,168,807
Available-for-sale securities:
AFS (denominated in EUR)	Fixed/Floating	18.73%	42,737,746
AFS (denominated in USD)	Fixed/Floating	19.30%	103,639,696
AFS(denominated in GBP)	Fixed/Floating	5.69%	5,474,301
			151,851,743
Financial assets at fair value
through proft or loss (EUR)	Floating	29.23%	10,484,039
Financial assets at fair value
throughproft or loss(USD)	Floating	7.54%	2,522,927
			13,006,966
Trade and other receivables	Non-interest bearing	N/A	5,132,642
Derivative contracts	Non-interest bearing	N/A	972,651
			6,105,293
			176,132,809
Financial liabilities
Trade and otherpayables	Non-interest bearing	N/A	(5,166,386)
			(5,166,386)
Interest rate profle as at 31 July 2011
	Interest charging	Effective interest rate	Amount
	basis	%	€
Financial assets
Cash and cash equivalents:
EUR deposit accounts	Floating	Eonia – 25bp	7,267,586
USD deposit accounts	Floating	Libor USD Overnight – 25bp	1,416,692
GBP deposit accounts	Floating	SONIA Overnight – 40bp	192,813
			8,877,091
Available-for-sale securities:
AFS (denominated in EUR)	Fixed/Floating	23.93%	44,271,727
AFS (denominated in USD)	Fixed/Floating	14.01%	80,426,310
AFS(denominated in GBP)	Fixed/Floating	264.55%	286,756
			124,984,793
Financial assets at fair value
through proft or loss (EUR)	Floating	Six month Euribor + 13.88%	6,203,728
Trade and other receivables	Non-interest bearing	N/A	4,779,231
Derivative contracts	Non-interest bearing	N/A	377,843
			11,360,802
			145,222,686
Financial liabilities
Trade and otherpayables	Non-interest bearing	N/A	(2,655,514)
			(2,655,514)

In the Directors’ opinion, market interest rate risk on the Company’s investments is not considered to be material when compared to the risk factors that are considered to be significant, as described in the sensitivity analysis.

56 VOLTA FINANCE LIMITED

annual report and accounts 2012

NOTES TO THE FINANCIAL STATEMENTS CONTINUED

FOR THE YEAR ENDED 31 JULY 2012

21. FINANCIAL RISK MANAGEMENT CONTINUED

CURRENCY RISK

The Company’s accounts are presented in euro, the Company’s functional currency, whilst investments are made and realised in euro and other currencies. Changes in rates of exchange may have an adverse effect on the value, price or income of the investments. A change in foreign currency exchange rates may adversely impact returns on the Company’s non-euro-denominated investments. The Company’s principal non-euro currency exposures are expected to be the US dollar and British pound sterling, but this may change over time.

The Company’s policy is to hedge currency risk on an asset by asset basis and also, where the Investment Manager considers appropriate, on an overall portfolio basis. The Company may bear a level of currency risk that could otherwise be hedged where the Investment Manager considers that bearing such risks is advisable or is in the best interest of the Company considering the liquidity risk that is attached to any derivative contracts that could be used (e.g. margin calls on those contracts). At the end of July 2012 the Investment Manager has put into place arrangements to hedge into euro its US dollar exposure associated with the US dollar-denominated assets. In order to reduce the risk of having to post a potentially unlimited amount of cash with respect to forward euro/US dollar foreign exchange swaps, the Investment Manager has capped and floored those amounts using short to mid-term options. Consequently, there is no guarantee that hedging the currency exposure generated by US dollar assets can continue to be performed in the future if volatility in the US dollar/euro cross rate is very high.

The exposure associated with the British pound sterling-denominated residuals of asset-backed securities is unhedged as at the end of July 2012 given the limited amount that is considered.

Currency risk is analysed by the Investment Manager on a daily basis and is communicated and monitored by the Board through the quarterly business report.

Currency risk profile as at 31 July 2012

	Denominated	Denominated	Denominated
	in EUR	in USD	in GBP
	€	€	€
Investments:
Available-for-sale debt securities	42,737,746	88,507,716	5,474,301
Financial assets at fair value through proft or loss	10,484,039	2,522,927	—
Available-for-sale equitysecurities	—	15,131,980	—
	53,221,785	106,162,623	5,474,301
Cash and cash equivalents	2,289,772	1,731,740	1,147,295
Trade and other receivables	2,906,245	2,218,082	8,315
Trade and other payables	(5,035,152)	—	(131,234)
Derivative contracts	972,651	—	—
	54,355,301	110,112,445	6,498,677

The following foreign exchange swaps and options were unsettled as at 31 July 2012:

	Nominal amount
Description of openpositions	USD	Average strikeprice
Forward foreign exchange contracts (USD sold forward vs. EUR)	67,500,000	1.32
Long position – USD calls vs. EUR	50,000,000	1.23
Shortposition – USDputs vs. EUR	50,800,000	1.44
		Unrealised gain
		EUR
Aggregate revaluation loss		(1,517,398)
Margin accounts balance – amountspaid		2,490,049
Unsettled amount receivable		972,651

Currency risk profile as at 31 July 2011

Currency risk profle as at 31 July 2011
	Denominated	Denominated	Denominated
	in EUR	in USD	in GBP
	€	€	€
Investments
Available-for-sale debt securities	44,271,727	71,099,817	286,756
Financial assets at fair value through proft or loss	6,203,728	—	—
Available-for-sale equitysecurities	—	9,326,493	—
	50,475,455	80,426,310	286,756
Cash and cash equivalents	7,267,586	1,416,692	192,813
Trade and other receivables	3,052,847	1,719,147	7,237
Trade and other payables	(2,607,989)	(1,043)	(46,482)
Derivative contracts	377,843	—	—
	58,565,742	83,561,106	440,324

VOLTA FINANCE LIMITED 57

annual report and accounts 2012

21. FINANCIAL RISK MANAGEMENT CONTINUED

CURRENCY RISK CONTINUED

Currency risk profile as at 31 July 2011 continued

The following foreign exchange swaps and options were unsettled as at 31 July 2011:

	Nominal amount
Description of openpositions	USD	Average strikeprice
Forward foreign exchange contracts (USD sold forward vs. EUR)	70,000,000	1.37
Long position – USD calls vs. EUR	60,000,000	1.28
Shortposition – USDputs vs. EUR	60,800,000	1.49
		Unrealised gain
		EUR
Aggregate revaluation gain		1,377,843
Margin accounts balance – amounts received		(1,000,000)
Unsettled revaluationgain		377,843

CREDIT RISK, INCLUDING COUNTERPARTY RISK

Credit risk is the risk of financial loss to the Company if the counterparty to a financial instrument fails to meet its contractual obligations. The carrying amounts of financial assets best represent the maximum credit risk exposure at the reporting date. This also relates to financial assets carried at amortised cost, as they have a short-term to maturity.

At the reporting date, the Company’s financial assets exposed to credit risk are available-for-sale securities, financial assets at fair value through profit or loss, open foreign exchange contracts and cash and cash equivalents.

