Perpetual Limited
Annual Report 2020

Plain-text annual report

PERPETUAL CREDiT iNCOME TRUST ARSN 626 053 496 ANNUAL FiNANCiAL REPORT 30 JUNE 2020 ANNUAL FINANCIAL REPORT 2020 | i Perpetual Credit Income Trust Appendix 4E For the year ended 30 June 2020 Details of reporting period This annual financial report is for the year ended 30 June 2020. The previous corresponding period was from 22 May 2018 to 30 June 2019. The Directors of Perpetual Trust Services Limited, the Responsible Entity of Perpetual Credit Income Trust (the Trust) announce the audited results of the Trust for the year ended 30 June 2020 as follows: Results for announcement to the market Extracted from 30 June 2020 annual financial report. Revenue from ordinary activities Profit/(loss) Total comprehensive income/(loss) Details of distributions For the period from 22 Increase/(decrease) May 2018 to Year ended 30 June 2020 30 June 2019 Increase/(decrease) $'000 $'000 $'000 5,072 643 643 2,200 1,568 1,568 2,872 (925) (925) % 130.55 (58.99) (58.99) The distributions for the year ended 30 June 2020 was $17,051,403 (4.2605 cents per ordinary unit). The Responsible Entity aims to make distributions each month. For such distributions, the record date is the last ASX trading day of each month. Subsequent to year end, on 27 July 2020, the Directors declared a distribution of 0.3157 cents per ordinary unit which amounted to $1,263,935 and was paid on 10 August 2020. Details of distribution reinvestment plan The Responsible Entity has established a Distribution Reinvestment Plan (DRP) on 24 June 2019 in relation to distributions. Units under the DRP are issued at the net asset value of a unit, as determined in accordance with the Trust's Constitution, on record date. On 25 March 2020, the Responsible Entity announced that the DRP will be suspended until further notice. Net Tangible Assets Total Net Tangible Assets attributable to unitholders ($'000) Units on issue ('000) Net Tangible Assets attributable to unitholders per unit ($) Control gained or lost over entities during the year As at 30 June 2020 30 June 2019 425,186 400,334 1.062 441,226 400,000 1.103 Name of entity Perpetual Loan Fund Date of gain of control 13 May 2019 Contribution to profit ($'000) 635 There was no loss of control of the entity during the year. Details of associates and joint venture entities The Trust did not have any interest in associates and joint venture entities during the year. Independent audit report This report is based on the annual financial report which has been audited by the Trust's auditor, KPMG. Additional disclosure requirements can be found in the notes to the Trust's annual financial report for the year ended 30 June 2020. PERPETUAL CREDIT INCOME TRUST CONTENTS Investment manager’s report Directors’ report Corporate governance statement Lead auditor’s independence declaration Statement of comprehensive income Balance sheet Statement of changes in equity Statement of cash flows Notes to the financial statements Directors’ declaration Independent auditor’s report to the unitholders ASX additional information 2 6 10 16 17 18 19 20 21 46 47 51 Perpetual Credit Income Trust Appendix 4E For the year ended 30 June 2020 Details of reporting period May 2018 to 30 June 2019. This annual financial report is for the year ended 30 June 2020. The previous corresponding period was from 22 The Directors of Perpetual Trust Services Limited, the Responsible Entity of Perpetual Credit Income Trust (the Trust) announce the audited results of the Trust for the year ended 30 June 2020 as follows: Results for announcement to the market Extracted from 30 June 2020 annual financial report. For the period from 22 Increase/(decrease) Year ended May 2018 to 30 June 2020 30 June 2019 Increase/(decrease) $'000 $'000 $'000 5,072 643 643 2,200 1,568 1,568 2,872 (925) (925) % 130.55 (58.99) (58.99) Revenue from ordinary activities Profit/(loss) Total comprehensive income/(loss) Details of distributions The distributions for the year ended 30 June 2020 was $17,051,403 (4.2605 cents per ordinary unit). The Responsible Entity aims to make distributions each month. For such distributions, the record date is the last ASX trading day of each month. Subsequent to year end, on 27 July 2020, the Directors declared a distribution of 0.3157 cents per ordinary unit which amounted to $1,263,935 and was paid on 10 August 2020. Details of distribution reinvestment plan The Responsible Entity has established a Distribution Reinvestment Plan (DRP) on 24 June 2019 in relation to distributions. Units under the DRP are issued at the net asset value of a unit, as determined in accordance with the Trust's Constitution, on record date. On 25 March 2020, the Responsible Entity announced that the DRP will be suspended until further notice. Net Tangible Assets As at 30 June 2020 30 June 2019 425,186 400,334 1.062 441,226 400,000 1.103 Total Net Tangible Assets attributable to unitholders ($'000) Units on issue ('000) Net Tangible Assets attributable to unitholders per unit ($) Control gained or lost over entities during the year Name of entity Perpetual Loan Fund Date of gain of control Contribution to profit ($'000) 13 May 2019 635 There was no loss of control of the entity during the year. Details of associates and joint venture entities The Trust did not have any interest in associates and joint venture entities during the year. Independent audit report This report is based on the annual financial report which has been audited by the Trust's auditor, KPMG. Additional disclosure requirements can be found in the notes to the Trust's annual financial report for the year ended 30 June 2020. ANNUAL FINANCIAL REPORT 2020 | 1 iNVESTMENT MANAGER’S REPORT Dear Investors, We are pleased to present the Annual Financial Report for the Perpetual Credit Income Trust (the “Trust”). With the Trust commencing trading on the ASX on 14 May 2019, these are the first annual accounts which reflect a full year of activity. During the financial year to 30 June 2020 (FY20), the Trust has continued to deliver to its investment objective of providing investors with monthly income by investing in a diversified pool of credit and fixed income assets. The Trust has paid monthly distributions since inception which are in line with the target return of the RBA Cash Rate plus 3.25% p.a. (net of fees) through the economic cycle1. For FY20, 4.26 cents per unit2 has been paid to investors, which equates to an annual distribution return of 3.8%3. iNVESTMENT PHiLOSOPHY AND PROCESS At Perpetual, we believe the key to investing in credit and fixed income assets is constructing, and actively managing, a well-diversified portfolio of quality assets. The Portfolio Managers for the Trust, Michael Korber, Managing Director, Credit and Fixed Income and Anne Moal, Head of Corporate High Yield and Portfolio Manager for the Perpetual Loan Fund together have over 60 years’ experience. They have invested through many market cycles and are supported by the broader Perpetual Investments Credit and Fixed Income team. The team follow a robust, active and risk-aware approach to investing in credit and fixed income assets. This involves top-down market screening of the credit environment and extensive bottom up fundamental research to develop a list of approved issuers. This research seeks to screen out issuers with poor credit quality or susceptibility to downside shock. The formal credit review process involves consideration of where the asset sits in the capital structure and in- depth financial analysis and modelling. We look for companies that have a good balance sheet and predictable cash flows, who hold a competitive market position and have a quality management team. For unrated or sub- investment grade assets, we undertake a more extensive due diligence process which includes a number of meetings with arrangers and borrowers. We will not invest unless we have high conviction. Our investment process aims to find the most attractive segments of the market and ensure adequate compensation is provided for investments. We actively manage risk via our thorough investment process and by diversifying the portfolio across industry sectors, maturities and credit rating bands. PORTFOLiO COMPOSiTiON The Trust’s investment strategy is to hold a diversified and actively managed portfolio of credit and fixed income assets. The strategy allows for a combination of domestic and global credit, floating and fixed income assets. 1 This is a target only and may not be achieved. 2 Rounded to two decimal places. 3 Distribution return has been calculated based on the PCI investment portfolio return less the growth of NTA. Past performance is not indicative of future performance. 2 | PERPETUAL CREDIT INCOME TRUST As at 30 June 2020, PCI’s portfolio had 102 holdings across 76 issuers4. Investments include corporate bonds, floating rate notes, securitised assets and private debt (for example, corporate loans). While the investment universe for the Trust is relatively broad and includes the ability to invest in assets of foreign issuers, the focus is on Australian issuers. The Trust can hold a maximum of 30% of the portfolio in assets denominated in foreign currencies. As at 30 June 2020, 90.2% of assets were denominated in AUD and 82.1% of assets were issued by entities incorporated in Australia. This includes Australian corporations, banks, property trusts, asset backed securities (ABS) and infrastructure groups. We believe our local presence and ability to meet borrowers and their management team provides an advantage in assessing opportunities and managing credit risk for the portfolio. As the COVID-19 pandemic impacted investment markets, we were quick to move to working remotely and confirm we were fully operational during FY20, without disruption, including contacting our borrowers. As at 30 June 2020, 54.8% of the portfolio was invested in investment grade assets which means that the issuer of those assets are in the rating bands BBB to AAA as rated by an independent ratings agency. The Trust can also invest up to 70% of the portfolio in unrated or sub–investment grade assets. We believe that unrated or sub- investment grade assets provide a point of differentiation for the Trust’s investment strategy as these assets typically pay higher coupons than investment grade assets and can be a valuable source of income. As at 30 June 2020, 42.8% of the portfolio was invested in sub-investment grade or unrated assets5. Investments in sub-investment grade and unrated corporate bonds and loans will generally be focused on senior positions in the capital structure which means they are given higher priority in the event an issuer or company is wound-up or liquidated. Approximately 17% of the portfolio comprised secured loans (including via the Perpetual Loan Fund) at the end of FY20. MARKET OVERViEW The spread of the COVID-19 pandemic, the ensuing response and its impact on financial markets has undoubtedly dominated FY20. This led to extreme volatility, particularly in late February and March with all asset classes – equities, credit and fixed income, property and commodities selling off dramatically and the global economy heading towards recession. The impact on the global economy was significant as governments around the world responded to the virus by shutting down their economies and enacting social distancing measures. Financial markets were severely impacted with volatility being elevated as a result of concerns surrounding the virus, the monetary policy response and a concurrent crisis in energy prices. 