Carador Annual Fs 31.12.2011

Carador Income Fund PLC | (Formerly Carador PLC)

ANNUAL REPORT AND ACCOUNTS 2011

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CONTENTS

Carador Income Fund PLC | Annual report and accounts 2011

Overview01 Carador: Investment objective02 Carador: At a glance04 Chairman’s report

Business review06 Investment Manager’s review20 Directors’ report30 Statement of Custodian’s responsibilities

and Custodian’s report to the shareholders

Financial statements and notes32 Independent auditors’ report to the members of Carador Income Fund PLC33 Statement of financial position34 Statement of comprehensive income35 Statement of changes in equity36 Statement of cash flows37 Notes to the financial statements

Other information60 Glossary of terms64 Summary of key financial information – unaudited65 Unaudited schedule of investments67 Portfolio changes – material acquisitions/

disposals – unaudited68 Management and administration

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Carador Income Fund PLC | Annual report and accounts 2011 | Overview

CARADOR:INVESTMENT OBJECTIVE

The Company’s investment objective is to produce attractive and stable returns, with low volatility compared to equity markets, by investing in a diversified portfolio of senior notes of collateralised loan obligations “CLOs”, collateralised by senior secured bank loans and Income Notes and mezzanine tranches of CLOs.

The Company is listed on the London Stock Exchange (“LSE”).

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CARADOR: AT A GLANCE

PORTFOLIO BREAKDOWN

Senior Securities (original rating: AAA/AA) US$1,586,250

Mezzanine Securities (original rating: A/BBB/BB) US$91,937,704

Income Notes US$172,171,295

Healthcare 9.92%

Business Equipment and Services 7.24%

Retailers (except food and drug) 5.59%

Cable Television 5.05%

Financial Intermediaries 4.67%

Electronics/Electric 4.57%

Publishing 3.65%

Leisure Goods/Activities/Movies 3.62%

Chemicals/Plastics 3.61%

Broadcast Radio and Television 3.22%

TOP TEN SECTOR EXPOSURESAS AT 31 DECEMBER 2011 (%)*

PORTFOLIO RISK BY SENIORITYAS AT 31 DECEMBER 2011 (US$)*

* Forms an integral part of the financial statements.

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CARADOR: EXPOSURE TO US SENIOR LOANS

The predominant exposure to transactions backed by US senior loans has been successful as these have outperformed those collateralised by European loans. As at the end of February 2012(1), 40.7% of CLOs backed by European loans were breaching their interest diversion test versus 7.8% for CLOs backed by US loans.

All investments in Carador are in compliance with their interest diversion tests as at 29 February 2012.

Broadly syndicated sub-investment grade secured loans – US 85.44%

Broadly syndicated sub-investment grade secured loans – Europe 9.55%

Middle markets secured loans – US 0.61%

Cash 4.40%

Broadly syndicated sub-investment grade secured loans – US 76.71%

Broadly syndicated sub-investment grade secured loans – Europe 2.41%

Middle market secured loans – US 0.27%

Cash 20.61%

(1) Source: Citigroup

PORTFOLIOAS AT 31 DECEMBER 2011 (%)*

PORTFOLIOAS AT 31 DECEMBER 2010 (%)*

As at 31 December 2011, the Company’s portfolio had exposure to 53 loan portfolios. The Company’s portfolio is diversified across 26 managers.


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CHAIRMAN’S REPORT

I present herewith the annual report and audited accounts for Carador Income Fund PLC (“Carador” or the “Company”) for the year ended 31 December 2011.

2011 has seen an improvement in fundamentals and market sentiment despite continuing concerns about growth and sovereign stress.

The NAV on the Company’s US Dollar shares increased by 19.18%. The Credit Suisse Leveraged Loan Index returned +1.82% in 2011, underperforming investment grade bonds (Credit Suisse Liquid US Corporate Index return: +8.49%), high yield bonds (Credit Suisse High Yield Index return: +5.47%) and equities (S&P500 return: +2.11%).

The 12-month lagging default rate by principal amount decreased to 0.17% in December from 1.87% at the end of 2010(1) but despite this positive fundamental performance of the underlying loan assets, prices for CLO securities, with the exception of CLO Income Notes, have been weaker with the CLO credit curve steepening. The spreads in AAA and AA US senior CLO bonds have tightened by 10 bps and widened by 100 bps respectively in the year whereas spreads for originally rated A, BBB and BB CLO securities have increased by 165 to 225 bps(2).

PERFORMANCE DURING THE 12-MONTH PERIOD ENDED 31 DECEMBER 2011The Company’s net asset value increased by US$6.11c per US Dollar share and €5.23c per Euro share in the period which, when adjusted for the dividends paid in the period ended 31 December 2011, equates to an increase of US$14.16c and €11.09 or 19.18% and 19.91% for the US Dollar and the Euro shares respectively. During the 12-month period ended 31 December 2011 the Company incurred a net gain of US$35,612,532 and earnings per US Dollar share of US$0.15, Euro share of €0.09, US Dollar C share of US$(0.02)** and US Dollar C share of US$0.02*. The Board declared interim dividends of US$0.0225 per US Dollar share (€0.0155 per Euro share) in respect of the quarterly period ended 31 March 2011, US$0.0280 per US Dollar share (€0.0211 per Euro share) in respect of the quarterly period ended 30 June 2011, US$0.0300 per US Dollar share (€0.0220 per Euro share) in respect of the quarterly period ended 30 September 2011 and US$0.0320 per US Dollar share (€0.0250 per Euro share) in respect of the quarterly period ended 31 December 2011.

The performance of the Company’s portfolio of CLO Income Notes benefited from significant prepayments in the underlying portfolios which increased the average portfolio spreads as a result of new issues being funded at wider spreads. As a consequence, the cash flows to the CLO investments increased. The presence of Libor floors in the underlying loan portfolio was also beneficial for CLO Income Note investments. As a consequence of the 20% cap in recognised income (until the cash flows received on CLO Income Note investments reach a 105% target

(1) Source: S&P/LSTA, 1 July 2011(2) Source: JP Morgan, US Fixed Income Strategy, 9 December 2011

amortisation on a future value basis), the Company’s increased dividends were supported by higher net cash flow coverage; which increased from 1.38 times in the fourth quarter of 2010 to 1.57 times in the fourth quarter of 2011.

As a result of these dynamics, the dividend increase was accompanied by an improvement in the net cash flow coverage of the dividends.

CASH FLOW COVERAGE OF NET INCOME

3Q092Q09 2Q101Q10 3Q10 2Q111Q09 4Q09 4Q10 1Q11 4Q113Q11

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2.0

1.5

1.0

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1.87x2.06x

1.85x

1.60x1.72x

1.30x1.42x

1.57x1.46x1.40x

1.49x1.38x

In 2011, the investment in Gale Force CLO Ltd 2006-2X SUB notes (US$19 million), part of the investment in Callidus Debt Partners Fund Ltd 5A INC notes (US$2 million), the investment in Gale Force CLO Ltd 2007-3A INC notes (US$12 million) and the investment in Octagon Investment Partners XI Ltd 2007-1A INC notes (US$11.5 million), reached the 105% threshold. As a result of the Company’s income recognition policy described above an estimated US$2.9 million worth of incremental cash flows received from these investments in the year were allocated to income.

The Investment Manager expects that, based on the average of the cash flows received in 2011, six additional Income Note investments could reach the 105% amortisation target, based on future value, in 2012. These six investments represent 9.67% of the Company’s NAV as at 31 December 2011 and diverted an estimated US$3.7 million to principal in 2011.

GROSS INCOMEThe Company’s dividend in 2011 was funded by net income proceeds defined as:

a) coupons accrued from debt investments, plus

b) cash flows from Income Notes up to a maximum of 20% annualised rate based on purchase price, plus

c) excess cash flows from Income Notes that, according to the Company’s policy, had reached an amortisation level of 105% of purchase price on a future value basis, minus

d) expenses excluding performance fees due to the Manager.

* US Dollar C Class – Admitted to the Official List and to trading on the London Stock Exchange’s Main Market on 18 August 2011, converted to US Dollar shares on 20 October 2011 and delisted on 31 October 2011.

** US Dollar C Class – Admitted to the Official List and to trading on the London Stock Exchange’s Main Market on 15 December 2011.

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The Company considers that the income generated by c) is more sensitive to changes in certain variables such as the percentage of Income Notes which have reached the 105% level of amortisation on a future value basis, the average portfolio spread in the CLOs where the Company holds Income Notes, or changes in the asset allocation within the Company’s portfolio.

As a way to facilitate the analysis of the Company’s dividend, the Directors consider that it could be useful to define the sum of a) and b) as “core gross income” and a separate measure of “excess gross income” equal to c).

For the year ended 31 December 2011, the Company estimates that its “core gross income” was US$28,106,167 or US$0.0861 per US Dollar share, and its “excess gross income” was US$5,065,826.

Any reference herein to future dividends is a target and not a forecast and there can be no guarantee or assurance that it will be achieved. The actual dividend in any particular case will be determined by the cash flows received.

MATERIAL EVENTSOn 28 January 2011, the Company announced the appointment of Singer Capital Markets Limited, as joint financial adviser and joint broker to the Company. Dexion Capital plc were also appointed as joint corporate broker and financial adviser of the Company effective from midnight (Irish time) on 28 September 2011.

At the Annual General Meeting of the Company held on 30 June 2011, shareholders approved the following ordinary and special resolutions:

Ordinary resolutions1. Approval of the Directors’ report and the financial

statements.

2. Reappointment of auditors to the Company.

3. To authorise the Directors to fix remuneration of auditors.

4. Re-election of Mr Werner Schwanberg as a Director.

5. Re-election of Mr Claudio Albanese as a Director.

6. Re-election of Mr Fergus Sheridan as a Director.

7. Re-election of Mr Adrian Waters as a Director.

Special resolutions1. To authorise the Board to allot up to 300 million

shares without having to offer such shares on a pre-emptive basis.

2. To amend the Articles of Association to ensure that the shares fall outside the scope of the UK tax offshore funds regime.

3. To amend the Articles of Association to allow for the issue of C shares.

4. To amend the Articles of Association to remove the requirement that AGMs be held within six months of the financial year end.

5. To adopt new Articles of Association of the Company.

At the Extraordinary General Meeting of the Company held on 30 June 2011, holders of US Dollar Class shares approved the proposed resolution to amend the performance fee hurdle rate applicable to the US Dollar Class shares.

On 9 August 2011 and 6 December 2011, revised Prospectuses were announced by the Company. The 9 August 2011 Prospectus detailed the issue and placing of US Dollar C shares. In total US$150 million of new shares were issued by the Company and by 28 February 2012, these proceeds were fully reinvested. In conjunction with the August 2011 Prospectus, the Directors stated their intention, subject to the requirements of the Central Bank, to propose an ordinary resolution for the continuation of the Company at the annual general meeting to be held in 2017. If the continuation vote is not passed, the Directors will propose a reconstruction or winding-up of the Company, in accordance with applicable law and regulation and the terms of the Articles of Association, with an opportunity for shareholders to receive a cash exit for all of their shares at around realisable net asset value less costs.

OUTLOOKThe Company was well positioned in 2011 to take advantage of potential opportunities presented by the market and invested the cash raised in the placing of shares completed on 24 January 2011, 15 August 2011 and 12 December 2011 in what the Board believes are attractive investment opportunities. As at the end of December 2011, we estimate that the general portfolio attributable to the Company (excluding the US Dollar C share class) held an estimated cash balance of 3.34% of its NAV and was, in the opinion of the Board, effectively fully invested. The separate portfolio attributable to the US Dollar C share class held, as at the end of December 2011, an estimated cash balance of 75.63%.

The general portfolio attributable to the Company is, as at 31 December 2011, balanced with 20.85% of the NAV invested in senior notes or cash, 27.12% invested in mezzanine notes and 50.93% invested in Income Notes. As at 29 February 2012, the cash balance was 7.32%. The Board believes that this portfolio allocation supports the current dividend policy while forming a base for future NAV growth.

The Board also considers that the actions the Company took in 2011 and the expansion of the investor base as a result of the placings of shares completed in 2010 and 2011 have helped to further improve the trading levels of the share price as compared to the NAV. As at 31 December 2011, the US Dollar shares traded at a 0.90% premium to NAV, the US Dollar C shares traded at a 4.82% premium to NAV and the Euro shares traded at a 4.67% premium to NAV versus a 0.14% discount and 1.36% premium to NAV as at 31 December 2010 respectively.

Werner SchwanbergChairman 23 April 2012

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Carador Income Fund PLC | Annual report and accounts 2011 | Business review

INVESTMENT MANAGER’S REVIEWFOR THE YEAR ENDED 31 DECEMBER 2011

The Chairman’s report provides a clear overview of the challenges and opportunities faced by the leveraged loan and CLO markets in 2011. We believe that Carador’s exposure to large, broadly syndicated US loans, transparency, income recognition policy and valuation methodology have been recognised by investors and have been reflected in the average 6.93% premium to NAV at which the Company’s US Dollar shares have traded in 2011.

BANK LOAN MARKET OVERVIEWThe loan market started the year positively despite weak economic growth indicators, the earthquake in Japan and concerns about Greece. The second half of 2011 was marked by the US downgrade and concerns over the US debt ceiling and increasing uncertainty about developments in the European periphery. Despite continued fundamental improvements, the Credit Suisse Leverage Loan Index returned 1.82% in 2011 compared to 5.47% and 2.11% for the Credit Suisse High Yield Index and the S&P 500, respectively.

Corporate credit quality has improved in 2011 with S&P 500 operating earnings per share at a ten-year high(1). Companies continued to address maturities in 2011 as they

(1) Source: RBS, “CLO Market Review”, 7 December 2011

repaid or refinanced US$205 billion of loans. There were US$219 billion of new US institutional loans priced in 2011 in total, up from US$154 billion in 2010(2). Issuers have reduced total maturities between 2012 through 2015 to US$252 billion in 2011 from US$688 billion at

(2) Source: CSFB, “2012 Leveraged Finance Outlook and 2011 Annual Review”, 26 January 2012

MATURITY PROFILE OF THE US BANK LOAN MARKET

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7

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1713

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136

101

35

103

91

125

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150

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25031/12/2011 (Price<90) 31/12/2011 (Price>90)31/12/2009

20192018201720162015201420132012

bn

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31 December 2008, according to Credit Suisse. The chart on page 6 compares the maturity profile of the loan market as at 31 December 2009 and as at 31 December 2011. It also highlights the amount of loans trading at a price lower than 90 cents on the dollar within each year.

Defaults continued to slow. As a result, the lagging 12-month default rate ended the month of December 2011 at 0.17% by principal amount, down from 1.87% at the end of 2010. By number of loans, the rate ended June at 0.62% vs 2.86% at year end, near the all-time low of 0.15% from June 2007.

The structural change in the composition of the US loan market has continued in 2011. Whereas 74% of loans sold to non-bank lenders were purchased by CLOs in 2001, the percentage in 2011 fell to 41%, not far from the historical low of 30% in 1997(3). The participation of retail and alternative investors in the US loan market may make the increase in price volatility experienced in 2011 a permanent fixture. As an example, inflows from bank loan mutual funds of US$3.7 billion in February 2011 were followed by outflows of almost US$6 billion in August.

(3) Source: Bloomberg, “Hedge Funds Gaining on CLOs Drives Up Volatility”, 2 February 2012

CLO MARKET OVERVIEWIn terms of performance over the first half of the year, US CLO prices underperformed broader markets after rallying at the end of 2010. Prices recovered in the second half of 2011 but spreads for US CLO rated notes were generally lower versus spreads at the end of 2010, with originally rated AAA US CLO notes tightening by 10 bps and originally rated AA, A, BBB and BB CLO notes widening by 100 to 225 bps in the period to 9 December 2011(4). Although information for returns in US CLO Income Notes is more difficult to source and the dispersion of returns more extreme, market commentators suggest that US CLO Income Notes outperformed CLO debt as wider loan spreads and LIBOR floors resulted in higher cash distributions. According to RBS, US CLO Income Notes annualised payments averaged over 31% over original par, up from 25% at the end of 2010.

According to Citibank US CLO Income Notes paid about 15 points more on an annual basis than Euro CLO Income Notes, supporting Carador’s asset allocation in 2010 and 2011. We believe that the underperformance of Euro CLO Income Notes was largely due to lower loan refinancing rates in Europe, the presence of Libor floors in US loans,

(4) Source: Citibank, 2 February 2012

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INVESTMENT MANAGER’S REVIEWCONTINUED

the higher fees in Euro CLO deals, and structural differences, among others. This performance differential continues: close to 95% of outstanding US CLOs are making distributions whereas 25% of European CLOs are still diverting all cash flows from the equity(5). All of Carador CLO investments are currently making distributions and the average quarterly CLO Income Note payment over par was 32% as of the fourth quarter of 2011 vs 26% median cash payout for the US CLO market and 10% for the European CLO market(6).

There was US$14.3 billion worth of new CLOs issued in 2011, versus a total of US$4.1 billion in 2010(7). Spread levels for new US CLO AAA rated debt tightened to Libor+150 after touching a low of Libor+120 bps, versus Libor+175-200 bps at the beginning of 2011. Most of the new CLOs were issued by well-stablished managers and offered more conservative capital structures and shorter non-call and reinvestment periods. The European CLO market, in contrast, remained closed.

We believe that there are still attractive returns to be achieved based on the potential “normalisation” of credit markets. The Credit Suisse High Yield Index was trading as at the end of December at a spread of T+726 bps (approximately equivalent to Libor+697 bps) while the Credit Suisse Leveraged Loan Index was trading at a discount margin of Libor+656 bps(8). This compares with an average differential between both indices of 144 bps since inception on 31 January 1992 and 176 bps as from 31 January 1992 to 31 December 2007. Technical reasons (strong dedicated demand for high-yield bonds, certain types of loans not being UCITS eligible assets, etc.) are some of the main reasons why Income Note bonds in the capital structure trade at similar levels to secured loans. The importance of seniority cannot be underestimated in the current uncertain environment.

(5) Source: RBS, “CLO Market Review”, 7 December 2011(6) Source: BofA Merrill Lynch, “Global CLO Weekly”, 23 January 2012(7) Source: JP Morgan, US Fixed Income Strategy, 9 December 2011(8) Source: Credit Suisse, “Leveraged Finance Strategy Update”,

30 December 2011

In addition to the relative value we identify in secured loans vs unsecured bonds, there continues to be a valuation gap between the value of the assets of secondary CLOs (underlying loan portfolios) and the value of the debt and Income Note issued to finance the purchase of the portfolio. According to RBS, the difference between the weighted average price of CLO tranches and the price of the underlying bank loans continues to trade at a 4-6 point discount as at the beginning of December(9).

VALUATION UPDATEWe believe that Carador’s value proposition is based on the “double discount” described above between bank loans and high yield bonds, and bank loans and CLOs but also on the Investment Manager’s ability to mitigate defaults and generate alpha. Defaults are a key driver of CLO performance given the non-mark to market nature of CLOs.

In the current, less stressed environment, the higher estimated average annualised distributions (based on par) for CLO Income Note investments in Carador’s portfolio as at 31 December 2011 (32% vs a 26% median cash payout for the US CLO market) highlight the positive selection and the result of active management present in the Company’s portfolio(6).

Cash flows have continued to improve since the first quarter of the year. Net income available for distributions, which deducts principal provisions from the actual cash flows received, increased from US$0.0202 per US Dollar share as at the end of December 2010 to US$0.0301 per US Dollar share as at the end of December 2011.

Carador provisions a percentage of received distributions in order to normalise the cash flows from Income Notes which, under base default assumptions, may not recover full principal at maturity. The amount that can be considered “income” is further capped at 20% as long as the transaction

(9) Source: RBS, “CLO Market Review”, 7 December 2011

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is not fully provisioned on a future value basis. A large percentage of the increase in Income Note cash flows has been provisioned. We estimate that total Income Note cash flows retained and not distributed as dividends have increased from US$4.8 million in 2010 to US$14.0 million in 2011, unadjusted for the new shares issued during the period. The estimated net cash flow coverage of net income available for distributions has increased from 1.19 times at the end of the fourth quarter of 2010 to 1.57 times at the end of the fourth quarter of 2011.

The improvements in overcollateralisation tests based on lower defaults, higher recoveries and increasing prices for CCC rated assets have increased the probability of future cash flows, although high distributions during the year have resulted in the application of the 20% cap, accelerating the amortisation process and reducing or eliminating the need to divert future cash. To illustrate the magnitude of this early amortisation, the annualised distributions from US CLO Income Note investments in the Company’s portfolio in the fourth quarter based on the valuations as at the end of December averaged 42.70% vs 34.56% at the end of June 2011(10).

We believe that the importance of cash flows in Carador’s performance in 2011 explains the lack of correlation between the Company’s shares and other credit assets, including US bank loans. The cash flows received from investments in CLOs are primarily driven by the fundamental performance of the underlying loan portfolios, not the mark to market of the loans. August 2011 provided an interesting data point. The S&P 500 closed the month down 5.43% and the monthly return for US bank loans was -4.16%. We estimate that the actual prices of the investments in Carador’s portfolio underperformed loans and were marked down by four points (approximately -5.2%) on average. Cash flows in the month were, however, worth approximately 2.2%, generating a net monthly return (including other adjustments) of -2.8%. We estimate that the correlation of daily returns between Carador US Dollar shares and

(10) Source: Company monthly reports

the S&P 500, the S&P LCD US Loan Index and the iBoxx US Dollar Liquid High Yield Index was 4.4%, 11.6% and 13.7% in 2011 respectively(11).

The Company’s NAV is estimated using third-party valuation and traded prices. As at 31 December 2011, the general portfolio attributable to the Company (excluding the US Dollar C shares class) held investments with a notional value of US$346 million, compared with an estimated securities NAV of US$248 million. US$137 million worth of par value was represented by senior and mezzanine securities, which are expected to redeem at par. US$209 million of par value were Income Note investments which follow the amortisation procedure described above.

PORTFOLIO UPDATEAs at 31 December 2011, the Company’s top five exposures based on the general portfolio attributable to the Company (excluding the US Dollar C shares class) were:

Investment* Original rating % NAV

Gale Force CLO Ltd 2007-4A INC NR/NR 4.04Ares CLO Ltd 2007-12X E Ba1/BB+ 3.86Octagon Investment Partners XI Ltd 2007-1A INC NR/NR 3.48Gale Force CLO Ltd 2006-2A SUB NR/NR 2.67Callidus Debt Partners Fund Ltd 5A INC NR/NR 1.20


Gale Force CLO Ltd 2007-4A INC has paid annualised quarterly distributions since purchase ranging from 7.13% to 28.57%. The lowest 7.13% distribution in February 2010 was due to a partial diversion of cash flow to cure the interest reinvestment test. If we exclude this payment, the lowest quarterly payment would have been 13.23%. This investment has never missed any payment and enjoys, as at 2 January 2012, a 0.99% cushion over the tightest over collateralisation test. The manager is GSO/Blackstone Debt Funds Management LLC, an affiliate of the Investment Manager.

(11) Source: Company monthly reports and Bloomberg

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Ares CLO Ltd 2007-12X E is an originally rated Ba1/BB+ note paying a quarterly coupon of Libor+5.75%. This note would be repaid at par using proceeds which would otherwise have been due to the Income Notes if the overcollateralisation test for the E Class is breached (and as long as the overcollateralisation test for the D Class is in compliance). As a result, it may serve as a partial hedge against our investment in the Income Notes. The manager is Ares CLO Management XII.