AFS debt securities include ABS positions, Cash Corporate Credit assets and CLO assets.

The ABS positions could be split into three different buckets: a tranche, originally rated AAA, of a deal backed by tranches of ABS (Pangaea), representing 27% of the fair value of this asset class; a position in a fund mainly investing in US RMBS debt tranches (St Bernard Opportunity Fund), representing 9% of the fair value of this asset class; and five residual income positions backed by UK non-conforming residential loans, representing 64% of the fair value of this asset class. During the financial year, no particular events affected Pangaea and the investment in St Bernard Opportunity Fund is a very recent one (July 2012). At the period end, the valuation of the five UK non-conforming residual positions reflects the approach that recently observed cash flows, being the result of extra payments at the underlying level, might last for 2 years. A sale executed during the year of a previously held UK non-conforming residual income position appears to demonstrate that some market participants believe that such cash flows might last for a longer period than this.

The Cash Corporate Credit assets include three positions: one loan fund (Tennenbaum), one residual position exposed to German SME loans (Promise Mobility) and an originally AA rated tranche of a CDO exposed to emerging market credit positions (ICE). During the financial year, no particular events affected the situation of Tennenbaum and ICE. The most recent investor report concerning Promise Mobility evidenced a modest increase in credit events in June 2012, which was taken into account as at 31 July when estimating the likely pace of further defaults. Since its purchase, in December 2006, this asset has paid cash flows representing 74% of the amount invested.

The positions in the CLO asset class are residual or mezzanine debt tranches of CLOs. CLOs, being term leveraged structures at a fixed margin, can generate more excess payments through re-investments when markets are under stress than under normal circumstances. Overall, for these ten transactions, US dollar and euro transactions altogether, held since early/mid 2007, the effective cash flows available for the owner of the residual positions have increased by more than 35% throughout the crisis as a result of the significant increase of the weighted average spread of the underlying portfolios.

A residual position on a CLO also gives access to the amount that remains in the structure once the debt tranches are paid back (at maturity if the normal process of deleveraging the structure takes place, sooner if the deal is called by the residual holders). It can be possible to measure the principal amount of the underlying loan portfolios (defaulted loans are valued at their market value) that exceeds the principal amount of the outstanding CLO debt tranches at any point in time. The average remaining principal amount of the eleven classic residual positions held by Volta was 100% at the end of July 2012, up 7% over the financial year, according to the latest CLO reports available at this time. It illustrates the ability of the underlying portfolio managers to re-build principal value for the residual holder.

58 VOLTA FINANCE LIMITED

annual report and accounts 2012

NOTES TO THE FINANCIAL STATEMENTS CONTINUED

FOR THE YEAR ENDED 31 JULY 2012

21. FINANCIAL RISK MANAGEMENT CONTINUED CREDIT RISK, INCLUDING COUNTERPARTY RISK CONTINUED

All of the positions in this bucket are negatively exposed to an increase in default rates, an increase in the percentage of assets rated CCC or below and to a significant decrease in underlying loans. However, they also benefit from some of their intrinsic features, mainly the ability to re-invest diverted amounts and prepayments.

With the exception of one Mezzanine CLO investment that is unrated but could be considered equivalent to BB- rated tranche taking into account its level of subordination, the investments in debt tranches of CLOs have been in tranches initially rated between BB (second loss position) and AA (generally fifth position). These positions, as for the residual holdings, have cash flows that are sensitive to the level of defaults and the percentage of assets rated CCC or lower in the underlying loan portfolio. Nevertheless, these tranches are structured to be able to absorb a higher level of defaults in the underlying loans portfolio than residual holdings, given their second, third and even higher loss ranking.

It should be noted that if the current sovereign debt crisis, especially in the eurozone, degenerates into a more general and profound economic crisis, the positioning of the Company predominantly toward Corporate Credit exposures, even if it has been a correct choice for the last three years, could generate some significant losses.

Six of these positions (Adagio III, Alpstar II, Centurion, Apidos, Black Diamond and Tara Hill) have structural features that could generate some early payments of principal in the event of stressed conditions arising in the underlying portfolios, which might be beneficial to the Company, considering these positions were bought significantly below par. During the period, one of the Company’s mezzanine debt tranches paid part of its principal early.

Financial assets at fair value through profit or loss comprise Synthetic Corporate Credit positions.

The Synthetic Corporate Credit bucket could be split in two: debt tranches, representing 52% of the fair value of this bucket; and first loss positions in credit portfolios, representing 48% of the fair value of this bucket. No particular events in the financial year affected the situation of the debt positions. Consequently, there was no change in the Investment Manager’s opinion that all of these positions have sufficient subordination to losses to be reimbursed at par at maturity. Concerning the residual positions, the European sovereign crisis caused a significant deterioration of one position (ARIA III). At 31 July 2012 it was expected that only a small portion of the principal amount of this deal will be reimbursed at maturity. The fair value of this position, as for other positions, was reasonably reflecting any possible outcome.

Through these synthetic deals the Company is exposed to the credit of the counterparty of such deals, namely: Merrill Lynch International, JP Morgan, UBS and Standard Chartered.

The table below takes into account losses of nominal amounts that could not be recouped for Corporate Credit and ABS; residual tranches of CLOs are accounted for by their remaining principal amount; and US dollar nominal amounts being translated to euro using end of period cross rate.

using end of period cross rate.
			End ofperiod nominal	amounts (€	million)
	January2010	July2010	January2011	July2011	January	2012	July2012
Synthetic Corporate Credit Equity	25.3	25.4	26.3	26.2		23.3	18.9
Synthetic Corporate Credit Debt	14.7	15.6	14.9	14.2		23.4	24.3
Synthetic Corporate Credit – Bank Balance Sheet transactions	—	—	—	—		5.0	7.0
CLO Equity	33.8	38.7	41.6	44.1		51.5	54.9
CLO Debt	61.2	73.2	90.6	87.1		94.0	106.9
Cash Corporate Credit Equity	22.8	22.4	20.9	20.0		21.1	18.5
Cash Corporate Credit Debt	—	3.8	3.7	3.5		3.8	4.1
ABS	3.7	3.1	1.8	5.0		4.8	10.7
Cash per originally reported GAV	4.2	5.5	1.7	8.1		3.8	3.9
Total nominal (including cash)	165.7	187.7	201.5	208.2	230.7		249.2
Change from previous date due to US dollar variation	1.4	5.8	(2.8)	(5.3)		11.4	9.9
Nominal per share	5.47	6.19	6.55	6.76		7.46	7.94

The Company is subject to credit risk with respect to its investments. The Company and its Investment Manager seeks to mitigate credit risk by actively monitoring the Company’s portfolio of investments and the underlying credit quality of its holdings. The Company’s multi-asset class investment strategy is founded on diversifying credit risk by pursuing investments in assets that are expected to generate cash flows from underlying portfolios that have at the time of purchase, in aggregate, diverse characteristics such as low historical default rates and/or high expected recovery rates in the event of default and/or significant granularity.