4 Number of holdings and number of issuers reported on a full look through basis (excluding derivatives) 5 A sub-investment grade asset has a rating below BBB-/Baa3 and includes unrated assets ANNUAL FINANCIAL REPORT 2020 | 3 Throughout the first half of FY20, increasing valuations and slowing economic growth were supported by easing monetary policy globally. The RBA cut the official cash rate by 0.25% in July and October. In the third quarter, the cash rate was cut twice, once at the March meeting and a second emergency cut that brought the target cash rate to 0.25%. The first seven months of the year saw credit spread tightening up until February. This meant compensation, or return provided for accepting credit risk, was lower. However, in March, credit and fixed income markets experienced the most significant widening of credit spreads since the Global Financial Crisis. A consequence of the market volatility and widening spreads was the diminished liquidity in the secondary market. It also resulted in a slow-down of domestic corporate primary market issuance from late February until mid-May. The fourth quarter saw a sharp recovery in asset prices following the turmoil of late February and March. The unprecedented monetary and fiscal response to the COVID-19 pandemic supported credit spreads and equity prices. The strong financial performance was in contrast to worsening economic indicators as a raft of global Purchasing Managers’ Indices (PMIs) fell below 50, indicating contraction, and the US reported record unemployment growth for the month of April. In a similar pattern to the first half of FY20, equity valuations and credit spreads were being supported by monetary policy in spite of a worsening economic outlook. TRUST PERFORMANCE The market and economic conditions during the second half of the year provided the ultimate test of resilience for the portfolio in its first full year of operation. The assets in the portfolio have held up well during the extremely volatile market conditions and we believe the focus on quality and defensive nature of the portfolio contributed to this result. We recognise the importance of income to our investors and have continuously delivered on our investment objective of providing monthly income over FY20. The total distributions for the year was 4.26 cents per unit and the 30 June 2020 annual distribution return was 3.8% which is in line with the Trust’s target return6 objective of the RBA cash rate + 3.25% (net of fees) over the economic cycle. The Trust’s net tangible assets (NTA) position remains strong and there has been no permanent impairment of underlying security values, meaning the Trust’s ability to generate income remains intact. Prior to 28 February 2020, the Trust had been trading at an average premium to NTA of 2.8% since the Trust’s inception. Unfortunately, the market volatility led by COVID-19 resulted in the Trust trading at a discount to NTA. We believe the NTA for the Trust is more reflective of the Trust’s performance during the volatility and are comfortable with the composition of the portfolio, only seeing a decrease of -3.5% between 28 February and 30 June 2020. 6 This is a target only and may not be achieved. 4 | PERPETUAL CREDIT INCOME TRUST We encourage unitholders to remain patient and have a long-term view. This will generally provide time to ride out market woes and profit from market rises. We believe the assets in the portfolio have proven their defensive capabilities, as indicated by the modest decrease in NTA during the market volatility. The full value of the portfolio’s assets is also reflected in the Trust’s NTA released to ASX daily7, providing investors with transparency as to the portfolio value. We are confident that our robust, active and risk-aware investment process will translate to attractive opportunities for the Trust which will be rewarded over the long-term. We would like to take this opportunity to thank you for your continued support and trust and we look forward to providing you with further updates on the progress of the Trust’s investments over the coming year via our regular ASX announcements. Perpetual Investments The Trust minimised the impact of credit spread volatility by diversifying assets across asset type and maintaining high aggregate credit quality. Importantly, the Trust maintained its running yield which was 4.0% at the end of June 2020. The Trust’s income was primarily generated by coupon payments and interest income from investments in loans. The Trust predominately collected income return from non-financial corporates, prime RMBS, domestic banks and non-bank financials. This assisted in offsetting widening credit spreads in challenging conditions. We aim to build a portfolio in which overall interest rate exposure is floating and duration is relatively short. The portfolio weighted average life as at 30 June 2020 was 4.4 years which is short and less sensitive to credit spread movements than longer dated securities. Further, the securities in the portfolio are typically bonds and floating rate notes which are tradeable with daily pricing and liquidity. The loan assets are valued at fair value having considered any impairment. Critical to our investment process is also having regular access to information to enable credit risk to be monitored on an ongoing basis. Accordingly, we did not experience, nor did we expect any default from borrowers in the portfolio. 7 The NTA released to ASX daily is unaudited and approximate. Past performance is not indicative of future performance. ANNUAL FINANCIAL REPORT 2020 | 5 DiRECTOR’S REPORT Directors' report Perpetual Credit Income Trust Directors' report For the year ended 30 June 2020 Perpetual Trust Services Limited (ACN 000 142 049, AFSL 236 648) is the Responsible Entity of Perpetual Credit Income Trust (the Trust). The Directors of the Responsible Entity (the Directors) present their report together with the annual financial report of the Trust for the year ended 30 June 2020 and the auditor's report thereon. Principal activities The Trust is a registered managed investment scheme domiciled in Australia. The Trust was constituted on 9 May 2018, registered with the Australian Securities and Investments Commission on 22 May 2018, commenced operations on 8 May 2019 and its units commenced trading on the Australian Securities Exchange (ASX: PCI) on 14 May 2019. The Trust invests in a diversified pool of credit and fixed income assets in accordance with the Product Disclosure Statement and the provisions of the Trust's Constitution. Perpetual Investment Management Limited (AFSL 234 426) has been appointed by the Responsible Entity to be the Investment Manager of the Trust (Investment Manager). The Trust did not have any employees during the year. There were no significant changes in the nature of the Trust’s activities during the year. Directors The Directors of Perpetual Trust Services Limited during the year or since the end of the year and up to the date of this report are shown below. The Directors were in office for this entire year except where stated otherwise. Name Glenn Foster Vicki Riggio Richard McCarthy Simone Mosse Phillip Blackmore Michael Vainauskas Andrew Mclver Units on issue Date of appointment/resignation Appointed as Director on 27 September 2019 Alternate Director for Vicki Riggio Resigned as Director on 27 September 2019 Resigned as Alternate Director for Michael Vainauskas on 2 September 2019 Appointed as Alternate Director for Glenn Foster on 2 September 2019 Resigned as Alternate Director for Glenn Foster on 27 September 2019 Units on issue in the Trust at the end of the year are set out below: Units on issue As at 30 June 2020 As at 30 June 2019 Units ('000) Units ('000) 400,334 400,000 -6- 6 | PERPETUAL CREDIT INCOME TRUST Perpetual Credit Income Trust Directors' report For the year ended 30 June 2020 (continued) Directors' report (continued) Review and results of operations During the year, the Trust invested in accordance with the investment objective and guidelines as set out in the governing documents of the Trust and in accordance with the provisions of the Trust's Constitution. The performance of the Trust, as represented by the results of its operations, was as follows: Profit/(loss) ($'000) Distributions paid and payable ($'000) Distributions (cents per unit) For the period from 22 May 2018 to 30 June 2019 $'000 30 June 2020 $'000 643 1,568 17,051 4.2605 342 0.0854 As at 30 June 2020, the Trust's Net Tangible Assets (NTA) were $1.062 per unit. This represents a decrease of -3.72% compared to NTA of $1.103 per unit as at 30 June 2019. The decrease in NTA was predominantly attributable to the widening credit spreads caused by the coronavirus (COVID-19) pandemic in the second half of the year and distributions paid. The Trust paid distributions of 4.2605 cents per unit during the year which equated to an annualised distribution return of 3.8%. The rapid spread of COVID-19 across the globe has led to unprecedented economic times and governments taking extreme measures to limit the spread of the virus. This has resulted in extreme volatility in global and local capital markets which has been reflected in the valuation of the Trust's investment portfolio and its financial results for the year ended 30 June 2020. The Manager continues to follow a robust, active and risk-aware approach to investing in credit and fixed income assets. This involves market screening of the credit environment and research which aims to screen out issuers with poor credit quality or susceptibility to downside shock. Further information on the operating and financial performance of the Trust is contained in the Investment Manager's Report. Units in the Trust The movement in units on issue in the Trust during the year is disclosed in note 7 to the financial statements. The value of the Trust's assets and liabilities is disclosed on the balance sheet and derived using the basis set out in note 2 to the financial statements. Significant changes in state of affairs In the opinion of the Directors, there were no significant changes in the state of affairs of the Trust during the year other than the matters previously disclosed under the review and results of operations. -7- ANNUAL FINANCIAL REPORT 2020 | 7 Perpetual Credit Income Trust Directors' report For the year ended 30 June 2020 (continued) Directors' report (continued) Likely developments and expected results of operations The Trust will continue to be managed in accordance with its investment objectives and guidelines as set out in the governing documents of the Trust and in accordance with the provisions of the Trust's Constitution. The results of the Trust's operations will be affected by a number of factors, including the performance of investment markets in which the Trust invests. Investment performance is not guaranteed and future returns may differ from past returns. As investment conditions change over time, past returns should not be used to predict future returns. Matters subsequent to the end of the financial year On 27 July 2020, the Directors declared a distribution of 0.3157 cents per ordinary unit which amounted to $1,263,935 and was paid on 10 August 2020. The uncertainty around COVID-19 is expected to continue to present social and economic challenges in the next financial year and the resulting impact on the capital markets remain uncertain. Since the reporting date, there have been no significant changes in the valuation of the Trust's investment portfolio arising from the changes in the estimates and assumptions in relation to COVID-19. The Directors are closely monitoring the liquidity of the Trust and any impact on the valuation of the Trust's investment portfolio. No other matter or circumstance has arisen since 30 June 2020 that has significantly affected, or may significantly affect: (i) (ii) (iii) the operations of the Trust in future financial years; or the results of those operations in future financial years; or the state of affairs of the Trust in future financial years. Environmental regulation The operations of the Trust are not subject to any particular or significant environmental regulations under a law of the Commonwealth, or of a State or Territory. Fees paid to and interests held in the Trust by the Responsible Entity or its associates Fees paid to the Responsible Entity and its related parties out of Trust property during the year are disclosed in note 14 to the financial statements. No fees were paid out of Trust property to the Directors of the Responsible Entity during the year. The number of units in the Trust held by the Responsible Entity or its associates as at the end of the financial year are disclosed in note 14 to the financial statements. Indemnification and insurance of officers and auditors No insurance premiums are paid for out of the assets of the Trust in regards to insurance cover provided to either the officers of Perpetual Trust Services Limited or the auditor of the Trust. So long as the officers of Perpetual Trust Services Limited act in accordance with the Trust's Constitution and the law, the officers remain indemnified out of the assets of the Trust against losses incurred while acting on behalf of the Trust. The auditor of the Trust is in no way indemnified out of the assets of the Trust. -8- 8 | PERPETUAL CREDIT INCOME TRUST Perpetual Credit Income Trust Directors' report For the year ended 30 June 2020 (continued) Perpetual Credit Income Trust Directors' report For the year ended 30 June 2020 (continued) Directors' report (continued) Directors' report (continued) Likely developments and expected results of operations Rounding of amounts to the nearest thousand dollars The Trust is an entity of a kind referred to in ASIC Corporations (Rounding in Financial/Directors' Reports) Instrument 2016/191 issued by the Australian Securities and Investments Commission (ASIC) relating to the “rounding off” of amounts in the Directors' report. Amounts in the Directors' report and financial report have been rounded to the nearest thousand dollars in accordance with that ASIC Corporations Instrument, unless otherwise indicated. Lead auditor's independence declaration A copy of the lead auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 