Octagon Investment Partners XI Ltd 2007-1A INC has paid annualised quarterly distributions since purchase ranging from 26.43% to 36.66%. This investment has never missed any payment and enjoys, as at 19 Dec 2011, a 1.38% cushion over the tightest overcollateralisation test. The manager is Octagon Credit Investors.

Gale Force CLO Ltd 2006-2A SUB has paid annualised quarterly distributions since purchase ranging from 8.52% to 31.50%. The lowest 8.52% distribution in January 2009 was due to the Libor spike which took place after the Lehman collapse resulting in a high Libor fixing for the quarter for the liabilities and a slower adjustment for the assets. If we exclude this payment and the first payment,

the lowest quarterly payment would have been 20.15%. This investment has never missed any payment and enjoys, as at 2 January 2011, a 1.43% cushion over the tightest overcollateralisation test. The manager is GSO/Blackstone Debt Funds Management LLC, an affiliate of the Investment Manager.

Senior securities (original rating: AAA/AA) 0.47%

Mezzanine securities (original rating: A/BBB/BB) 27.47%

Income Notes 51.45%

Cash 20.61%

PORTFOLIO BREAKDOWN BY CLO INSTRUMENT % of NAV as at 31 December 2011

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Callidus Debt Partners Fund Ltd 5A INC has paid annualised quarterly distributions since purchase ranging from 29.03% to 35.43%. This investment has never missed any payment and enjoys, as at 10 January 2011, a 3.40% cushion over the tightest overcollateralisation test. The manager is GSO/Blackstone Debt Funds Management LLC, an affiliate of the Investment Manager.

As at 31 December 2011, the general portfolio attributable to the Company (excluding the US Dollar C shares class) portfolio was primarily invested in CLO Income Notes and CLO debt, senior and mezzanine tranches.

We believe that the combination of CLO debt and CLO Income Notes creates a balance between NAV stability and dividend.

Carador seeks to provide investors with a diversified exposure to the loan market through CLO portfolios. Our aim is not to recreate the market but to leverage the Manager’s extensive research team to select those loans and portfolios which will outperform the market from a fundamental credit perspective. Our objective as an investor in CLO loan portfolios is to minimise defaults.

Carador invests in CLO loan portfolios and, as a result, the total number of loans to which we are exposed is large. We estimate that as at 31 December 2011, the general portfolio attributable to the Company (excluding the US Dollar C shares class) was exposed to approximately 1,800 single loans. The following table highlights that this exposure is, however, concentrated on a smaller number of issuers. As a comparison, we estimate that funds managed by the Investment Manager and its affiliates own approximately 1,500 loans issued by over 950 issuers and our analysts cover approximately 30 credits each.

Exposure Number of issuers

50% 14175% 34990% 732100% 1827

The following two tables highlight the differences between the top ten exposures for the general portfolio attributable to the Company (excluding the US Dollar C shares class), on a look-through basis, and the top ten exposures for the Credit Suisse US Leveraged Loan Index.

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CARADOR INCOME FUND AS AT 31 DECEMBER 2011Issuer* Rating %

Reynolds Group Ba3/BB- 1.01Sungard Data Systems Ba3/BB 0.92HCA Ba3/BB 0.90RPI Finance Trust Baa2/BBB- 0.85Univision Communications B2/B+ 0.84Nielsen Finance Ba2/BB 0.83First Data B1/B+ 0.80MetroPCS Ba1/BB 0.76Charter Communications Ba1/BB+ 0.69Aramark Ba3/BB 0.62


CREDIT SUISSE LEVERAGED LOAN INDEX AS AT 31 DECEMBER 2011Issuer Rating %

Energy Future Holdings B2/CCC 1.60First Data B1/B 1.50Clear Channel Communications Caa1/CCC+ 1.39Caesars Entertainment B3/B 1.16HCA Ba3/BB 1.13Pernod Ricard NR/NR 1.06Univision Communications B2/B+ 0.99Community Health Systems Ba3/BB 0.96Las Vegas Sands Ba2/BB 0.94Tribune WR/NR 0.77

CARADOR – PERFORMANCE HIGHLIGHTSCarador’s NAV per US Dollar share increased over the 12-month period by 8.16% to US$0.81 per share as at 31 December 2011. The NAV per Euro share increased over the 12-month period by 9.21% to €0.62 per share as at 31 December 2011.

Carador’s NAV total return per US Dollar share, including distributions, was +19.18% over the 12-month period. The NAV total return per Euro share, including distributions, was +19.91% over the 12-month period.

Carador’s shares closed at US$0.8175, €0.6425 and US$1.01, a 0.90%, 4.67% and 4.82% premium to the NAV respectively, as at 31 December 2011. The annualised dividend yield for the US Dollar and Euro shares, based on the last declared dividend, was 15.80% and 16.12% of NAV or 15.66% and 15.55% of closing mid-market price respectively.

The portfolio has been actively traded in the period. The general portfolio attributable to the Company added 46 investments to the portfolio (total consideration of US$169 million) and sold 14 securities in the period (total consideration of US$47 million). The general portfolio attributable to the Company (excluding the US Dollar C shares class) was effectively fully invested as at 31 December 2011, with a cash balance of 3.34%.

OUTLOOKAlthough we remain cautious in the near term about future volatility, we believe that current market conditions offer an opportunity to identify new investments with attractive risk-reward profiles. Over the medium term we believe the Company will benefit from its exposure to the US loan market, which has experienced strong refinancing of shorter term maturities(12). The lack of significant maturities in 2012 and 2013 means that defaults are expected to be low regardless of the broader economic environment. As discussed before, the Company’s dividend is primarily based on its ability to mitigate default risk. We believe that this general market background, together with our ability to mitigate default risk, creates a supportive environment for the Company.

(12) Source: Credit Suisse

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TOP LEVEL LOAN EXPOSURESThe sources for these are Company website and Company filings, except Univision Communications, where the source is BAML 3Q11 earnings review report 4 November 2011)

EV Senior EBITDA ST debt Total liquidity Issuer Issue rating % US$m leverage US$m US$m US$m

Reynolds Group Ba3/BB- 1.01 17,385 3.7 2,789 – 1,259

Reynolds Group is a leading global manufacturer of consumer food, beverage packaging and storage products. The company operates through five segments: SIG, Evergreen, Closures, Reynolds Consumer and Pactiv Foodservice. SIG manufactures a broad range of aseptic beverage carton packaging for the non-carbonated and liquid dairy beverage industries. Evergreen manufactures fresh carton packaging for cold beverage products. Closures provides a broad line of caps and closures primarily for the carbonated soft drink, isotonic and bottled water markets. Reynolds Consumer makes a full line of consumer foil, wraps and bags under the Reynolds brand name platform. Pactiv Foodservice sells a broad range of branded and private label consumer and foodservice packaging.

The company is one of the world’s leading and most diversified consumer and foodservice packaging providers, with annual sales of close to US$14 billion (with industry leading EBITDA margins), pro forma for the acquisition of Graham Packaging Holdings Co completed in September 2011.


Sungard Data Systems Ba3/BB 0.92 9,363 3.8 1,237 25 1,748

Sungard is one of the world’s leading software and IT services companies. Sungard provide software and processing solutions to institutions throughout the financial services industry, higher education and the public sector. Sungard also provide disaster recovery services, managed services, information availability consulting services and business continuity management software. Sungard operates its business in four segments: Financial Systems – serves financial services companies, corporate and government treasury departments and energy companies; Higher Education – serves higher education institutions; Public Sector – serves state and local governments, public safety and justice agencies, and not-for-profit organisations; and Availability Services – serves IT-dependent companies across virtually all industries.


HCA Ba3/BB 0.90 38,267 3.0 6,061 119 2,600

HCA Inc. is the largest and most diversified investor-owned healthcare services provider in the US. As of 31 December 2011, HCA owned and operated 163 acute care hospitals and 105 freestanding surgery centres in 20 US states and the UK. The Company is approximately 1.2x larger in terms of number of hospitals and approximately 2.2x larger in terms of revenue as compared to the next largest for-profit acute care provider.


RPI Finance Trust Baa2/BBB- 0.85 NA 3.3 1,091 0 NA

RPI is the largest pharmaceutical royalty acquisition company. It has a proven track record and a diverse portfolio by product and by marketer: no single product accounts for more than 21% of annual royalty revenues. Key products in the portfolio include Lyrica (Pfizer Inc.); Remicade (Centocor, a Johnson & Johnson subsidiary); Humira (Abbott Laboratories); and Neupogen/Neulasta (Amgen Inc.). These four products account for 65% of RPI’s revenues. According to S&P, the majority of the underlying drugs hold leading positions in their respective therapeutic class and have an established commercial and safety track record, but are still in their growth phases. RPI has not had any royalty collection issues, because the bulk of its royalty streams rest with strong, highly rated counterparties with strong marketing programmes.

RPI’s stable royalty revenues and free cash flows from an increasingly diverse portfolio of long life royalty streams should continue to provide stability to the firm’s credit quality.


Univision Communications B2/B+ 0.84 14,331 9.3 899 0 492

UVN operates the number one Spanish language (“SL”) TV broadcast network, the number three SL TV broadcast network (TeleFutura), and the number one SL cable TV network (Galavisión). UVN also owns the largest SL television station group (63 stations) with the number one ranked SL station in each of its markets. UVN is number one SL radio broadcaster (74 stations) with the number one cluster in nine of the top ten Hispanic markets. Univision also operates the number one SL internet portal. Lastly, the company owns the number one Latin music company in the US, with 39% of all Latin music sales in the US and Puerto Rico.




Nielsen Finance Ba3/BB- 0.83 16,988 3.0 1,546 150 934

Verenigde Nederlandse Uitgeverijen is a leading information and media company that provides marketing and media measurement information, analytics and industry expertise to customers globally. The business consists of three segments: What People Watch (the media segment including Nielsen Research) providing US television, internet, etc. audience measures; What People Buy (consumer services segment or ACNielsen/Claritas/et al) – provider of consumer information via retail measurement services; and Enterprise (business media excluding printing business which was divested of) which includes trade shows and conferences.


First Data B1/B+ 0.80 26,477 5.6 2,794 15 2,001

First Data Corporation operates e-commerce, providing services that include merchant transaction processing and acquiring services, credit, retail, debit card issuing and processing services, prepaid card services, and check verification, settlement and guarantee services. US-based merchant acquiring and processing is approximately 51% of revenue; US-based financial institution card issuing and processing services is approximately 21%; and services to international merchants and financial institutions is roughly 27% of total revenue. The US represents roughly 75% of total revenue, with Europe representing 15%; Asia Pacific representing 6% and Latin America representing 3%.

The company maintains a leading market presence as a provider of payment processing services for merchants and financial institutions, with high barriers to entry, significant recurring revenues and a broad customer base.


MetroPCS Ba1/BB 0.76 8,478 2.1 1,332 25 2,043

MetroPCS is a pay-in-advance cellular operator with approximately 9.3 million subscribers. MetroPCS focuses on serving major metro areas including Atlanta, Dallas – Fort Worth, Detroit, Las Vegas, Los Angeles, Miami, Orlando – Jacksonville, Sacramento, San Francisco, Tampa Bay –Sarasota, and as of 2009, Boston, New York and Philadelphia.


Charter Communications Ba1/BB+ 0.69 19,419 1.3 2,671 531 865

Charter Communications is the fourth largest cable operator in the US (based upon subscribers). Charter provides advanced video, high-speed internet, and telephone services to approximately 5.5 million residential and business customers in 27 states.


Aramark Ba3/BB 0.62 7,876 3.8 1,127 54 595

Aramark provides food and facilities management services to business, education, healthcare, government, and sports and entertainment clients, as well as uniform and career apparel. The company has 240,000 employees to serve thousands of clients and millions of customers in 19 countries.

S&P revised its rating outlook to stable from negative on 13 February 2012, following Aramark’s extension of its US$1.0 billion loan facilities. The outlook revision to stable from negative reflects S&P’s view that the company should be able to modestly increase profitability and slowly improve credit measures.

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PRINCIPAL RISKS AND UNCERTAINTIES(13)

Investment in the Company carries a degree of risk including the risks in relation to the Company and the price, credit, liquidity and cash flow risk of the shares referred to below.

Risks associated with an investment in the CompanyThe past performance of the Company is not necessarily indicative of future performanceThe past performance of the Company is not necessarily indicative of, and cannot be relied upon as a guide to, the future performance of the Company. The value of the securities in which the Company invests, as well as the income derived therefrom, may fluctuate. Investors should regard an investment in the Company as long term in nature and they may not get back the amount they invest in the Company.

The market value of the shares can fluctuate; returns are reliant upon the performance of the underlying investments in which the Company’s assets are investedInvestors contemplating an investment in shares should recognise that their market value can fluctuate and may not always reflect their underlying value. Returns achieved are reliant upon the performance of the underlying investments in which the Company’s assets are invested. No guarantee is given, express or implied, that shareholders will receive back any of their original investment.

The calculation of net asset value throughout the year may be based on estimates which may be unaudited or subject to little verificationIn calculating the Company’s net asset value the Company may be required to rely on estimates of the value of securities in which the Company invests, which will be supplied, directly or indirectly, by the originating banks, other market counterparties or pricing systems approved for such purpose by the Administrator and the Custodian.

The Company may be unable to dispose of its assets at their estimated valueThe Company may be unable to dispose of the assets acquired by it or, should it be able to dispose of them, may realise a price at significantly less than par (or even zero) or significantly less than any net asset value or valuation it has previously obtained for such securities.

The performance of many of the Company’s investments may depend to a significant extent upon the performance of the managers of the underlying asset portfolioThe Company will not control the portfolios of assets underlying the CLOs in which it invests and will rely on the managers of the CLOs (which may or may not be affiliated to the Investment Manager) to administer and review the portfolios. The actions of these managers, including their ability to identify and report on issues affecting the portfolio on a timely basis, may affect the Company’s return on its investments, in some cases significantly.

(13) Please refer to Note 12 of the Financial Statements for a detailed review of the general risk management process and a detailed qualitative and quantitative review of the specific risks that are relevant to the Company

There can be no assurance that the Investment Manager will be able to accurately assess the price movement of assets The performance of the Company depends to a great extent on correct assessments of the future course of price movements and performance of assets selected by the Investment Manager. There can be no assurance that the Investment Manager will be able accurately to predict these price movements.

Economic recessions and downturns and adverse market conditions may impair the profitability of the Company and the value of its investments and the income available for distribution to investors The Company and its portfolio of investments are materially affected by conditions in the global financial markets and economic conditions throughout the world, including interest rates, unemployment, inflation, business and consumer confidence, availability of credit, currency exchange rates and controls, changes in laws, trade flows, terrorism and political uncertainty. These factors are outside the Company’s control and may affect the level and volatility of prices, the amount of distributions received from its investments and the liquidity and the value of investments. The Company may be unable to or may choose not to manage its exposure to these conditions and any efforts to manage its exposure may or may not be effective.

Risks related to CLO securitiesThe Company is exposed to underlying borrower fraud through the debt securities held in its portfolioInvesting in debt securities involves the possibility of the Company’s investments being subject to potential losses arising from material misrepresentation or omission on the part of borrowers whose loans are held within the relevant investments. Such inaccuracy or incompleteness may adversely affect the valuation of the collateral underlying the debt securities that are held within the Company’s portfolio or may adversely affect the ability of the relevant investment to perfect or effectuate a lien on the collateral securing the loan. The vehicles in which the Company invests will rely upon the accuracy and completeness of representations made by the underlying borrowers to the extent reasonable, but cannot guarantee such accuracy or completeness. In addition, the quality of the Company’s investments in CLOs are subject to the accuracy of representations made by the underlying borrowers. Accordingly, the Company is subject to the risk that the systems used by originators of CLOs to control for such accuracy are defective.

Underlying portfolio manager fees and other chargesThe Company may and does invest in securities where the underlying portfolios may be subject to management, administration and incentive or performance fees, in addition to those payable by the Company. Payment of such additional fees could adversely impact on the returns achieved by the Company.

15

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GSO is entitled to a base fee of 1.5% per annum of net assets, calculated and payable monthly in arrears. This base fee will be reduced to take into account any fees received by the Investment Manager or any of its associates as a result of managing any collective investment scheme that the Company invests in or as a result of managing any CLO that the Company invests in, if such investment is or has been made in the Primary Market.

CLOs typically will have no significant assets other than the collateral; payments on the CLO securities are and will be payable solely from the cash flows from the collateralCLOs typically will have no significant assets other than the collateral. Accordingly, payments on the CLO securities are and will be payable solely from the cash flows from the collateral, net of all management fees and other expenses. Payments to the Company as a holder of Income Notes and/or mezzanine notes are and will be met only after payments due on the senior notes (and, where appropriate, the mezzanine notes) from time to time have been made in full.

The Company is exposed to leveraged credit riskThe Company may be in a first loss or subordinated position with respect to realised losses on the collateral. The leveraged nature of the Income Notes and the mezzanine notes, in particular, magnifies the adverse impact of Collateral defaults.

There is the potential for interruption and deferral of cash flowIf certain minimum collateral par value ratios and/or interest coverage ratios are not met by an issuer (e.g. due to collateral defaults), then cash flow that otherwise would have been available to pay the coupon on the Income Notes may instead be used to redeem any senior notes and/or any mezzanine notes or to purchase additional collateral securities, until the ratios again exceed the minimum required levels or any senior notes and/or mezzanine notes are repaid in full. This could result in an elimination, reduction or deferral in the coupon and/or principal paid to the holders of the Income Notes, which would adversely impact the returns to the Company.

There may be a mismatch between the fixed rate nature of the CLO securities and the floating rate nature of the collateralIn certain transactions undertaken by issuers, the fixed rate nature of some of the senior and mezzanine notes and the floating rate nature of the collateral may produce a fixed/floating interest rate mismatch between the assets and the liabilities of the CLO.

CLOs may enter into one or more interest rate hedges with a counterparty acceptable to the ratings agencies to reduce this asset/liability mismatch, and therefore lower the return sensitivity of the CLO securities to changes in the absolute level of interest rates.

The CLO securities may experience volatilityIncome Notes and mezzanine notes represent a leveraged investment with respect to the underlying collateral. Therefore, changes in the market value of the Income Notes and mezzanine notes could be greater than the change in the market value of the underlying collateral, which themselves are subject to credit, liquidity and interest rate risk.

The CLO securities may be illiquidThe investments acquired by the Company are viewed as long-term investments by the Company, not as trading investments. Income Notes can normally be redeemed so long as the senior notes and the mezzanine notes and any remaining fees and expenses have been repaid in full. Income Notes and mezzanine notes may be subject to transfer restrictions.

The inability of the Collateral Manager to reinvest the proceeds of the prepayment of collateral may adversely affect the CompanyThere can be no assurance that, in relation to any investment, in the event that any of the collateral underlying such investment is prepaid, the Collateral Manager will be able to reinvest such proceeds in new collateral with equivalent investment returns. To this extent, the interest proceeds available to pay interest on the rated liabilities and investments may be adversely affected.

The Company’s investments are subject to prepayments, increasing reinvestment riskThe Company’s investments and the assets that collateralise them may prepay more quickly than expected and have an impact on the value of the Company. Prepayment rates are influenced by changes in interest rates and a variety of economic, geographic and other factors beyond the Company’s control and consequently cannot be predicted with certainty.

The collateral may be sold and replaced resulting in a loss to the CompanyThe collateral may be sold and replacement collateral purchased within certain parameters. If these transactions result in a net loss, the magnitude of the loss from the perspective of the Income Notes would be increased by the leveraged nature of the investment.

Subinvestment grade debt is subject to increased risksSubinvestment grade debt is subject to many of the same risk factors as investment grade debt, but in addition has more credit risk, is less liquid and has higher price volatility than investment grade debt.

17

Risks relating to the Investment ManagerThe performance of the Company depends on the ability and services of the Investment ManagerThe performance of the Company depends on: (i) the ability of the Investment Manager to generate positive returns; and (ii) the Investment Manager’s ability to advise on, and identify, investments in accordance with the investment objective of the Company and to allocate the assets of the Company among all investments in an optimal way. Achievement of the investment objective will also depend, in part, on the ability of the Investment Manager to provide competent, attentive and efficient services to the Company under the terms of the Investment Management Agreement. There can be no assurance that, over time, the Investment Manager will be able to provide such services or that the Company will be able to invest its assets on attractive terms or generate any investment returns for shareholders or, indeed, avoid investment losses.

The Company will depend on the managerial expertise available to the Investment Manager and its key personnelThe performance of the Company’s investments depends heavily on the skills of the Investment Manager in analysing, selecting and managing the investments. As a result, investors will be highly dependent on the financial and managerial experience of certain investment professionals associated with the Investment Manager, none of whom is under any contractual obligation to the Company to continue to be associated with the Investment Manager. The loss of one or more of these individuals could have a material adverse effect on the performance of the Company.

The investment professionals of the Investment Manager will attend to matters unrelated to the investment activities of the CompanyThe Company currently has no employees or facilities and depends upon the Investment Manager for the day-to-day management and operation of its investment portfolios. Additionally, there are no restrictions on the Investment Manager’s ability to establish funds or other publicly traded entities that compete with the Company. The Investment Manager currently serves as the Investment Manager for funds other than the Company.

The Investment Manager’s ability to invest the Funds may be constrainedThe Investment Manager’s ability to invest the funds available to the Company in appropriate investments may be constrained by a lack of investment opportunities or other market-related constraints.

The Company may face increased competition in sourcing and making investmentsThe Company may become subject to increased competition in sourcing and making investments. In particular, competition in respect of cash flow CLO transactions may increase. Some of the Company’s competitors may have greater financial, technical and marketing resources and the Company may not be able to compete successfully for investments.

The due diligence process that the Investment Manager undertakes in connection with the Company’s investments may not reveal all facts that may be relevant in connection with an investmentBefore the Company makes any investment, the Investment Manager conducts due diligence that it deems reasonable and appropriate based on the facts and circumstances applicable to each investment.

When conducting due diligence and making an assessment regarding an investment, the Investment Manager will be required to rely on resources available to it, including information provided by the originator of the investment.

Accordingly, there can be no assurance that the due diligence investigation that the Investment Manager carries out with respect to any investment opportunity will reveal or highlight all relevant facts that may be necessary or helpful in evaluating such investment opportunity. Moreover, there can be no assurance that such an investigation will result in an investment being successful.

The Investment Manager has no influence on management of portfolios underlying investments managed by non-affiliated third partiesThe Investment Manager is not responsible for and has no influence over the asset management of the portfolios underlying the securities held by the Company where those portfolios are managed by non-affiliated third parties. To the same extent, the Investment Manager is not responsible for and has no influence over the day-to-day management, administration or any other aspect of the issuers of the individual securities.

The performance fee may create an incentive for riskier investments; the performance fee may be paid on unrealised gains which may subsequently never be realised The performance fee payable to the Investment Manager may result in substantially higher payments to the Investment Manager than alternative arrangements in other types of investment vehicle. The existence of the performance fee may create an incentive for the Investment Manager to make riskier or more speculative investments than it would otherwise make in the absence of such fee.

In addition, since the performance fee is calculated on a basis that includes unrealised appreciation of the Company’s assets, it may be greater than if such fee were based solely on realised returns. A performance fee may be payable based on net realised and unrealised gains as at the end of each calculation period and, as a result, a performance fee may be paid on unrealised gains which may subsequently never be realised.

18



Blackstone policies and procedures to mitigate conflicts of interest and address regulatory requirements and contractual restrictions may affect the CompanySpecified policies and procedures implemented by The Blackstone Group to mitigate potential conflicts of interest and address certain regulatory requirements and contractual restrictions may reduce the synergies across The Blackstone Group’s various businesses that the Board and the Investment Manager expect to draw on for purposes of pursuing attractive investment opportunities.

