Audited Annual Financial Report

For immediate release on 15 May 2009 CQS RIG FINANCE FUND LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 SEPTEMBER 2008 Chairman's Statement Introduction I present the Company's annual report for the twelve months from 1 October 2007 to 30 September 2008. The Company has faced difficulties towards the end of the period and the Financial Statements as at 30 September 2008, while representative of the position as of 30 September 2008 do not reflect the extent of deterioration that has happened since that date and the decisions the Board and the Investment Manager have taken subsequently. Investment Performance The Company's performance for the year under review was extremely disappointing. Despite generally supportive fundamentals in the offshore exploration and production of oil and natural gas, the turmoil in financial markets impacted substantially on the Company's net asset value and share price. The Company's net asset value declined from 99 pence per ordinary share on 30 September 2007 to 73 pence per ordinary share on 30 September 2008. The price of ordinary shares declined from a closing price of 102 pence on 30 September 2007 to 57.75 pence on 30 September 2008, representing a negative return (including dividends) of (38.3)%. The ordinary shares ended the year at a 21% discount to the net asset value. The Company's NAV was affected by both events specific to particular portfolio holdings and especially, by the rapid deterioration in financial markets overall. At the portfolio level holdings in two issuers had a particularly negative impact. These were Viking Drilling ASA and MPU Offshore Lift ASA. The collapse in credit markets leading up to and following the failure of Lehman Brothers led to a market wide deleveraging and significant selling of high yield bonds by market participants. Rig bonds were not immune to this and all of the Company's holdings were subject to substantial mark downs in price. Mindful of increasing market risk, the terms of the Company's financing agreement and with a desire to reduce leverage, the Company sold positions. Post Year End October proved to be an exceptionally challenging month for the Company. It was recognised that the continuing deterioration in market conditions through September had resulted in a significant NAV decline during September 2008. The Company sought to relock its committed financing with the secured lender, but because of the prevailing market conditions, found the secured lender unwilling to do so. Nonetheless, the secured lender indicated a willingness to continue to support the Company. The secured lender was able to implement an increase of 100 basis points to the cost of the Company's financing as it sought to cover its own financing cost increases during this period. The Company sought to respond to the continuing challenging market conditions in a number of ways. It continued to reduce risk and debt through the orderly sale of assets reducing the debt burden by a further amount equivalent to GBP32.8 million (the value of these assets included on the year end balance sheet was GBP39.9 million) in October 2008. On 24 October 2008 the Company announced it had entered into an unsecured facility agreement with RBC Cees Trustee Limited under which US$6 million (GBP3.4 million) was made available to the Company for short term working capital. The facility has been provided by RBS in its capacity as trustee of certain assets for the benefit of Michael Hintze, Chief Executive of CQS, who holds a majority interest in CQS Cayman LP, the Company's Investment Manager. The unsecured term loan carries an interest rate of LIBOR plus 5 per cent per annum and per the agreement is repayable at the earliest of 23 October 2009 or a date 90 days after receipt of cancellation by the lender. However, the unsecured lender has subsequently confirmed that it has no current intention to seek his contractual right to repayment until the secured lender has been repaid in full. The Company also announced its intention to seek a placing of new equity to provide stability and a more appropriate capital structure. However, a potential issuance of securities was not able to proceed as securing sufficient new capital and/or committed finance was not possible in the face of continued deterioration of the NAV and the financial markets which were effectively closed to financing. NAV per share fell rapidly through the month ending at 30.76 pence as at 30 October 2008. That continued rapid decline in the NAV moved the Company to a position of expected margin deficit and, on the basis of this anticipated material change in the financial condition of the Company, the Company announced on 30 October 2008 it had requested that trading in its shares on AIM and the CISX be suspended with immediate effect pending clarification of the Company's financial position. That request was granted. Over the course of the remainder of the calendar year the asset prices and liquidity conditions in the markets continued to deteriorate. The NAV declined to 11.67 pence per share on 24 November 2008 and on 1 December 2008 the Company announced that in light of the lack of liquidity and visibility in the high yield bond markets, the Company no longer considered that the methodology used to calculate the NAV provided an accurate indication of value and that it had therefore decided to defer publication of the NAV until more normal market conditions returned. November also saw the resignation of Mark Conway, the senior portfolio manager, as announced on 24 November 2008. The Investment Adviser confirmed that it continued to have an appropriately skilled and experienced