16. This report is made in accordance with a resolution of the Directors of Perpetual Trust Services Limited. Director Sydney 21 August 2020 The Trust will continue to be managed in accordance with its investment objectives and guidelines as set out in the governing documents of the Trust and in accordance with the provisions of the Trust's Constitution. The results of the Trust's operations will be affected by a number of factors, including the performance of investment markets in which the Trust invests. Investment performance is not guaranteed and future returns may differ from past returns. As investment conditions change over time, past returns should not be used to predict future returns. Matters subsequent to the end of the financial year On 27 July 2020, the Directors declared a distribution of 0.3157 cents per ordinary unit which amounted to $1,263,935 and was paid on 10 August 2020. The uncertainty around COVID-19 is expected to continue to present social and economic challenges in the next financial year and the resulting impact on the capital markets remain uncertain. Since the reporting date, there have been no significant changes in the valuation of the Trust's investment portfolio arising from the changes in the estimates and assumptions in relation to COVID-19. The Directors are closely monitoring the liquidity of the Trust and any impact on the valuation of the Trust's investment portfolio. No other matter or circumstance has arisen since 30 June 2020 that has significantly affected, or may significantly affect: (i) (ii) (iii) the operations of the Trust in future financial years; or the results of those operations in future financial years; or the state of affairs of the Trust in future financial years. Environmental regulation The operations of the Trust are not subject to any particular or significant environmental regulations under a law of the Commonwealth, or of a State or Territory. Fees paid to and interests held in the Trust by the Responsible Entity or its associates Fees paid to the Responsible Entity and its related parties out of Trust property during the year are disclosed in note 14 to the financial statements. No fees were paid out of Trust property to the Directors of the Responsible Entity during the year. The number of units in the Trust held by the Responsible Entity or its associates as at the end of the financial year are disclosed in note 14 to the financial statements. Indemnification and insurance of officers and auditors No insurance premiums are paid for out of the assets of the Trust in regards to insurance cover provided to either the officers of Perpetual Trust Services Limited or the auditor of the Trust. So long as the officers of Perpetual Trust Services Limited act in accordance with the Trust's Constitution and the law, the officers remain indemnified out of the assets of the Trust against losses incurred while acting on behalf of the Trust. The auditor of the Trust is in no way indemnified out of the assets of the Trust. -8- -9- ANNUAL FINANCIAL REPORT 2020 | 9 CORPORATE GOVERNANCE STATEMENT BACKGROUND CORPORATE GOVERNANCE Perpetual Trust Services Limited ACN 000 142 049, AFS Licence No. 236648 (“Responsible Entity”) is the responsible entity for the Perpetual Credit Income Trust (“Trust”), a registered managed investment scheme that is listed on the Australian Securities Exchange (“ASX”). The Responsible Entity is a wholly owned subsidiary of Perpetual Limited (ASX: PPT) (“Perpetual”). The Responsible Entity is reliant on Perpetual for access to adequate resources including directors, management, staff, functional support (such as company secretarial, responsible managers, legal, compliance, risk and finance) and financial resources. As at the date of this Corporate Governance Statement, Perpetual has at all times made such resources available to the Responsible Entity. In operating the Trust, the Responsible Entity’s overarching principle is to always act in good faith and in the best interests of the Trust’s unitholders, in accordance with our fiduciary duty. The Responsible Entity’s duties and obligations in relation to the Trust principally arise from: the Constitution of the Trust; the Compliance Plan for the Trust; the Corporations Act 2001 (“Act”); the ASX Listing Rules; the Responsible Entity’s Australian Financial Services Licence; relevant regulatory guidance; relevant contractual arrangements; and other applicable laws and regulations. At Perpetual, good corporate governance includes a genuine commitment to the ASX Corporate Governance Council Corporate Governance Principles and Recommendations 3rd Edition (“Principles”). The directors of the Responsible Entity are committed to implementing high standards of corporate governance in operating the Trust and, to the extent applicable to registered managed investment schemes, are guided by the values and principles set out in Perpetual’s Corporate Responsibility Statement and the Principles . The Responsible Entity is pleased to advise that, to the extent the Principles are applicable to registered managed investment schemes; its practices are largely consistent with the Principles. As a leading responsible entity, the Responsible Entity operates a number of registered managed investment schemes (“Schemes”). The Schemes include the Trust as well as other schemes that are listed on the ASX. The Responsible Entity’s approach in relation to corporate governance in operating the Trust is consistent with its approach in relation to the Schemes generally. The Responsible Entity addresses each of the Principles that are applicable to externally managed listed entities in relation to the Schemes, including the Trust, as at the date of this Corporate Governance Statement. 10 | PERPETUAL CREDIT INCOME TRUST 10 | PERPETUAL CREDIT INCOME TRUST PRiNCiPLE 1 LAY SOLiD FOUNDATiONS FOR MANAGEMENT AND OVERSiGHT The role of the Responsible Entity’s Board is generally to set objectives and goals for the operation of the Responsible Entity and the Schemes, to oversee the Responsible Entity’s management, to regularly review performance and to monitor the Responsible Entity’s affairs acting in the best interests of the unitholders of the Trust. The Responsible Entity’s Board is accountable to the unitholders of the Trust, and is responsible for approving the Responsible Entity’s overall objectives and overseeing their implementation in discharging their duties and obligations and operating the Trust. The role of the Responsible Entity’s management is to manage the business of the Responsible Entity in operating the Trust. The Responsible Entity Board delegates to management all matters not reserved to the Responsible Entity’s Board, including the day-to-day management of the Responsible Entity and the operation of the Trust. Directors, management and staff are guided by Perpetual’s Code of Conduct and Perpetual Risk Appetite Statement which is designed to assist them in making ethical business decisions. The Responsible Entity has appointed agents (“Service Providers”) to provide investment management, administration, custody and other specialist services and functions in relation to the Trust. Effective processes for monitoring Service Providers are integral to the Responsible Entity’s operations, given that substantial operational activities are outsourced to third parties. The Management of the Responsible Entity ensure a systematic and rigorous approach is applied with respect to monitoring the performance of outsourced Service Providers to the Trust. The Responsible Entity views all interactions with Service Providers as a monitoring opportunity, from the informal discussions that regularly occur with Service Providers, to more formalised monitoring reviews. The outcomes of all interactions with Service Providers inform the Responsible Entity’s view as to the extent to which the Service Provider is complying with their operational obligations to the Responsible Entity. Prior to appointment, all Service Providers are subject to operational due diligence, to verify that the Service Provider can deliver the outsourced services in an efficient, effective and compliant manner. All Service Providers are assigned an initial operational risk rating. The Responsible Entity’s approach to Service Provider monitoring is outlined in the diagram below. In addition to the continuous monitoring that occurs through day to day interactions with Service Providers in the regular course of business, all Service Providers are required to periodically report to the Responsible Entity as to the extent to which they have met their obligations. informal engagement Formal Reviews Compliance Reporting The RE and Management Market intelligence2 Key Scheme Data1 1 Includes information regarding investment performance, actual versus strategic asset allocation, liquidity where applicable and complaints, incidents and issues arising with respect to the operation of the Trust 2 Information from secondary sources, including the media and analysts and rating house reports. CORPORATE GOVERNANCE STATEMENT 2020 | 11 ANNUAL FINANCIAL REPORT 2020 | 11 Periodically, the Service Provider’s risk rating is reviewed by the stakeholders within the business, based on the outcomes of all interactions that have occurred with the Service Provider during the review period. The Responsible Entity maintains policy, procedure and program documents that determine the nature and frequency of formal service provider monitoring reviews. Service providers are typically subject to annual review. The Service Provider risk rating dictates any additional monitoring measures required to be put in place – for example a Service Provider assessed as ‘low to medium risk’ will be subject to the standard monitoring measures the Responsible Entity utilises under the Service Provider Monitoring Framework. Service Providers risk rated ‘high to very high’ may be subject to additional oversight measures to deal with the factors that caused the Service Providers risk rating to be high or very high. In addition, management and stakeholders utilise the risk assessment rating in determining if any action is required when considering information and the outcomes of all interactions that have occurred with the Service Provider during the review period. PRiNCiPLE 2 PRiNCiPLE 3 STRUCTURE THE BOARD TO BE EFFECTiVE AND ADD VALUE ACTiNG ETHiCALLY AND RESPONSiBLY At present the Responsible Entity Board consists of four executive directors and one alternate directors. The names of the current directors and year of appointment is provided below: Name of Director Year of Appointment Glenn Foster Richard McCarthy Vicki Riggio Phillip Blackmore (Alternate for Vicki Riggio) 2015 2018 2018 2018 Simone Mosse 2019 As the Responsible Entity’s Board consists of only executive directors, a Compliance Committee is appointed in relation to the Trust (refer to Principle 7). None of the executive directors of the Responsible Entity are independent and they are not remunerated by the Responsible Entity. The Compliance Committee comprises of a majority of external members and is chaired by an external member who is not the chair of the Responsible Entity Board. The Responsible Entity relies on a variety of mechanisms to monitor and maintain a culture of acting lawfully, ethically and responsible: • policies and procedures: a Code of Conduct which articulates and discloses Perpetual’s values, cyclical mandatory training, a Whistleblowing Policy and a Gifts, Political Donations, Bribery and Corrupt Practices Policy (further details noted below); • “The Way We Work” behaviour framework, and risk ratings that are intertwined into its annual performance, remuneration and hiring processes; and • employee engagement surveys and action planning conducted to address any gaps or concerns in culture. These apply to all directors and employees of Perpetual, and the Responsible Entity. The Code of Conduct, The Way We Work and core values supports all aspects of the way the Responsible Entity conducts its business and is embedded into Perpetual’s performance management process. The Code of Conduct draws from and expands on Perpetual’s Core Values of integrity, partnership and excellence. The Code of Conduct underpins Perpetual’s culture. The Responsible Entity Board and the Compliance Committee are informed of material breaches of the Code of Conduct which impact the Scheme and the Responsible Entity. 