Various potential and actual conflicts of interest may arise from the activities of the Investment Manager or its affiliatesVarious potential and actual conflicts of interest may arise from the overall advisory, investment and other activities of the Investment Manager, its affiliates, other funds or vehicles managed directly or indirectly by the Investment Manager or its affiliates and their respective clients and employees, including in relation to the direct or indirect management by the Investment Manager or its affiliates of other entities in which the Company may invest.

The Investment Manager is authorised and regulated by the FSA. If the Investment Manager fails to comply with legal and regulatory requirements, the Company, its net asset value and its share price may be adversely affectedThe provision of investment management services is regulated in the United Kingdom, and the Investment Manager is authorised and subject to regulation and supervision by the FSA (which has the authority to review and investigate the conduct of the Investment Manager and its employees). Changes to statutes, regulations or regulatory policies (including changes in interpretation or implementation thereof) or any failure by the Investment Manager or its employees to comply with such laws, regulations or policies could adversely impact the Investment Manager and thereby could adversely affect the Company, its net asset value and its share price. Although the Investment Manager has implemented systems and controls requiring employees to comply with these laws, regulations and policies, there can be no assurance that all employees will abide by these and, if any were to fail to do so, that such failure would not have an adverse effect on the Company.

Risks relating to the sharesShareholders have no right to have their shares redeemed by the CompanyThe Company was established as a listed closed ended vehicle. Accordingly, shareholders will have no right to have their shares redeemed or repurchased by the Company at any time. While the Directors retain the right to effect repurchase of shares in the manner described in this document, they are under no obligation to use such powers at any time and shareholders should not place any reliance on the willingness of the Directors so to act. Shareholders wishing to realise their investment in the Company will therefore be required to dispose of their shares through the London Stock Exchange or negotiated transactions with potential purchasers. Accordingly, shareholders’ ability to realise their investment at NAV or at all is in part dependent on the continued existence of a market for the shares.

The existence of a liquid market in the shares cannot be guaranteedThere can be no guarantee that a liquid market in the shares will continue to develop or that the shares will trade at prices close to their underlying NAV. Accordingly, shareholders may be unable to realise their investment at NAV or at all.

Individual share classes may be exposed to currency risk; there are risks associated with class currency hedging arrangements The Investment Manager may hedge the currency exposure of any class. Hedging may be by means of spot and forward foreign exchange contracts or options on such contracts or by using such other derivative instruments as may be available and having the same or similar effect.

While not the intention of the Investment Manager, overhedged or underhedged positions may arise due to factors outside of the control of the Investment Manager.

The Company may issue additional securities that dilute existing shareholdersSubject to the Companies Acts and all other legal and regulatory requirements, the Company may issue additional shares. Any additional issuances by the Company or the possibility of such issue, may cause the market price of the relevant shares to decline.

Increases in operating and other expenses could limit the Company’s ability to pay dividends to shareholdersThe Company’s ability to pay dividends to shareholders will be adversely impacted by any increase in costs associated with its borrowings and operating expenses. There is no guarantee that shareholders will receive dividends in the future. The payment of dividends in respect of the shares in the past should not be taken as implying that dividends will be paid in respect thereof in the future.

Transfer restrictions relating to the shares may affect the liquidity of the sharesThe shares have not been registered in the United States under the Securities Act or under any other applicable securities law and are subject to restrictions on transfer contained in such laws. There are additional restrictions on the resale of shares by any shareholder to any person who is located in the United States or is a US person.

Risk managementThe Company’s portfolio of CLO investments is actively managed to minimise default risk and potential loss through comprehensive credit analysis performed by the Investment Manager’s experienced credit research team and use of the Investment Manager’s proprietary risk management systems. Achieving efficient diversity is central to the Company’s investment objective. Each investment is assessed with a view to providing diversification in terms of underlying assets, issuer, sector, geography and maturity profile.

19

The Company invests in a minimum of 20 separate transactions with a maximum exposure per investment, at the time of investment, of 20% of the net asset value. The Company also limits its exposure to transactions managed by the same portfolio manager to 15% of the net asset value, at the time of investment. However, if the portfolio manager is an affiliate of the Investment Manager, this limit is increased to 60% of the net asset value, at the time of investment. The Investment Manager analyses all transactions at the underlying portfolio level, identifying any concentration in terms of issuer, sector, geography and maturity profile. The Investment Manager’s analysis also takes into consideration the correlation among different underlying securities to avoid concentrations of risk.

The Company invests in underlying assets which are predominantly US Dollar and Euro denominated. The base currency of the Company is the US Dollar. The Company therefore has an exposure to changes in the exchange rate between the US Dollar and the Euro which, if unhedged, has the potential to have a significant effect on returns. In addition, the Euro Class is denominated in Euros. The Directors believe that it is in the best interests of shareholders for the Company to engage consistently in currency hedging solely to reduce the risk of currency fluctuations and the volatility of returns which may result from such currency exposure. This involves hedging, at the level of the Company, the Euro assets to US Dollar and, at the class level, the US Dollar exposure of the Euro Class back to Euros, as appropriate.

The Company only uses currency and other hedging techniques for the purposes of efficient portfolio management in accordance with the requirements of the Central Bank of Ireland. The Company has no intention of using the currency hedging facility for the purposes of currency speculation for its own account.

Please refer to note 12 of the financial statements for a detailed review of the general risk management process and a detailed qualitative and quantitative review of the specific risks that are relevant to the Company.

Important events post-balance sheet datePlease refer to note 19 Subsequent Events for details of the important events post-balance sheet date.

GSO Capital Partners International LLP23 April 2012

20


DIRECTORS’ REPORT

PRINCIPAL ACTIVITIESThe Company was incorporated on 20 February 2006 as a closed-ended limited liability investment company under the laws of Ireland and is authorised by the Central Bank of Ireland (“Central Bank”). The Company continues to be registered and domiciled in Ireland and the Company’s shares are listed on the London Stock Exchange.

INVESTMENT OBJECTIVE The Company’s investment objective is to produce attractive and stable returns, with low volatility compared to equity markets, by investing in a diversified portfolio of senior notes of collateralised loan obligations or “CLOs” collateralised by senior secured bank loans and Income Notes and mezzanine tranches of CLOs. CLOs are debt securities backed by a diversified pool of underlying assets. The CLO uses the cash flows from this portfolio of assets to back the issuance of multiple classes of rated debt securities which, together with the Income Notes, are used to fund the purchase of the underlying assets.

INVESTMENT POLICYThe Company invests in cash flow CLO transactions, managed by portfolio managers with proven track records. It seeks to achieve diversification across asset class, geography, manager, and maturity profile. Each CLO investment is collateralised by a diverse pool of fixed income assets, which may include:

• senior secured bank loans;

• investment grade loans;

• project finance debt;

• asset-backed securities or other asset-backed obligations;

• mortgage-backed securities; and/or

• debt securities issued by other CLOs.

The Company may also invest in other collective investments schemes for the purposes of gaining exposure to the types of CLO transactions described above or otherwise to pursue the investment objective and policy of the Company.

The Company seeks to have minimal exposure to CLOs where the underlying assets comprise unsecured corporate bonds (investment grade or otherwise). The Company will limit investment in synthetic CLO transactions, at the time of investment, to 25% of the net asset value. It is intended that the Company’s investments comprise Income Notes and mezzanine tranches in actively managed CLOs, with a variety of portfolio managers. The Company may also invest in senior tranches of leveraged loan CLOs where attractive opportunities can be identified such may include investments in senior tranches of CLOs in respect of which the collateral consists of fee streams due to portfolio managers from underlying leverage loans CLOs. The Company may invest in new issue CLO transactions in the primary market and transactions in the secondary market where attractive opportunities can be identified.

The Company’s portfolio of CLO investments is actively managed to minimise default risk and potential loss through comprehensive credit analysis performed by the Investment Manager’s experienced credit research team and use of the Investment Manager’s proprietary risk management systems. Achieving efficient diversity is central to the Company’s investment objective. Each CLO investment is assessed with a view to providing diversification in terms of underlying assets, issuer, sector, geography and maturity profile.

The Company invests in a minimum of 20 separate transactions with a maximum exposure per investment, at the time of investment, of 20% of the net asset value. The Company also limits its exposure to transactions managed by the same portfolio manager to 15% of the net asset value, at the time of investment. However, if the portfolio manager is an affiliate of the Investment Manager, this limit is increased to 60% of the net asset value, at the time of investment. The Investment Manager analyses all transactions at the underlying portfolio level, identifying any concentration in terms of issuer, sector, geography and maturity profile. The Investment Manager’s analysis also takes into consideration the correlation among different underlying securities to avoid concentrations of risk.

There is no restriction as to the geographical composition of the underlying portfolios, but it is currently weighted towards the United States.

21

The functional and presentational currency of the Company is US Dollar as the Directors have determined that this reflects the Company’s primary economic environment. The Company therefore has an exposure to changes in the exchange rate between the Euro and the US Dollar which, if unhedged, could have the potential to have a significant effect on returns. In addition, the Euro class is denominated in Euro. The Directors believe that it is in the best interests of shareholders for the Company to engage consistently in currency hedging solely to reduce the risk of currency fluctuations and the volatility of returns which may result from such currency exposure. This involves hedging, at the level of the Company, the Euro assets to US Dollar, and at the class level, the US Dollar exposure of the Euro class back to Euro, through the use of rolling forward foreign exchange transactions. The Company only uses hedging techniques for the purposes of efficient portfolio management in accordance with the requirements of the Central Bank and has no intention of using the currency hedging facility for the purposes of currency speculation for its own account.

Investment restrictionsIn accordance with the requirements of the UK Listing Authority and the Central Bank, the Company has adopted the following additional investment restrictions:

• distributable income will be principally derived from investment activity;

• the Company will not conduct a trading activity;

• a maximum of 20% of the value of the net asset value of the Company may be invested in the securities of any one issuer (Related companies within a group of companies shall be deemed to be one issuer);

• a maximum of 15% of the value of the net asset value of the Company may be invested in other listed investment companies;

• the Company will not take legal or management control of the issuers of the underlying investments, nor shall the Company acquire any shares carrying voting rights which would enable it to exercise significant influence over the management of an issuing body;

• no more than 20% of the net asset value of the Company may be kept on cash deposit with any one institution;

• the Company may not invest more than 20% of its net asset value in other collective investment schemes, of which no more than 20% of its net asset value may be invested in other open-ended collective investment schemes; no more than 10% of its net asset value may be invested in closed-ended collective investment schemes; no more than 10% of its net asset value may be invested in funds of funds. No more than 10% of its net asset value may be invested in unregulated collective investment schemes; no issue or purchase commission may be charged to the Company where investments are made in collective investment schemes managed by the Investment Manager or by an associated or related company of the Investment Manager and where the Investment Manager receives a commission by virtue of an investment in a collective investment scheme, this commission must be paid into the Company;

• for the purposes of the above limits, related entities (where 50% or more of the voting rights or paid up capital of one entity are held or owned directly or indirectly by another entity) are regarded as a single issuer;

• the Company shall not invest in real estate or directly in physical commodities;

• dividends will not be paid unless they are covered by net income received from, and/or net realised and unrealised capital gains deriving from, the Company’s investments;

• the investment objective of the Company may not be altered without the prior written approval of all shareholders or a special resolution of shareholders in general meeting;

• any material change to the investment policy of the Company may only be made with the prior approval, by special resolution, of shareholders;

• the Company may borrow up to 25% of its net asset value from time to time for short term or temporary liquidity purposes and may grant collateral to secure borrowings. The Company will not have any long-term or structural borrowings;

22


DIRECTORS’ REPORTCONTINUED

• the Company may hedge corporate credit risk through the use of short sales, credit default swaps, options and other methods where the underlying assets relate to single issuers for the broader indices and may thereby be leveraged up to a total limit of 10% of its net asset value; and

• the Company may not acquire more than 20% of any class of security issued by any single issuer. This restriction does not apply to debt securities.

Any change in the above investment restrictions shall be subject to the prior approval of the Central Bank.

The above limits apply at the time of the purchase of the investment. If these limits are exceeded for reasons beyond the control of the Company, the Company shall adopt as a priority for its sales transactions the remedying of the position taking account of the interests of the shareholders. In the event of any breach of these investment restrictions, the Board of Directors (“the Board”) will as soon as practicable make an announcement on a Regulatory Information Service provider and subsequently write to shareholders, if appropriate.

REVIEW OF DEVELOPMENT OF THE BUSINESS AND FUTURE DEVELOPMENTSA detailed review of the business and future developments of the Company is included in the Investment Manager’s report.

RESULTS FOR THE YEAR AND STATE OF AFFAIRSThe financial position and results for the year are set out in the statement of financial position on page 33 and in the statement of comprehensive income on page 34.

The profit for the year attributable to participating equity shareholders amounted to US$35,612,532. The Directors declared an interim distribution of €0.0157 per share (US$0.021 per US Dollar share) for the quarter ended 31 December 2010 which was paid on 31 January 2011, an interim distribution of €0.0155 per share (US$0.0225 per US Dollar share) for the quarter ended 31 March 2011 which was paid on 3 May 2011, an interim distribution of €0.0211 per share (US$0.0280 per US Dollar share) for the quarter ended 30 June 2011 which was paid on 5 August 2011, an interim distribution of €0.0220 per share (US$0.0300 per US Dollar share) for the quarter ended 30 September 2011 which was paid on 31 October 2011 and an interim distribution of €0.0250 per share (US$0.0320 per US Dollar share) for the quarter ended 31 December 2011 which is payable on 6 February 2012. There was no distribution paid on the US Dollar C shares during the year.

The fundamental performance of the underlying portfolios has been strong and, as a result, the Company has declared dividends of US$11.25c per US Dollar share and €8.36c per EUR share over the four quarters in 2011. The valuation of the Company’s assets has been affected by the volatility and dislocation of the broader markets. The Board believes that the Company is well positioned to take advantage of this market opportunity.

On 5 January 2011, the Company announced that effective as of midnight (Irish time) on 31 December 2010, the following changes were made to the Company: 1) the Administrator, Northern Trust International Fund Administration Services (Ireland) Limited, was replaced by State Street Fund Services (Ireland) Limited; and 2) the Custodian, Northern Trust Fiduciary Services (Ireland) Limited, was replaced by State Street Custodial Services (Ireland) Limited.

On 4 January 2011, a supplement to the Prospectus of the Company dated 10 December 2010 was issued to reflect these changes.

Effective as of midnight (Irish time) on 31 December 2010, the Company’s registered office was changed to 78 Sir John Rogerson’s Quay, Dublin 2, Ireland.

On 24 January 2011, in connection with the placing of shares detailed in the Prospectus published on 10 December 2010, the Company announced that it had raised a further US$17.4 million (before costs) through a placing of a total of 22,384,574 US Dollar shares (“the Placing Shares”) at a price of US$0.7754 per Placing Share. The Placing Shares were admitted to the Official List and to trading on the London Stock Exchange’s Main Market for listed securities on 26 January 2011.

On 28 January 2011, the Company announced the appointment of Singer Capital Markets Limited as joint financial adviser and joint broker to the Company.

The Company announced on 11 August 2011 that a Prospectus in respect of a proposed placing of US Dollar C shares at US$1.00 per share, Euro C shares at €1.00 per share and Sterling C shares at £1.00 per share, each of no par value, had been filed with, and approved by, the Central Bank of Ireland as required by the Prospectus (Directive 2003/71/EC) Regulations 2005.

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In accordance with the revised Prospectus of the Company dated 9 August 2011, the Company also announced that a review of the maturity profile of the Company’s current CLO investments and, on a “look-through” basis, the bank loan market indicated the potential for a significant amount of principal receipts in the period between 2016 and 2018. As a result, the Directors believe that it may be appropriate to allow shareholders to consider the continuation of the Company at an earlier date than the Company’s current winding up date in 2021. Therefore, it is currently the Directors’ intention, subject to the requirements of the Central Bank, to propose an ordinary resolution for the continuation of the Company at the annual general meeting to be held in 2017. If the continuation vote is not passed, the Directors will propose a reconstruction or winding up of the Company, in accordance with applicable laws and regulations and the terms of the Articles of Association, with an opportunity for the shareholders to receive a cash exit for all of their shares at around realisable net asset value less costs.

The Company announced on 15 August 2011 that it had raised approximately US$75 million (before costs) through a placing of US Dollar C shares in the Company. The issue price of each new US Dollar C share was US$1.00. The US Dollar C shares were admitted to the Official List and to trading on the London Stock Exchange’s Main Market for listed securities on 18 August 2011.

On 20 October 2011, the Company announced that the US Dollar C shares that were in issue would be converted into US Dollar shares at the following rate, calculated in accordance with the Company’s Prospectus dated 9 August 2011, 1.2847 US Dollar shares for every 1 US Dollar C share (the “Conversion Ratio”). The US Dollar C shares were delisted on 31 October 2011 and an application was made for 96,096,202 new US Dollar shares to be admitted to the Official List and to trading on the London Stock Exchange from the same date. The new US Dollar shares arising on conversion rank pari passu with, and have the same rights as, the US Dollar shares of the Company already in issue.

Another revised Prospectus was announced on 6 December 2011, detailing a further proposed placing of US Dollar C shares. C shares. The Company announced on 12 December 2011 that it had raised approximately US$77 million (before costs) through a placing of US Dollar C shares in the Company. The issue price of each new US Dollar C share was US$1.00. The US Dollar C shares were admitted to the Official List and to trading on the London Stock Exchange’s Main Market for listed securities on 15 December 2011.

The Prospectus was also revised to reflect the appointment of Dexion Capital plc as joint corporate broker and financial adviser of the Company effective from midnight (Irish time) on 28 September 2011. RBS Hoare Govett Ltd ceased to be joint financial adviser and joint corporate broker effective from midnight (Irish time) 28 September 2011.

TRANSACTIONS INVOLVING DIRECTORSPlease refer to note 5 and note 10 for details of transactions involving Directors.

EVENTS SINCE YEAR-ENDPlease refer to note 19 Subsequent Events for details of the important events post-balance sheet date.

DIRECTORSThe names of the persons who were Directors at any time during the year are set out on page 68. All of the Directors are independent. No Director has a service contract with the Company, nor are any such contracts proposed.

DIRECTORS’ & COMPANY SECRETARY’S INTERESTSThe Directors and Company Secretary (including family interests) do not have any shareholdings in the Company as at 31 December 2011.

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MANAGEMENT ARRANGEMENTSDuring the year, the Company had an agreement with GSO Capital Partners International LLP (“GSO”) for the provision of investment management services. The management fees and fees payable are disclosed in note 5. After due consideration of the investment experience, resources and reputation of GSO as a whole, it is the opinion of the Directors that the continuing appointment of GSO on the terms agreed is in the interest of shareholders as a whole.

The investment management agreement may be terminated on six-months’ notice by either party and may also be terminated by either party with immediate effect on the occurrence of certain events, including: (i) if an order has been made or an effective resolution passed for liquidation of the other party; (ii) if a receiver or similar officer has been appointed in respect of the other party or its assets or the other party becomes subject to an administration order; (iii) if the other party enters into an arrangement with its creditors or any of them or the other party is or is deemed to be unable to pay its debts; (iv) if the other party ceases or threatens to cease to carry on its business or threatens to make any material alteration to the nature of its business as carried out on the date of the investment management agreement; or (v) if the other party commits a material breach of its obligations under the investment management agreement and such breach (if capable of being remedied) is not remedied within 28 days of receiving notice of the breach. The duration of the Investment Manager’s appointment has not been fixed.

BOOKS OF ACCOUNTThe Directors are responsible for ensuring that proper books of account, as outlined in Section 202 of the Companies Act, 1990, are kept by the Company. To achieve this, the Directors have employed a service organisation, State Street Fund Services (Ireland) Limited (the “Administrator”). The books of account are maintained at the Company’s registered offices at 78 Sir John Rogerson’s Quay, Dublin 2, Ireland.

PRINCIPAL RISKS, UNCERTAINTIES, RISK MANAGEMENT OBJECTIVES AND POLICIESThe Company’s investment objective is to produce attractive and stable returns with a low volatility compared to equity markets, by investing in a diversified portfolio of senior notes of collateralised loan obligations (“CLOs”) collateralised by senior secured bank loans and Income Notes and mezzanine tranches of CLOs. Investment in the Company carries with it a degree of risk including, but not limited to, business risks and the risks associated with financial instruments referred to in note 12 of these financial statements and the Investment Manager’s review on pages 15 to 19. The primary business risk is the risk that the Company may not achieve its investment objective. Meeting that objective is a target but the existence of such an objective should not be considered as an assurance or guarantee that it can or will be met.

CORPORATE GOVERNANCE IntroductionThe Company is subject to and complies with Irish statute comprising the Companies Acts 1963 to 2009 and with the Listing Rules of the UK Listing Authority.

The Listing Rules of the UK Listing Authority requires the Company to apply the main principles of the UK Corporate Governance Code (the “Code”) published by the Financial Reporting Council in May 2010, which replaces the 2008 Combined Code and is applicable to the Company for the year under review, and to report to shareholders on how it has done so. The Code can be found at: http://www.frc.org.uk/CORPORATE/ukcgcode.cfm.

The Board considers that the Company has complied with the main provisions contained in the Code, except as outlined on page 27, throughout this accounting period and that it complies with corporate governance requirements in Ireland. The following statement describes how the relevant principles of governance are applied to the Company.

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The BoardThe Board currently consists of six non-executive Directors, all of whom are independent of the Investment Manager. The Board accepts collective responsibility for the decisions of the Board. The Board has four scheduled board meetings during the year ended 31 December 2011 and between these formal meetings there was regular contact between the Board and the Investment Manager, the Company Secretary and the Company’s brokers. The Directors are kept fully informed of investment and financial controls and other matters that are relevant to the business of the Company and should be brought to the attention of the Directors.

The Directors, where necessary in the furtherance of their duties, have access to independent professional advice at the expense of the Company.

The attendance record of Directors at the formal scheduled meetings is set out below:

Board Audit Remuneration Meetings Committee Committee Number of meetings* 4 4 1

Meetings attended:Werner Schwanberg 4 N/A N/AClaudio Albanese 4 N/A N/AFergus Sheridan 4 4 1Adrian Waters 4 4 N/AEdward D’Alelio 4 N/A 1Nicholas Moss 4 4 1

* In addition to the scheduled quarterly Board meetings the Board, or committees thereof, held eight ad hoc meetings. These meetings were attended by the Directors who were available at the time.

The Board has a breadth of experience relevant to the Company and the Directors believe that any changes to the Board’s composition can be managed without undue disruption. With any new Director appointment to the Board, consideration will be given as to whether an induction process is appropriate and upon any such appointment the new Director would be available to meet shareholders upon request. The Board considers agenda items laid out in the notice and agenda which are formally circulated to the Board in advance of the meeting as part of the board papers and therefore Directors may request any agenda items to be added that they consider appropriate for Board discussion. Additionally, each Director is required to inform the Board of any potential or actual conflicts of interest prior to Board discussion.

Questions arising at any meeting shall be determined by a majority of votes. In case of an equality of votes, the Chairman shall have a second or casting vote. A Director may, and the Company Secretary on the requisition of a Director shall, at any time summon a meeting of the Directors. The quorum necessary for the transaction of business of the Directors may be fixed by the Directors, and unless so fixed at any other number shall be two.