VOLTA FINANCE LIMITED 59

annual report and accounts 2012

21. FINANCIAL RISK MANAGEMENT CONTINUED

CREDIT RISK, INCLUDING COUNTERPARTY RISK CONTINUED

The Company may invest in total return swaps, credit default swaps and other derivatives with various financial institution counterparties for purposes of securing investment exposure to portfolios of diverse underlying reference obligations. The Company is exposed to counterparty credit risk in respect of these transactions and the Investment Manager employs various techniques to limit actual counterparty credit risk. As at the financial year end, the Company’s derivative counterparties were Deutsche Bank AG, London Branch (“Deutsche Bank”), Citibank New York and Citibank N.A., London Branch. The current long term issuer credit ratings assigned to Deutsche Bank AG and Citigroup Inc by each of Moody’s, Standard & Poor’s and Fitch respectively are as follows: Deutsche Bank AG: A2 (stable); A+ (negative); and A+ (stable); and Citigroup Inc: Baa2 (negative); A- (negative); and A (stable).

Substantially all of the cash held by the Company is held at Deutsche Bank. Bankruptcy or insolvency by Deutsche Bank may cause the Company’s rights with respect to the cash held at Deutsche Bank to be delayed or limited. The Company monitors its risk by monitoring the credit rating of Deutsche Bank, as reported by Standard and Poor’s, Moody’s or Fitch and analyses any information that could imply deterioration in Deutsche Bank’s financial position.

The Company may have more than 20% of its gross assets invested in the instruments of one or more special purpose vehicles. The Company’s investment guidelines establish criteria for synthetic arrangements entered into by the Company and require specific Board approval for investments in excess of certain limits. Those criteria, and Board approval for synthetic arrangements, are intended to limit the investment risk of the Company. Shareholders should, however, be prepared to bear the risks of direct and indirect investment in special purpose structured finance vehicles and arrangements, which often involve reliance on techniques intended to achieve bankruptcy remoteness and protection through security arrangements that may not function as intended in unexpected scenarios.

Further information regarding the credit quality of the Company’s investments are as presented in tables 2, 3, 4, 5 and 6 and paragraphs as annotated within the Investment Manager’s Report.

No financial assets carried at amortised cost were past due but not impaired either at 31 July 2012 or 31 July 2011.

RISK RELATING TO DERIVATIVES

The Company’s transactions using derivative instruments and any credit default or total return swap arrangements or other synthetic investments entered into by the Company or any of its funding vehicles may involve certain additional risks, including counterparty credit risk. Moreover, as referred to in the preceding paragraph, the Company has established criteria for synthetic arrangements that are intended to limit its investment risk. Certain derivative transactions into which the Company may enter may be sophisticated and innovative and as a consequence may involve tax or other risks that may be misjudged.

CONCENTRATION RISK

The Company may be exposed at any given time to any one Corporate Credit, counterparty, industry, region, country or any given services or asset manager (in addition to the Investment Manager) and may therefore be exposed to a degree of concentration risk. The Company monitors the concentration of its portfolio and from time to time, as long as market liquidity permits it to do so, might rebalance its investment portfolio accordingly, although there can be no assurance that it will succeed.

Indeed, considering the fact that assets are purchased in order to generate cash flows on a long-term horizon and that most of the Company’s assets are significantly illiquid, the difference in market and credit performances of the various assets bought by the Company may combine to increase the concentration of the portfolio.

In such a stressed situation, characterised by high volatility in the value of the Company’s assets and/or significant changes in the market expectation of default rates, the ability of the Company to mitigate its concentration risk could be significantly affected for liquidity reasons.

As at the reporting date, the Company’s exposures were concentrated in the following asset classes:

		As at 31 July 2012	As at 31 July 2011
Main asset class	Detailed classifcation	%	%
CLO	USD CLO Equity	21.1	19.3
	USD CLO Debt	24.6	21.2
	EUR CLO Equity	1.7	3.1
	EUR CLO Debt	15.9	20.9
Synthetic Corporate Credit	Synthetic Corporate Credit Equity	5.5	7.6
	Synthetic Corporate Credit Debt	10.2	8.1
	Bank Balance Sheet transactions	4.1	—
Cash Corporate Credit	Cash Corporate Credit Equity	7.9	9.7
	Cash Corporate Credit Debt	1.8	1.7
ABS	Mortgage Residual positions	3.2	0.2
	ABS Debt	1.8	1.8
Cash		2.3	6.5

The table above shows the asset allocation based on mark-to-market prices (based on originally reported GAV). As at 31 July 2012, originally reported GAV amounted to €173.2 million (31 July 2011: €145.2 million). The valuation of each asset class takes into account the valuation of the individual assets and of the derivatives hedging the asset class. Figures do not add up to 100% due to rounding. For further information please refer to tables 1 to 7 of the Investment Manager’s Report.

60 VOLTA FINANCE LIMITED

annual report and accounts 2012

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 JULY 2012

21. FINANCIAL RISK MANAGEMENT CONTINUED

RE-INVESTMENT RISK

Some of the Company’s investments (e.g. ABS, including mortgage-backed securities, and leveraged loans) may be particularly sensitive to the interest rate environment, with a general decline in prevailing rates of interest tending to promote faster rates of repayment of fixed-rate obligations. Unexpected accelerations in the rate of repayments can cause the value of such investments to decline and may leave the Company with excess cash to re-invest in a low interest rate environment. One virtue of having a multi-asset class strategy is that the flexibility exists to reallocate among asset classes in such cases.

LIQUIDITY RISK

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. Most of the assets in which the Company invests are illiquid. Changes in market sentiment may make significant portions of the Company’s investment portfolio rapidly more illiquid, particularly with regard to types of assets for which there is not a broad well-established trading market or for which such a market is linked to a fewer number of market participants. Portfolio issuers and borrowers may experience changes in circumstance that adversely affect their liquidity, leading to interruptions in cash flows. The Company can seek to manage liquidity needs by borrowing but turns in market sentiment may make credit expensive or unavailable. Liquidity may also be addressed by selling assets in the Company’s portfolio but selling assets may in some circumstances be significantly disadvantageous for the Company or even almost impossible if liquidity were to disappear for the Company’s assets.

Liquidity risk is analysed by the Investment Manager on a daily basis and is communicated and monitored by the Board through the quarterly business report. This is demonstrated by the Investment Manager’s decision to invest in several short-term European ABS assets in order to enhance cash management. A decision was also made to sell assets to improve the Company’s capability to generate cash flows to diminish the risk that adverse scenarios could negatively affect liquidity.