team to manage the portfolio. The Company sold further assets for the equivalent of GBP10 million (the value of these assets included on the year end balance sheet was GBP14.7 million) as it continued to seek to reduce risk and debt. During December the Company moved initially to a position of negative NAV, where the long market value of securities was less than the sum of both secured and unsecured debt and subsequently, the long market value of the assets fell below that of the secured debt. During the month there was no substantive disposal of assets. There was some small change in the portfolio where the Company saw the opportunity to enhance the expected recovery profile of the portfolio through selective sale and purchase of positions as sanctioned by the secured lender. Throughout the last few months of the Company's 2008 financial year and post year end, both the Company and the Investment Adviser have had a continuous dialogue with the secured lender. Post the suspension of trading there has been an ongoing discussion with the secured lender with respect to a clarification of the Company's financial position and a continued exploration of options to achieve financial stability and a more appropriate capital structure. I am pleased to note that, as announced on 22 April 2009, the Company has successfully renegotiated its committed financing terms with its lender. The key terms are: The secured lender agrees to provide financing for 18 months. There can be no increase in the net USD value of the secured debt. The financing cost is LIBOR + 400 basis points. There is a USD2.8m fee for the facility payable at the earliest of the end of 18 months and the point at which the secured lender is repaid. During the period of the facility; * all cash receipts, net of agreed operating expenses, are used to pay down the secured lender's debt (including fee) and, if achieved, * all cash receipts thereafter, net of agreed operating expenses, are used to pay down the unsecured lender's principal and interest and, if achieved, * all cash receipts thereafter, net of agreed operating expenses, and remaining portfolio assets are available for distribution to share holders. There are some conditions under which the secured lender may, but is not obliged to, withdraw the facility. The primary condition is one where the cumulative cash recovered from assets, that have crystallised through maturity, early redemption, or from the conclusion of realisation scenarios, falls short of the total expected aggregate level of recoverable cash for the whole of the portfolio as agreed with the secured lender at the date of execution of the facility, by an amount greater than or equal to 20% of that total expected recoverable cash. Such expected aggregate level of recoverable cash agreed with the secured lender at the date of execution of the facility is substantially higher then the long market value of the securities as at that date. The Company believes it should be able to operate within the terms of this new financing agreement based on its cash forecasts and projections. Outlook For shareholders the return to a positive NAV is of primary interest. This remains both a function of the debt which the Company will seek to reduce, and of the value ascribed to the portfolio by the markets over which the Company has no control. Most commentators see a prolonged period of financial/credit market dislocation combined with, at least short term, weakness in energy demand and on that basis it is difficult to envisage a rapid return to a positive NAV. Nonetheless, we believe that the longer term possibility of sharing in any upside remains for shareholders. The Company is exploring options with regards to recommencing trading on AIM and CISX. However, it remains a possibility that this may not occur. The Board is looking to resolve this issue as soon as possible. Dividends The Company met its target for dividend distributions during the year. Total dividends paid during the year to 30 September 2008 were 7.89 pence per ordinary share. A dividend of 1.95 pence per ordinary share was paid on 17 December 2007, a dividend of 1.98 pence per ordinary share was paid on 10 March 2008, a dividend of 1.98 pence per ordinary share was paid on 10 June 2008 and a dividend of 1.98 pence per ordinary share was paid on 15 September 2008. The Company has suspended payments of further dividends and no dividend payable was declared in December 2008. It is unlikely that the Company will re commence dividend payments in the 2009 financial year. Annual General Meeting The Company's Annual General Meeting will be held at the offices of Kleinwort Benson (Channel Islands) Fund Services Limited on 9 June 2009. Michael Salter Chairman Date: 15 May 2009 Investment Manager's Report Energy Markets Crude oil prices were strong during the first nine months of the financial year under review reflecting persistent supply concerns. WTI crude oil prices rose from US$82 per barrel at the end of September 2007 to US$145 on 3 July 2008. However subsequently, oil prices weakened significantly in response to growing concerns regarding a potential decline in demand for oil in response to evidence of sharply weakening global economic growth, with WTI crude oil prices having declined to US$101 by 30 September 2008. On 13 March 2009 the IEA projected global oil product demand figures for 2009 was 84.4 million barrels per day, down 1.5% from the previous year following large downward revisions to global GDP forecasts by the IMF and continued signs of demand weakness in the OECD. Financial Markets As the Company's financial year progressed global equity and credit market weakness gave way, in