The primary focus at Board meetings is a review of investment performance and associated matters such as asset allocation, as well as marketing/investor relations, risk management, general administration, corporate governance and compliance, peer group information and industry issues. The Board evaluates its performance and considers the tenure of each Director on an annual basis and believes that the mix of skills, experience, ages and length of service are appropriate to the requirements of the Company.

Directors’ duties and responsibilitiesThe duties and responsibilities of the Directors cover the following areas:

• statutory obligations and public disclosure;

• strategic matters and financial reporting;

• oversight of management and personnel matters;

• risk assessment and management, including reporting, monitoring, governance and control; and

• other matters having a material effect on the Company.

Nomination/remuneration committeesThere was no nomination committee in the year ended 31 December 2011 as it is not considered appropriate at the present time. A remuneration committee was established on 6 April 2011 at the behest of the Board Chair. The Chairman of the remuneration committee is Edward D’Alelio. Nicholas Moss and Fergus Sheridan are members of the committee. The terms of reference of the committee are as follows:

a) review the existing compensation scheme for directors;

b) review comparable peer fund data; and

c) make any recommendations on a regular basis regarding director compensation.

Pricing committeeThe pricing committee meets every month and is attended by representatives of the Investment Manager, GSO Capital Partners International LLP, the Independent Auditors, KPMG, the Administrator, State Street Fund Services (Ireland) Limited and the Board of Directors, Claudio Albanese and Edward D’Alelio.

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The purpose of the meetings is to review all valuations received by the Company and send a final summary to the Administrator, State Street Fund Services (Ireland) Limited, for pricing purposes.

Audit committeeAn audit committee has been established consisting of Fergus Sheridan, Nicholas Moss and Adrian Waters. The audit committee examines the effectiveness of the Company’s internal control systems, the annual report and financial statements and interim report, the auditor’s remuneration and engagement, as well as the auditor’s independence and any non-audit services provided by them. The audit committee receives information from the Company Secretary and the compliance department of the Administrator and the external auditors. The audit committee met four times in the year ended 31 December 2011 to review the annual accounts, interim accounts, audit timetable and other risk management and governance matters.

Internal controlsThe Board is ultimately responsible for the Company’s system of internal control and for reviewing its effectiveness. The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Company.

This process has been in place for the year under review and up to the date of approval of this annual report and financial statements and is reviewed by the Board and accords with the Code. The Board has reviewed the effectiveness of the system of internal control. In particular, it has reviewed and updated the process for identifying and evaluating the significant risks affecting the Company and the policies by which these risks are managed.

As there is delegation of daily operational activity, described below, the Company has no direct internal audit function. The internal control systems are designed to meet the Company’s particular needs and the risks to which it is exposed. Accordingly, the internal control systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and by their nature can only provide reasonable and not absolute assurance against misstatement and loss.

The Board has delegated the responsibility for the management of the Company’s investment portfolio, the provision of custody services and the administration, registrar and corporate secretarial functions including the independent calculation of the Company’s net asset value and the production of the annual report and financial statements which are independently audited. Whilst the Board delegates responsibility, it retains accountability for the functions it delegates and is responsible for the systems of internal control. Formal contractual agreements have been put in place between the Company and providers of these services. Compliance reports are provided on a quarterly basis by the Administrator.

Corporate responsibilityThe Company’s business is concerned with investment. It considers the ongoing concerns of investors by open and regular dialogue with and through the appointed Investment Manager and the Company’s brokers.

The Company keeps abreast of regulatory and statutory changes and takes appropriate action.

The Company does not have any employees.

Going concernAfter making enquiries and given the nature of the Company and its investments, the Directors are satisfied that it is appropriate to continue to adopt the going concern basis in preparing the financial statements and after due consideration, the Directors consider that the Company is able to continue in the foreseeable future.

Relations with shareholdersThe Investment Manager and the Company’s brokers maintain a regular dialogue with shareholders, the feedback from which is reported to the Board. In addition, Board members will be available to respond to shareholders’ questions at the annual general meeting.

All general meetings of the Company shall be held in Ireland. In each year the Company shall hold a general meeting of the Company as its annual general meeting. Twenty-one days’ notice (excluding the day of mailing and the day of the meeting) shall be given in respect of each general meeting of the Company. The notice shall specify the venue and time of the meeting, the business to be transacted at the meeting and that a proxy may attend and vote on behalf of any shareholder. The requirements for quorum and majorities at all general meetings are set out in the Articles of Association of the Company. An ordinary resolution is a resolution passed by a simple majority of the votes cast and a special resolution is a resolution passed by a majority of 75% or more of the votes cast. The Articles of Association provide that matters may be determined at a meeting of shareholders on a show of hands unless a poll is requested by five shareholders or shareholders holding 10% or more of the shares in number or by value or unless the Chairman of the meeting requests a poll. Subject to disenfranchisement by law in the event of non-compliance with any notice requiring disclosure of the beneficial ownership of shares, the Articles of Association provide that each share gives the holder one vote in relation to any matters relating to the Company which are submitted to shareholders for a vote by poll and each shareholder present at a meeting has one vote in relation to any matters relating to the Company which are submitted to shareholders for a vote by show of hands. All shares of each class have equal voting rights, except that in matters affecting only a particular class, only shares of that class shall be entitled to vote.

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The Board monitors the trading activity and shareholder profile on a regular basis. Shareholder sentiment is also ascertained by the careful monitoring of the discount/premium at which each class of shares is traded in the market against the net asset value per share when compared to the discounts/premiums experienced by the Company’s peer group.

The Company reports formally to shareholders twice a year and a proxy voting card is sent to shareholders with the annual report and financial statements. Additionally, the Interim Management Statements and the current information provided to shareholders on an ongoing basis through the Company’s website, the Investment Manager’s monthly report and the Regulatory News Service of the London Stock Exchange assist in keeping shareholders informed. The Registrar monitors the voting of shareholders and proxy voting is taken into consideration when votes are cast at the annual general meeting. Shareholders may contact the Directors via the Company Secretary.

Compliance with the CodeThroughout the year ended 31 December 2011, the Company has complied with the Code on Corporate Governance 2010, with the following exceptions:

B.1 – This provision is not fully complied with as it calls for a balance of executive and non-executive Directors and the Company only has non-executive Directors. However, the Directors have a broad range of experience and given the nature of the Company’s activity and that the Directors are deemed to be independent from the Investment Manager, it is not considered necessary to have executive directors appointed.

B2.1 – There was no nomination committee in the year ended 31 December 2011 as they are not considered appropriate at the present time.

B2.3 – This provision is complied with save that all of the Directors are appointed for a term which expires when either the Director is (i) removed or vacates office; (ii) resigns, or (iii) terminates his appointment.

E.1 – This provision is not strictly complied with as it is the management team of the Investment Manager who has most regular contact with shareholders on behalf of the Board. All comments received from such shareholders are fed back to the Board both from the Investment Manager and the Company’s brokers. All Directors are available to attend the annual general meeting, with the Chairman and the Directors in particular, being available to communicate with shareholders.

Additional corporate governance disclosures under Irish company lawThe Board is ultimately responsible for overseeing the establishment and maintenance of adequate internal control and risk management systems of the Company in relation to the financial reporting process. As the Company has no employees and all Directors serve in a non-executive capacity, all functions including the preparation of the financial statements have been outsourced. The Company has appointed State Street Fund Services (Ireland) Limited as its Administrator consistent with the regulatory framework applicable to investment fund companies such as the Company. The Administrator has functional responsibility for the preparation of the Company’s interim and annual financial statements and the maintenance of its books and records. On appointing the Administrator the Board noted that it was regulated by the Central Bank and, in the Board’s opinion, had significant experience as an administrator. The Board also noted the independence of the Administrator from the Company’s Investment Manager. Subject to the supervision of the Board, the appointment of the Administrator is intended to manage rather than eliminate the risk of failure to achieve the Company’s financial reporting objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.

The Board and audit committee evaluates and discusses significant accounting and reporting issues as the need arises. The Board and audit committee reviews the financial statements prior to their approval, though it should be noted that such review does not include verification of information in the financial statements to source documents. The annual financial statements are subject to independent audit.

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Capital structure As at 31 December 2011, so far as the Directors are aware, no person other than those listed below was interested, directly or indirectly, in 5% or more of the issued share capital of each share class in the Company: Percentage Percentage Percentage of issued of issued of issued Number of share capital Number of share capital Number of share capital US$ US$ US$ US Dollar Name EUR shares EUR class shares class C shares C class

BNY Custodial Nominees (Ireland) Limited – – 36,772,226 11.76% – – Credit Agricole Corporate and Investment Bank 5,000,000 35.93% – – – – Deutsche Bank Aktiengesellschaft – – – – 5,000,000 6.51%Euroclear Nominees Limited 3,200,000 23.00% – – – – Goldman Sachs Securities (Nominees) Limited – – 16,500,470 5.28% – – HSBC Client Holdings Nominee (UK) Limited – – 19,701,687 6.30% – – Nortrust Nominees Limited – – 17,523,308 5.61% 6,258,000 8.14%Securities Services Nominees Limited 2,000,000 14.37% – – – – State Street Nominees Limited – – 32,787,053 10.49% 12,143,288 15.80%The Bank of New York (Nominees) – – – – 10,528,000 13.70%The Bank of New York (Nominees) – – – – 5,504,000 7.16%

None of the above shareholders have shareholder rights different to those of other shareholders.

With regard to the appointment and replacement of Directors, the Company is governed by its Articles of Association, the Companies Acts, 1963-2009, and the Listing Rules of the London Stock Exchange as applicable to investment funds. The Articles of Association themselves may be amended by special resolution of the shareholders.

Powers of the DirectorsThe Directors are responsible for managing the business of the Company in accordance with the Articles of Association. The Directors may delegate certain functions to the Administrator and other parties, subject to the supervision and direction by the Directors. The Directors have delegated the day-to-day administration of the Company to the Administrator and the investment management function to the Investment Manager.

The Articles of Association provide that the Directors may exercise all the powers of the Company to borrow money, to mortgage or charge its undertaking, property or any part thereof and may delegate these powers to the Investment Manager. However, the amount and circumstances in which the Company may borrow are limited by the Central Bank’s non-UCITS Notices and the limitations set out in the Prospectus of the Company.

The Directors at any time, and from time to time, temporarily suspend the calculation of the net asset value and the issue, repurchase and conversion of shares in certain instances more particularly described in the Prospectus.

RESPONSIBILITY STATEMENTThe Directors are responsible for preparing the Directors’ report and the Company’s financial statements, in accordance with applicable law and regulations.

Company law requires the Directors to prepare Company financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with IFRSs as adopted by the EU, to present fairly the financial position and performance of the Company.

The Company’s financial statements are required by law and IFRSs as adopted by the EU to present fairly the financial position and performance of the Company. The Companies Acts, 1963 to 2009 provide in relation to such financial statements that references in the relevant parts of these Acts to financial statements giving a true and fair view are references to their achieving a fair presentation.

In preparing the 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 that the financial statements comply with IFRSs as adopted by the EU; and

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

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Under applicable law and the requirements of the Listing Rules issued by the London Stock Exchange, the Directors are also responsible for preparing a Directors’ report and reports relating to Directors’ remuneration and corporate governance that comply with that law and those rules. In particular, in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007 (the “Transparency Regulations”), the Directors are required to include in their report a fair review of the business and a description of the principal risks and uncertainties facing the Company and a responsibility statement relating to these and other matters, included below.

The Directors are responsible for keeping proper books of account that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Acts 1963 to 2009. They are also responsible for safeguarding the assets of the Company. They have general responsibility for taking such steps as are reasonably open to them to prevent and detect fraud and other irregularities.

Responsibility Statement, in accordance with the Transparency RegulationsEach of the Directors, whose names and functions are listed on page 68 confirm that, to the best of that Director’s knowledge and belief;

• the financial statements, prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities and financial position of the Company at 31 December 2011 and its profits for the year then ended;

• the Directors’ report contained in the 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 they face; and

• the related party transactions as disclosed in note 10 are a complete and accurate reflection of all related party transactions that impacted the Company during the year.

AUDITORSThe auditors, KPMG, have signified their willingness to continue in office in accordance with Section 160(2) of the Companies Act, 1963.

MATERIAL CHANGES TO THE PROSPECTUSOn the 4 January 2011, a supplement to the Prospectus of the Company dated 10 December 2010 was issued to reflect the appointment of State Street Fund Services (Ireland) Limited as Administrator and Secretary of the Company and State Street Custodian Services (Ireland) Limited as Custodian of the Company, and the change of the Company’s registered office with effect from midnight (Irish time) on 31 December 2010.

On 9 August 2011 and 6 December 2011, revised Prospectuses were announced. The Company announced a Prospectus on 9 August 2011 detailing the issue and placing of US Dollar C shares. In addition, the section entitled “Life of the Company” of the Prospectus was amended to refer to the Directors’ intention, subject to the requirements of the Central Bank, to propose an ordinary resolution for the continuation of the Company at the annual general meeting to be held in 2017. If the continuation vote is not passed, the Directors will propose a reconstruction or winding-up of the Company, in accordance with applicable law and regulation and the terms of the Articles of Association, with an opportunity for shareholders to receive a cash exit for all of their shares at around realisable net asset value less costs.

The Company announced a Prospectus on 6 December 2011 in respect of the placing of US Dollar C shares. Various disclosures were updated in the Prospectus. In addition, the Prospectus was amended to remove all references to the issue and placing of Sterling C shares and to reflect the appointment of Dexion Capital plc as joint corporate broker and financial adviser of the Company.

On behalf of the Board of Directors:

Werner Schwanberg Fergus Sheridan Director Director

23 April 2012

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STATEMENT OF CUSTODIAN’S RESPONSIBILITIES AND CUSTODIAN’S REPORT TO THE SHAREHOLDERS

We have enquired into the conduct of Carador Income Fund plc (the “Company”) for the year ended 31 December 2011, in our capacity as Custodian to the Company.

This report including the opinion has been prepared for and solely for the shareholders in the Company, in accordance with the Central Bank of Ireland’s (the “Central Bank”) Non-UCITS Notice 7, and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown.

RESPONSIBILITIES OF THE CUSTODIANOur duties and responsibilities are outlined in the Central Bank’s Non-UCITS Notice 7. One of those duties is to enquire into the conduct of the Company in each annual accounting period and report thereon to the shareholders.

Our report shall state whether, in our opinion, the Company has been managed in that period in accordance with the provisions of the Company’s Memorandum and Articles of Association and the Non-UCITS Notices. It is the overall responsibility of the Company to comply with these provisions. If the Company has not so complied, we as Custodian must state why this is the case and outline the steps which we have taken to rectify the situation.

BASIS OF CUSTODIAN OPINIONThe Custodian conducts such reviews as it, in its reasonable opinion, considers necessary in order to comply with its duties as outlined in Non-UCITS Notice 7 and to ensure that, in all material respects, the Company has been managed (i) in accordance with the limitations imposed on its investment and borrowing powers by the provisions of the constitutional documentation and the appropriate regulations and (ii) otherwise in accordance with the Company’s constitutional documentation and the appropriate regulations.

OPINIONIn our opinion, the Company has been managed during the year, in all material respects:

(i) in accordance with the limitations imposed on the investment and borrowing powers of the Company by the Memorandum and Articles of Association and by the Central Bank under the powers granted to it by Part XIII of the Companies Act, 1990; and

(ii) otherwise in accordance with the provisions of the Memorandum and Articles of Association and Part XIII of the Companies Act, 1990.

State Street Custodial Services (Ireland) Limited78 Sir John Rogerson’s Quay Dublin 2 Ireland

23 April 2012

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Carador Income Fund PLC | Annual report and accounts 2011 | Financial statements and notes

FINANCIAL STATEMENTS AND NOTES

Financial statements and notes32 Independent auditors’ report to the members of Carador Income Fund PLC33 Statement of financial position34 Statement of comprehensive income35 Statement of changes in equity36 Statement of cash flows37 Notes to the financial statements

Other information60 Glossary of terms64 Summary of key financial information – unaudited65 Unaudited schedule of investments67 Portfolio changes – material acquisitions/ disposals – unaudited68 Management and administration

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INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CARADOR INCOME FUND PLC

We have audited the financial statements (“the financial statements”) of Carador Income Fund Plc for the year ended 31 December 2011 which comprise the statement of financial position, the statement of comprehensive income, the statement of changes in equity, the statement of cash flows and the related notes. These financial statements have been prepared under the accounting policies set out therein.

This report is made solely to the Company’s members, as a body, in accordance with section 193 of the Companies Act, 1990. 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 AUDITORSThe Directors responsibility for preparing the annual report and the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU), are set out in the statement of Directors’ responsibilities on pages 28 to 29.

Our responsibility is to audit the financial statements in accordance with the relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financial statements give a true and fair view in accordance with IFRSs as adopted by the EU, and have been properly prepared in accordance with the Companies Acts, 1963 to 2009.

We also report to you whether in our opinion proper books of account have been kept by the Company and whether the information given in the Directors’ report is consistent with the financial statements. In addition, we state whether we have obtained all the information and explanations necessary for the purposes of our audit, and whether the Company’s financial statements are in agreement with the books of account.

We also report to you if, in our opinion, any information specified by law or the Listing Rules of the London Stock Exchange regarding Directors’ remuneration and Directors’ transactions is not disclosed and, where practicable, include such information in our report.

We review whether the corporate governance statement reflects the Company’s compliance with the nine provisions of the UK Corporate Governance Code as published by the Financial Reporting Council in May 2010 specified for our review by the Listing Rules of the London Stock Exchange, and we report if it does not. We are not required to consider whether the Board’s statements on internal controls cover all risks and controls, or form an opinion on the effectiveness of the Company’s corporate governance procedures or its risk and control procedures.

We read the other information contained in the annual report, and consider whether it is consistent with the audited

financial statements. The other information comprises only the Chairman’s report, the Directors’ report, the Custodian’s report and the Investment Manager’s report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

BASIS OF AUDIT OPINIONWe conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements.

It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

OPINIONIn our opinion:• the financial statements give a true and fair view, in

accordance with IFRSs as adopted by the EU, of the state of the Company’s affairs as at 31 December 2011 and its profit for the year then ended; and

• the financial statements have been properly prepared in accordance with the Companies Acts, 1963 to 2009.

We have obtained all the information and explanations we considered necessary for the purposes of our audit. In our opinion, proper books of account have been kept by the Company. The financial statements are in agreement with the books of account.

In our opinion, the information given in the Directors’ report is consistent with the financial statements.

Colm Clifford for and on behalf of

KPMGChartered Accountants, Statutory Audit Firm 1 Harbourmaster Place IFSC Dublin1 Ireland

23 April 2012

33

STATEMENT OF FINANCIAL POSITIONAS AT 31 DECEMBER 2011


31 December 2011 31 December 2010 Notes US$ US$

ASSETSCash and cash equivalents 6 68,979,533 7,065,553Balance due from brokers 12 – 500,000Receivables related to investments and other receivables 4 9,054,803 3,601,415Derivative financial instruments 3, 11 46,336 68,231Financial assets designated at fair value through profit or loss 3, 12 265,695,249 153,621,291

TOTAL ASSETS 343,775,921 164,856,490

LIABILITIESDistribution payable 16 – 4,370,151Expenses payable 5 5,326,331 4,435,552Derivative financial instruments 3, 11 36,711 96,672

TOTAL LIABILITIES 5,363,042 8,902,375

NET ASSETS ATTRIBUTABLE TO PARTICIPATING EQUITY SHAREHOLDERS 338,412,879 155,954,115

NET ASSET VALUE PER PARTICIPATING € SHARE 0.6200 0.5677NET ASSET VALUE PER PARTICIPATING US DOLLAR SHARE 0.8100 0.7489NET ASSET VALUE PER PARTICIPATING US DOLLAR C SHARE 0.9636 –

These financial statements were authorised and approved for issue by the Directors on 23 April 2012 and signed on their behalf by:


The accompanying notes form an integral part of the financial statements.

34


STATEMENT OF COMPREHENSIVE INCOMEFOR THE YEAR ENDED 31 DECEMBER 2011

31 December 2011 31 December 2010 Notes US$ US$

Dividend income 2 – 152,218Interest income on cash and cash equivalents 2 1,606 1,583Miscellaneous income 55,432 – Net (loss)/gain on derivative financial instruments 2 (165,209) 74,396Net gain on foreign exchange 2 144,755 121,116Net gain on financial assets designated at fair value through profit or loss 2, 4 44,515,854 57,466,876

TOTAL REVENUE 44,552,438 57,816,189

Performance fees 5 (4,168,092) (4,006,412)Investment management fee 5 (3,038,833) (1,263,623)Custodian fee 5 (42,451) (38,802)Administration fee 5 (181,964) (106,759)Directors’ fees 5, 10 (284,588) (240,882)Audit fee 5 (152,753) (249,192)Operating expenses 5 (1,071,225) (556,047)

TOTAL OPERATING EXPENSES (8,939,906) (6,461,717)

PROFIT FOR THE YEAR ALL ATTRIBUTABLE TO THE PARTICIPATING EQUITY SHAREHOLDERS 35,612,532 51,354,472

Loss on foreign currency translation 2K – (7,788,332)

OTHER COMPREHENSIVE EXPENSE FOR THE YEAR – (7,788,332)

TOTAL COMPREHENSIVE INCOME FOR THE YEAR ALL ATTRIBUTABLE TO PARTICIPATING EQUITY SHAREHOLDERS 35,612,532 43,566,140

EARNINGS PER SHARE 14 Basic/diluted earnings per € share €0.09/€0.09 €0.18/€0.18Basic/diluted earnings per US Dollar share US$0.15/US$0.10 US$0.36/US$0.36Basic earnings per US Dollar C share** US$(0.02) –Basic earnings per US Dollar C share* US$0.02 –



These financial statements were authorised and approved for issue by the Directors on 23 April 2012 and signed on their behalf by:



35

STATEMENT OF CHANGES IN EQUITYFOR THE YEAR ENDED 31 DECEMBER 2011


Total Notes US$

AT 31 DECEMBER 2009 83,363,427

TRANSACTIONS WITH PARTICIPATING EQUITY SHAREHOLDERSIssue of participating shares 7 68,265,313Redemption of participating shares 7 (25,612,458)Distributions to participating equity shareholders (13,628,307)

TOTAL TRANSACTIONS WITH PARTICIPATING EQUITY SHAREHOLDERS 29,024,548Profit for the year all attributable to participating equity shareholders 51,354,472Other comprehensive income 2 (7,788,332)

TOTAL COMPREHENSIVE INCOME FOR THE YEAR ALL ATTRIBUTABLE TO PARTICIPATING EQUITY SHAREHOLDERS 43,566,140

AT 31 DECEMBER 2010 155,954,115

TRANSACTIONS WITH PARTICIPATING EQUITY SHAREHOLDERS Issue of participating shares 7 240,228,728Redemption of participating shares 7 (74,782,065) Distributions to participating equity shareholders (18,600,431)

TOTAL TRANSACTIONS WITH PARTICIPATING EQUITY SHAREHOLDERS 146,846,232Profit for the year all attributable to participating equity shareholders 35,612,532

TOTAL COMPREHENSIVE INCOME FOR THE YEAR ALL ATTRIBUTABLE TO PARTICIPATING EQUITY SHAREHOLDERS 35,612,532

AT 31 DECEMBER 2011 338,412,879

The issue and the redemption of participating shares include the non-cash switches between the share classes of US$74,782,065 (2010: US$25,612,458).