12 | PERPETUAL CREDIT INCOME TRUST Additional policies deal with a range of issues such as the obligation to maintain client confidentiality and to protect confidential information, the need to make full and timely disclosure of any price sensitive information and to provide a safe workplace for employees, which is free from discrimination. Compliance with Perpetual’s Code of Conduct is mandatory for all employees. A breach is considered to be a serious matter that may impact an employee’s performance and reward outcomes and may result in disciplinary action, including dismissal. A full copy of the Code of Conduct is available on Perpetual’s website (https://www.perpetual.com.au/ about/corporate-governance/code-of- conduct). Perpetual also has a Whistleblowing Policy to protect directors, executives, employees, contractors and suppliers who report misconduct, including: • conduct that breaches any law, regulation, regulatory licence or code that applies to Perpetual; • fraud, corrupt practices or unethical behaviour; • bribery; • unethical behaviour which breaches Perpetual’s Code of Conduct or policies; • inappropriate accounting, control or audit activity; including the irregular use of Perpetual or client monies; and • any other conduct which could cause loss to, or be detrimental to the interests or reputation of, Perpetual or its clients. As part of Perpetual’s Whistleblowing Policy, a third party has been engaged to provide an independent and confidential hotline for Perpetual employees who prefer to raise their concern with an external organisation. A full copy of the Whistleblowing Policy is available on Perpetual’s website ((https://www.perpetual.com. au/about/corporate-governance/code- of-conduct). As part of Perpetual’s commitment to promoting good corporate conduct and to conducting business in accordance with the highest ethical and legal standards, bribery and corrupt practices will not be tolerated by Perpetual under any circumstances. Perpetual’s Gifts, Political Donations, Bribery and Corrupt Practices Policy supports Perpetual’s commitment by: • prohibiting the payment of political donations; • instituting proper procedures regarding the exchange of gifts; • clearly outlining Perpetual’s zero tolerance for bribery and corruption; and • including avenues where concerns may be raised. A full copy of the Gifts, Political Donations, Bribery and Corrupt Practices Policy is available on Perpetual’s website (https://www. perpetual.com.au/about/corporate- governance/code-of-conduct). Mechanisms are in place to ensure the Responsible Entity Board and the Compliance Committee are informed of material breaches which impact the Trust and the Responsible Entity which would include material breaches of the Code of Conduct and material incidences reported under the Whistleblowing Policy and the Gifts, Political Donations, Bribery and Corrupt Practices Policy. PRiNCiPLE 4 SAFEGUARD THE iNTEGRiTY OF CORPORATE REPORTS The functions of an audit committee are undertaken by the full Responsible Entity Board with assistance from management. The Responsible Entity has policies and procedures designed to ensure that the Trust’s: • financial reports are true and fair and meet high standards of disclosure and audit integrity; and • other reports released on ASX are materially accurate and balanced. This includes policies relating to the preparation, review and sign off process required for the Trust’s financial reports, the engagement of the Trust’s independent auditors and the review and release of certain reports on the ASX. The declarations under section 295A of the Corporations Act 2001 provide formal statements to the Responsible Entity Board in relation to the Trust (refer to Principle 7). The declarations confirm the matters required by the Corporations Act in connection with financial reporting. The Responsible Entity receives confirmations from the service providers involved in financial reporting and management of the Trust, including the Investment Manager. These confirmations together with the Responsible Entity’s Risk and Compliance Framework which includes the service provider oversight framework, assist its staff in making the declarations provided under section 295A of the Corporations Act. The Responsible Entity manages the engagement and monitoring of independent ‘external’ auditors for the Trust. The Responsible Entity Board receives periodic reports from the external auditors in relation to financial reporting and the compliance plans for the Trust. CORPORATE GOVERNANCE STATEMENT 2020 | 13 PRiNCiPLE 5 PRiNCiPLE 6 PRiNCiPLE 7 MAKE TiMELY AND BALANCED DiSCLOSURE RESPECT THE RiGHTS OF UNiTHOLDERS RECOGNiSE AND MANAGE RiSK The Responsible Entity has a continuous disclosure policy to ensure compliance with the continuous disclosure requirements of the Corporations Act and the ASX Listing Rules in relation to the Trust which sets out the processes to review and authorise market announcements and which is periodically reviewed to ensure that it is operating effectively. The policy requires timely disclosure of information to be reported to the Responsible Entity’s management and/or directors to ensure that, information that a reasonable person would expect to have a material effect on the unit price or would influence an investment decision in relation to any of the Trust, is disclosed to the market. The Responsible Entity’s Company Secretary may assist management and/or the directors in making disclosures to the ASX after appropriate Responsible Entity’s Board consultation for material market announcements. The Responsible Entity requires service providers, including the Investment Manager, to comply with its policy in relation to continuous disclosure for the Trust. The Responsible Entity’s Company Secretary is the Continuous Disclosure Officer for the Trust in accordance with the ASX Listing Rules. The Responsible Entity is committed to ensuring timely and accurate information about the Trust is available to security holders via the Trust’s website. All ASX announcements are promptly posted on the Trust’s website: https:// www.perpetual.com.au/income/ pci-investors/asx-announcements. The annual and half year results financial statements and other communication materials are also published on the website. In addition to the continuous disclosure obligations, the Responsible Entity receives and responds to formal and informal communications from unitholders and convenes formal and informal meetings of unitholders as requested or required. The Responsible Entity has an active program for effective communication with the unitholders and other stakeholders in relation to Trust. The Responsible Entity handles any complaints received from unitholders in accordance with Perpetual’s Complaints Handling Policy. The Responsible Entity is a member of the Australian Financial Complaints Authority (AFCA), an independent dispute resolution body, which is available to unitholders in the event that any complaints cannot be satisfactorily resolved by the Responsible Entity. The Responsible Entity is also committed to communicating with shareholders electronically in relation to communications from the share registry. Shareholders may elect to receive information from the Company’s share registry electronically. The Responsible Entity values the importance of robust risk and compliance management systems and maintains a current risk register as part of its formal risk management program. The systems supporting the business have been designed to ensure our risks are managed within the boundaries of the Perpetual Risk Appetite Statement and consistent with our core values built on integrity, partnership and excellence. The Responsible Entity has established a Compliance Committee, comprised of Johanna Turner (Chair), Virginia Malley and Simone Mosse. The Compliance Committee meets at least quarterly. The Compliance Committee Terms of Reference sets out its role and responsibilities, which is available on request. The Compliance Committee is responsible for compliance matters regarding the Responsible Entity’s Compliance Plan, Constitution and the Corporations Act. The declarations under section 295A of the Act provide assurance regarding sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks. The Responsible Entity also receives appropriate declarations from the service providers involved in financial reporting. The Responsible Entity manages the engagement and monitoring of independent external auditors for the Trust. The Responsible Entity’s board receives periodic reports in relation to financial reporting and the compliance plan audit outcomes for the Trust. 14 | PERPETUAL CREDIT INCOME TRUST PRiNCiPLE 8 REMUNERATE FAiRLY AND RESPONSiBLY The RE does not have a Remuneration Committee. The fees and expenses which the Responsible Entity is permitted to pay out of the assets of the Trust are set out in the Trust constitution. The Trust financial statements provide details of all fees and expenses paid by the Trust during a financial period. The Perpetual Board has the responsibility and commitment to monitor that the organisation has a framework in place to manage risk. The Board’s commitment is reflected through the establishment of, and investment in the Perpetual Group Risk, Group Compliance and Internal Audit functions, led by the Chief Risk Officer. The Chief Risk Officer has the mandate to design and implement this Risk Management Framework (RMF). Perpetual’s Audit, Risk and Compliance Committee (ARCC) is responsible for oversight and monitoring of the Perpetual’s risk appetite statement, compliance and risk management frameworks and internal control systems, and risk culture. The ARCC is also responsible for monitoring overall legal and regulatory compliance across Perpetual including the Responsible Entity. The RMF was reviewed, updated and approved by the Audit, Risk and Compliance Committee during the 2020 financial year. The RMF consists of programs and policies which are designed to address specific risk categories - strategic, financial, operational, outsourcing, investment, reputation, people and compliance, legal and conduct risk. Programs supporting the RMF are regularly reviewed to confirm their appropriateness. The Audit, Risk and Compliance Committee is comprised of Ian Hammond (Chair), Nancy Fox, Craig Ueland and Gregory Cooper. The Audit, Risk and Compliance Committee Terms of Reference sets out its role and responsibilities. This can be obtained on the Perpetual website. All members of the Perpetual Audit, Risk and Compliance Committee members are independent non-executive directors of Perpetual Limited. A majority of the Responsible Entity Compliance Committee is comprised of external members, including an external Chair. All Perpetual Group Executives are accountable for managing risk within their area of responsibility, including the extent to which the Responsible Entity is effectively applying and acting in accordance with the RMF. They are also required to manage risk as part of their business objectives with risk management integrated across business processes. The RMF is underpinned by the “Three Lines of Defence” model. This model sees the first line, being business unit management, accountable for the day to day identification and management of risks. The Risk and Compliance function represents the second line and consists of risk management professionals who provide the framework, tools, advice and assistance to enable management to effectively identify, assess and manage risk and is responsible for overseeing first line activities. Internal Audit provides independent assurance, representing the third line, and reports to the ARCC. In respect of economic, environmental and social sustainability risks, the Manager is a signatory to the United Nations-supported Principles for Responsible Investment (PRI) and has sought to integrate ESG considerations within its Investment Process via a Responsible Investment Policy. This policy outlines the necessary considerations for incorporating environmental, social and corporate governance factors in the investment decision. The Manager’s consideration of ESG factors and labour standards does not include making ethical or moral judgements on particular practices or issues. Instead, when deciding whether to buy, retain or sell an investment, the Manager will consider those ESG factors only to the extent that they are relevant to the current or future value of the investment. CORPORATE GOVERNANCE STATEMENT 2020 | 15 LEAD AUDiTOR’S iNDEPENDENT DECLARATiON Lead Auditor’s Independence Declaration under Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 Section 307C of the Corporations Act 2001 To the Directors of Perpetual Trust Services Limited as the Responsible Entity of Perpetual Credit Income Trust To the Directors of Perpetual Trust Services Limited as the Responsible Entity of Perpetual Credit Income Trust I declare that, to the best of my knowledge and belief, in relation to the audit of Perpetual Credit Income Trust for the financial year ended 30 June 2020 there have been: i. I declare that, to the best of my knowledge and belief, in relation to the audit of Perpetual Credit Income Trust for the financial year ended 30 June 2020 there have been: no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and ii. i. ii. no contraventions of any applicable code of professional conduct in relation to the audit. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG KPMG Jessica Davis Partner Jessica Davis Sydney Partner 21 August 2020 Sydney 21 August 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 16 | PERPETUAL CREDIT INCOME TRUST Liability limited by a scheme approved under Professional Standards Legislation. Liability limited by a scheme approved under Professional Standards Legislation. Lead Auditor’s Independence Declaration under Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 Section 307C of the Corporations Act 2001 To the Directors of Perpetual Trust Services Limited as the Responsible Entity of Perpetual Credit Income Trust To the Directors of Perpetual Trust Services Limited as the Responsible Entity of Perpetual Credit Income Trust I declare that, to the best of my knowledge and belief, in relation to the audit of Perpetual Credit Income Trust for the financial year ended 30 June 2020 there have been: I declare that, to the best of my knowledge and belief, in relation to the audit of Perpetual Credit Income no contraventions of the auditor independence requirements as set out in the i. Trust for the financial year ended 30 June 2020 there have been: Corporations Act 2001 in relation to the audit; and ii. i. ii. no contraventions of any applicable code of professional conduct in relation to the audit. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG KPMG Jessica Davis Partner Jessica Davis Sydney Partner Sydney 21 August 2020 21 August 2020 STATEMENT OF COMPREHENSiVE iNCOME Statement of comprehensive income Investment income Distribution income Interest income Net gains/(losses) on financial instruments at fair value through profit or loss Net foreign exchange gains/(losses) Other income Total net investment income/(loss) Expenses Responsible Entity's fees Investment Manager's fees Other operating expenses Total expenses Profit/(loss) Other comprehensive income Total comprehensive income/(loss) for the year Earnings per unit Basic and diluted earnings per unit - cents per unit Perpetual Credit Income Trust Statement of comprehensive income For the year ended 30 June 2020 For the period from 22 May 2018 to 30 June 2019 $'000 30 June 2020 $'000 Notes 3 4 5(a), 14 5(b) 5(c) 3,598 14,492 (13,091) 33 40 5,072 130 3,144 1,155 4,429 643 - 643 519 1,203 487 (9) - 2,200 20 469 143 632 1,568 - 1,568 8 0.16 0.39 The above statement of comprehensive income should be read in conjunction with the accompanying notes. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. Liability limited by a scheme approved under Professional Standards Legislation. -17- ANNUAL FINANCIAL REPORT 2020 | 17 BALANCE SHEET Balance sheet Assets Cash and cash equivalents Financial assets at fair value through profit or loss Receivables for securities sold Receivables Total assets Liabilities Financial liabilities at fair value through profit or loss Distributions payable Payables for securities purchased Payables Total liabilities Net assets attributable to unitholders - equity Perpetual Credit Income Trust Balance sheet As at 30 June 2020 As at 30 June 2020 $'000 30 June 2019 $'000 11,942 415,073 5,824 1,364 434,203 2,968 1,210 4,475 364 9,017 149,358 297,029 - 839 447,226 692 342 4,526 440 6,000 425,186 441,226 Notes 13(b) 9 11 10 6 12 7 The above balance sheet should be read in conjunction with the accompanying notes. -18- 18 | PERPETUAL CREDIT INCOME TRUST Balance sheet Assets Cash and cash equivalents Financial assets at fair value through profit or loss Receivables for securities sold Receivables Total assets Liabilities Financial liabilities at fair value through profit or loss Distributions payable Payables for securities purchased Payables Total liabilities Perpetual Credit Income Trust Balance sheet As at 30 June 2020 As at 30 June 2020 $'000 30 June 2019 $'000 11,942 415,073 5,824 1,364 434,203 2,968 1,210 4,475 364 9,017 149,358 297,029 - 839 447,226 692 342 4,526 440 6,000 Notes 13(b) 9 11 10 6 12 7 Net assets attributable to unitholders - equity 425,186 441,226 The above balance sheet should be read in conjunction with the accompanying notes. STATEMENT OF CHANGES iN EQUiTY Statement of changes in equity Total equity at the beginning of the year Comprehensive income for the year Profit/(loss) Other comprehensive income Total comprehensive income for the year Transactions with unitholders Capital raising from the Initial Public Offering (IPO) Units issued upon reinvestment of distributions Distributions to unitholders Total transactions with unitholders Total equity at the end of the year Perpetual Credit Income Trust Statement of changes in equity For the year ended 30 June 2020 For the period from 22 May 2018 to 30 June 2019 $'000 - - - 1,568 - 1,568 - 440,000 - (342) 439,658 - - 441,226 30 June 2020 $'000 441,226 - - 643 - 643 - - 368 (17,051) (16,683) - - 425,186 Notes 7 7 7 6, 7 7 The above statement of changes in equity should be read in conjunction with the accompanying notes. -18- -19- ANNUAL FINANCIAL REPORT 2020 | 19 STATEMENT OF CASH FLOWS Statement of cash flows Perpetual Credit Income Trust Statement of cash flows For the year ended 30 June 2020 For the period from 22 May 2018 to 30 June 2019 $'000 30 June 2020 $'000 Notes Cash flows from operating activities Distributions received Interest received Other income received Investment Manager's fees paid Other operating expenses paid Net cash inflow/(outflow) from operating activities 13(a) Cash flows from investing activities Proceeds from sale of investments Payments for purchase of investments Net cash inflow/(outflow) from investing activities Cash flows from financing activities Capital raising from the Initial Public Offering (IPO) Distributions paid Net cash inflow/(outflow) from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rate changes on cash and cash equivalents 2,963 14,654 258 (3,385) (1,405) 13,085 - 927 - (224) (12) 691 452,220 (586,919) (134,699) 4,269 (295,602) (291,333) - (15,800) (15,800) 440,000 - 440,000 (137,414) 149,358 149,358 (2) - - Cash and cash equivalents at the end of the year 13(b) 11,942 149,358 The above statement of cash flows should be read in conjunction with the accompanying notes. -20- 20 | PERPETUAL CREDIT INCOME TRUST Statement of cash flows Perpetual Credit Income Trust Statement of cash flows For the year ended 30 June 2020 For the period from 22 May 2018 to 30 June 2019 $'000 30 June 2020 $'000 Notes 2,963 14,654 258 (3,385) (1,405) 13,085 927 - - (224) (12) 691 452,220 (586,919) (134,699) 4,269 (295,602) (291,333) - 440,000 (15,800) (15,800) 440,000 (137,414) 149,358 149,358 (2) - - - Cash flows from operating activities Distributions received Interest received Other income received Investment Manager's fees paid Other operating expenses paid Net cash inflow/(outflow) from operating activities 13(a) Cash flows from investing activities Proceeds from sale of investments Payments for purchase of investments Net cash inflow/(outflow) from investing activities Cash flows from financing activities Capital raising from the Initial Public Offering (IPO) Distributions paid Net cash inflow/(outflow) from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the year 13(b) 11,942 149,358 The above statement of cash flows should be read in conjunction with the accompanying notes. NOTES TO THE FiNANCiAL STATEMENTS 1 General Information Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 The annual financial report covers the Perpetual Credit Income Trust (the Trust) as an individual entity. The Trust is a registered managed investment scheme, which was constituted on 9 May 2018, registered with the Australian Securities and Investments Commission on 22 May 2018, commenced operations on 8 May 2019 and its units commenced trading on the Australian Securities Exchange (ASX: PCI) on 14 May 2019. The Trust is domiciled in Australia. For the purpose of the financial statements, the Trust is a for-profit entity. The Responsible Entity of the Trust is Perpetual Trust Services Limited (ACN 000 142 049, AFSL 236 648) (the Responsible Entity). The Responsible Entity's registered office is Level 18, Angel Place, 123 Pitt Street, Sydney, NSW 2000. The Investment Manager of the Trust is Perpetual Investment Management Limited (AFSL 234 426) (the Investment Manager). The Trust's investment objective is to provide investors with monthly income by investing in a diversified pool of credit and fixed income assets. The annual financial report was authorised for issue by the Directors on 21 August 2020. The Directors of the Responsible Entity have the power to amend and reissue the annual financial report. 2 Summary of significant accounting policies The principal accounting policies applied in the preparation of this annual financial report are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. (a) Basis of preparation The annual financial report is a general purpose financial report which has been prepared in accordance with the Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001 in Australia. The annual financial report is prepared on the basis of fair value measurement of assets and liabilities except where otherwise stated. Compliance with International Financial Reporting Standards The annual financial report of the Trust also complies with International Financial Reporting Standards and Interpretations issued by the International Accounting Standards Board. Functional and presentation currency The annual financial report is presented in Australian dollars, which is the Trust's functional currency. Use of estimates Management has taken into consideration the impacts of COVID-19 to make estimates and assumptions that affect the reported amounts in the financial statements. These estimates and associated assumptions are reviewed regularly and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The use of estimates and critical judgements in fair value measurement that can have significant effect on the amounts recognised in the financial statements is described in note 16(d). -20- -21- ANNUAL FINANCIAL REPORT 2020 | 21 Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 2 Summary of significant accounting policies (continued) (b) New accounting standards and interpretations There are no new accounting standards, amendments and interpretations effective for the first time for the financial year beginning 1 July 2019 that would be expected to have a material impact on the Trust. (c) Financial instruments (i) Classification The Trust classifies its investments based on its business model for managing those financial instruments and their contractual cash flow characteristics. The Trust’s investment portfolio is managed and its performance is evaluated on a fair value basis in accordance with the Trust’s documented investment strategy. The Trust evaluates the information about its investments on a fair value basis together with other related financial information. Derivatives and unlisted unit trusts are classified as financial assets at fair value through profit or loss. Derivative contracts that have negative values are presented as financial liabilities at fair value through profit or loss. For debt securities, the contractual cash flows are solely payments of principal and interest, however, they are neither held for collecting contractual cash flows nor held both for collecting contractual cash flows and for sale. The collection of contractual cash flows is only incidental to achieving the Trust’s business model’s objective. Consequently, the debt securities are classified as financial assets at fair value through profit or loss. (ii) Recognition/derecognition The Trust recognises financial assets and liabilities on the date it becomes party to the purchased contractual agreement (trade date) and recognises changes in fair value of the financial assets or financial liabilities from this date. Investments are derecognised on the date the Trust becomes party to the sale contractual agreement (trade date). (iii) Measurement At initial recognition, a financial asset or liability is measured at fair value. Transaction costs are expensed in profit or loss as incurred. Subsequently all financial assets and liabilities are measured at fair value without any deduction for estimated future selling cost. Gains and losses arising from changes in the fair value measurement are recognised in profit or loss in the period in which they arise. Fair value is 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. Further details of fair value measurement are disclosed in note 16(d). (iv) Offsetting financial instruments Financial assets and liabilities are offset and the net amount is reported in the balance sheet when 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 asset and settle the liability simultaneously. -22- 22 | PERPETUAL CREDIT INCOME TRUST Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 2 Summary of significant accounting policies (continued) 2 Summary