September 2008, to one of the most volatile and challenging trading environments ever observed in financial markets. The catalyst for the severe market declines appeared to be the failure of Lehman Brothers resulting in investor panic and major concerns about many financial institutions and indeed the financial system itself. As a result, many global regulators introduced short-selling restrictions, primarily in financial shares, and globally authorities encouraged consolidations and rescues of many major financial institutions and introduced a range of bailout programmes designed to support the financial system. Simultaneously, pressure in the banking system forced Libor spreads to widen dramatically and the effects were to drive financing costs higher for companies and the general decline in asset prices was exacerbated by forced selling in many asset classes. The Portfolio During the first half of the year under review the portfolio held up relatively well. This was in part due to the fundamentals underlying the oil and gas sector and the companies in whose bonds the Company was invested, as well as continued corporate activity in the sector. As in other markets, there appeared to be a flight to quality within the offshore oil and gas infrastructure bond market. However, in the second half of the Company's financial year, and as the turmoil in financial markets gathered pace, selling pressure appeared among those market participants who were leveraged and/or required liquidity. This was consistent with what we believe occurred in the broader credit markets and bonds held in the Company's portfolio were generally marked down across-the-board and indiscriminately. In such a market environment, the Company's portfolio continued to be impacted by forced selling and market liquidity factors, which we believe was a reflection of a further significant markdown in high yield bond markets. Given the largely US dollar denominated asset base and matching US dollar funding, the rapid depreciation of sterling against the dollar generated an increase in the Company's borrowings in sterling terms. These factors combined to increase the leverage in the portfolio, which the Company took steps to reduce. As at 30th April 2009, the remaining assets in the portfolio divide into three broad categories by function. Analysed by face value, drilling rigs are the largest category accounting for 50% of the assets. These rigs break down into two main sub categories: jack up drilling rigs (29%) and are semisubmersible drilling rigs (21%). The majority of the jack up rigs (23%) are regarded as "giant jack-ups" which are targeted at particular water depths and demanding environmental conditions, such as the Norwegian Continental Shelf, setting them apart from the general jack up market which is much better supplied and very competitive. Production focused equipment, the majority being Floating Production Storage and Offloading (FPSO) vessels, is the second largest category accounting for 32% of assets. FPSO vessels are customised to meet the particular chemical/physical characteristics of a target oil reservoir to which they are then likely to be contracted for many years. While this customisation takes time and can be costly, it also makes it difficult to switch a vessel from one field to another at short notice. The current level of oil prices and associated softening in the capital expenditure plans of oil companies means that FPSO's built on a speculative basis will find it harder to get employment in the short term. The remaining 18% of the portfolio assets are oil service related equipment. Analysed by type of security, 30% of the assets are first lien secured while the remaining 70% have second lien security over the underlying assets built or being built. Construction is complete on approximately 23% of the portfolio and some 38% of the assets (built and under construction) have contracts of varying tenors in place Outlook Since the end of the Company's financial year the price of oil continued to fall reaching a low of US$37.41 a barrel on 18 February 2009 despite the agreed and proposed production cuts by OPEC. Since then, oil prices have staged a recovery, closing at US$56.71 on 7 May 2009. It is clear that much of the developed world is experiencing very challenging economic conditions. The decline in GDP and the associated collapse in world trade in both raw material and finished goods, has caused a significant reduction in the demand for energy and in particular oil and gas. We believe that offsetting the supply/demand driven fall in oil prices, is the decline in production capacity as existing fields continue to be depleted at rates in excess of the rate at which new capacity comes on stream. Since the Company's financial year end, the financial markets continued to deteriorate significantly and deleverage. Selling continues across the high yield bond markets driving down asset prices. The ongoing and increasing scarcity of available credit continues to be the primary cause of stress in the portfolio. It is against this backdrop that we see a continuing vulnerability of all construction projects where completion was predicated on the ability to raise further debt and / or equity finance even as the construction risk diminishes. The portfolio continues to generate income and capital repayments. Under the terms of the financing facility all cash receipts net of agreed operating expenses, are required to be applied to repay the borrowing from the secured lender. Once that borrowing has been repaid together with the facility fee, the Company will be required to apply such cash receipts to repay the borrowing, and accrued