36


STATEMENT OF CASH FLOWSFOR THE YEAR ENDED 31 DECEMBER 2011

31 December 2011 31 December 2010 US$ US$

CASH FLOWS FROM OPERATING ACTIVITIESProfit for the year all attributable to the participating equity shareholders 35,612,532 51,354,472Adjustments for non-cash items and working capital:Increase in creditors 890,779 3,778,680(Increase) in debtors (4,953,388) (1,073,645)Net unrealised loss/(gain) on financial assets and derivatives at fair value 1,727,693 (54,047,795)Net realised (gain)/loss on disposal of financial assets at fair value (4,112,327) 10,890,142

NET CASH INFLOW FROM OPERATING ACTIVITIES 29,165,289 10,901,854

CASH FLOWS USED IN INVESTING ACTIVITIESPurchase of investments (168,807,190) (84,235,822)Disposal and paydowns of investments 59,079,800 35,105,371

NET CASH OUTFLOW USED IN INVESTING ACTIVITIES (109,727,390) (49,130,451)

CASH FLOWS FROM FINANCING ACTIVITIESDistributions to participating equity shareholders (22,970,582) (9,258,156)Issue of shares net of costs* 165,446,663 42,652,855

NET CASH INFLOW FROM FINANCING ACTIVITIES 142,476,081 33,394,699

Net increase/(decrease) in cash and cash equivalents 61,913,980 (4,833,898)CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 7,065,553 11,899,451

CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 68,979,533 7,065,553

* Issue of shares excludes non-cash switches between the share classes of US$74,782,065 (2010: US$25,612,458).


37

1 GENERAL

Carador Income Fund plc (the “Company”) is a closed-ended limited liability investment company domiciled and incorporated under the laws of Ireland with variable capital pursuant to the Companies Acts, 1963 to 2009 of Ireland. It was incorporated on 20 February 2006 under registration number 415764. The Company is authorised by the Central Bank pursuant to Part XIII of the Companies Act, 1990.

The Company’s share capital consists entirely of shares of no par value. The Company’s initial share capital was denominated in Euro. The Euro denominated shares were admitted to the Official List and began trading on the London Stock Exchange on 12 April 2006. The Company issued a US Dollar denominated share class at the time of the amalgamation of its wholly-owned subsidiary, Carador Guernsey Limited, with Abingdon Investment Limited on 9 December 2008 (the “Amalgamation”). The US Dollar denominated shares were admitted to the Official List and began trading on the London Stock Exchange on 9 December 2008. On 20 October 2010 and 22 November 2010 the Company had two further issuances of shares denominated in US Dollars. On 24 January 2011, the Company announced that it had raised a further US$17.4 million (before costs) through a placing of a total of 22,384,574 US Dollar shares (“the Placing Shares”) at a price of US$0.7754 per Placing Share. The Placing Shares were admitted to the Official List and to trading on the London Stock Exchange’s Main Market for listed securities on 26 January 2011. The Company announced on 15 August 2011 that it had raised approximately US$75 million (before costs) through a placing of US Dollar C shares in the Company. The issue price of each new US Dollar C share was US$1.00. The US Dollar C shares were admitted to the Official List and to trading on the London Stock Exchange’s Main Market for listed securities on 18 August 2011. The Company announced on 12 December 2011 that it had raised approximately US$77 million (before costs) through a placing of US Dollar C shares in the Company. The issue price of each new US Dollar C share was US$1.00. The US Dollar C shares were admitted to the Official List and to trading on the London Stock Exchange’s Main Market for listed securities on 15 December 2011.

The Company’s investment objective is to produce attractive and stable returns, with low volatility compared to equity markets, by investing in a diversified portfolio of senior and income notes of collateralised debt obligations collateralised by senior secured bank loans and income notes and mezzanine tranches of collateralised debt obligations.

The Company may issue one or more additional classes of shares on prior notice to and clearance by the Central Bank.

2 SIGNIFICANT ACCOUNTING POLICIES

2A STATEMENT OF COMPLIANCEThe financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and adopted by the European Union and Irish Company Law.

2B BASIS OF PREPARATIONThe financial statements have been prepared on a historical cost basis, except for financial instruments classified at fair value through profit or loss that have been measured at fair value.

For the current year the functional currency of the Company is US Dollar. The Directors have determined that this reflects the Company’s primary economic environment following various share issuances. The presentation currency of the Company is also US Dollar.

These financial statements are prepared on a company only basis, as the Company does not hold the majority of the risks and rewards of the underlying investments under SIC 12, with prior year comparatives presented on a similar company only basis.

2C CHANGES IN ACCOUNTING POLICIES AND DISCLOSURESNo changes in accounting policies were required by the Company during the year.

2D INTEREST AND DIVIDEND INCOME AND INTEREST EXPENSEIncome receivable on cash and cash equivalents and payable on overdrafts is recognised separately through profit or loss in the statement of comprehensive income on an effective interest rate yield basis. Dividend income is recognised through profit and loss on an ex-dividend basis. Dividend income is shown gross of any non-recoverable withholding taxes, which is disclosed separately in the statement of comprehensive income.

2E PARTICIPATING EQUITY SHARESThe shares of the Company inclusive of US Dollar C shares are classified as equity based on the substance of the contractual arrangements and in accordance with the definition of equity instruments under IAS 32.

The proceeds from the issue of participating shares are recognised in the statement of changes in equity net of the incremental issuance costs.

2F FEES AND CHARGES Expenses are charged through profit or loss in the statement of comprehensive income on an accruals basis.

NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 31 DECEMBER 2011


38

NOTES TO THE FINANCIAL STATEMENTS CONTINUED

FOR THE YEAR ENDED 31 DECEMBER 2011


2 SIGNIFICANT ACCOUNTING POLICIES CONTINUED

2G CASH AND CASH EQUIVALENTSCash comprises current 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 investments or other purposes.

2H NET REALISED GAINS OR LOSSES ON INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSSRealised gains or losses on investments pertain to gains or losses on disposal of investments at fair value through profit or loss calculated on a weighted average cost basis, coupons and receivables on investments and gains or losses on settlement of derivative financial instruments. The realised gains/losses are calculated as the difference between the disposal proceeds and the original purchase cost.

2I NET UNREALISED GAINS OR LOSSES ON INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSSNet unrealised gains or losses on investments at fair value through profit or loss pertain to the fair value movement, which is calculated as described in note 2j (iii).

2J FINANCIAL INSTRUMENTS AT FAIR VALUE

(i) ClassificationThe Company classifies its financial assets and financial liabilities into categories in accordance with IAS 39 Financial Instruments: Recognition and Measurement.

The category of financial assets and financial liabilities at fair value through profit or loss comprises:

Financial assets and financial liabilities designated at fair value through profit and lossFinancial assets classified in this category are designated by management on initial recognition as part of a group of financial assets and liabilities which are managed and their performance evaluated on a fair value basis, in accordance with a documented investment strategy. The term “financial assets designated at fair value through profit or loss” includes investments in collateralised loan obligations.

Financial instruments held for tradingDerivatives are categorised as held for trading, as the Company does not designate any derivatives as hedges for hedge accounting purposes as described under IAS 39. Derivatives include forward currency contracts. The fair value of forward currency contracts is calculated as the difference between the contracted rate and the current forward rate that would close out the contract on the Statement of Financial Position date. Changes in the fair value of the forward currency contracts are recorded in “Net gain/(loss) on derivative financial instruments”.

(ii) Initial measurementFinancial assets and financial liabilities are measured initially at fair value, being the transaction price, on the trade date. Transaction costs on these financial assets are expensed immediately.

(iii) Subsequent measurementAfter initial measurement, the Company measures financial instruments which are classified at fair value through profit or loss at their fair values. Changes in fair value are recorded within “Net gain/(loss) on financial assets designated at fair value through profit or loss” and “Net gain/(loss) on derivative financial instruments”. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-length transaction.

The following sources have been used to obtain fair value for the financial assets and liabilities of the Company:

1 where quoted prices in an active market are available for the financial assets and liabilities these are used to determine fair value of the respective financial instrument;

2 where the market for a financial instrument is not an active market the fair value on subsequent measurement is obtained through broker quotes or through the use of pricing services; and

3 where the fair value cannot be determined by reference to observable market quotes or broker quotes the entity estimates fair value through the use of a discounted cash flow model. There are a number of assumptions applied in determining the fair values of the financial assets whose fair value is estimated through the use of the discounted cash flow model.

39


2J FINANCIAL INSTRUMENTS AT FAIR VALUE CONTINUED

(iv) Offsetting financial instrumentsFinancial assets and liabilities are offset and the net amount reported in the statement of financial position where there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the assets and settle the liability simultaneously.

(v) DerecognitionThe Company derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire or it transfers the financial asset and the transfer qualifies for derecognition in accordance with IAS 39. The Company derecognises a financial liability when the obligation specified in the contract is discharged, cancelled or expires.

2K FOREIGN CURRENCYFor the current year the functional currency of the Company is US Dollar. The Directors have determined that this reflects the Company’s primary economic environment following the share issuances. The presentation currency of the Company is also US Dollar.

Transactions in foreign currencies are translated at the foreign currency exchange rate to the functional currency at rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated to US Dollar at the foreign currency closing exchange rate ruling at the statement of financial position date. Foreign currency exchange differences relating to investments designated at fair value through profit or loss are included in “Net gain/loss on financial assets designated at fair value through profit or loss”. All other foreign currency exchange differences relating to monetary items, including cash, are presented through profit or loss in the statement of comprehensive income.

For the purpose of presenting the financial statements of the Company, on 14 July 2010, the functional currency of the Company changed from Euro to US Dollar. Therefore in the prior year up to 14 July 2010, the financial information (for the time when the Euro was the functional currency) was retranslated into US Dollar as follows:

• the statements of financial position were translated to US Dollar at the exchange rate ruling at reporting year end dates;

• the statement of comprehensive income, proceeds from participating shares issued, amount paid on participating shares and statement of cash flows were translated at the US Dollar average rates where those rates represent a reasonable approximation to actual rates; and

• the statement of financial position at the date of change of functional currency was translated to US Dollar at the exchange rate ruling at that date.

2L TAXATIONUnder current law and Irish practice the Company qualifies as an investment undertaking under Section 739B of the Taxes Consolidation Act 1997 and is not therefore chargeable to Irish tax on its relevant income or relevant gains. No stamp, transfer or registration tax is payable in Ireland on the issue, redemption or transfer of shares in the Company. Distributions and interest on securities issued in countries other than Ireland may be subject to taxes including withholding taxes imposed by such countries. The Company may not be able to benefit from a reduction in the rate of withholding tax by virtue of the double taxation agreement in operation between Ireland and the other countries. The Company may not therefore be able to reclaim withholding tax suffered by it in particular countries.

To the extent that a chargeable event arises in respect of a shareholder, the Company may be required to deduct tax in connection with that chargeable event and pay the tax to the Irish Revenue Commissioners. A chargeable event can include payments to shareholders, appropriation, cancellation, redemption, repurchase or transfer of shares, or a deemed disposal of shares every eight years beginning from the date of acquisition of those shares. Certain exemptions can apply. To the extent that shareholders have appropriate tax declarations in place with the Company there may be no requirement to deduct tax.

2M DISTRIBUTIONSDistributions paid to the holders of participating shares are recorded through the statement of changes in equity when they are declared to shareholders.

2N LOANS AND RECEIVABLESLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, and they are carried at amortised cost. The Company includes in this category amounts receivable from brokers and other receivables. The amortised cost of a financial asset or liability is the amount at which the instrument is measured at initial recognition (its fair value) adjusted for initial direct costs, minus principle repayments, plus or minus the cumulative amortisation using effective interest method of any difference between the initial amount recognised and the maturity amount, minus, in the case of assets, any reduction for impairment.

40





2O OPERATING SEGMENTS An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the Company’s chief operating decision-maker and for which discrete financial information is available. In considering the segments of the Company, the Company has considered the information reviewed by the Investment Manager and the Directors being the Company’s chief operating decision-makers.

2P SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES The preparation of the financial statements requires management to make judgements, estimates and assumptions that effect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

When the fair value of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active market quotations or other observable inputs, they are determined using valuation techniques including the use of discounted cash flow models. The inputs to these models are taken from observable markets where possible but where this in not feasible, a degree of judgement is required in establishing fair values. The judgements include considerations of liquidity and model inputs such as credit risk, correlation and volatility. Changes in assumptions relating to these factors could affect the reported fair value of financial instruments. The models are calibrated regularly and tested for validity using prices from any observable current market transactions in the same instrument or based on observable market data. During the year ended 31 December 2011, there were no valuation techniques used as the fair value of the financial assets and liabilities was able to be derived from inputs that were observable either directly (as prices) or indirectly (derived from prices). In the year ended 31 December 2010, the key assumptions applied were base discount rate 40%, default rate 3% and severity loss 30%.

2Q NEW STANDARDS AND INTERPRETATIONS NOT ADOPTEDA number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2011. None of these are expected to have a significant effect on the measurement of the amounts recognised in the financial statements of the Company. However, IFRS 9, IFRS 10, IFRS 11, IFRS 12 and IFRS 13 were issued in May 2011 but are not yet effective.

In November 2009, the IASB issued IFRS 9 (2009), Financial Instruments, which was followed by IFRS 9 (2010) in October 2010. Both parts are effective for annual periods beginning after 1 January 2015. The standard provides guidance on the classification and measurement of financial assets and liabilities.

In May 2011, the IASB issued IFRS 10, Consolidated Financial Statements which is effective for annual periods beginning on or after 1 January 2013. The standard establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 replaces the consolidation requirements in SIC –12 Consolidation – Special Purpose Entities and IAS 27 Consolidated and Separate Financial Statements.

In May 2011, the IASB issued IFRS 11, Joint Arrangements which is effective for annual periods beginning on or after 1 January 2013. The standard establishes principles for financial reporting by parties to a joint arrangement.

In May 2011, the IASB issued IFRS 12, Disclosure of Interests in Other Entities which is effective for annual periods beginning on or after 1 January 2013. The standard requires entities to disclose the nature, risk and financial effects of its interests in other entities.

In May 2011, the IASB issued IFRS 13, Fair Value Measurement which is effective for annual periods beginning on or after 1 January 2013. The standard defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. an exit price).

The above standards have not yet been endorsed by the EU and the Company is currently assessing the impact of the standards.

41

3 FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS

As described in the accounting policies note, the Company has financial assets designated at fair value through profit or loss and derivative financial instruments held for trading. The following table shows financial instruments recognised at fair value, analysed between those whose fair value is based on:

– Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

– Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices); and

– Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

31 December 2011 Level 1 Level 2 Level 3 Total US$ US$ US$ US$

FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSSFinancial assets held for tradingDerivative financial assets – forward currency contracts – 46,336 – 46,336 Financial assets designated at fair value through profit or lossCollateralised loan obligations – 265,695,249 – 265,695,249

– 265,741,585 – 265,741,585

FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSSFinancial liabilities held for tradingDerivative financial liabilities – forward currency contracts – (36,711) – (36,711)

– (36,711) – (36,711)

31 December 2010 Level 1 Level 2 Level 3 Total US$ US$ US$ US$

FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSSFinancial assets held for tradingDerivative financial assets – forward currency contracts – 68,231 – 68,231Financial assets designated at fair value through profit or lossCollateralised loan obligations – 152,976,578 644,713 153,621,291

– 153,044,809 644,713 153,689,522

FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSSFinancial liabilities held for tradingDerivative financial liabilities – forward currency contracts – (96,672) – (96,672)

– (96,672) – (96,672)

When fair values of listed equity and debt securities as well as publicly traded derivatives at the reporting date are based on quoted market prices or binding dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs, the instruments are included within Level 1 of the hierarchy.

For collateralised loan obligations that have been categorised as Level 2, fair value has been determined using independent broker quotes based on observable inputs. If it cannot be verified that the valuation is based significantly on observable inputs, then the investments fall into Level 3.

The Company considers observable data to be that market data that is readily available, regularly distributed or updated, reliable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

For derivative valuations the Company uses widely recognised valuation models. For these financial instruments, inputs into models are market observable and are therefore included within Level 2.

42




3 FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS CONTINUED

There were no instruments classified as Level 3 at year end. In the prior year, the fair value of the CLO instruments classified as Level 3 was US$644,713. Instruments included in Level 3 are those for which there were significant unobservable inputs used in arriving at the valuation. In valuing such instruments the Company used a valuation model which was accepted in the industry. Some of the inputs to that model may not have been market observable and were therefore estimated based on assumptions. The model was calibrated to reflect performance of the investment in terms of overcollateralisation tests, weighted average spread of the underlying portfolio, weighted average rating factor of the underlying portfolio and Manager quality.

Transfers between Level 1 and 2There were no significant transfers between Level 1 and Level 2 during the year.

Level 3 reconciliationThe following table shows a reconciliation of all movements in the fair value of financial instruments categorised within Level 3 between the beginning and the end of reporting year. Total gains At 31 At 1 January recorded in December 2011 profit or loss Purchases Sales 2011 US$ US$ US$ US$ US$

FINANCIAL ASSETSFinancial assets designated at fair value through profit or loss: Collateralised loan obligations 644,713 781,924 – (1,426,637) –

TOTAL LEVEL 3 FINANCIAL ASSETS 644,713 781,924 – (1,426,637) –

Total (losses) At 31 At 1 January recorded in Transfers December 2010 profit or loss Purchases Sales to Level 2 2010 US$ US$ US$ US$ US$ US$

FINANCIAL ASSETSFinancial assets designated atfair value through profit or loss: Collateralised loan obligations 44,699,747 (166,051) – – (43,888,983) 644,713 Equities 389,018 – – – (389,018) –

TOTAL LEVEL 3 FINANCIAL ASSETS 45,088,765 (166,051) – – (44,278,001) 644,713

Collateralised loan obligations with a carrying amount of US$Nil (2010: US$44,278,001) were transferred from Level 3 to Level 2 due to an improvement in market conditions and an increase in market liquidity.

4 NET GAIN ON FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS

The split between the income and capital of net gain on financial assets designated at fair value through profit or loss according to the Prospectus was as follows: 31 December 2011 31 December 2010 US$ US$

Net gain on financial assets designated at fair value through profit or lossIncome 42,169,285 14,414,702Capital 2,346,569 43,052,174

44,515,854 57,466,876

Of the income amount, US$8,947,637 (2010: US$3,601,415) is a receivable from investments at the year end.

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5 FEES

The Investment Manager is entitled to receive a management fee from the Company of 1.5% per annum of the net asset value of the Company, calculated and payable monthly in arrears. The base management fee will be reduced to take into account any fees received by the Investment Manager or any of its associates or affiliates as a result of managing any CLO or collective investment scheme that the Company invests in, if such investment is or has been made in the primary market (i.e. the market in which investors have the first opportunity to buy a new security).

In addition, the Investment Manager is entitled to a performance fee in respect of the class of Euro shares equivalent to 13% of the amount by which the value of the financial year-end net asset value per Euro share plus dividends per Euro share paid in the period exceeds the value of the net asset value per Euro share, as increased by 12-month Euribor as at the last business day of the relevant accounting reference period plus 2%, as at the end of the most recent previous completed accounting period or, if greater, the net asset value per Euro share as at the end of the previous completed accounting reference period in respect of which a performance fee was paid.

The Investment Manager is entitled to a performance fee in respect of the US Dollar shares equivalent to 13% of the amount by which the value of the financial year-end net asset value per US Dollar share plus dividends per US Dollar share paid in the period exceeds the value of the net asset value per US Dollar share, as increased by the Hurdle Rate (as defined below) plus 2%, as at the end of the most recent previous completed accounting reference period or, if greater, the net asset value per US Dollar share as at the end of the previous completed accounting reference period in respect of which a performance fee was paid.

The “Hurdle Rate” shall be:

(a) in respect of any accounting reference period from the date of the Amalgamation until 31 December 2011, 12-month Euribor as at the last business day of the relevant accounting reference period;

(b) in respect of any accounting reference period after 31 December 2011, 12-month US Dollar Libor as at the last business day of the relevant accounting reference period.

Provided that if a Euro share performance fee or a US Dollar share performance fee was not paid in respect of the previous accounting reference period, Euribor or US Dollar Libor (as the case may be) shall be the annualised annually compounded Euro Inter-Bank Offered Rate or the US Dollar London Inter-Bank Offered Rate (as the case may be and taking into account the change in Hurdle Rate for the US Dollar Class referred to above) for 12-month deposits in respect of all previous relevant accounting periods since such Euro share performance fee or US Dollar share performance fee (as the case may be) was last paid.

The Investment Manager is entitled to a performance fee in respect of the US Dollar C shares equivalent to 13% of the amount by which the net asset value per US Dollar C share at the Class C Calculation Time plus dividends per US Dollar C share paid or declared in the period between the Issue and the Class C Calculation Time exceeds the Issue Price, as increased by 12-month US Dollar Libor as at the Class C Calculation Time plus 2%.

The performance fee is accrued on a monthly basis and is paid annually, or in respect of the US Dollar C shares following the relevant Class C Conversion, within 14 days of receipt of the calculation by the Company from the Administrator.

The calculation of the performance fee is verified by the Custodian.

The Company also reimburses the Investment Manager for all out-of-pocket expenses reasonably incurred in the performance of its duties.

The Administrator and Custodian shall be entitled to receive aggregate fees of up to 0.10% per annum of the net asset value of the Company for the provision, respectively, of administration, accounting, trustee and custodial services to the Company, subject to a minimum monthly fee of US$10,000.

During the year ended 31 December 2011, the Company incurred performance fees of US$4,168,092 (31 December 2010: US$4,006,412), Investment Manager fees of US$3,038,833 (31 December 2010: US$1,263,623), Custodian fees of US$42,451 (31 December 2010: US$38,802) and administration fees of US$181,964 (31 December 2010: US$106,759) respectively.

Of these, performance fees of US$4,168,092 (31 December 2010: US$4,006,412), Investment Manager fees of US$650,415 (31 December 2010: US$175,545), Custodian fees of US$18,324 (31 December 2010: US$5,436) and administration fees of US$76,511 (31 December 2010: US$10,443) was outstanding at year end.

The Directors are entitled to a fee in remuneration for their services at a rate to be determined from time to time by the Directors and disclosed in the financial statements. During the year ended 31 December 2011 the Company paid Directors’ fees of US$257,443 plus out of pocket expenses for the Directors of US$27,145 (31 December 2010: US$240,882), of which US$Nil (31 December 2010: US$68,812) was outstanding at the year-end.

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5 FEES CONTINUED

The Company incurred the following audit, assurance and tax fees during the year of which US$152,753 (31 December 2010: US$146,095) was outstanding at the year end. Year ended Year ended 31 December 2011*** 31 December 2010 US$ US$

Audit of individual accounts 125,991 146,095Other assurance services 13,999** 4,893*Tax advisory services – 98,204*

139,990 249,192

* The above amounts were not paid to the statutory auditors.** The above amounts were paid to the statutory auditors for work undertaken by them in relation to the issuance and conversion of the US Dollar C shares during the year.*** The above amounts incurred for the year ended 31 December 2011 are before the inclusion of VAT.

During the year ended 31 December 2011 the Company incurred other operating expenses of US$1,071,225 (31 December 2010: US$556,047) of which US$271,620 (31 December 2010: US$22,809) was outstanding at year end.

6 CASH BALANCES

Company cash balances are held with the State Street Bank and Trust Company.