of significant accounting policies (continued) (b) New accounting standards and interpretations There are no new accounting standards, amendments and interpretations effective for the first time for the financial year beginning 1 July 2019 that would be expected to have a material impact on the Trust. (c) Financial instruments (i) Classification The Trust classifies its investments based on its business model for managing those financial instruments and their contractual cash flow characteristics. The Trust’s investment portfolio is managed and its performance is evaluated on a fair value basis in accordance with the Trust’s documented investment strategy. The Trust evaluates the information about its investments on a fair value basis together with other related financial information. Derivatives and unlisted unit trusts are classified as financial assets at fair value through profit or loss. Derivative contracts that have negative values are presented as financial liabilities at fair value through profit or loss. For debt securities, the contractual cash flows are solely payments of principal and interest, however, they are neither held for collecting contractual cash flows nor held both for collecting contractual cash flows and for sale. The collection of contractual cash flows is only incidental to achieving the Trust’s business model’s objective. Consequently, the debt securities are classified as financial assets at fair value through profit or loss. The Trust recognises financial assets and liabilities on the date it becomes party to the purchased contractual agreement (trade date) and recognises changes in fair value of the financial assets or financial liabilities from this Investments are derecognised on the date the Trust becomes party to the sale contractual agreement (trade (ii) Recognition/derecognition date. date). (iii) Measurement At initial recognition, a financial asset or liability is measured at fair value. Transaction costs are expensed in profit or loss as incurred. Subsequently all financial assets and liabilities are measured at fair value without any deduction for estimated future selling cost. Gains and losses arising from changes in the fair value measurement are recognised in profit or loss in the period in which they arise. Fair value is 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. Further details of fair value measurement are disclosed in note 16(d). (iv) Offsetting financial instruments Financial assets and liabilities are offset and the net amount is reported in the balance sheet when 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 asset and settle the liability simultaneously. (d) Net assets attributable to unitholders The Trust is a closed-end vehicle and accordingly there are no redemptions by investors. Instead, while the Trust is listed, unitholders who wish to exit their investment will be able to do so via the ASX. Units in the Trust are listed on the ASX and traded by unitholders. The units can be traded on the ASX at any time for cash based on the listed price. While the Trust is listed and liquidity is generally expected to exist in the secondary market (ASX), there are no guarantees that an active trading market with sufficient liquidity will be available. The units issued by the Trust have been classified as equity as the Trust satisfies all criteria for the classification of puttable financial instruments as equity under AASB 132 Financial Instruments: Presentation. (e) Cash and cash equivalents For the purpose of presentation in the statement of cash flows, cash and cash equivalents include cash at bank, margin accounts, other short term and highly liquid financial assets with a maturity period of three months or less from the date of acquisition that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Margin accounts comprise cash held as collateral for derivative transactions. The cash is held by the broker and is only available to meet margin calls. (f) Receivables Receivables include accrued income and receivables for securities sold. Amounts are generally received within 30 days of being accrued for. These amounts are recognised initially at fair value and subsequently measured at amortised cost. At each reporting date, the Trust shall measure the loss allowance on receivables at an amount equal to the lifetime expected credit losses if the credit risk has increased significantly since initial recognition. If, at the reporting date, the credit risk has not increased significantly since initial recognition, the Trust shall measure the loss allowance at an amount equal to 12-month expected credit losses. Significant financial difficulties of the counterparty, probability that the counterparty will enter bankruptcy or financial reorganisation, and default in payments are all considered indicators that a loss allowance may be required. If the credit risk increases to the point that it is considered to be credit impaired, interest income will be calculated based on the gross carrying amount adjusted for the loss allowance. The amount of the impairment loss is recognised in profit or loss within other operating expenses. When a trade receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against other operating expenses in profit or loss. (g) Payables Payables include accrued expenses and payables for securities purchased which are unpaid at the end of the reporting date. Amounts are generally paid within 30 days of being accrued for. -22- -23- ANNUAL FINANCIAL REPORT 2020 | 23 Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 2 Summary of significant accounting policies (continued) (h) Investment income Interest income from financial assets at amortised cost is recognised using the effective interest method and includes interest from cash and cash equivalents. Interest from financial assets at fair value through profit or loss is determined based on the contractual coupon interest rate and includes interest from debt securities. Distribution income from financial assets at fair value through profit or loss is recognised in profit or loss when the Trust's right to receive payment is established. Other changes in fair value for such instruments are recorded in accordance with the accounting policies described in note 2(c). (i) Expenses All expenses, including Investment Manager's fees and Responsible Entity's fees are recognised in profit or loss on an accruals basis. (j) Income tax The Trust is not subject to income tax provided the taxable income of the Trust is attributed in full to its unitholders each financial year either by way of cash or reinvestment. Unitholders are subject to income tax at their own marginal tax rates on amounts attributable to them. The benefits of foreign tax paid are passed on to unitholders, providing certain conditions are met. (k) Distributions Distributions are payable as set out in the Trust's Constitution. Such distributions are recognised as payable when they are determined by the Responsible Entity of the Trust. (l) Goods and Services Tax The Goods and Services Tax (GST) is incurred on the cost of various services provided to the Trust by third parties. The Trust qualifies for Reduced Input Tax Credit; hence expenses such as Responsible Entity's fees have been recognised in profit or loss net of the amount of GST recoverable from the Australian Taxation Office. Payables are stated with the amount of GST included. The net amount of GST recoverable is included in receivables in the balance sheet. Cash flows are included in the statement of cash flows on a gross basis. (m) Foreign currency translation Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the date of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translations at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when fair value was determined. Translation differences on assets and liabilities carried at fair value are reported in profit or loss on a net basis within net gains/(losses) on financial instruments at fair value through profit or loss. -24- 24 | PERPETUAL CREDIT INCOME TRUST Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 2 Summary of significant accounting policies (continued) 3 Interest income (h) Investment income Interest income from financial assets at amortised cost is recognised using the effective interest method and includes interest from cash and cash equivalents. Interest from financial assets at fair value through profit or loss is determined based on the contractual coupon interest rate and includes interest from debt securities. Distribution income from financial assets at fair value through profit or loss is recognised in profit or loss when the Trust's right to receive payment is established. Other changes in fair value for such instruments are recorded in accordance with the accounting policies Cash and cash equivalents Debt securities Total Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) For the period from 22 May 2018 to 30 June 2019 $'000 30 June 2020 $'000 109 14,383 14,492 567 636 1,203 All expenses, including Investment Manager's fees and Responsible Entity's fees are recognised in profit or loss 4 Net gains/(losses) on financial instruments at fair value through profit or loss Net gains/(losses) arising from changes in the fair value measurement comprise: For the period from 22 May 2018 to 30 June 2019 $'000 30 June 2020 $'000 Net unrealised gains/(losses) on financial instruments at fair value through profit or loss Net realised gains/(losses) on financial instruments at fair value through profit or loss Net gains/(losses) on financial instruments at fair value through profit or loss (11,583) (1,508) (13,091) 864 (377) 487 described in note 2(c). (i) Expenses on an accruals basis. (j) Income tax The Trust is not subject to income tax provided the taxable income of the Trust is attributed in full to its unitholders each financial year either by way of cash or reinvestment. Unitholders are subject to income tax at their own marginal tax rates on amounts attributable to them. The benefits of foreign tax paid are passed on to unitholders, providing certain conditions are met. Distributions are payable as set out in the Trust's Constitution. Such distributions are recognised as payable when they are determined by the Responsible Entity of the Trust. (k) Distributions (l) Goods and Services Tax The Goods and Services Tax (GST) is incurred on the cost of various services provided to the Trust by third parties. The Trust qualifies for Reduced Input Tax Credit; hence expenses such as Responsible Entity's fees have been recognised in profit or loss net of the amount of GST recoverable from the Australian Taxation Office. Payables are stated with the amount of GST included. The net amount of GST recoverable is included in receivables in the balance sheet. Cash flows are included in the statement of cash flows on a gross basis. (m) Foreign currency translation Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the date of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translations at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when fair value was determined. Translation differences on assets and liabilities carried at fair value are reported in profit or loss on a net basis within net gains/(losses) on financial instruments at fair value through profit or loss. -24- -25- ANNUAL FINANCIAL REPORT 2020 | 25 Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 5 Expenses All expenses are recognised, net of the amount of Goods and Services Tax (GST) recoverable from the taxation authority, in profit or loss on an accruals basis. (a) Responsible Entity's fees The Responsible Entity, Perpetual Trust Services Limited, is entitled to receive 0.03% - 0.05% per annum (net RITC) of the Net Asset Value of the Trust and is also entitled to be paid remuneration for Additional Fund Administration services in the manner and at the time as set out in Investment Management Agreement. The Responsible Entity’s fees are calculated and accrued daily and paid monthly in arrears. Further details of the Responsible Entity’s fees are disclosed in note 14. (b) Investment Manager's fees The Investment Manager, Perpetual Investment Management Limited, receives management fees of 0.72% per annum (net of RITC) of the Net Asset Value of the Trust. In accordance with the PDS dated 8 March 2019, the Net Asset Value of the Trust is calculated daily by deducting all liabilities, which includes declared but unpaid distributions, calculated in accordance with the Responsible Entity’s Unit pricing and Valuation Policy and Australian Accounting Standards (AAS) from the total value of assets of the Trust. The management fees are calculated and accrued daily and paid monthly in arrears. Investment Manager's fees For the period from 22 May 2018 to 30 June 2019 $'000 30 June 2020 $'000 3,144 469 The Manager is appointed for an initial term of ten years unless terminated earlier (Initial