PRINCIPAL AND EMERGING RISK FA
CTORS (CONTINUED
)
Volta Finance Limi
ted
Annual Report
and Audited Financial Statem
ents 2022
20
These are the risks that the Board believes should be substantially mitigated by the Company’s controls. The Board has defined
limits for various metrics in order to monitor and control the following preventable risks, which are reviewed by the Board on at
least a quarterly basis.
Impact, tolerance, controls and mitigation
Liquidit
y
a
nd going concern
–
The risk that the Company is
unable to meet its payment
obligations and is unable to
continue as a going concern for
the next twelve months.
If the Company were to be unable to meet its obligations as they fell due, the impact on the
Company would be severe, although this risk is remote. Consequently, the Company
monitors this risk and the potential threats to the liquidit
y of t
he
portfolio. The availability of
liquid resources is a high priority for the Board. On a day-to-day basis, the Investment
Manager monitors cash flow and payment obligations carefully and retains sufficient cash
and/or liquid assets available to meet its obligations. The Investment Manager also monitors
and reports to the Board on the market liquidity of the po
r
tfolio. Cash demands may arise
from collateralisation and payment obligations under any Repo, FX margin calls and other
payment obligations on hedging agreements and any other derivatives the Company might
enter into, drawdowns on investment commitments and other paym
ent obligations such as
ongoing expenses.
–
The risk that the Company,
through its service providers, fails
to meet its contractual and/or
legal or regulatory reporting
obligations, resulting in sanctions,
financial penalties and/or
reputational damage.
The Board has considered the potential impact of failure to meet its contractual, legal and
regulatory obligations. To this end, the Board carries out annual due diligence
vi
s
its with the
Company’s Investment Manager and Administrator to discuss processes and identify areas
for improvement.
Strategic risks (continued)
Impact, tolerance, controls and mitigation
Market risk (continued) –
The impact of movements in
market prices, interest rates and
foreign exchange rates on cash
flows receivable and the
Company’s NAV (continued).
-The risk that unhedged currency
exposures may lead to volatility in
the Company’s NAV;
Given that the Company’s investments have floating interest rate characteristics, the direct
risk arising from interest rate volatility is modest.
The I
nvestment Manager carefully manages
the Company’s foreign exchange exposure hedging through derivatives to balance the partial
mitigation of the impact of foreign exchange fluctuations upon the NAV with the need to
ensure that any margin obligations can be met comfortably. The Board has set foreign
exchange exposure tolerances and derivati
ve
margin tolerances.
The Company invests in both EUR and USD markets, and maintains that flexibility to be able
to access the full range of investment opportunities. However if the USD exposure is not fully
hedged, this could lead to volatility in the Company’s NAV due to changes in FX rates. The
Investment Manager mitigates this risk through hedging a significant portion of the FX risk,
and monitors the unhedged exposure of the portfolio on a consistent basis.
The risk of severe market
disruption leading to impairment
of the market value and/or
liquidity of the Company’s
investment portfolio.
The Company is well positioned to be able to tolerate prolonged market disruption, as
occurred in 2008/2009, due to the fact that the Company is currently financed by equity on
which it is able to exercise discretion regarding dividend payments. The Compan
y
m
ay utilise
debt financing through entering into repurchase agreements. The Board monitors overall
leverage levels and soft limits applicable to any Repo and associated collateralisation.
Re-investment risk –
The ability to re-invest in
investments that maintain the
targeted level of returns at an
acceptable level of risk.
The potential impact of this risk is considered to be moderate in that it would not be felt
immediately, given the medium-term nature of the Company’s portfolio. The Company fully
tolerates this risk in order to achieve its investment objectives. In the Board’s opinion, the
ability of the Company and the Investment Manager to mitigate this risk is necessarily limited
by external factors. Nevertheless, the Investment Manager is alert to the need to anticipate
and respond to market and regulatory developments. Taking into account the reputation, size
and presence in the market of the Investment Manager, which provide increased exposure to
investment opportunities, and the Company’s fle
x
i
ble investment mandate, the Board
believes that this risk is mitigated as far as reasonably possible. The Board is aware of the
risk of “creep” in risk tolerance in order to maintain
r
eturns in less favourable market
environments and regularly challenges the Investment Manager o
n this point.