7 PARTICIPATING SHARES

EURO/US DOLLAR SHARESThe authorised share capital of the Company shall not be less than the currency equivalent of €2 and the maximum issued share capital shall not be more than the currency equivalent of €500 billion divided into a specified number of shares of no par value. The issued share capital consists of 13,914,839 Euro shares (31 December 2010: 13,914,839), 312,627,080 US Dollar shares (31 December 2010: 194,146,304) and 76,839,740 US Dollar C shares (31 December 2010: Nil). The Company has allotted two subscriber shares of €1 each. These shares do not participate in the profits of the Company. Switching of shares between the classes are permitted on a quarterly basis subject to the prior consent of the Directors. The Euro and US Dollar class shares both participate in the profits of the Company and have equal voting rights. Shareholders of each class shall have one vote in respect of each whole share held.

US DOLLAR CLASS C SHARESRights as to capitalIf at any time a Class of C shares is in issue, the Directors shall establish a separate pool of assets and liabilities attributable to such Class of C shares and a single separate pool of assets and liabilities attributable to all Classes of General Pool shares (each, a “Pool”). For the avoidance of doubt, if a number of Classes of C shares are in issue, a separate Pool shall be established for each such Class. The Directors shall maintain all the assets, income, earnings, liabilities, expenses and costs of each Pool separate and separately identifiable from all other assets, income, earnings, liabilities, expenses and costs of the Company and the other Pools. Please see the Prospectus for the provisions that apply.

Voting and transferClass C shareholders shall have the right to attend, speak and vote at any general meetings of the Company and the relevant class, as the case may be, in accordance with the provisions of the Articles of Association. The Class C shares shall be transferable in the same manner as the General Pool shares in accordance with the provisions of the Articles of Association.

UndertakingsUntil the relevant Class C Conversion and without prejudice to its obligations under the Companies Acts and the Rules, the Company shall in relation to each Class of C shares:

a) procure that the Company’s books and records shall be operated so that the assets attributable to the C shares of the relevant class can, at all times, be separately identified and, in particular but without prejudice to the generality of the foregoing, the Company shall procure that separate cash and securities accounts shall be created and maintained in the books of the Company for the assets attributable to the C shares of the relevant class;

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7 PARTICIPATING SHARES CONTINUED

US DOLLAR CLASS C SHARES CONTINUEDb) allocate to the assets attributable to the C shares of the relevant class such proportion of the expenses or liabilities of the Company incurred or accrued between the date of issuance of the Class C shares and the Class C Calculation Time (both dates inclusive) as the Directors fairly consider to be attributable to the C shares of the relevant class; and

c) give appropriate instructions to the Investment Manager, the Custodian and the Administrator to manage the Company’s assets so that such undertakings can be complied with by the Company.

CONVERSIONSIn relation to each class of C shares, the C shares shall be converted, subject to the prior consent of the Directors, into General Pool shares of the corresponding class at the Class C Conversion Time in accordance with the provisions contained in the Prospectus.

On 24 January 2011, the Company announced that it had raised a further US$17.4 million (before costs) through a placing of a total of 22,384,574 US Dollar shares (“the Placing Shares”) at a price of US$0.7754 per Placing Share. The Placing Shares were admitted to the Official List and to trading on the London Stock Exchange’s Main Market for listed securities on 26 January 2011.

The Company announced on 15 August 2011 that it had raised approximately US$75 million (before costs) through a placing of US Dollar C shares in the Company. The issue price of each new US Dollar C share was US$1.00. The US Dollar C shares were admitted to the Official List and to trading on the London Stock Exchange’s Main Market for listed securities on 18 August 2011. The Company announced on 20 October 2011 that the conversion of such US Dollar C shares would result in the issuance of 1.2847 US Dollar shares for every 1 US Dollar C share held. This conversion took place on 31 October 2011 when the US Dollar C shares were delisted and 96,096,202 new US Dollar shares were admitted to the Official List and to trading on the London Stock Exchange.

The Company announced on 12 December 2011 that it had raised approximately US$77 million (before costs) through a placing of US Dollar C shares in the Company. The issue price of each new US Dollar C share was US$1.00. The US Dollar C shares were admitted to the Official List and to trading on the London Stock Exchange’s Main Market for listed securities on 15 December 2011.

It is the intention of the Directors that these shares will be converted to US Dollar shares when the proceeds have been fully invested.

ISSUED PARTICIPATING SHARES EUR shares US Dollar shares US Dollar C shares

ISSUED SHARES (NO. OF SHARES)Balance at 31 December 2010 13,914,839 194,146,304 –Issued during the year – 22,384,574 151,640,240 Conversion during the year – 96,096,202 (74,800,500)

Balance at 31 December 2011 13,914,839 312,627,080 76,839,740

EUR shares US Dollar shares

ISSUED SHARES (NO. OF SHARES)Balance at 31 December 2009 55,282,169 84,764,307Switches during the year (41,367,330) 43,762,157Issued during the year – 65,619,840

Balance at 31 December 2010 13,914,839 194,146,304

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7 PARTICIPATING SHARES CONTINUEDPARTICIPATING EQUITY Euro Class US Dollar Class US Dollar C Class** US Dollar C Class* Total US$ US$ US$ US$ US$

Balance at 31 December 2010 10,555,057 145,399,058 – – 155,954,115 Profit for the year all attributable to participating equity shareholders 1,812,406 33,593,162 (1,270,611) 1,477,575 35,612,532 Issue of participating shares – 91,621,293 75,302,945 73,304,490 240,228,728 Redemption of participating shares – – – (74,782,065) (74,782,065)Distribution to participating equity shareholders (1,169,695) (17,430,736) – – (18,600,431)

Balance at 31 December 2011 11,197,768 253,182,777 74,032,334 – 338,412,879



Euro class US Dollar class Total US$ US$ US$

Balance at 31 December 2009 32,906,268 50,457,159 83,363,427 Profit for the year all attributable to participating equity shareholders 6,545,620 44,808,852 51,354,472 Other comprehensive income (992,698) (6,795,634) (7,788,332)Issue of participating shares – 68,265,313 68,265,313 Redemption of participating shares (25,612,458) – (25,612,458)Distribution to participating equity shareholders (2,291,675) (11,336,632) (13,628,307)

Balance at 31 December 2010 10,555,057 145,399,058 155,954,115

The issue and the redemption of participating shares include the non-cash switches between the share classes of US$74,782,065 (2010: US$25,612,458).

CAPITAL MANAGEMENTThe Company is closed ended. The Company was established with an initial 15-year life. However, per the Prospectus dated 9 August 2011, under the section entitled “Life of the Company”, it is the Directors’ intention, subject to the requirements of the Central Bank, to propose an ordinary resolution for the continuation of the Company at the annual general meeting to be held in 2017. If the continuation vote is not passed, the Directors will propose a reconstruction or winding-up of the Company, in accordance with applicable law and regulation and the terms of the Articles of Association, with an opportunity for shareholders to receive a cash exit for all of their shares at around realisable net asset value less costs.

The Company has no externally imposed capital requirements, except for the initial subscriber share capital.

The Company’s objectives for managing capital are: – to invest the capital in investments meeting the description, risk exposure and expected return indicated in its Prospectus;– to achieve consistent returns while safeguarding capital by investing in CLOs backed by corporate loans or holding cash;– to maintain sufficient liquidity to meet the expenses of the Company and to meet distribution commitments; and– to maintain sufficient size to make the operation of the Company cost-efficient.

8 SOFT COMMISSIONSThere are no agreements for the provision of any services by means of soft commission.

9 OFF BALANCE SHEET ARRANGEMENTS

There are no off balance sheet arrangements during the year. At 31 December 2011 the fair value of investments is approximately US$265,695,249 (2010: US$153,621,291). These investments are non-recourse securities with no contingent liabilities where the Company’s maximum loss exposure is capped at the current carrying value.

47

10 RELATED PARTY TRANSACTIONS AND KEY MANAGEMENT PERSONNEL

TRANSACTIONS WITH ENTITIES WITH SIGNIFICANT INFLUENCEIn accordance with IAS 24 “Related Party Disclosures” the following note summarises related parties and related party transactions during the year. GSO Capital Partners International LLP act as Investment Manager to the Company. Investment Management Fees incurred by GSO Capital Partners International LLP amounted to US$3,038,833 (31 December 2010: US$1,263,623), of which US$650,415 (31 December 2010: US$175,545) were outstanding at the year end. Performance fees of US$4,168,092 (31 December 2010: US$4,006,412) were also incurred by the Investment Manager, of which US$4,168,092 (31 December 2010: US$4,006,412) were outstanding at the year end.

TRANSACTIONS WITH KEY MANAGEMENT PERSONNELDuring the year ended 31 December 2011, the Company incurred Directors’ fees and out of pocket expenses of US$284,588 (31 December 2010: US$240,882), of which US$Nil (31 December 2010: US$68,812) were outstanding at the year end. The listing of the members of the Board of Directors is shown on page 68.

No Director, nor the Company Secretary, had any beneficial interest in the shares of the Company during the year ended 31 December 2011 or during the year ended 31 December 2010.

The following Directors fees were incurred during the year: Year ended Year ended 31 December 2011 31 December 2010 US$ US$

Werner Schwanberg 37,729 64,042Claudio Albanese 43,943 17,789Adrian Waters 43,943 58,272Fergus Sheridan 43,943 39,909Edward D’Alelio 43,943 43,081Nicholas Moss 43,943 17,789

257,443* 240,882

* The above amount excludes out of pocket expenses for the Directors of US$27,145.

TRANSACTIONS WITH OTHER RELATED PARTIESGSO Capital Partners Employee Side by Side Fund LLC, employees of the Investment Manager, and Miguel Ramos Fuentenebro, the employee of the Investment Manager who manages the Carador portfolio, acquired a total of 1,179,932 US Dollar shares and 550,000 Euro shares respectively in May 2010, the shares were validly tendered by shareholders under a tender offer from them, representing approximately 1.2% of the issued shares of the Company at the time.

At 30 June 2011, GSO Capital Partners Employee Side by Side Fund LLC was terminated and the 12,524,424 US Dollar shares are now held directly by employees. This represents 4.01% of the total US Dollar class and 3.10% of the issued shares of the Company (31 December 2010: GSO Capital Partners Employee Side by Side Fund LLC had a holding of 12,524,424 US Dollar shares, representing 6.45% of the total US Dollar class. Together these holdings represented in aggregate approximately 6.30% of the issued shares of the Company.)

At 31 December 2011, Miguel Ramos Fuentenebro, has a holding of 673,772 US Dollar shares, 639,729 Euro shares, and 198,194 US Dollar C shares, together these holdings represent in aggregate approximately 0.37% of the issued shares of the Company (31 December 2010: Miguel Ramos Fuentenebro had a holding of 365,444 US Dollar shares, representing 0.19% of US Dollar class and 639,729 Euro shares, representing 4.60% of the Euro class).

48




The Company may invest in other entities and transactions that are managed directly or indirectly by the Investment Manager or any of its affiliates and as at 31 December 2011, 32.11% of the Company’s underlying investments are managed in this way and these are listed below:

CLO INVESTMENTS MANAGED BY GSO AND AFFILIATESInvestment Investment Manager

Callidus Debt Partners Fund Ltd 4A INC GSO/Blackstone Debt Funds Management LLCCallidus Debt Partners Fund Ltd 5A INC GSO/Blackstone Debt Funds Management LLCCallidus Debt Partners Fund Ltd 5X D GSO/Blackstone Debt Funds Management LLCCallidus Debt Partners Fund Ltd 5X INC GSO/Blackstone Debt Funds Management LLCCallidus Debt Partners Fund Ltd 6A INC GSO/Blackstone Debt Funds Management LLCCallidus Debt Partners Fund Ltd 6A D GSO/Blackstone Debt Funds Management LLCCallidus Debt Partners Fund Ltd 6X D GSO/Blackstone Debt Funds Management LLCCallidus Debt Partners Fund Ltd 7A SUB GSO/Blackstone Debt Funds Management LLCCallidus Debt Partners Fund Ltd 7X SUB GSO/Blackstone Debt Funds Management LLC Central Park CLO Ltd 2011-1A SUB GSO/Blackstone Debt Funds Management LLCGale Force CLO Ltd 2006-2A SUB GSO/Blackstone Debt Funds Management LLCGale Force CLO Ltd 2006-2X E GSO/Blackstone Debt Funds Management LLCGale Force CLO Ltd 2006-2X SUB GSO/Blackstone Debt Funds Management LLC Gale Force CLO Ltd 2007-3A D GSO/Blackstone Debt Funds Management LLCGale Force CLO Ltd 2007-3A E GSO/Blackstone Debt Funds Management LLCGale Force CLO Ltd 2007-3A INC GSO/Blackstone Debt Funds Management LLCGale Force CLO Ltd 2007-3X COM GSO/Blackstone Debt Funds Management LLC Gale Force CLO Ltd 2007-4A E GSO/Blackstone Debt Funds Management LLCGale Force CLO Ltd 2007-4A INC GSO/Blackstone Debt Funds Management LLCGreen Park CDO BV 2006-1X E Blackstone Debt AdvisorsHyde Park CDO BV 1X E Blackstone Debt AdvisorsInwood Park CDO Ltd 2006-1A E Blackstone Debt AdvisorsInwood Park CDO Ltd 2006-1A SUB Blackstone Debt AdvisorsInwood Park CDO Ltd 2006-1X SUB Blackstone Debt Advisors Morningside Park CLO Ltd 2010-1X E GSO/Blackstone Debt Funds Management LLCProspect Park CDO Ltd 2006-1X SUB Blackstone Debt AdvisorsRiverside Park CLO Ltd 2011-3X SNR GSO/Blackstone Debt Funds Management LLC

11 FINANCIAL DERIVATIVE INSTRUMENTS

The Company invests in underlying assets which are predominantly US Dollar and Euro denominated. The functional and presentational currency of the Company is US Dollar. The Company therefore has an economic exposure to changes in the exchange rate between Euro and the US Dollar which, if unhedged, has the potential to have a significant effect on returns. In addition, the Euro class is denominated in Euro. The Directors believe that it is in the best interests of shareholders for the Company to engage consistently in currency hedging solely to reduce the risk of currency fluctuations and the volatility of returns which may result from such currency exposure. This involves hedging, at the level of the Company, the Euro assets to US Dollar and, at a class level, the US Dollar exposure to the Euro class back to US Dollar, through the use of rolling forward foreign exchange transactions.

The Company utilised currency contracts for the purposes of efficient portfolio management during the year ended 31 December 2011. Details of the contracts open at year end are disclosed in note 12. Unrealised gains/(losses) resulting from these contracts are disclosed below. The fair value of forward foreign exchange contracts is calculated using valuation techniques based on observable market data.


Financial assets held for trading: – derivative financial instruments 46,336 68,231Financial liabilities held for trading: – derivative financial instruments (36,711) (96,672)

TOTAL FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING 9,625 (28,441)

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12 RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS

INTRODUCTIONRisk is inherent in the Company’s activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risks limits and other controls. The process of risk management is critical to the Company’s continuing profitability. The Company is exposed to market risk (which includes currency risk, interest rate risk and other price risk), and credit risk arising from the financial instruments it holds. Given the Company’s permanent capital structure as a closed-ended fund, it is not exposed to redemption risk. However the financial instruments include investments in collateralised loan obligations and derivative contracts traded over-the-counter which are not traded in an organised public market and which may be illiquid. As a result, the Company may not be able to promptly liquidate some of its investments in these instruments at an amount close to its fair value in order to meet its liquidity requirements or to respond to specific events such as deterioration in the credit worthiness of any particular issuer. It may be impossible to assess the exposure to risk in such circumstances.

RISK MANAGEMENT STRUCTUREThe Board of Directors is ultimately responsible for identifying and controlling risks. The Investment Manager also carries out ongoing monitoring of the risk. As a result, there are separate bodies for managing and monitoring risks at the Company.

RISK MEASUREMENT AND REPORTING SYSTEMThe Company’s risks are measured using a method which reflects both the expected loss likely to arise in normal circumstances and unexpected losses, which are an estimate of the ultimate actual loss based on models. The models makes use of the probabilities derived from historical experience, adjusted to reflect the economic environment.

Monitoring and controlling risks is primarily performed based on limits established by the Board. These limits reflect the business strategy and market environment of the Company as well as the level of risk that the Company is willing to accept. In addition, the Company monitors and measures the overall risk-bearing capacity in relation to the aggregate risk exposure across risks type and activities.

RISK MITIGATIONThe Company has investment guidelines that set out its overall business strategies, its tolerance for risk and its general risk management philosophy and has established processes to monitor and control economic hedging transactions in a timely and accurate manner. The Company uses derivatives and other instruments only in connection with its risk management activities, but not for trading purposes.

EXCESSIVE RISK CONCENTRATIONConcentration arises when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentration indicates the relative sensitivity of the Company’s performance to developments affecting a particular issuer, Manager, asset class or geographical location.

In order to avoid excessive concentration of risk, the Company’s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio. Identified concentration of credit risks are controlled and managed accordingly.

Carador’s investment guidelines specify, among others, that the Company must invest in a minimum of 20 separate transactions with a maximum exposure per investment, at the time of investment, of 20% of the net asset value. The Company also limits its exposure to transactions managed by the same portfolio manager to 15% of the net asset value, at the time of investment. However, if the portfolio manager is an affiliate of the Investment Manager, this limit is increased to 60% of the net asset value at the time of investment.

The concentration risk at 31 December 2011 and 31 December 2010 is disclosed within credit risk note 12 (A) and 12 (B).

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12 RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS CONTINUED

(A) MARKET RISKMarket risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices and includes interest rate risk, foreign currency risk and other price risks, such as index price risk. The Company uses derivative instruments to hedge the investment portfolio against currency risk.

The Company’s investments are in collateralised loan obligations vehicles. The CLO vehicles typically have no significant assets other than the loans as collateral. Accordingly, payments on the CLO securities are payable solely from the cash flows from the collateral, net of all management fees and other expenses. Payments to the Company as a holder of Income Notes and/or mezzanine notes, CLO vehicles are met only after payments due on the senior notes (and, where appropriate, the mezzanine notes) have been made in full.

The following table shows the securities held by the Company which are susceptible to market risk arising from uncertainties about interest rates, foreign currency fluctuation and future prices of the instruments. 31 December 2011 31 December 2010 US$ US$

Financial assets designated at fair value through profit or loss 265,695,249 153,621,291Derivative financial instruments – assets 46,336 68,231Derivative financial instruments – liabilities (36,711) (96,672)

(i) Interest rate riskThe majority of the Company’s financial assets are Income Notes and mezzanine tranches of cash flow CLOs. The Company’s investments have some exposure to interest rate risk but this is limited to floating Libor-based exposure for the CLO’s assets.

The following table shows the Directors’ best estimate of the sensitivity of the portfolio to stressed changes in interest rates, with all other variables held constant. The table assumes parallel shifts in the respective forward yield curves. 31 December 2011 31 December 2010 Possible effect on net assets effect on net assets reasonable and profit or loss and profit or loss change in rate US$ US$

–1% (1,503,327) (4,091,101) 1% 3,426,626 4,595,674

The following table shows the portfolio profile at 31 December 2011. 31 December 2011 31 December 2010

Investments related to floating rate notes 98% 97%Investments related to fixed rate notes 2% 3%

FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS 100% 100%

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(A) MARKET RISK CONTINUED(ii) Currency riskThe Company’s investments are denominated in Euro and US Dollar (the latter being the functional currency of the Company). It is therefore exposed to currency risk, as the value of the securities denominated in other currencies than the US Dollar will fluctuate due to changes in exchange rates. This exposure is mitigated by the use of monthly rolling forward currency contracts as hedges.

The tables below indicate the currencies to which the Company had significant exposure at 31 December 2011 on its trading monetary assets and liabilities. The analysis discloses the Directors’ best estimates of the effect of a reasonably possible movement of the currency rate against the Dollar with all other variables held constant on the profit and loss account. A negative amount in the table reflects a potential net reduction in profit and loss or net assets, while a positive amount reflects a net potential increase. 31 December 2011 31 December 2010 Possible 31 December 2011 effect on net assets 31 December 2010 effect on net assets change in net exposure and profit or loss net exposure and profit or loss exchange rate US$ US$ US$ US$

Euro/US Dollar +/–5% (450,224) (+/–) 6,137 181,109 (+/–) 2,551

The Company’s total net exposure in foreign currency exchange rates at the statement of financial position date was as follows:


TOTAL INVESTMENTS AND CASHEuro 8,511,996 16,146,675

TOTAL INVESTMENTS 8,511,996 16,146,675

PARTICIPATING SHARESEuro (11,199,176) (11,494,110)

TOTAL PARTICIPATING SHARES (11,199,176) (11,494,110)

Derivative financial instruments for assets (8,531,789) (15,164,473)Derivative financial instruments for participating shares 10,768,745 10,693,017

NET EXPOSURE (450,224) 181,109

At 31 December 2011 and 31 December 2010 the Company had open forward positions in the following contracts:

Contract Contract Maturity Ccy Ccy Unrealised date price date buy Amount sell Amount gain/(loss) US$

30/12/2011 0.7702 31/01/2012 US$ 8,531,789 EUR 6,599,466 (36,711)30/12/2011 0.7702 31/01/2012 EUR 8,329,784 US$ 10,768,745 46,336

Contract Contract Maturity Ccy Ccy Unrealised date price date buy Amount sell Amount gain/(loss) US$

31/12/2010 0.7454 31/01/2011 US$ 15,164,473 EUR 11,376,199 (96,672)31/12/2010 0.7454 31/01/2011 EUR 8,021,768 US$ 10,693,017 68,231

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(A) MARKET RISK CONTINUEDThe primary purpose of the Company’s foreign currency economic hedging activities is to protect against the economic volatility associated with investments denominated in foreign currencies and non-base currency denominated shares. The Company primarily utilises forward exchange contracts to economically hedge foreign currency denominated financial assets and participating shares. Increases or decreases in the Company’s foreign currency denominated financial assets and participating shares are largely offset by gains and losses on the economic hedging instruments. The Company does not use foreign currency forward exchange contracts or purchased currency options for trading purposes.

(iii) Index price riskIndex price risk is the risk that the fair value of the portfolio changes as the result of changes in the levels of fixed income and credit indices. Specifically, it is the Company’s portfolio of CLOs that may be affected by index price risk.

The Directors’ best estimate of the effect on the Company’s net assets and profit and loss due to a reasonably possible change in standard fixed income credit indices, with all other variable held constant is as follows.** Effect on net assets Effect on net assets and profit or loss and profit or loss Change in market Change in price (%) 31 December 2011 Change in price (%) 31 December 2010 Market indices* index (%) 31 December 2011 US$ 31 December 2010 US$

iTraxx LEVX +10% 0.48% 1,613,984 1.44% 2,353,855CDX LCDX +10% 15.69% 53,111,045 17.16% 28,125,152iTraxx Europe +10% 2.50% 8,461,386 2.50% 4,097,092CDX NA IG +10% 2.50% 8,461,386 5.00% 8,194,184

* Market indices are outlined in glossary of terms.** In practice the actual trading results may differ from the below sensitivity analysis and the difference could be material.

The table below contains the inputs that have been used for the Index price risk analysis table.

Estimated % of portfolio Estimated % of portfolio Change in market sensitivity to apply sensitivity to apply Market indices* index (%) 31 December 2011 31 December 2011 31 December 2010 31 December 2010

iTraxx LEVX +10% 2.00 2% 1.50 10%CDX LCDX +10% 2.00 78% 2.00 86%iTraxx Europe +10% 0.25 100% 0.25 100%CDX NA IG +10% 0.25 100% 0.50 100%

* Market indices are outlined in glossary of terms.

The definition for each of the columns is the following:

– market indices: relevant market indices to stress;

– change in market index: stress applied;

– estimated sensitivity: the Investment Manager’s view on the “beta” between the Company’s investments and the index; and

– % of portfolio to apply: based on asset allocation of the Company and the market indices.