MATURITY PROFILE

The following tables show the legal maturity of the securities:

Maturity profle as at 31 July 2012	Within one year	One to fve years	Over fve years
	€	€	€
Financial assets
Cash and cash equivalents	5,168,807	—	—
Available-for-sale securities	6,196,798	22,733,567	122,921,377
Financial assets at fair value through proft and loss	2,103,314	8,909,520	1,994,133
Derivative contracts	2,877,412	(1,904,761)	—
Trade and other receivables	5,132,642	—	—
	21,478,973	29,738,326	124,915,510
Financial liabilities
Trade and otherpayables	(5,166,386)	—	—
	(5,166,386)	—	—
Maturity profle as at 31 July 2011	Within one year	One to fve years	Over fve years
	€	€	€
Financial assets
Cash and cash equivalents	8,877,091	—	—
Available-for-sale securities	5,141,722	14,802,184	105,040,887
Financial assets at fair value through proft and loss	—	6,203,728	—
Derivative contracts	(458,310)	836,153	—
Trade and other receivables	4,779,231	—	—
	18,339,734	21,842,065	105,040,887
Financial liabilities
Trade and otherpayables	(2,655,514)	—	—
	(2,655,514)	—	—

RISKS RELATING TO LEVERAGED EXPOSURE

The Company’s investment strategy involves a high degree of exposure to the risks of leverage. Investors in the shares must accept and be able to bear the risk of investment in a highly-leveraged investment portfolio.

VOLTA FINANCE LIMITED 61

annual report and accounts 2012

21. FINANCIAL RISK MANAGEMENT CONTINUED

CAPITAL RISK MANAGEMENT

The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the Company. The Company’s capital is represented by the ordinary shares, share premium account, other distributable reserves and accumulated loss reserve. The capital of the Company is managed in accordance with its investment policy, in pursuit of its investment objectives. The Company seeks to attain its investment objectives by pursuing a multi-asset class investment strategy, although investments made during the period were predominantly concentrated in assets leveraging corporate credit exposures. The investment strategy focuses on direct and indirect investments in, and exposures to, a variety of assets selected for the purpose of generating cash flows for the Company. The Board of Directors also monitors the level of dividends to ordinary shareholders.

The Company’s current general objective is to pay, to the extent possible and reasonable, a dividend of approximately 10% per annum of the Company’s net assets excluding cash at the end of the relevant period.

There were no changes in the Company’s approach to capital management during the year.

22. RELATED PARTY DISCLOSURE

TRANSACTIONS WITH DIRECTORS AND THE INVESTMENT MANAGER

For disclosure of Directors’ remuneration, please see Note 8. As at the year end, Directors’ fees to be paid in cash of €66,150 (31 July 2011: €66,150) had been accrued but not paid. Directors’ fees to be paid in shares of €28,350 (31 July 2011: €28,350) had been accrued but not paid and Director’s expenses of €891 (31 July 2011: €Nil) had been accrued but not paid.

As at 31 July 2012, the Directors of the Company controlled 0.98% (31 July 2011: 0.76%) of the voting shares of the Company.

Under the Investment Management Agreement, the Investment Manager is entitled to receive a management fee from the Company at a rate of 1.5% per annum of the portion of the Company’s NAV that is less than €200,000,000 and 1.75% per annum on the portion of the NAV that is greater or equal to €200,000,000, calculated for each semi-annual period ending on 31 July and 31 January each year on the basis of the Company’s NAV at the end of the preceding period and payable semi-annually in arrears. During the year the investment management Fees accrued were €1,892,641 (year ended 31 July 2011: €1,623,361). Fees accrued outstanding as at 31 July 2012 were €904,894 (31 July 2011: €951,448).

“Performance” for any semi-annual period is defined as the difference, positive or negative, between the Distribution Income and the hurdle amount for that semi-annual period. The hurdle amount is currently calculated at a rate of 8% per annum (4% per semi-annual period) on the weighted average number of shares outstanding at their weighted average issue price. If the performance of the Company for a semi-annual period is positive and the aggregate of the performance for such period and the performance for the three previous semi-annual periods (the “Underperformance Measure Period”) is also positive, the Investment Manager will be entitled to receive an Incentive Fee of 25% of the amount of the lower of (i) the performance for the semi-annual period and (ii) the aggregate of the performance for the semi-annual period and the performance for the Underperformance Measure Period, less any Incentive Fees previously payable with respect to the Underperformance Measure Period. If an Incentive Fee is payable, 50% of any such fee is payable in cash and 50% is payable in the form of newly issued Class C shares, which are recognised in equity immediately upon issue. 139,914 Class C shares were issued during the financial year in payment of Incentive Fees of €533,610. The Incentive Fee charge recognised in the income statement for the year was €2,897,357, after taking into account a reversal of Incentive Fees in the amount of €321,791 over-accrued as at 31 July 2011 but not paid (year ended 31 July 2011: Incentive Fee of €1,389,010). Incentive fees of €3,752,758 were outstanding as at 31 July 2012 (31 July 2011: €1,389,010).

As stated in the Investment Manager’s Report, the Investment Manager also acts as Investment Manager for the following of the Company’s investments: ARIA III; Jazz III CDO (Ireland) PLC Subordinated Notes (EUR and USD); Adagio III CLO PLC Class E Notes; Adagio III CLO PLC Class C Notes; Jazz III CDO (Ireland) PLC Class A-1 Notes; Jazz III CDO (Ireland) PLC Class C Notes; Oryx European CLO B.V.; Adagio II CLO PLC Class D Notes; Prelude Credit Alpha PLC; Bank Capital Opportunity Fund; Cadenza; and St. Bernard Opportunity Fund.

The Investment Manager earns Investment Management Fees directly from each of the above investment vehicles, in addition to its Investment Management Fees earned from the Company, except for the Company’s investments in: ARIA III; Bank Capital Opportunity Fund; Cadenza; St. Bernard Opportunity Fund; and the original purchases of first loss tranches of Jazz III. In these cases there is no duplication of Investment Management Fees as adjustment for these investments is made in the calculation of the Investment Management Fees payable by the Company

Except for the Company’s investments in: ARIA III; Bank Capital Opportunities Fund; Cadenza; St Bernard Opportunity Fund and the original purchases of first loss tranches of Jazz III, all other investments in products managed by the Investment Manager were made by way of secondary market purchases on a bona fide arm’s length basis from parties unaffiliated with the Investment Manager. Therefore, the Company pays Investment Management Fees with respect to these investments calculated in the same way as if the Investment Manager of these deals was an independent third party.

As at 31 July 2012, AXA Group Investors and AXA Assurances Vie Mutuelle together held 28.28% (31 July 2011: 28.50%) of the voting shares in the Company and funds managed by AXA IM for third-party investors owned 5.77% (31 July 2011: 5.85%) of the voting shares in the Company. AXA IM did not hold any voting shares in the Company for its own account as at 31 July 2012. AXA IM held 139,914 Class C shares as at 31 July 2012.

62 VOLTA FINANCE LIMITED annual report and accounts 2012

NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 JULY 2012

23. COMMITMENTS

As at 31 July 2012 the Company had no outstanding commitments linked to previous investments.

24. SUBSEQUENT EVENTS

Since the end of the financial year, as largely anticipated by the Company, no particular credit event has materially affected the Company, however some comments can be raised:

CLO BUCKET

No particular credit event has materially affected the situation of the CLO positions (equity or debt positions). However it should be mentioned that the market value of most of the CLO Equity positions significantly increased in August as the US CLO primary market standards tend to affect (through a convergence to tighter spreads) the way market participants trade secondary tranches such as those held by the Company.