Term). The Investment Management Agreement will be automatically extended for a further five year term on the expiry of the Initial Term (Extended Term) unless terminated earlier in accordance with its terms. If the Investment Management Agreement is terminated during the term, then in certain circumstances the Manager will be entitled to a termination payment equal to the Management fee rate multiplied by the number of years in the Initial Term or Extended Term and the value of the total Portfolio as at the termination date, reduced by one one hundred and twentieth (1/120) for Initial Term or one sixtieth (1/60) for Extended Term for each whole calendar month that has elapsed between the commencement date or the commencement of the Extended Term and the termination date. The Manager agreed to pay all of the costs incurred in raising capital under the Offer in accordance with the PDS dated 8 March 2019. If the Investment Management Agreement is terminated during the Initial Term, then, in certain circumstances the Manager will be entitled to be reimbursed for these costs, reduced by one one hundred and twentieth (1/120) for each whole calendar month that has elapsed between the commencement date and the termination date. -26- 26 | PERPETUAL CREDIT INCOME TRUST Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 5 Expenses All expenses are recognised, net of the amount of Goods and Services Tax (GST) recoverable from the taxation authority, in profit or loss on an accruals basis. (a) Responsible Entity's fees The Responsible Entity, Perpetual Trust Services Limited, is entitled to receive 0.03% - 0.05% per annum (net RITC) of the Net Asset Value of the Trust and is also entitled to be paid remuneration for Additional Fund Administration services in the manner and at the time as set out in Investment Management Agreement. The Responsible Entity’s fees are calculated and accrued daily and paid monthly in arrears. Further details of the Responsible Entity’s fees are disclosed in note 14. (b) Investment Manager's fees The Investment Manager, Perpetual Investment Management Limited, receives management fees of 0.72% per annum (net of RITC) of the Net Asset Value of the Trust. In accordance with the PDS dated 8 March 2019, the Net Asset Value of the Trust is calculated daily by deducting all liabilities, which includes declared but unpaid distributions, calculated in accordance with the Responsible Entity’s Unit pricing and Valuation Policy and Australian Accounting Standards (AAS) from the total value of assets of the Trust. The management fees are calculated and accrued daily and paid monthly in arrears. For the period from 22 May 2018 to 30 June 2019 $'000 30 June 2020 $'000 3,144 469 Investment Manager's fees The Manager is appointed for an initial term of ten years unless terminated earlier (Initial Term). The Investment Management Agreement will be automatically extended for a further five year term on the expiry of the Initial Term (Extended Term) unless terminated earlier in accordance with its terms. If the Investment Management Agreement is terminated during the term, then in certain circumstances the Manager will be entitled to a termination payment equal to the Management fee rate multiplied by the number of years in the Initial Term or Extended Term and the value of the total Portfolio as at the termination date, reduced by one one hundred and twentieth (1/120) for Initial Term or one sixtieth (1/60) for Extended Term for each whole calendar month that has elapsed between the commencement date or the commencement of the Extended Term and the termination date. The Manager agreed to pay all of the costs incurred in raising capital under the Offer in accordance with the PDS dated 8 March 2019. If the Investment Management Agreement is terminated during the Initial Term, then, in certain circumstances the Manager will be entitled to be reimbursed for these costs, reduced by one one hundred and twentieth (1/120) for each whole calendar month that has elapsed between the commencement date and the termination date. 5 Expenses (continued) (c) Other operating expenses Auditors’ remuneration ASX fees Registry services Custody administration fees Other expenses Total other operating expenses (d) Auditor's remuneration Audit and review of financial statements - KPMG Tax compliance services - KPMG Audit and review of compliance plan - PwC Total auditor's remuneration Audit fees were paid or payable by the Trust. For the period from 22 May 2018 to 30 June 2019 $'000 32 51 33 12 15 143 30 June 2020 $'000 59 56 204 59 777 1,155 For the period from 22 May 2018 to 30 June 2019 $ 30 June 2020 $ 48,235 8,034 2,836 59,105 22,500 7,500 2,500 32,500 -26- -27- ANNUAL FINANCIAL REPORT 2020 | 27 6 Distributions to unitholders The distributions for the year were as follows: Distributions paid - July Distributions paid - August Distributions paid - September Distributions paid - October Distributions paid - November Distributions paid - December Distributions paid - January Distributions paid - February Distributions paid - March Distributions paid - April Distributions paid - May Distributions payable - June Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) For the period from 22 May 2018 to 30 June 2019 $'000 For the period from 22 May 2018 to 30 June 2019 CPU - - - - - - - - - - - 342 342 - - - - - - - - - - - 0.0854 0.09 30 June 2020 $'000 30 June 2020 CPU 1,599 1,597 1,544 1,499 1,449 1,497 1,498 1,401 1,307 1,209 1,241 1,210 17,051 0.3997 0.3993 0.3860 0.3745 0.3622 0.3741 0.3741 0.3501 0.3264 0.3019 0.3099 0.3023 4.2605 -28- 28 | PERPETUAL CREDIT INCOME TRUST Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 6 Distributions to unitholders The distributions for the year were as follows: 7 Net assets attributable to unitholders Movements in the number of units and net assets attributable to unitholders during the year were as follows: For the For the period from period from 22 May 2018 to 30 June 2019 $'000 22 May 2018 to 30 June 2019 CPU - - - - - - - - - - - - - - - - - - - - - - 30 June 30 June 2020 $'000 2020 CPU 1,599 1,597 1,544 1,499 1,449 1,497 1,498 1,401 1,307 1,209 1,241 1,210 0.3997 0.3993 0.3860 0.3745 0.3622 0.3741 0.3741 0.3501 0.3264 0.3019 0.3099 0.3023 Distributions paid - July Distributions paid - August Distributions paid - September Distributions paid - October Distributions paid - November Distributions paid - December Distributions paid - January Distributions paid - February Distributions paid - March Distributions paid - April Distributions paid - May Distributions payable - June For the period from 22 May 2018 to 30 June 2019 Units '000 30 June 2020 Units '000 30 June 2020 $'000 For the period from 22 May 2018 to 30 June 2019 $'000 Net assets attributable to unitholders Opening balance Capital raising from the Initial Public Offering (IPO) Units issued upon reinvestment of distributions Distributions to unitholders Profit/(loss) Closing balance 400,000 - 334 - - 400,334 - 400,000 - - - 400,000 441,226 - 368 (17,051) 643 425,186 - 440,000 - (342) 1,568 441,226 As stipulated within the Trust's Constitution, each unit represents a right to an individual unit in the Trust and does not extend to a right to the underlying assets of the Trust. There are no separate classes of units and each unit has the same right attaching to it as all other units of the Trust. 17,051 4.2605 342 342 0.0854 0.09 Capital risk management The Trust considers its net assets attributable to unitholders as capital. 8 Earnings per unit blank blank blank Profit/(loss) attributable to unitholders ($'000) blank Weighted average number of units on issue ('000) blank blank Basic and diluted earnings per unit (cents per unit) For the period from 22 May 2018 to 30 June 2019 30 June 2020 blank 643 1,568 400,210 400,000 0.16 0.39 Basic and diluted earnings per unit is calculated by dividing the profit attributable to unitholders of the Trust by the weighted average number of units on issue during the year. -28- -29- ANNUAL FINANCIAL REPORT 2020 | 29 9 Financial assets at fair value through profit or loss Derivatives Futures Swaps Debt securities Unlisted unit trusts Total financial assets at fair value through profit or loss 10 Financial liabilities at fair value through profit or loss Derivatives Futures Swaps Total financial liabilities at fair value through profit or loss 11 Receivables Distributions receivable Interest receivable Other receivables Total receivables Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 30 June 2020 $'000 30 June 2019 $'000 24 458 331,992 82,599 415,073 - - 247,317 49,712 297,029 30 June 2020 $'000 30 June 2019 $'000 447 2,521 2,968 236 456 692 30 June 2020 $'000 30 June 2019 $'000 1,154 114 96 1,364 519 276 44 839 -30- 30 | PERPETUAL CREDIT INCOME TRUST Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 30 June 2020 $'000 30 June 2019 $'000 24 458 331,992 82,599 415,073 - - 247,317 49,712 297,029 30 June 2020 $'000 30 June 2019 $'000 447 2,521 2,968 236 456 692 30 June 2020 $'000 30 June 2019 $'000 1,154 114 96 1,364 519 276 44 839 Derivatives Futures Swaps Debt securities Unlisted unit trusts Total financial assets at fair value through profit or loss 10 Financial liabilities at fair value through profit or loss Total financial liabilities at fair value through profit or loss Derivatives Futures Swaps 11 Receivables Distributions receivable Interest receivable Other receivables Total receivables 9 Financial assets at fair value through profit or loss 12 Payables Responsible Entity's fees payable Investment Manager's fees payable Other operating expenses payable Other payable Total payables Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 30 June 2020 $'000 30 June 2019 $'000 69 269 11 15 364 21 280 139 - 440 13 Reconciliation of profit/(loss) to net cash inflow/(outflow) from operating activities (a)Reconciliation of operating profit/(loss) to net (a) Reconciliation of profit/(loss) to net cash inflow/(outflow) from operating activities Profit/(loss) (Increase)/decrease in distributions receivable (Increase)/decrease in interest receivable (Increase)/decrease in other receivables Increase/(decrease) in payables Net (gains)/losses on financial instruments at fair value through profit or loss Net foreign exchange (gains)/losses Net cash inflow/(outflow) from operating activities (b)Components of cash and cash equivalents (b) Components of cash and cash equivalents Cash at the end of the year as shown in the statement of cash flows is reconciled to the balance sheet as follows: Cash at bank Margin accounts Total cash and cash equivalents (c)Non-cash financing activities (c) Non-cash financing activities During the year, the following distribution payments were satisfied by the issue of units under the distribution reinvestment plan For the period from 22 May 2018 to 30 June 2019 $'000 1,568 (519) (276) (44) 440 (487) 9 691 30 June 2020 $'000 643 (635) 162 (52) (91) 13,091 (33) 13,085 9,400 2,542 11,942 148,263 1,095 149,358 368 - -30- -31- ANNUAL FINANCIAL REPORT 2020 | 31 Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 14 Related party transactions Responsible Entity The Responsible Entity of Perpetual Credit Income Trust is Perpetual Trust Services Limited (ACN 000 142 049, AFSL 236 648), a wholly owned subsidiary of Perpetual Limited (ACN 000 431 827). The Trust does not employ personnel in its own right. However, it is required to have an incorporated Responsible Entity to manage the activities of the Trust and this is considered the key management personnel. Key management personnel (a) Directors The following persons held office as Directors of Perpetual Trust Services Limited during the year or since the end of the year and up to the date of this report. Name Glenn Foster Vicki Riggio Richard McCarthy Simone Mosse Phillip Blackmore Michael Vainauskas Andrew Mclver Date of appointment/resignation Appointed as Director on 27 September 2019 Alternate Director for Vicki Riggio Resigned as Director on 27 September 2019 Resigned as Alternate Director for Michael Vainauskas on 2 September 2019 Appointed as Alternate Director for Glenn Foster on 2 September 2019 Resigned as Alternate Director for Glenn Foster on 27 September 2019 Directors were in office for this entire year except where stated otherwise. (b) Other key management personnel There were no other persons with responsibility for planning, directing and controlling the activities of the Trust, directly or indirectly, during or since the end of the financial year. Key management personnel unitholdings No key management personnel of the Responsible Entity held units in the Trust as at 30 June 2020. Transactions with key management personnel Key management personnel services are provided by Perpetual Trust Services Limited and included in the Responsible Entity's fees. There is no separate charge for these services. There was no compensation paid directly by the Trust to any of the