In order to arrive at “Change in price” in the table above, the “Change in market index” was multiplied by “Estimated sensitivity” and “% of portfolio to apply”.

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(A) MARKET RISK CONTINUEDConcentration of index price riskThe table below analyses the Company’s concentration of index price risk by subsector in the secured loan asset class.

31 December 2011 31 December 2010 By asset class US$ US$

Broadly syndicated sub-investment grade secured loans – Europe 8,069,919 15,342,982Broadly syndicated sub-investment grade secured loans – North America 256,729,160 137,292,936Middle market secured loans – North America 896,170 985,373

265,695,249 153,621,291

The table below analyses the Company’s concentration of market price risk by geographical area. 31 December 2011 31 December 2010 US$ US$

Europe 8,069,919 15,342,982North America 257,625,330 138,278,309

265,695,249 153,621,291

(B) CREDIT RISKCredit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. It is the Company’s policy to enter into financial instruments with a range of reputable counterparties. Therefore, the Company does not expect to incur material credit losses on its financial instruments.

The table below analyses the Company’s maximum credit exposure to credit risk for the components of the statement of financial position, including derivative financial instruments. 31 December 2011 31 December 2010 US$ US$

Cash and cash equivalents 68,979,533 7,065,553Balances due from brokers – 500,000Financial assets designated at fair value through profit or loss 265,695,249 153,621,291Derivative financial instruments 46,336 68,231Receivables related to investments and other receivables 9,054,803 3,601,415

343,775,921 164,856,490

The cash and substantially all of the assets of the Company are held by its Custodian, State Street Custodial Services (Ireland) Limited. Bankruptcy or insolvency of the Custodian may cause the Company’s rights with respect to securities held by the Custodian to be delayed or limited. The Company monitors its risk by monitoring the credit quality and financial positions of the Custodian. State Street Corporation is the parent company of the Custodian, State Street Custodial Services (Ireland) Limited and the long-term rating of State Street Corporation as at 31 December 2011 was A1. As at 31 December 2011, the derivative financial instruments are transacted with State Street Bank London whose parent Company is also State Street Corporation which has a long-term rating of A1.

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(B) CREDIT RISK CONTINUEDThe Company also quantifies the exposure to the credit risk of all financial assets based on the country of registration (not necessarily asset class exposure):


Cayman Islands 256,729,160 90,379,901United States 896,170 51,294,185Ireland 2,741,921 3,594,228Netherlands 5,327,998 8,352,977

265,695,249 153,621,291

The table below summarises the Company’s portfolio concentrations as of 31 December 2011 and 31 December 2010.

Maximum portfolio Average holdings of a single asset portfolio holdings % of total portfolio % of total portfolio

31 December 2011 5.15% 1.30%31 December 2010 8.81% 1.92%

The below table summarises the portfolio by asset class and ratings of the portfolio as of 31 December 2011 and 31 December 2010.

31 December 2011 31 December 2010 By asset class: US$ US$

Senior CLO 1,586,250 11,518,401Mezzanine CLO 91,937,704 82,929,029Income Notes CLO 172,171,295 59,173,861

265,695,249 153,621,291

Senior investments were originally rated AAA/AA CLO notes, mezzanine investments were originally rated A/BBB/BB and Income Notes were Non Rated (“NR”).

The Company’s portfolio is partly invested in the Income Notes tranches of cash flow collateralised loan obligations which is subject to potential non-payment and is by definition, not rated securities. The Company assesses the quality of non-rated assets based on a fundamental analysis of the underlying loans in the respective portfolios and the effect of the liabilities and terms and conditions determined in the relevant CLO document in the expected cash flow allocation to the non-rated tranche.

For additional credit risk information please see portfolio top ten sector exposures, portfolio risk by seniority, portfolio top five exposures and top ten underlying loan level exposures on pages 2, 3, 9 and 12.

With the exception of investments in senior and mezzanine CLO notes, the Company will typically be in a first loss or subordinated position with respect to realised losses on the collateral of each investment. The leveraged nature of the Income Notes and the mezzanine notes, in particular, magnifies the adverse impact of collateral defaults.

The Company may be adversely impacted by an increase in its credit exposure related to investing and other activities. The Company is exposed to the potential for credit-related losses that can occur as a result of an individual, counterparty or issuer being unable or unwilling to honour its contractual obligations. These credit exposures exist within financing relationships, commitments, derivatives and other transactions. These exposures may arise, for example, from a decline in the financial condition of a counterparty, from entering into swap or other derivative contracts under which counterparties have obligations to make payments to us, from a decrease in the value of securities of third parties that the Company holds as collateral, or from extending credit through guarantees or other arrangements. As the Company’s credit exposure increases, it could have an adverse effect on the Company’s business and profitability if material unexpected credit losses occur.

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(C) LIQUIDITY RISKLiquidity risk is defined as the risk that the Company may not be able to settle or meet its obligations on time or at a reasonable price.

The Company does not currently use leverage and as a result it has no financing subject to margin calls which may force the Company to liquidate assets. The Company’s unleveraged capital structure reflects the long-term investment strategy and matches the illiquidity of the underlying investments.

The Company was established with an initial 15-year life. However, per the Prospectus dated 9 August 2011, under the section entitled “Life of the Company”, it is the Directors’ intention, subject to the requirements of the Central Bank, to propose an ordinary resolution for the continuation of the Company at the annual general meeting to be held in 2017. If the continuation vote is not passed, the Directors will propose a reconstruction or winding-up of the Company, in accordance with applicable law and regulation and the terms of the Articles of Association, with an opportunity for shareholders to receive a cash exit for all of their shares at around realisable net asset value less costs.

Given the Company’s permanent capital structure as a closed-ended fund, it is not exposed to redemption risk. However, the Company’s financial instruments include investments in collateralised debt obligations and derivative contracts traded over-the-counter which are not traded in an organised public market and which may be illiquid.

As at 31 December 2011, all of the Company’s liabilities were due within three months (31 December 2010: all due within three months).

(D) BALANCES DUE FROM BROKERSThe following table details the financial assets pledged as collateral for derivatives: 31 December 2011 31 December 2010 US$ US$

Balances due from brokers – 500,000

As at 31 December 2010, cash collateral was held with JP Morgan.

13 STOCKLENDING

The Company did not enter into any stocklending transactions during the year to which these financial statements relate.

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14 EARNINGS PER SHARE

The EPS is calculated by dividing the profit/(loss) for the year attributable to the participating shareholders by the weighted average number of shares outstanding in the year.

YEAR ENDED 31 DECEMBER 2011 Euro Class US Dollar Class US Dollar C Class** US Dollar C Class* € US$ US$ US$

Profit/(loss) for the year attributable to the participating equity shareholders 1,294,585 33,593,162 (1,270,611) 1,477,575 Number of ordinary shares for basic earnings per share 13,914,839 230,996,274 76,839,740 74,800,500

Basic Earnings Per Share 0.09 0.15 (0.02) 0.02

Euro Class US Dollar Class € US$

Profit for the year attributable to the participating equity shareholders 1,294,585 34,134,957Number of ordinary shares for diluted earnings per share 13,914,839 336,233,525

Diluted Earnings Per Share 0.09*** 0.10



YEAR ENDED 31 DECEMBER 2010 Euro Class US Dollar Class € US$

Profit for the year attributable to the participating equity shareholders 4,911,142 44,808,853Number of ordinary shares for basic earnings per share 27,160,494 126,106,737

Basic Earnings Per Share 0.18 0.36

Euro Class US Dollar Class € US$

Profit for the year attributable to the participating equity shareholders 4,911,142 44,808,853Number of ordinary shares for diluted earnings per share 27,160,494 126,106,737

Diluted Earnings Per Share 0.18*** 0.36***

*** The diluted earnings per share for the Euro Class and the US Dollar Class shareholders is the same as the basic earnings per share, as the impact would be anti-dilutive.

The diluted EPS shown above reflects the impact of potential conversions between share classes as disclosed in Note 7.

The Directors consider the key performance indicators for the Company to be the net asset value, net asset value per share and the quarterly dividends.

15 SEGMENTAL REPORTING

The Company’s identified reporting segments changed in 2011 following the issuance of the US Dollar C classes and are set out below. As required by IFRS8, Operating Segments, the information provided to the Board of Directors and Investment Manager, who are the Chief Operating Decision Makers, can be classified in the following segments:

Core share classes: consists of the Euro and US Dollar Class;

Former US Dollar C Class: consists of the US Dollar C Class issued on 15 August 2011 and converted on 20 October 2011; and

Current US Dollar C Class: consists of the US Dollar C Class issued on 12 December 2011.

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15 SEGMENTAL REPORTING (CONTINUED)

INFORMATION ABOUT REPORTABLE SEGMENTS Core Former US Dollar Current US Dollar US$ Share Classes C Class C Class Total

Net gain on financial assets designated at fair value through profit or loss 45,712,770 (6,291) (1,190,625) 44,515,854 Net (loss)/gain on derivative financial instruments (165,209) – – (165,209)Operating expenses (8,695,057) (173,947) (70,902) (8,939,906)

Total profit for reportable segments 36,852,504 180,238 (1,261,527) 35,410,739

Financial assets designated at fair value through profit or loss 248,369,737 – 17,325,512 265,695,249 Derivative financial instruments – net 9,625 – – 9,625 Receivables related to investments and other receivables 8,338,440 – 716,363 9,054,803 Cash and cash equivalents 12,908,863 – 56,070,670 68,979,533 Expenses payable (5,255,429) – (70,902) (5,326,331)

RECONCILIATION OF REPORTABLE SEGMENT TO PROFIT OR LOSSTotal profit for reportable segments 35,410,739

Other profit or loss – unallocated amounts Interest income on cash and cash equivalents 1,606 Miscellaneous income 55,432 Net gain on foreign exchange 144,755

Profit before tax for the year 35,612,532

In 2010, the Company had only one business segment which was the investments in collaterised loan obligations. Returns by geographical area are provided below: Europe North America Total US$ US$ US$

31 DECEMBER 2010Dividend income – 152,218 152,218 Net gain on financial assets designated at fair value 14,316,076 43,150,800 57,466,876

16 DISTRIBUTIONS

The Board declared the following distributions during the year:

PERIOD ENDED 31 MARCH 2011€0.0155 per Euro share US$0.0225 per US Dollar share

This distribution was paid on 3 May 2011 to shareholders on the share register as at the close of business on 26 April 2011.

PERIOD ENDED 30 JUNE 2011€0.0211 per Euro share US$0.0280 per US Dollar share

This distribution was paid on 5 August 2011 to shareholders on the share register as at the close of business on 29 July 2011.

PERIOD ENDED 30 SEPTEMBER 2011€0.0220 per Euro share US$0.0300 per US Dollar share

This distribution was paid on 31 October 2011 to shareholders on the share register as at the close of business on 28 October 2011.

There has been no dividend paid on the US Dollar Class C shares during the year ended 31 December 2011.

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17 SHARE REPURCHASE AGREEMENT

The Company entered into a share repurchase agreement, dated 11 February 2010, with RBS Hoare Govett Limited as adviser and corporate broker of the Company allowing its affiliate, The Royal Bank of Scotland N.V. (London Branch) (“RBS”) to purchase some of the shares of the Company, as part of the Company’s share buy back programme, from time to time at its absolute discretion on the following conditions:

The aggregate amount of shares acquired on behalf of the Company in connection with the programme shall not exceed €2 million.

The maximum price per share payable by RBS may not exceed the higher of:

i. 105% of the average of the official closing middle market prices for the five business days before the day on which the purchase is made;

ii. that stipulated in Article 5(1) of Commission Regulation (EC) 2273/2003 (Buy-back and Stabilisation Regulations); and

iii. the maximum prices per share payable by RBS may not exceed 80% of the last published net asset value per shares.

The maximum number of shares may not exceed the higher of:

i. the aggregate number of shares (of either class) to be acquired on behalf of the Company in connection with the programme shall not exceed 5 million shares;

ii. the aggregate value of shares (of either class) to be acquired on behalf of the Company in connection with the programme on a daily basis shall not exceed €100,000; and

iii. the aggregate value of shares (of either class) to be acquired on behalf of the Company in connection with the programme on a rolling ten business day basis shall not exceed €250,000.

During the year ended 31 December 2011, no shares had been repurchased under the share repurchase agreement.

18 EVENTS DURING THE YEAR

On 5 January 2011, the Company announced that effective as of midnight (Irish time) on 31 December 2010, the following changes were made to the Company: 1) the Administrator, Northern Trust International Fund Administration Services (Ireland) Limited, was replaced by State Street Fund Services (Ireland) Limited; and 2) the Custodian, Northern Trust Fiduciary Services (Ireland) Limited, was replaced by State Street Custodial Services (Ireland) Limited.

On the 4 January 2011, a supplement to the Prospectus of the Company dated 10 December 2010 was issued to reflect these changes.

On 24 January 2011, the Company announced that it had raised a further US$17.4 million (before costs) through a placing of a total of 22,384,574 US Dollar shares (“the Placing Shares”) at a price of US$0.7754 per Placing Share. The Placing Shares were admitted to the Official List and to trading on the London Stock Exchange’s Main Market for listed securities on 26 January 2011.

On 28 January 2011, the Company announced the appointment of Singer Capital Markets Limited as joint financial adviser and joint broker to the Company.

The Company announced on 11 August 2011 that a Prospectus in respect of a proposed placing of US Dollar C shares at US$1.00 per share, Euro C shares at €1.00 per share and Sterling C shares at £1.00 per share, each of no par value, had been filed with, and approved by, the Central Bank of Ireland as required by the Prospectus (Directive 2003/71/EC) Regulations 2005.

In accordance with the revised Prospectus of the Company dated 9 August 2011, the Company also announced that a review of the maturity profile of the Company’s current CLO investments and, on a “look-through” basis, the bank loan market indicates the potential for a significant amount of principal receipts in the period between 2016 and 2018. As a result, the Directors believe that it may be appropriate to allow shareholders to consider the continuation of the Company at an earlier date than the Company’s current winding up date in 2021. Therefore, it is currently the Directors’ intention, subject to the requirements of the Central Bank, to propose an ordinary resolution for the continuation of the Company at the annual general meeting to be held in 2017. If the continuation vote is not passed, the Directors will propose a reconstruction or winding up of the Company, in accordance with applicable laws and regulations and the terms of the Articles of Association, with an opportunity for the shareholders to receive a cash exit for all of their shares at around realisable net asset value less costs.

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18 EVENTS DURING THE YEAR (CONTINUED)

The Company announced on 15 August 2011 that it had raised approximately US$75 million (before costs) through a placing of US Dollar C shares in the Company. The issue price of each new US Dollar C share was US$1.00. The US Dollar C shares were admitted to the Official List and to trading on the London Stock Exchange’s Main Market for listed securities on 18 August 2011. On 20 October 2011, the Company announced that the US Dollar C shares that were in issue were converted into US Dollar shares at the following rate calculated in accordance with the Company’s Prospectus dated 9 August 2011, 1.2847 US Dollar shares for every 1 US Dollar C share (the “Conversion Ratio”). The US Dollar C shares were delisted on 31 October 2011 and an application was made for 96,096,202 new US Dollar shares to be admitted to the Official List and to trading on the London Stock Exchange from the same date. The new US Dollar shares arising on conversion rank pari passu with, and have the same rights as, the US Dollar shares of the Company already in issue.

Another revised Prospectus was announced on 6 December 2011 detailing a further proposed placing of US Dollar C shares and the Company announced on 12 December 2011 that it had raised approximately US$77 million (before costs) through a placing of US Dollar C shares in the Company. The issue price of each new US Dollar C share was US$1.00. The US Dollar C shares were admitted to the Official List and to trading on the London Stock Exchange’s Main Market for listed securities on 15 December 2011.

In addition, the Prospectus reflected the appointment of Dexion Capital plc as joint corporate broker and financial adviser of the Company effective from midnight (Irish time) on 28 September 2011. RBS Hoare Govett Ltd ceased to be joint financial adviser and joint corporate broker effective from midnight (Irish time) 28 September 2011.

19 SUBSEQUENT EVENTS

On 10 January 2012, the Company announced that, following the placing of the newly issued US Dollar C shares in December 2011, it had committed to six investments in the US Dollar C share portfolio with a total cost of approximately US$38.2 million.

On 18 January 2012, the Company announced that, to reflect the increased level of work undertaken by the Board in connection with the growth in the size of the Company, as provided for in the Prospectus dated 6 December 2011, the Company had resolved to increase the maximum level of Directors’ remuneration by 10% for the financial year ending 31 December 2012, to an aggregate maximum of EUR 235,950 (excluding taxes and withholdings).

On 24 January 2012, the Board declared a dividend of US$0.0320 per US Dollar share and €0.0250 per Euro share in respect of the period from 1 October 2011 to 30 December 2011 (3Q11: US$0.0300 and €0.0220). This dividend was paid on 6 February 2012 to shareholders on the register as at the close of business on 3 February 2012. The Board did not recommend payment of a dividend in respect of the US Dollar C shares for this period.

On 20 February 2012, the Company announced that, in accordance with the terms described in its Prospectus dated 6 December 2011, the Investment Manager had notified the Board of Directors that as at 17 February 2012, 88% of the assets attributable to the US Dollar C shares had been invested or committed to be invested in a portfolio consistent with the Company’s investment policy. As a result, the Board determined that the Class C Calculation Time (for the purposes of calculating the basis upon which the Company’s US Dollar C shares will convert into US Dollar shares) would be the close of business on 29 February 2012. The Company announced on 19 March 2012 that the conversion of such US Dollar C shares would result in the issuance of 1.2012 US Dollar shares for every 1 US Dollar C share. The US Dollar shares were admitted to the Official List and to trading on the London Stock Exchange on 26 March 2012.

The Board declared on 15 March 2012 a dividend of US$0.0330 per US Dollar share, €0.0250 per Euro share and US$0.0100 per US Dollar C share in respect of the period from 1 January 2012 to 31 March 2012 (4Q11: US$0.0320 and €0.0250; US Dollar C share – N/A). This dividend is payable on 26 March 2012 to shareholders on the register as at the close of business on 23 March 2012.

A notice of termination of the share repurchase agreement dated 11 February 2010 between the Company and RBS was served on RBS on 16 March 2012, terminating the agreement with effect from 30 March 2012.

No other events have occurred in respect of the Company subsequent to the year end that may be deemed relevant to the accuracy of these financial statements.

20 APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the Directors on 23 April 2012.

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Carador Income Fund PLC | Annual report and accounts 2011 | Other information

AMEND-TO-EXTENDThis technique allows an issuer to push out part of its loan maturities through an amendment, rather than a full-out refinancing. The new debt is pari passu with the existing loan. But because it matures later it carries a higher rate, and, in some cases, more attractive terms.

ARBITRAGE CDOA CDO in which the arranger sets out to acquire exposures to take advantage of the difference between spreads on the underlying portfolio and spreads on the CDO liabilities. CLOs are special-purpose vehicles set up to hold and manage pools of leveraged loans. The special-purpose vehicle is financed with several tranches of debt (typically a “AAA” rated tranche, a “AA” tranche, a “BBB” tranche, and a “BB” tranche) that have rights to the collateral and payment stream in descending order. In addition, there is an equity tranche, but the equity tranche is usually not rated. CLOs are created as arbitrage vehicles that generate equity returns through leverage. CLOs are usually rated by two of the three major ratings agencies and impose a series of covenant tests on collateral Managers, including minimum rating, industry diversification, and maximum default basket.

BALANCE SHEET CDOA CDO in which an issuing bank sells exposures that are already on its balance sheet. The first synthetic CDOs, issued in the late 1990s, were balance sheet transactions, designed to reduce banks’ regulatory capital charge on loans on their books.

BESPOKE CDOA synthetic CDO in which the investor chooses the names in the reference portfolio, the attachment and detachment points, and other details. The term bespoke is sometimes used to contrast single tranche CDOs with full capital structure deals. More commonly, the term is used to distinguish synthetic CDO tranches from index tranches which use standard portfolios.

BIDS-WANTED-IN-COMPETITION (BWIC)A list of positions on which a counterparty seeks competitive bids in the hope of achieving the best possible price.

CLOSCLOs are structured vehicles that issue different tranches of liabilities collateralised by senior secured bank loans.

CDX LCDXIndex consists of 100 reference entities, referencing first-lien loans listed on the Markit Syndicated Secured List.

CDX NA IGIndex composed of 125 investment grade entities domiciled in North America. Calculated by Markit.

CLO COVERAGE TESTSThe coverage tests in a CLO will include an interest coverage test and an overcollateralisation test with respect to each Class of Rated Notes. The Coverage Tests will be used primarily to determine whether and to what extent Interest Proceeds may be used to pay interest on any Deferrable Class and distribution on the Subordinated Securities and certain expenses, and whether Principal Proceeds may be reinvested in Collateral Obligations, or whether Principal Proceeds, Interest Proceeds and funds which would otherwise be used to pay interest on any Deferrable Class and distributions on the Subordinated Securities, and to pay certain expenses must instead be used to pay principal on the Rated Notes, to the extent necessary to cause the Coverage Tests to be met.

COMBINED CODEThe Combined Code refers to the Combined Code of Corporate Governance June 2008 issued by the Financial Reporting Council.

COVENANTSLoan agreements have a series of restrictions that dictate, to varying degrees, how borrowers can operate and carry themselves financially. The three primary types of loan covenants are affirmative, negative, and financial.

Affirmative covenants state what action the borrower must take to be in compliance with the loan, such as that it must maintain insurance.

Negative covenants limit the borrower’s activities in some way, such as regarding new investments. Negative covenants, which are highly structured and customised to a borrower’s specific condition, can limit the type and amount of investments, new debt, liens, asset sales, acquisitions and guarantees.

Financial covenants enforce minimum financial performance measures against the borrower, such as that he must maintain a higher level of current assets than of current liabilities. The presence of these maintenance covenants – so called because the issuer must maintain quarterly compliance or suffer a technical default on the loan agreement – is a critical difference between loans and bonds. In general, there are five types of financial covenants — coverage, leverage, current ratio, tangible net worth, and maximum capital expenditures.

GLOSSARY OF TERMS

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COVENANT-LITE LOANCovenant-lite loans are really just another type of syndicated loan facility. At the most basic level, covenant-lite loans are loans that have bond-like financial incurrence covenants rather than traditional maintenance covenants that are normally part and parcel of a loan agreement.

DIP LOANSDebtor-in-possession (DIP) loans are made to bankrupt entities. These loans constitute super-priority claims in the bankruptcy distribution scheme, and thus sit ahead of all prepretition claims. Many DIPs are further secured by priming liens on the debtor’s collateral.

DISCOUNTED OBLIGATIONIt means a loan which has been purchased at a price which is less than 85% (in most CLOs).

DISTRESSED EXCHANGESIs a negotiated tender in which classholders will swap their existing paper for a new series of bond that typically have a lower principal amount and, often, a lower yield. In exchange the bondholders might receive stepped-up treatment, going from subordinated to senior, say, or from unsecured to second-lien. Standard & Poor’s consider these programmes a default and, in fact, the holders are agreeing to take a principal haircut in order to allow the company to remain solvent and improve their ultimate recovery prospects. This technique is used frequently in the bond market but rarely for first-lien loans.

EQUITY CURESThese provisions allow issuers to fix a covenant violation by making an equity contribution. These provisions are generally found in private equity backed deals. The equity cure is a right, not an obligation.

EXIT LOANSThese are loans that finance an issuer’s emergence from bankruptcy. Typically, the loans are prenegotiated and are part of the company’s reorganisation plan.