ABS AND CASH CORPORATE CREDIT

No material events have occurred subsequent to the financial year end and the financial situation of the positions held by the Company in this category is unchanged relative to that described in the Investment Manager’s Report.

SYNTHETIC CORPORATE CREDIT

When having to make assumptions at the end of July 2012 for the purpose of establishing the financial statements and reports of the Company, Volta decided to take into account the special situation of two of its riskiest positions in this bucket (ARIA III and JAZZ III) regarding their exposure to several underlying credit names (Alpha Bank, Clear Channel, Supervalu and EFG). Since the end of July 2012, the situation of these credits is unchanged: the CDS market continues to indicate a high possibility of default for these names, although no default has yet materialised. Considering the exposure to these credit names through ARIA III and JAZZ III and the still high possibility of default, according to the market spread of these names at the time of writing, the fact that none of these have yet defaulted does not materially affect Volta’s financial statements. If it were to be confirmed that certain of these names avoid default in the coming weeks or months, it is likely that cash flows to be received from ARIA III and Jazz III would be slightly higher than the projected cash flows used to establish Volta’s financial statements at the end of July 2012.

Since the end of July 2012, thanks to the rally on credit markets in general and on tranches of CLO more specifically, Volta’s GAV increased from €5.52 per share to €5.92 per share at the end of August 2012.

Since the end of July 2012, the Company made two investments: one originally rated BBB tranche of a euro CLO (Adagio III) and one originally rated BB tranche of a primary US dollar CLO (ACAS 2012). With this second purchase Volta resumed purchases in the primary market of CLOs.

annual report and accounts 2012 VOLTA FINANCE LIMITED 63

DISTRIBUTION INCOME CALCULATION (UNAUDITED) FOR THE YEAR ENDED 31 JULY 2012

Distribution Income (“DI”) is a non-IFRS financial measure that was devised at the Company’s inception to express the Company’s intentions with respect to the distribution of dividends. Other companies may define DI or similar terms differently. It should be noted that the Company no longer uses DI to determine its dividend policy.

The calculation of DI for the year is set out below. An explanation of the Company’s definition of DI, together with certain related information, is stated below.

CALCULATION

CALCULATION
	1 August 2011	1 February 2012	1 August 2011
to 31 January2012		to 31 July2012	to 31 July 2012
Net IFRS proft per the income statement	16,009,656	34,559,634	50,569,290
Less: income from available-for-sale securities – effective interest income
and dividend income per IFRS fnancial statements	(10,532,260)	(11,719,319)	(22,251,579)
Less: income from available-for-sale securities – recognition of revised cash fow estimates per IFRS fnancial statements Less: income on investments at fair value through proft or loss per IFRS fnancial statements	(2,282,931) (1,664,079)	(3,782,009) (1,590,160)	(6,064,940) (3,254,240)
Add: income from available-for-sale securities – effective interest
income and dividend income per DI, incorporating adjustments for
impaired and improved assets	9,965,203	9,993,952	19,959,155
Add: income from available-for-sale securities – recognition of revised cash fow estimates per DI, incorporating adjustments for impaired
and improved assets	1,614,678	2,556,824	4,171,502
Add: income on investments at fair value through proft or loss	1,083,010	989,363	2,072,373
per DI, incorporating adjustments for impaired assets
Less: realised gains on disposals and/or redemptions per IFRS fnancial statements	(161,591)	(1,097,729)	(1,259,320)
Add: realised gains on disposals and/or redemptions per DI	161,591	1,028,308	1,189,899
Less: net reversals of impairments per IFRS fnancial statements	(754,151)	(18,504,662)	(19,258,813)
Add: net reversals of impairments per DI	433,933	14,024,617	14,458,550
Add/(less): unrealised loss/(gain) on revaluation of investments held at FVTPL	2,609,474	(52,888)	2,556,586
(Less)/add: unrealised (gain)/loss on foreign exchange retranslation of available-for-sale securities and investments at fair value through proft or loss	(6,278,383)	(4,864,486)	(11,142,869)
Add/(less): unrealised loss/(gain) on revaluation of derivatives	1,150,292	1,744,949	2,895,241
(Less)/add: deferral of net foreign exchange derivatives	(106,481)	43,603	(62,878)
(Less)/add:(over accrual)/accrual of Incentive Fees for the(priorperiod)/period	(321,791)	3,219,148	2,897,357
Distribution Income	10,926,170	26,549,144	37,475,314
CALCULATION (PRIOR YEAR)
	1 August 2010	1 February 2011	1 August 2010
to 31 January 2011		to 31 July 2011	to 31 July 2011
	€	€	€
Net IFRS proft per the income statement	18,640,398	12,355,598	30,995,996
Less: income from available-for-sale securities – effective interest income
and dividend income per IFRS fnancial statements	(8,653,688)	(11,121,035)	(19,774,723)
Less: income from available-for-sale securities – recognition of revised cash fow estimates per IFRS fnancial statements Less: income on investments at fair value through proft or loss per IFRS fnancial statements	— (1,518,487)	(6,366,063) (1,326,375)	(6,366,063) (2,844,862)
Add: income from available-for-sale securities – effective interest income
and dividend income per DI, incorporating adjustments for impaired
and improved assets	8,154,861	7,180,816	15,335,677
Add: income from available-for-sale securities – recognition of revised cash fow estimates per DI, incorporating adjustments for impaired
and improved assets	—	3,795,409	3,795,409
Add: income on investments at fair value through proft or loss	765,319	2,355,274	3,120,593
per DI, incorporating adjustments for impaired assets
Less: realised gains on disposals and/or redemptions per IFRS fnancial statements	(664,563)	(2,029,095)	(2,693,658)
Add: realised gains on disposals and/or redemptions per DI	664,563	1,947,666	2,612,229
Less: net reversals of impairments per IFRS fnancial statements	(10,515,886)	1,843,353	(8,672,533)
Add: net reversals of impairments per DI	6,059,123	802,688	6,861,811
Add/(less): unrealised loss/(gain) on revaluation of investments held at FVTPL	(192,841)	2,473,048	2,280,207
(Less)/add: unrealised (gain)/loss on foreign exchange retranslation
of available-for-sale securities and investments at fair value through proft or loss	2,444,876	2,933,851	5,378,727
Add/(less): unrealised loss/(gain) on revaluation of derivatives	(1,949,893)	(1,336,666)	(3,286,559)
(Less)/add: deferral of net foreign exchange derivatives	298,915	179,286	478,201
(Less)/add:(over accrual)/accrual of Incentive Fees for the(priorperiod)/period	439,857	949,153	1,389,010
Distribution Income	13,972,554	14,636,908	28,609,462

64 VOLTA FINANCE LIMITED annual report and accounts 2012

DISTRIBUTION INCOME CALCULATION (UNAUDITED) CONTINUED FOR THE YEAR ENDED 31 JULY 2012

OBJECTIVE OF DI CALCULATION

As referred to above, the Company’s IPO Prospectus dated 4 December 2006 described DI as “a non-GAAP financial measure that has been devised to express the Company’s intentions with respect to the distribution of dividends”. However, since the date of the Prospectus, the Company’s circumstances have changed such that DI is currently no longer relevant with respect to this principal purpose, as described in the annual report for 2010. However, DI remains relevant for the purpose of calculation of the Investment Manager’s Incentive Fee, if any, as described in Note 22 (Related Party Disclosure).