interest, from the unsecured lender. Thereafter, any further such cash receipts and remaining portfolio assets are available for distribution to shareholders. There is consequently, no expectation that dividends will be paid over the course of this financial year. The projected income and capital repayments over the next 18 months are expected to repay a material proportion of the debt to the secured lender. Leading up to the end of the 18 months, the Company will review its options to extend or replace its financing, or issue new equity to repay some or all of the residual debt. Furthermore, it may be that by then asset values have recovered to a point where the sale of assets to repay the residual debt also represents an attractive option. All WTI price data sourced from Bloomberg All share price data sourced from Bloomberg CQS Cayman Limited Partnership Date: 15 May 2009 Income Statement for the year ended 30 September 2008 For the Period from year ended 8 Nov 2006 to 30 Sep 2008 30 Sep 2007 Notes GBP GBP Operating (loss)/income 3 (14,468,181) 5,670,122 Operating expenses Other operating expenses 4 (1,787,798) (847,201) Finance costs (4,321,565) (1,960,641) Total operating expenses (6,109,363) (2,807,842) Net (loss)/profit (20,577,544) 2,862,280 (Loss)/Earnings per Ordinary Share Basic and Diluted 5 (24.55p) 5.72p All items in the above statement are derived from continuing operations. All income is attributable to the Ordinary Shareholders of the Company. The accompanying notes (available on the Company's website) form an integral part of the financial statements. Statement of Changes in Shareholders' Equity for the year ended 30 September 2008 Share Share Other Accumulated Total Capital Premium Reserve Losses Notes GBP GBP) GBP GBP) GBP) Balance at 1 October 2007 - - 48,724,675 777,280) 49,501,955) Net loss for the year - - - (20,577,544) (20,577,544) Total recognised income and expense plus equity brought forward - - 48,724,675 (19,800,264) 28,924,411 Conversion of C Shares 49,018,863 into Ordinary Shares 11 - - - 49,018,863 Transfer to (49,018,863) 49,018,863 other reserve 11 - - - Dividends paid to Shareholders 15 - - (6,761,154) - (6,761,154) Balance at 30 90,982,384 September 2008 - - (19,800,264) 71,182,120 For the period from 8 November 2006 (date of incorporation) to 30 September 2007 Share Share Other Accumulated Total Capital Premium Reserve Profits Notes GBP GBP) GBP GBP GBP) Balance at 8 November 2006 - - - - - Net profit - for the period - - 2,862,280 2,862,280 Total recognised - - income and expense plus equity brought forward - 2,862,280 2,862,280 Issuance of Ordinary Shares 11 - 50,000,000 - - 50,000,000 Cost related to the issuance of Ordinary Shares 11 - (1,275,325) (1,275,325) Transfer to (48,724,675) other reserve 11 - 48,724,675 - - Dividends - paid to Shareholders 15 - - (2,085,000) (2,085,000) Balance at 30 48,724,675 September 2007 - - 777,280 49,501,955 The accompanying notes (available on the Company's website) form an integral part of the financial statements. Balance Sheet as at 30 September 2008 30 Sep 2008 30 Sep 2007 Notes GBP GBP Assets Non-current assets Investments at fair value through 6 158,024,503 104,367,052 profit or loss Current assets Derivative financial assets - unrealised gain on forward exchange contracts 7 - 971,825 Receivable for securities sold 2,769,402 - Cash and cash equivalents 97,888 - 2,867,290 971,825 Total assets 160,891,793 105,338,877 Equity and liabilities Equity Share capital 10 - - Share premium account 11 - - Other reserve 11 90,982,384 48,724,675 Accumulated (losses)/profits (19,800,264) 777,280 71,182,120 49,501,955 Current liabilities Interest-bearing borrowings 8 77,164,899 53,751,884 Payable for securities purchased 1,288,008 1,586,660 Derivative financial liabilities - unrealised loss on forward exchange contracts 7 10,722,889 - Other liabilities and payables 9 533,877 498,378 Total liabilities 89,709,673 55,836,922 Total equity and liabilities 160,891,793 105,338,877 Net Asset Value per Share 73.07p 99.00p The accompanying notes (available on the Company's website) form an integral part of the financial statements. Cash Flow Statement for the year ended 30 September 2008 For the Period from year ended 8 Nov 2006 to 30 Sep 2008 30 Sep 2007 Notes GBP GBP) Net cash outflow from 12 operating activities (51,037,278) (98,725,770) Financing activities Proceeds from issuance 11 of Shares 50,000,000 50,000,000) Costs related to 11 issuance of Shares (981,137) (1,275,325) Interest expense paid (4,245,297) (1,709,108) Increase in 8 interest-bearing borrowings 13,122,754 53,795,203) Dividends paid to 15 shareholders (6,761,154) (2,085,000) Cash inflows from financing activities 51,135,166 98,725,770) Net increase in cash 97,888 - Reconciliation of net cash flow to movement in net cash Net increase in cash and cash equivalents 97,888 - Effect of exchange rate fluctuation on cash and cash equivalents - - Cash and cash equivalents at start of year - - Cash and cash equivalents at end of year 97,888 - The accompanying notes (available on the Company's website) form an integral part of the financial statements. The Annual Report and Accounts for the year ended 30 September 2008 will be posted to shareholders shortly and in accordance with AIM Rule 26 a copy is available to view and download from the Company's website at Enquiries: Lynette Le Prevost Kleinwort Benson (Channel Islands) Fund Services Limited Telephone (01481) 752515 NOMAD and Broker Arbuthnot Securities Limited Alastair Moreton Telephone 020 7012 2000 ---END OF MESSAGE--- This announcement was originally distributed by Hugin. The issuer is solely responsible for the content of this announcement.