INSTITUTIONAL TERM LOANAn institutional term loan (B-term, C-term, or D-term loans) is a term loan facility carved out for non-bank, institutional investors. These loans came into broad usage during the mid-1990s as the institutional loan investor base grew.

INTEREST COVERAGE TEST (IC TEST)In a cash flow CDO, a measure to protect senior note holders in the event of a reduction in the cash flows produced by the portfolio collateral. If a deal starts to fail its IC test, cash flows are diverted from more junior classes of notes to pay down the liabilities in order of seniority until the deal is back in compliance with the test. The IC test is passed if the interest coverage ratio exceeds a predefined level. The IC ratio is calculated as the proceeds from interest payments on the collateral over a given period divided by the interest payments due on the deal’s notes over the same period.

INSTITUTIONAL DEBTInstitutional debt consists of term loans structured specifically for institutional investors, although there are also some banks that buy institutional term loans. These tranches include first- and second-lien loans, as well as prefunded letters of credit. Traditionally, institutional tranches were referred to as TLbs because they were bullet payments and lined up behind TLas.

ITRAXX LEVXIndex consists of 35 equally weighted European reference entities, referencing first-lien loans. Calculated by Markit.

ITRAXX EUROPEIndex composed of 125 investment grade entities domiciled in Europe. Calculated by Markit.

LCDSLoan credit default swaps (LCDS) are standard derivatives that have secured loans as reference instruments. The seller is paid a spread in exchange for agreeing to buy at par, or a pre-negotiated price, a loan if that loan defaults.

LCDXIntroduced in 2007, the LCDX is an index of 100 LCDS obligations that participants can trade. The index provides a straightforward way for participants to take long or short positions on a broad basket of loans, as well as hedge their exposure to the market. Markit Partners administers the LCDX. According to the primer posted by Markit, “the two events that would trigger a payout from the buyer (protection seller) of the index are bankruptcy or failure to pay a scheduled payment on any debt (after a grace period), for any of the constituents of the index.”

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LIBOR FLOORSAs the name implies, LIBOR floors put a floor under the base rate for loans. If a loan has a 3% LIBOR floor and three-month LIBOR falls below this level, the base rate for any resets default to 3%.

LEVERAGED LOANSStandard & Poor’s LCD definition includes loans rated “BB+” or lower or if not rated or rated “BBB+” or higher a loan that has (1) a spread of LIBOR +125 or higher and (2) is secured by a first or second lien.

MANAGED CDOA CDO in which a portfolio manager is appointed and paid a fee to make changes to the collateral or reference portfolio during the life of the transaction. The life of a managed deal can be divided into three phases. The first is the ramp-up, lasting up to a year, during which the Manager invests the proceeds of the sale of the CDO’s securities. Second is the reinvestment period, where the Manager actively manages the CDO collateral, reinvesting cash flows as well as buying and selling assets. In the final period the collateral matures or is sold and the investors are repaid.

MIDDLE MARKETIn the leveraged loan market, an issuer with no more than US$50 million of EBITDA.

PARTICIPATIONA participation is an agreement between an existing lender and a participant. As the name implies, it means the buyer is taking a participating interest in the existing lender’s commitment. The lender remains the official holder of the loan, with the participant owning the rights to the amount purchased.

PRIME FUNDSPrime funds are mutual funds that invest in leveraged loans. Prime funds were first introduced in the late 1980s. Most of the original prime funds were continuously offered funds with quarterly tender periods. Managers then rolled true closed-end, exchange-traded funds in the early 1990s.

PRO RATA DEBTPro rata debt consists of the revolving credit and amortising term loan (TLa), which are packaged together and, usually, syndicated to banks. Arrangers historically syndicated revolving credit and TLas on a pro rata basis to banks and finance companies.

ORIGINAL ISSUE DISCOUNTS (OID)The OID, the discount from par at loan, is offered in the new issue market as a spread enhancement.

OVERCOLLATERALISATION TEST (OC TEST)Most cash flow CDOs include measures to protect senior note holders in the event of deterioration in the par value of the collateral portfolio. This is known as an overcollateralisation (OC) test or par coverage test. If a deal starts to fail its OC test, cash flows are diverted from more junior classes of notes to pay down the liabilities in order of seniority until the deal is back in compliance with the test. The OC test is passed if the overcollateralisation ratio exceeds a predefined level.

The OC ratio is the par value of the portfolio collateral divided by the par value of the deal’s liabilities. Therefore, paying down the most senior notes should increase the OC ratio by decreasing the size of the deal’s liabilities. A deteriorating OC ratio usually indicates a decline in the credit quality of the portfolio. The par value of the portfolio will decline if there are defaults in the portfolio.

In most cash flow CDOs, discounted assets and the downgrade of a portfolio asset to a distressed rating (such as triple C, see “Excess CCC obligations”) will also reduce the par value of the portfolio if the percentage of CCC rated obligations exceed a certain threshold.


GLOSSARY OF TERMSCONTINUED

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SECOND-LIEN LOANSThe claims on collateral of second-lien loans are behind those of first-lien loans. Second-lien loans also typically have less restrictive covenant packages, in which maintenance covenant levels are set wide of the first-lien loans.

SPECIAL PURPOSE VEHICLE (SPV)Also known as special purpose company, a company created for the sole purpose of acquiring certain assets or derivative exposures and issuing liabilities that are thereby linked solely to those assets or exposures. An SPV is designed to be “bankruptcy remote” – that is, unlikely to be subject to bankruptcy proceedings. SPVs are used to issue all kinds of asset-backed securities, as well as cash CDOs and credit linked notes.

SUBORDINATIONThe amount of losses a portfolio has to experience before a CDO tranche suffers any loss.

TERM LOAN A (“TLA”)An amortising term loan (A-term loans, or TLa) is a term loan with a progressive repayment schedule that typically runs six years or less. These loans are normally syndicated to banks along with revolving credits as part of a larger syndication.

VOTING RIGHTSAmendments or changes to a loan agreement must be approved by a certain percentage of lenders. Most loan agreements have three levels of approval: required-lender level, full vote, and supermajority:

The “required-lenders” level, usually just a simple majority, is used for approval of non-material amendments and waivers or changes affecting one facility within a deal.

A full vote of all lenders, including participants, is required to approve material changes such as RATS (rate, amortisation, term, and security; or collateral) rights, but, as described below, there are occasions when changes in amortisation and collateral may be approved by a lower percentage of lenders (a supermajority).

A supermajority is typically 67% to 80% of lenders and is sometimes required for certain material changes such as changes in amortisation (in-term repayments) and release of collateral. Used periodically in the mid-1990s, these provisions fell out of favour by the late 1990s.

WATERFALL (PRIORITY OF PAYMENT)Payments in a CLO may be sequential or pro rata and the scheme may vary if certain tests are breached. The waterfall incorporates any overcollateralisation (“OC”) or interest-coverage (“IC”) tests that divert cash flows to more senior classes upon a breach. There may also be “reinvestment” OC tests that require proceeds to be set aside for the purchase of new collateral, rather than the paying down of liabilities. OC and IC tests may be satisfied first using either Interest Proceeds or Principal Proceeds. Any relevant fees, expenses and accounts must be reflected in the waterfall as well. The waterfall may also change when the Reinvestment Period ends.

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Year ended Year ended Year ended Period ended Year ended 31 December 2011 31 December 2010 31 December 2009 31 December 2008 31 March 2008

NAV US$338,412,879 US$155,954,115 US$83,363,427 €65,253,290 €33,953,572NAV per share US Dollar class US$0.8100 US$0.7489 US$0.5699 US$0.648 N/A US Dollar C class US$0.9636 – – – – Euro class €0.6200 €0.5677 €0.4418 €0.4662 €0.6787Shares at year end US Dollar class 312,627,080 194,146,304 84,764,307 56,184,881 N/A US Dollar C class 76,839,740 – – – – Euro class 13,914,839 13,914,839 55,282,169 83,799,318 50,025,000Income per Prospectus (inclusive of interest income on cash and cash equivalents) US$42,170,891 US$14,568,503 US$11,782,206 €5,119,389 €6,134,046Value of investments US$265,695,249 US$153,621,291 US$69,055,291 €65,347,223 €29,496,338Number of investments 77 54 39 45 36

The Company completed the Amalgamation with Abingdon Investment Limited by way of an Amalgamation of Carador Guernsey Limited, then a wholly owned subsidiary of the Company, effective 9 December 2008. A US Dollar class was created on the date of the Amalgamation, 9 December 2008. The year end of the Company was then changed from 31 March to 31 December starting in 2008.

The year end exchange rate was EUR: US$1.29815 (31 December 2010: US$1.34155). The average rate for the year was EUR: US$1.39999 (31 December 2010: US$1.33281).

As at 31 December 2011 and 31 December 2010, the Directors have determined that the net asset value per share published approximated the one presented in the financial statements.


SUMMARY OF KEY FINANCIAL INFORMATION (UNAUDITED)

65


Nominal Market % of net holdings value US$ asset value

COLLATERALISED LOAN AND DEBT OBLIGATIONSREGION OF TRADENorth AmericaCOUNTRY OF INCORPORATIONCayman Islands (December 2010: 57.97%)ACA CLO Ltd (Preference Shares) 2,200,000 1,628,943 0.48 Apidos CDO 2006-4A E 4,000,000 2,529,000 0.75 Apidos CDO 2011-8A D 6,200,000 4,531,704 1.34 ARES CLO Ltd 2007-11A E 5,000,000 3,458,250 1.02 ARES CLO Ltd 2007-12X E 17,392,792 13,039,376 3.86 Babson CLO Ltd 2005-2A D1 1,299,892 912,654 0.27 Babson CLO Ltd 2005-2A SUB 12,050,000 8,899,759 2.63 Blackrock Senior Income Series Corp 2004-1A D1 1,167,132 984,050 0.29 BlueMountain CLO Ltd 2007-3A E 3,150,000 1,873,872 0.55 Callidus Debt Partners Fund Ltd 7A SUB 9,350,000 6,046,187 1.79 Callidus Debt Partners Fund Ltd 4A INC 5,850,000 3,456,292 1.02 Callidus Debt Partners Fund Ltd 6A D 4,000,000 2,911,547 0.86 Callidus Debt Partners Fund Ltd 6A INC 12,500,000 12,708,870 3.77 Callidus Debt Partners Fund Ltd 5A INC 4,700,000 4,051,484 1.20 Callidus Debt Partners Fund Ltd 7X SUB 4,750,000 3,071,812 0.91 Callidus Debt Partners Fund Ltd 6X D 4,000,000 2,911,547 0.86 Callidus Debt Partners Fund Ltd 5X D 2,000,000 1,230,680 0.36 Callidus Debt Partners Fund Ltd 5X INC 7,000,000 6,006,639 1.77 Celerity CLO Ltd 2004-1A E 1,671,545 1,454,522 0.43 Central Park CLO Ltd 2011-1A SUB 2,858,500 2,434,428 0.72 CSAM Funding 1A D1 1,800,000 1,773,225 0.52 CSAM Funding 1X D1 1,000,000 985,125 0.29 Denali Capital CLO II Ltd (Preference Shares) 2,000,000 897,498 0.27 Eaton Vance CDO Ltd 2006-8I SUB 2,500,000 2,103,582 0.62 Eaton Vance CDO Ltd 2006-8X SUB 1,500,000 1,237,688 0.37 Foothill CLO Ltd 2007-1A SUB 9,200,000 9,509,101 2.81 Franklin CLO Ltd 6X E 5,277,918 3,442,786 1.02 Galaxy CLO Ltd 2006-7X SUB 2,000,000 1,406,238 0.42 Gale Force CLO Ltd 2006-2A SUB 17,000,000 9,036,838 2.67 Gale Force CLO Ltd 2007-3A E 1,600,000 1,012,373 0.30 Gale Force CLO Ltd 2007-3A INC 7,000,000 4,568,221 1.35 Gale Force CLO Ltd 2007-3A D 4,100,000 2,578,900 0.76 Gale Force CLO Ltd 2007-4A E 12,900,000 9,080,525 2.68 Gale Force CLO Ltd 2007-4A INC 19,352,000 13,672,838 4.04 Gale Force CLO Ltd 2006-2X E 2,000,000 1,357,500 0.40 Gale Force CLO Ltd 2006-2X SUB 2,000,000 1,063,157 0.31 Gale Force CLO Ltd 2007-3X COM 2,447,475 4,844,849 1.43 ING Investment Management 2007-5A SUB 9,000,000 8,502,195 2.51 ING Investment Management CLO II Ltd (Preference Shares) 3,700 2,823,615 0.83 ING Investment Management CLO II Ltd (Preference Shares) 8,000 6,449,515 1.91 Inwood Park CDO Ltd 2006-1A E 3,000,000 1,890,000 0.56 Inwood Park CDO Ltd 2006-1A SUB 1,000,000 593,387 0.18 Inwood Park CDO Ltd 2006-1X SUB 4,000,000 2,517,175 0.74 Kingsland Ltd 2006-3A D2 2,000,000 1,579,700 0.47 LCM LP 2A E1 2,006,110 1,776,745 0.53 Morningside Park CLO Ltd 2010-1X E 2,000,000 1,695,867 0.50 Mountain View Funding CLO 2006-2A E 5,000,000 2,917,750 0.86 Mountain View Funding CLO (Preference Shares) 1,000,000 681,864 0.20 NYLIM Flatiron CLO Ltd 2006-1X SUB 2,000,000 1,355,912 0.40 Octagon Investment Partners VII Ltd 2004-7A B2L 2,622,755 2,139,215 0.63 Octagon Investment Partners VII Ltd 2004-7X B2L 858,356 700,107 0.21 Octagon Investment Partners XI Ltd 2007-1A INC 11,500,000 11,780,458 3.48 Prospect Park CDO Ltd 2006-1X SUB 3,000,000 1,889,801 0.56

UNAUDITED SCHEDULE OF INVESTMENTSAS AT 31 DECEMBER 2011

66

Nominal Market % of net holdings value US$ asset value

COLLATERALISED LOAN AND DEBT OBLIGATIONS CONTINUEDREGION OF TRADENorth AmericaCOUNTRY OF INCORPORATIONCayman Islands (December 2010: 57.97%)Rampart CLO Ltd 2007-1A SUB 5,000,000 3,856,123 1.14Riverside Park CLO Ltd 2011-3X SNR 10,000,000 6,743,000 1.99 Saturn CLO Ltd 2007-1A D 2,170,000 1,260,987 0.37 Saturn CLO Ltd 2007-1X D 2,030,000 1,179,633 0.35 Silverado CLO Ltd 2006-1X NOTE 6,750,000 4,412,549 1.30 Stanfield Azure CLO Ltd (Preference Shares) 75,000 4,350,404 1.29 Stanfield Daytona CLO Ltd 2007-1A C1 6,150,000 4,616,642 1.36 Stanfield Daytona CLO Ltd 2007-1X C1 2,000,000 1,501,347 0.44 Stanfield McLaren CLO Ltd 2007-1X B2L 1,902,577 1,244,428 0.37 Stone Tower CLO Ltd 2007-6A SUB 3,000,000 2,510,178 0.74 Stone Tower CLO Ltd 2007-6X SUB 5,000,000 4,202,329 1.24 Stone Tower CLO Ltd 2006-5X SUB 2,000,000 1,456,576 0.43 Stone Tower CLO Ltd 2007-7X SUB 7,500,000 5,983,253 1.77 Stone Tower CLO VI Ltd (Preference Shares) 600 505,241 0.15 Symphony CLO Ltd 2007-4A E 1,500,000 1,021,400 0.30 Trimaran CLO Ltd (Preference Shares) 7,000,000 4,507,959 1.33 Venture CDO Ltd 2006-7A INC 2,000,000 1,837,995 0.54 Westbrook CLO Ltd 2006-1A E 3,000,000 1,947,500 0.58 Westbrook CLO Ltd 2006-1X B 2,000,000 1,586,250 0.47

256,729,160 75.87

United States (December 2010: 32.89%)Sargas CLO I Ltd 2006-1X SUB 1,500,000 896,170 0.26

896,170 0.26

EuropeCOUNTRY OF INCORPORATIONIreland (December 2010: 2.30%)Dryden Leveraged Loan CDO 2002-II 2006-14EX E 4,687,474 2,741,921 0.81

Netherlands (December 2010: 5.35%)Base CLO I BV 2008-1X E 3,000,000 2,684,250 0.79Green Park CDO BV 2006-1X E 1,500,000 837,307 0.25Hyde Park CDO BV 1X E 3,000,000 1,806,441 0.53

5,327,998 1.57

TOTAL COLLATERALISED DEBT OBLIGATIONS (DECEMBER 2010: 98.51%) 265,695,249 78.51

FINANCIAL DERIVATIVE INSTRUMENTS (DECEMBER 2010: (0.02%))OPEN FORWARD FOREIGN EXCHANGE CURRENCY CONTRACTS (DECEMBER 2010: (0.02%))

Contract Contract Maturity Currency Currency Unrealised % of net date price date buy Amount sell Amount gain/(loss) asset value

30/12/2011 0.7702 31/01/2012 USD 8,531,789 EUR 6,599,466 (36,711) (0.01)30/12/2011 0.7702 31/01/2012 EUR 8,329,784 USD 10,768,745 46,336 0.01

NET UNREALISED GAIN ON OPEN FORWARD FOREIGN EXCHANGE CURRENCY CONTRACTS 9,625 0.00

TOTAL FINANCIAL DERIVATIVE INSTRUMENTS (DECEMBER 2010: (0.02%)) 9,625 0.00

TOTAL INVESTMENTS AND DERIVATIVES AT FAIR VALUE (DECEMBER 2010: 98.49%) 265,704,874 78.51OTHER ASSETS (DECEMBER 2010: 7.16%) 78,034,336 23.06OTHER LIABILITIES (DECEMBER 2010: (5.65%)) (5,326,331) (1.57)TOTAL NET ASSETS ATTRIBUTABLE TO EQUITY PARTICIPATING SHAREHOLDERS 338,412,879 100.00


UNAUDITED SCHEDULE OF INVESTMENTSAS AT 31 DECEMBER 2011

CONTINUED

67


PORTFOLIO CHANGES – MATERIAL ACQUISITIONS/DISPOSALS (UNAUDITED)


Quantity US$ Acquisitions purchased costs

Callidus Debt Partners Fund Ltd 6A INC 12,500,000 14,312,500 Foothill CLO Ltd 2007-1A SUB 9,200,000 9,752,000 Babson CLO Ltd 2005-2A SUB 12,050,000 9,218,250 ING Investment Management CLO 2007-5A SUB 9,000,000 8,640,000 Riverside Park CLO Ltd 2011-3X SNR 10,000,000 7,300,000 Callidus Debt Partners Fund Ltd 7A SUB 9,350,000 6,813,252 Trimaran CLO Ltd (Preference Shares) 7,000,000 6,324,500 ING Investment Management CLO II Ltd (Preference Shares) 8,000 6,278,750 Stone Tower CLO Ltd 2007-7X SUB 7,500,000 6,187,500 Stanfield Daytona CLO Ltd 2007-1A C1 6,150,000 4,920,000 Silverado CLO Ltd 2006-1X NOTE 6,750,000 4,792,500 Stanfield Azure CLO Ltd (Preference Shares) 75,000 4,675,000 Rampart CLO Ltd 2007-1A SUB 5,000,000 4,600,000 Callidus Debt Partners Fund Ltd 5A INC 4,700,000 4,551,762 Callidus Debt Partners Fund Ltd 4A INC 5,850,000 4,512,339 Callidus Debt Partners Fund Ltd 5X INC 5,000,000 4,500,000 Stone Tower CLO Ltd 2007-6X SUB 5,000,000 4,445,000 Apidos CDO 2011-8A D 6,200,000 4,278,000 Callidus Debt Partners Fund Ltd 3A E 4,500,000 3,970,800Callidus Debt Partners Fund Ltd 3X C 4,000,000 3,280,000

Quantity US$ Disposals/Paydowns sold proceeds

Tiers Beach Street Synthetic CLO 2006 16 B 5,500,000 5,500,000 Callidus Debt Partners Fund Ltd 3A E 4,500,000 4,500,000 Westbrook CLO Ltd 2006 1A D 5,000,000 4,076,500 Callidus Debt Partners Fund Ltd 3X C 4,000,000 4,000,000 Lightpoint CLO Ltd 2007 7A D 4,000,000 2,905,200 Westbrook CLO Ltd 2006-1X B 3,160,000 2,656,375 Callidus Debt Partners Fund Ltd 4A D 3,000,000 2,475,900 RMF Euro CDO IV X SUB 2,400,000 2,288,894 Callidus Debt Partners Fund Ltd (Preference Shares) 7,850,000 2,212,932 LCM LP 5X B 2,500,000 2,131,750 Regent S Park CDO 1A F 2,100,000 1,823,891 RMF Euro CDO III X SUB 2,000,000 1,712,267 Callidus Debt Partners Fund Ltd 3X D 1,625,000 1,625,000 Lightpoint CLO Ltd 2006 5X D 2,000,000 1,495,200 Versailles CLO ME PLC I SUB 1,500,000 1,426,637 Egret Funding CLO I X M 2,000,000 1,376,199 Harbourmaster CLO 7X C 1,000,000 814,740 Octagon Investment VII (Preference Shares) 1,000,000 645,000 Regent S Park CDO 1X F 690,000 599,278 LCM LP 2A E1 118,581 118,581

68


MANAGEMENT AND ADMINISTRATION

* All Directors of Carador Income Fund PLC are Non-Executive Directors.

DIRECTORS *Werner Schwanberg (Chairman)Professor Claudio AlbaneseFergus SheridanAdrian WatersEdward D’AlelioNicholas Moss

ADMINISTRATOR AND COMPANY SECRETARYState Street Fund Services (Ireland) Limited78 Sir John Rogerson’s QuayDublin 2Ireland

CUSTODIANState Street Custodial Services (Ireland) Limited78 Sir John Rogerson’s QuayDublin 2Ireland

SOLICITORS AS TO US AND ENGLISH LAWHerbert Smith LLPExchange HousePrimrose StreetLondon EC2A 2HSUnited Kingdom

SOLICITORS AS TO IRISH LAWArthur CoxEarlsfort CentreEarlsfort TerraceDublin 2Ireland

REGISTRAR Computershare Investor Services (Ireland) LimitedHerron HouseCorrig RoadSandyford Industrial EstateDublin 18Ireland

REGISTERED OFFICE78 Sir John Rogerson’s QuayDublin 2Ireland

Company Registration Number: 415764Euro shares ISIN: IE00B10RXS64US Dollar shares ISIN: IE00B3D60Z08US Dollar C shares ISIN: IE00B692M025

INVESTMENT MANAGERGSO Capital Partners International LLP40 Berkeley SquareLondon W1J 5AL United Kingdom

JOINT PLACING AGENT, JOINT FINANCIAL ADVISER AND JOINT CORPORATE BROKERDexion Capital plc1 Tudor StreetLondon EC4Y 0AHUnited Kingdom

JOINT PLACING AGENT, UK SPONSOR, JOINT FINANCIAL ADVISER AND JOINT CORPORATE BROKERSinger Capital Markets LimitedOne Hanover StreetLondon W1S 1YZUnited Kingdom

INDEPENDENT AUDITORSKPMG1 Harbourmaster PlaceIFSCDublin 1Ireland

Designed and produced by FTI Consulting www.fticonsulting.comPrinted in Ireland by Cahill Printers

40 Berkeley SquareLondonW1J 5AL

www.carador.co.uk

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Documents

Carador Annual Fs 31.12.2011