When the Company’s Prospectus was published the market environment was significantly different from both the current market environment and the market environment experienced during the period since the occurrence of the credit crisis in 2008. Consequently, although it was intended to give comprehensive guidance as to how DI should be calculated in all foreseeable circumstances, the definition of DI in the Prospectus has proven to be inadequate to provide definitive and practicable guidance as to how DI should be calculated in all circumstances that have subsequently arisen.

Accordingly, the Board determined that it would be in the interests of all parties if the DI calculation process could be both better defined and simplified, whilst still observing the Board’s interpretation of the original intention, or “spirit”, of the DI calculation as defined in the Prospectus. The Board has applied the following principles and interpretations in the DI calculation for the period ended 31 January 2012 and intend to continue to do so consistently in all future periods.

In the opinion of the Board, the principal objective of the DI calculation is to measure the Investment Manager’s performance on a basis that smoothes the returns from its investments insofar as is possible, mainly by eliminating the volatility that might arise in the Company’s IFRS financial statements from measuring its investments at fair value rather than at amortised cost. Accordingly, where it is both practicable and prudent to do so and where it does not result in unnecessary complexity that might result in unnecessary expense to the Company, the Board has resolved to calculate DI for any relevant calculation period on the basis described below.

DI DEFINITION AND DI CALCULATION METHODOLOGY

For the majority of items recognised in DI, the methodology adopted is approximately equivalent to calculation on an amortised cost basis in accordance with the rules and guidance set out under IFRS. However, the Board will depart from such IFRS rules and guidance in order to try to achieve the principal objective of the DI calculation, where the Board considers it either prudent or more practical to do so.

The Board has determined that DI should normally include all net realised gains and losses but should normally exclude all net unrealised gains and losses, other than impairment losses (which for this purpose may be regarded as being equivalent to realised losses) and revised cash flow estimates recognised on available-for-sale debt securities (which for this purpose may be regarded as being equivalent to realised gains or losses, as applicable).

Where realised gains and/or losses result from sales of investments, all significant sales will be subsequently reviewed by the Board and explanations shall be obtained from the Investment Manager for any sales that resulted in a significant gain in order to try to ensure that no conflict of interest arose for the Investment Manager when considering any such sales. All net settled income/expense on derivative transactions will ordinarily be treated as realised gains/losses on such transactions, whilst any revaluation gains/losses on derivative transactions will ordinarily be treated as unrealised gains/losses on such transactions. However, any significant amounts paid/received during the period on derivative transactions might be considered by the Board to represent unrealised gains/losses and may be partially or totally excluded from DI at the Board’s discretion.

Items ordinarily included in DI, unadjusted from the figures reported in the Company’s income statement prepared in accordance with IFRS, include the following:

(a) deposit interest income;

(b) income on available-for-sale securities and investments at fair value through profit or loss that is neither impaired nor adjusted as a result of revised cash flow estimates;

(d) net income/expense on settlement of forward foreign exchange swaps and exercise of foreign exchange options;

(e) operating expenditure (excluding Investment Manager Incentive Fees, if any, for the period);

(f) net foreign exchange gains/losses on other assets; and

(g) net realised gains/losses on sales and redemptions of investments that are neither impaired nor adjusted as a result of revised cash flow estimates (which will include the amounts of any such gains or losses that were previously recognised in prior periods as unrealised gains or losses).

annual report and accounts 2012 VOLTA FINANCE LIMITED 65

DI DEFINITION AND DI CALCULATION METHODOLOGY

Items ordinarily included in DI, as adjusted from the figures reported in the Company’s income statement prepared in accordance with IFRS in accordance with the methods described below, are as follows:

(h) income on available-for-sale securities and investments at fair value through profit or loss that is either impaired or adjusted as a result of revised cash flow estimates;

(i) impairments and/or reversals of impairments on available-for-sale securities and investments at fair value through profit or loss;

(j) revised cash flow estimates recognised on available-for-sale securities and investments at fair value through profit or loss;

(k) net realised gains/losses on sales and redemptions of investments that are either impaired or adjusted as a result of revised cash flow estimates (which will include the amounts of any such gains or losses that were previously recognised in prior periods as unrealised gains or losses); and

(l) net income/expense on foreign exchange option premiums amortised during the period.

Items ordinarily excluded from DI, unadjusted from the figures reported in the Company’s income statement prepared in accordance with IFRS, are as follows:

(m) net unrealised gains/losses on revaluation of all derivatives;

(n) net gains/losses on revaluation of financial assets at fair value through profit or loss;

(o) net foreign exchange gains/losses on retranslation of available-for-sale securities; and

(p) Investment Manager Incentive Fees, if any, for the period.

NOTES:

(b) and (h): Income on available-for-sale securities and investments at fair value through profit or loss that are neither impaired nor adjusted as a result of revised cash flow estimates is calculated in the same way in both the IFRS financial statements and the DI calculation. However, subsequent to impairment/adjustment as a result of revised cash flow estimates, effective income is measured at the rate used to measure the impairment/adjustment. As described below, the IRRs used to measure such impairments/adjustments differ between IFRS and the DI calculation. Consequently, the IRRs used to measure effective income subsequent to impairment/ adjustment differ between IFRS and the DI calculation as described below.

(c): Net income from interest rate swaps will normally include all amounts received and paid under interest rate swap agreements, whether in accordance with the terms of such swap agreements, or upon termination or assignment thereof.

(d): Net income/expense on settlement of forward foreign exchange swaps and options will normally include: all option premiums paid/ received; all settlement amounts received/paid on exercise of such options; and all settlement amounts received/paid on maturity of forward currency contracts.

(f): Net foreign exchange gains/losses on other assets normally consists primarily of foreign exchange gains/losses on retranslation of cash balances. Consequently, the Board considers such gains/losses to be similar in nature to realised gains/losses and that they should be included in DI. Where net foreign exchange gains/losses on other assets includes significant amounts relating to retranslation of other assets and/or liabilities, the Board will normally include in DI all such gains/losses that relate to short-term assets and/or liabilities, on the basis that such gains/losses are also similar in nature to realised gains/losses. However, the Board may exclude any such gains/losses that relate to long-term assets and/or liabilities at its discretion.

(g) and (k): Net realised gains/losses on sales and redemptions of investments will include all net gains/losses resulting either from sales, redemptions at maturity or early redemptions of investments and will be computed by taking the difference between the proceeds received and the amortised cost (“AC”) at the date of sale/redemption. For assets that are neither impaired nor adjusted there will be no need to adjust the figure reported in the IFRS P&L account. For assets that are either impaired or adjusted, the figure reported in the IFRS P&L account will be adjusted such that the gain or loss will be computed by taking the difference between the proceeds received and the AC per the DI calculation at the date of sale/redemption.

(i): Impairments and/or reversals of impairments on available-for-sale securities and investments at fair value through profit or loss are measured as the difference between the AC per the DI calculation and the NPV of expected future cash flows discounted at the original IRR. Subsequent to impairment, effective income is measured at the rate used to measure the impairment, i.e. the original IRR.

(j): Adjustments resulting from revised cash flow estimates on available-for-sale securities and investments at fair value through profit or loss are measured as the difference between the AC per the DI calculation and the NPV of expected future cash flows discounted at the revised projected cumulative IRR. Subsequent to adjustment, effective income is measured at the rate used to measure the adjustment, i.e. the revised projected cumulative IRR.

(l): Foreign exchange option premiums received/paid are amortised on a straight line basis from the trade date until the expiry or exercise date.

This measurement basis represents a significant departure from the amortised cost basis under IFRS. In the Board’s opinion, measurement of adjustments resulting from revised cash flow estimates on an amortised cost basis under IFRS would result in short-term volatility in the DI calculation and would therefore not achieve the objective of smoothing the returns expected from the Company’s investments. Consequently, the Board considers that it is prudent to depart from the amortised cost basis under IFRS when measuring adjustments resulting from revised cash flow estimates.

66 VOLTA FINANCE LIMITED annual report and accounts 2012

DISTRIBUTION INCOME CALCULATION (UNAUDITED) CONTINUED FOR THE YEAR ENDED 31 JULY 2012

REPORTING

In addition to the disclosures required by IFRS, the Company will disclose in its interim and annual financial statements a calculation of Distribution Income.

IMPAIRMENT AND/OR RECOGNITION OF REVISED CASH FLOW ESTIMATES ON AVAILABLE-FOR-SALE DEBT SECURITIES

In assessing impairment and/or recognition of revised cash flow estimates for the purposes of determining DI, the Company will review or cause the Investment Manager to review on a semi-annual basis a set of assumptions (e.g. default rates, prepayment rates, recovery rates) for each asset. These assumptions (the “Projected Cash Flow Assumptions’’) are used to determine the expected cash flows from such asset and are compared with the assumptions that were used to determine the effective interest rate of the asset at the time of purchase. For the avoidance of doubt, the discount rate will be the projected effective yield at the time of purchase of any asset. These assumptions will be, or will have been, generated by the Investment Manager.

The Company will use reasonable endeavours to obtain on a semi-annual basis a confirmation from an independent third party that the Projected Cash Flow Assumptions for each asset are reasonable. The Investment Manager has agreed in the Investment Management Agreement that, where the independent third party has a view that differs from that of the Investment Manager, the Investment Manager will consult with that party to determine the source of the disagreement and will then determine whether such differences can be resolved and report its findings to the Company. When and where required, the Company has received confirmation from an independent third party that, as of 31 July 2012, the Projected Cash Flow Assumptions for each asset are reasonable. Where the Company is not able to attain such third-party confirmation, it will disclose that fact in its next interim or annual report.

VOLTA FINANCE LIMITED 67

annual report and accounts 2012

NOTICE OF MEETING

FOR THE YEAR ENDED 31 JULY 2012

VOLTA FINANCE LIMITED

A closed-ended limited liability company registered in Guernsey under The Companies (Guernsey) Law, 2008 (as amended) with registered number 45747 and registered with the Netherlands Authority for the Financial Markets pursuant to Section 1:107 of the Dutch Financial Markets Supervision Act (the “Company”).

NOTICE OF THE SIXTH ANNUAL GENERAL MEETING OF THE COMPANY

In accordance with the Company’s Articles of Incorporation, notice is hereby given that the sixth Annual General Meeting of the Company will be held at the Company’s registered office, First Floor, Dorey Court, Admiral Park, St Peter Port, Guernsey GY1 6HJ, Channel Islands, at 10.00am (London time) on 3 December 2012.

The Directors of the Company wish to notify shareholders of the following:

the Directors of the Company will continue with a temporary 10% reduction to their remuneration until the conclusion of the seventh AGM of the Company; and
in accordance with the Code, the Chairman wishes to inform shareholders that a formal performance evaluation process was undertaken in relation to Joan Musselbrook’s re-election. The Board found Ms Musselbrook to be a valuable member of the Board and wishes to propose her re-election for approval by the shareholders.

AGENDA

ORDINARY BUSINESS:

To adopt the audited financial statements of the Company for the year ended 31 July 2012, including the reports of the Directors and the Auditors (the “Accounts”).
To re-appoint KPMG Channel Islands Limited of 20 New Street, St Peter Port, Guernsey as the Company’s Auditors to hold office until the conclusion of the next AGM.
To authorise the Board to negotiate and fix the remuneration of the Auditors in respect of the year ending 31 July 2013.
To re-elect Joan Musselbrook as an Independent Director of the Company for a term of three years.
To approve a final dividend for the period ended 31 July 2012 in respect of the Company’s ordinary shares, Class B share and Class C shares of €0.26 per share, with an ex-dividend date of 5 December 2012, a record date of 7 December 2012 and a payment date of 28 December 2012.
Provided always that no dividend shall be paid in respect of any shares held by the Company as treasury shares.
To renew the authorisation of the Company unconditionally and generally for the purposes of Section 315 of the Companies (Guernsey) Law, 2008 (as amended) to make market purchases** of ordinary shares in the Company provided that:
a. the maximum number of ordinary shares in each class authorised to be purchased is 14.99% of each class of the ordinary shares in issue at any time;
b. the minimum price payable by the Company for each ordinary share is 1% of the average of the mid-market values of the ordinary shares of that class in the Company for the five business days prior to the date of the market purchase and the maximum price payable by the Company for each ordinary share will not be more than 105% of the average of the midmarket values of the ordinary shares of that class in the Company for the five business days prior to the date of the market purchase; and
c. such authority shall expire at the conclusion of the next Annual General Meeting of the Company.
** Provided always that the market purchase will meet the criteria stipulated in the Commission Regulation (EC) of 22 December 2003 implementing the Market Abuse Directive as regards exemptions for buy-back programmes and stabilisation of financial instruments (No 2273/2003); (unless the purchases would not bear the risk of breaching the market manipulation prohibition).

68 VOLTA FINANCE LIMITED annual report and accounts 2012

NOTICE OF MEETING CONTINUED

FOR THE YEAR ENDED 31 JULY 2012

NOTES

The Company’s 2012 annual report and accounts will be published on 22 October 2012.
Copies of the Company’s Memorandum and Articles of Incorporation and its 2012 annual report and accounts are available for inspection at the Company’s registered office during normal business hours and are available on request free of charge from the Company Secretary, State Street (Guernsey) Limited, First Floor, Dorey Court, Admiral Park, St Peter Port, Guernsey GY1 6HJ, Channel Islands (e-mail: [email protected]) and from the Listing Agent, ING Bank N.V., Bijlmerplein 888, 1102 MG Amsterdam, The Netherlands or from the Company’s website (www.voltafinance.com).
Investors holding ordinary shares via an admitted institution of Euroclear Nederland who wish to attend or to exercise the voting rights attached to the shares at the AGM should contact their admitted institution as soon as possible. Only those investors holding ordinary shares via an admitted institution of Euroclear Nederland as at 10.00am (London time) on 29 November 2012 shall be entitled to attend and/or exercise their voting rights attached to such shares at the AGM.
Should the Class B shareholder being entitled to vote wish to attend or exercise the voting rights attached to the shares at the AGM they should contact the Company Secretary as soon as possible.
All shareholders maintain the right to elect a proxy to vote on their behalf at the AGM.
The quorum requirements for the conduct of Ordinary Business are set out under Article 16(2) of the Company’s Articles of Association and the quorum requirements for the conduct of Special Business are set out under Articles 16(3)–(7). The consideration of Special Business requires a larger quorum than for Ordinary Business. In the event that there exists at the commencement of the AGM a quorum for Ordinary Business but no quorum for Special Business this situation shall not impede the AGM from proceeding to consider the Ordinary Business on its own and passing such resolutions arising there from. The progression of Special Business thereafter shall be dealt with on its own and in accordance with Articles 16(3)–(7).
Due to amendments to Dutch regulatory requirements the Notice period for an AGM of the Company is now 42 days. For and on behalf of

==> picture [105 x 39] intentionally omitted <==

STATE STREET (GUERNSEY) LIMITED COMPANY SECRETARY 19 OCTOBER 2012

==> picture [57 x 58] intentionally omitted <==

==> picture [33 x 38] intentionally omitted <==

VOLTA FINANCE LIMITED

First Floor Dorey Court Admiral Park St Peter Port Guernsey GY1 6HJ Channel Islands

Tel: +44 (0)1481 749610 E-mail: [email protected] Web: www.voltafinance.com

==> picture [5 x 169] intentionally omitted <==

----- Start of picture text -----

VOLTA FINANCE LIMITED
ANNUAL REPORT AND ACCOUNTS 2012
----- End of picture text -----

AI assistant

Volta Finance Ltd. — Annual Report 2012

9950_10-k_2012-10-23_c1ae79d6-ce5e-4285-a5fd-40870d59b4c7.pdf

VOLTA FINANCE LIMITED IS A CLOSED-ENDED LIMITED LIABILITY INVESTMENT COMPANY THAT PURSUES A MULTI-ASSET CLASS INVESTMENT STRATEGY.

FORWARD-LOOKING STATEMENTS

KEY POINTS 2012

CORPORATE SUMMARY FOR THE YEAR ENDED 31 JULY 2012

THE COMPANY

INVESTMENT OBJECTIVES

THE INVESTMENT MANAGER

ASSET VALUES

DURATION

WEBSITE

LISTING INFORMATION

PROVISIONAL FINANCIAL CALENDAR

CHAIRMAN’S STATEMENT

DIVIDEND

OUTLOOK

INVESTMENT MANAGER'S REPORT

1. OVERVIEW

GENERATION OF CASH FLOWS

DIVIDEND PAYMENTS INCREASED IN LINE WITH THE VALUE OF THE ASSETS

VOLTA HAS BEEN ABLE TO INVEST IN HIGH EXPECTED IRR ASSETS

THE NAV OF THE COMPANY SIGNIFICANTLY INCREASED DESPITE RISING UNCERTAINTIES

NEAR TERM EXPECTATIONS

PAST PERFORMANCES

INVESTMENT MANAGER'S REPORT CONTINUED

1. OVERVIEW CONTINUED GENERAL OUTLOOK

2. INVESTMENTS

TABLE 1 – VOLTA FINANCE ASSET ALLOCATION BASED ON MARK-TO-MARKET PRICES (BASED ON GAV)*

3. INVESTMENT PORTFOLIO

CLO

EQUITY TRANCHES OF CLO

RESILIENCE OF PAYMENTS FROM RESIDUAL TRANCHES OF CLO

INVESTMENT MANAGER'S REPORT CONTINUED

3. INVESTMENT PORTFOLIO CONTINUED

RESILIENCE OF PAYMENTS FROM RESIDUAL TRANCHES OF CLO CONTINUED

DEBT TRANCHES OF CLOS

TABLE 3 – LIST OF CLO DEBT HOLDINGS AS AT 31 JULY 2012 CONTINUED

INVESTMENT MANAGER'S REPORT CONTINUED

TABLE 4 – LIST OF SYNTHETIC CORPORATE CREDIT HOLDINGS AS AT 31 JULY 2012

3. INVESTMENT PORTFOLIO CONTINUED DEBT TRANCHES OF CLOS CONTINUED

SYNTHETIC CORPORATE CREDIT DEALS

INVESTMENT MANAGER'S REPORT CONTINUED

TABLE 6 – LIST OF ABS HOLDINGS AS AT 31 JULY 2012

3. INVESTMENT PORTFOLIO CONTINUED CASH CORPORATE CREDIT TRANSACTIONS

ABS

4. UNDERSTANDING THE GAV OF THE COMPANY

TABLE 7 – STANDARD PROJECTED IRR ON CLASSIC CORPORATE DEALS*

INVESTMENT MANAGER'S REPORT CONTINUED

5. FOREIGN EXCHANGE HEDGE OF US DOLLAR INVESTMENTS

6. OUTLOOK

TABLE 8 – NOMINAL AMOUNTS OF VOLTA’S ASSETS (€MILLION)

AXA INVESTMENT MANAGERS PARIS 19 OCTOBER 2012

BOARD OF DIRECTORS

01. JAMES GILLIGAN

CHAIRMAN AND INDEPENDENT DIRECTOR

03. JOAN MUSSELBROOK

INDEPENDENT DIRECTOR

02. CHRISTIAN JIMENEZ

SENIOR INDEPENDENT DIRECTOR

04. PAUL VAROTSIS INDEPENDENT DIRECTOR

MANAGEMENT, ADMINISTRATION AND ADVISORS

VOLTA FINANCE LIMITED

REGISTERED OFFICE

AUDITORS

COMPANY SECRETARY, ADMINISTRATOR AND REGISTRAR

INVESTMENT MANAGER

LIQUIDITY PROVIDER

DEPOSITARY AND ADMINISTRATOR OF THE LIQUIDITY ACCOUNT

CUSTODIAN AND PORTFOLIO ADMINISTRATOR

REPORT OF THE DIRECTORS

INCORPORATION

ACTIVITIES

RESULTS AND DIVIDENDS

LIQUIDITY ENHANCEMENT CONTRACT

GOING CONCERN

DIRECTORS

ROTATION PROVISIONS

REPORT OF THE DIRECTORS CONTINUED

Volta Finance Ltd. Annual Report 2012