key management personnel during the year. The Trust has not made, guaranteed or secured, directly or indirectly, any loans to the key management personnel or their personally related entities at any time during the reporting period. -32- 32 | PERPETUAL CREDIT INCOME TRUST 14 Related party transactions Responsible Entity The Responsible Entity of Perpetual Credit Income Trust is Perpetual Trust Services Limited (ACN 000 142 049, AFSL 236 648), a wholly owned subsidiary of Perpetual Limited (ACN 000 431 827). The Trust does not employ personnel in its own right. However, it is required to have an incorporated Responsible Entity to manage the activities of the Trust and this is considered the key management personnel. Key management personnel (a) Directors Name Glenn Foster Vicki Riggio Richard McCarthy Simone Mosse Phillip Blackmore Date of appointment/resignation Appointed as Director on 27 September 2019 Alternate Director for Vicki Riggio Michael Vainauskas Resigned as Director on 27 September 2019 Andrew Mclver Resigned as Alternate Director for Michael Vainauskas on 2 September 2019 Appointed as Alternate Director for Glenn Foster on 2 September 2019 Resigned as Alternate Director for Glenn Foster on 27 September 2019 Directors were in office for this entire year except where stated otherwise. (b) Other key management personnel There were no other persons with responsibility for planning, directing and controlling the activities of the Trust, directly or indirectly, during or since the end of the financial year. Key management personnel unitholdings No key management personnel of the Responsible Entity held units in the Trust as at 30 June 2020. Transactions with key management personnel Key management personnel services are provided by Perpetual Trust Services Limited and included in the Responsible Entity's fees. There is no separate charge for these services. There was no compensation paid directly by the Trust to any of the key management personnel during the year. The Trust has not made, guaranteed or secured, directly or indirectly, any loans to the key management personnel or their personally related entities at any time during the reporting period. Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 14 Related party transactions (continued) Investment Manager The Investment Manager, Perpetual Investment Management Limited, is a related party to the Trust. In accordance with AASB 124 Related Party Disclosures, a member of the same group as the Responsible Entity (who provides key management personnel services) is a related party. Under the terms of the Investment Management Agreement, the Investment Manager is entitled to receive Investment Manager's fees calculated by reference to the net asset value of the Trust. Further details of the Investment Manager's fees are disclosed in note 5. The following persons held office as Directors of Perpetual Trust Services Limited during the year or since the end of the year and up to the date of this report. Responsible Entity's fees and other transactions Under the terms of the Trust's Constitution, the Responsible Entity is entitled to receive Responsible Entity's fees calculated by reference to the net asset value of the Trust. The transactions during the year and amounts payable at the reporting date between the Trust and the Responsible Entity were as follows: For the period from 22 May 2018 to 30 June 2019 $ 30 June 2020 $ 129,729 68,857 19,558 20,989 Responsible Entity's fees Responsible Entity's fees payable Related party unitholdings Parties related to the Trust (including the Responsible Entity, its related parties and other schemes managed by the Responsible Entity) held units in the Trust as follows: 30 June 2020 Unitholders Number of units held '000 Interest held % Number of units acquired '000 Number of units disposed '000 Distributions paid/payable $'000 Perpetual Super Wrap 32 0.0 32 - 1 30 June 2019 There were no units held by parties related to the Trust. -32- -33- ANNUAL FINANCIAL REPORT 2020 | 33 Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 14 Related party transactions (continued) Investments The Trust held investments in the following scheme which is also managed by the Responsible Entity or its related parties: 30 June 2020 Investments Number of units held '000 Fair value of investments $'000 Interest held % Number of units acquired '000 Number of units disposed '000 Distributions received/ receivable $'000 Perpetual Loan Fund 82,087 82,599 56.4 34,233 - 3,598 30 June 2019 Investments Number of units held '000 Fair value of investments $'000 Interest held % Number of units acquired '000 Number of units disposed '000 Distributions received/ receivable $'000 Perpetual Loan Fund 47,854 49,712 49.8 47,854 - 519 15 Structured entities A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding control and the relevant activities are directed by means of contractual arrangements. The Trust considers all investments in unlisted unit trusts to be structured entities. The Trust invests in related unlisted unit trusts for the purpose of capital appreciation and earning investment income. The unlisted unit trusts are invested in accordance with the investment strategy by their respective investment managers. The return of the unlisted unit trusts is exposed to the variability of the performance of their investments. The unlisted unit trusts finance their operations by issuing redeemable units which are puttable at the holder's option and entitle the holder to a proportional stake in the respective trusts' net assets and distributions. The Trust's exposure to structured entities at 30 June 2020 was $82,599,041 (2019: $49,711,697). The fair value of these entities is included in financial assets at fair value through profit or loss in the balance sheet. The Trust's maximum exposure to loss from its interests in the structured entities is equal to the total fair value of its investments in these entities as there are no off balance sheet exposures relating to them. The Trust's exposure to any risk from the structured entities will cease when these investments are disposed of. The Trust does not have current commitments or intentions and contractual obligations to provide financial or other support to the structured entities. There are no loans or advances currently made to these entities. -34- 34 | PERPETUAL CREDIT INCOME TRUST 14 Related party transactions (continued) The Trust held investments in the following scheme which is also managed by the Responsible Entity or its Fair value Number of Number of Distributions Number of units held '000 of Interest units investments held acquired disposed $'000 % '000 units '000 received/ receivable $'000 Perpetual Loan Fund 82,087 82,599 56.4 34,233 3,598 Fair value Number of Number of Number of units held '000 of Interest investments $'000 held % units acquired '000 units disposed '000 Distributions received/ receivable $'000 - - 15 Structured entities A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding control and the relevant activities are directed by means of contractual arrangements. The Trust considers all investments in unlisted unit trusts to be structured entities. The Trust invests in related unlisted unit trusts for the purpose of capital appreciation and earning investment income. The unlisted unit trusts are invested in accordance with the investment strategy by their respective investment managers. The return of the unlisted unit trusts is exposed to the variability of the performance of their investments. The unlisted unit trusts finance their operations by issuing redeemable units which are puttable at the holder's option and entitle the holder to a proportional stake in the respective trusts' net assets and Investments related parties: 30 June 2020 Investments 30 June 2019 Investments distributions. sheet. The Trust's maximum exposure to loss from its interests in the structured entities is equal to the total fair value of its investments in these entities as there are no off balance sheet exposures relating to them. The Trust's exposure to any risk from the structured entities will cease when these investments are disposed of. The Trust does not have current commitments or intentions and contractual obligations to provide financial or other support to the structured entities. There are no loans or advances currently made to these entities. Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 15 Structured entities (continued) Unconsolidated subsidiaries The Trust applies the investment entity exception to consolidation available under AASB 10 Consolidated Financial Statements and measures its subsidiaries at fair value through profit or loss. The following unconsolidated structured entities are considered to be the Trust's subsidiaries at the reporting date: Fair value 30 June 2020 $'000 30 June 2019 $'000 Ownership interest 30 June 30 June 2019 2020 % % Perpetual Loan Fund 82,599 49,712 56.4 49.8 The principal place of business for the above entity is Sydney, Australia. 16 Financial risk management The Trust's activities expose it to a variety of financial risks. The management of these risks is undertaken by the Trust's Investment Manager who has been appointed by the Responsible Entity under an Investment Management Agreement to manage the Trust's assets in accordance with the Investment Objective and Strategy. Perpetual Loan Fund 47,854 49,712 49.8 47,854 519 The Responsible Entity has in place a framework which includes: • The Investment Manager providing the Responsible Entity with regular reports on their compliance with the Investment Management Agreement; • Completion of regular reviews on the Service Provider which may include a review of the investment managers risk management framework to manage the financial risks of the Trust; and • Regular reporting on the liquidity of the Trust in accordance with the Trust’s Liquidity Risk Management Statement. The Trust’s Investment Manager has in place a framework to identify and manage the financial risks in accordance with the investment objective and strategy. This includes an investment due diligence process and on-going monitoring of the investments in the Trust. Specific controls the Investment Manager applies to manage the financial risks are detailed under each risk specified below. The Trust's exposure to structured entities at 30 June 2020 was $82,599,041 (2019: $49,711,697). The fair value of these entities is included in financial assets at fair value through profit or loss in the balance (a) Market risk (i) Currency risk Currency risk arises as the fair value or future cash flows of monetary securities denominated in foreign currency will fluctuate due to changes in exchange rates. The currency risk relating to non-monetary assets and liabilities is a component of price risk not currency risk. However, Investment Manager monitors the exposures on all foreign currency denominated assets and liabilities. The Trust held cross currency swaps to protect the valuation of financial assets and liabilities against variations in the exchange rates. The Trust does not designate any derivatives as hedges, and hence these derivative financial instrument are classified at fair value through profit or loss. The Trust did not have significant net exposure to currency risk at the reporting date. -34- -35- ANNUAL FINANCIAL REPORT 2020 | 35 Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 16 Financial risk management (continued) (a) Market risk (continued) (ii) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Trust is exposed to cash flow interest rate risk on financial instruments with floating interest rates. Financial instruments with fixed interest rates expose the Trust to fair value interest rate risk. The Trust's exposure to interest rate risk also arises from cash and cash equivalents, which earn/charge a floating rate of interest. The following table summarises the Trust’s exposure to interest rate risk: 30 June 2020 Financial assets Cash and cash equivalents Debt securities Derivatives Financial liabilities Derivatives 30 June 2019 Financial assets Cash and cash equivalents Debt securities Financial liabilities Derivatives Floating interest rate $'000 Fixed interest rate $'000 Non-interest bearing $'000 Total $'000 11,942 156,544 - - 175,448 482 - 2,968 - - - - 11,942 331,992 482 2,968 Floating interest rate $'000 Fixed interest rate $'000 Non-interest bearing $'000 Total $'000 149,358 137,963 - 109,354 - 692 - - - 149,358 247,317 692 The table presented in note 16(a)(iv) summarises sensitivity analysis to interest rate risk. This analysis assumes that all other variables, in particular foreign currency exchange rates remain constant. -36- 36 | PERPETUAL CREDIT INCOME TRUST Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 16 Financial risk management (continued) 16 Financial risk management (continued) (a) Market risk (continued) (ii) Interest rate risk rate risk. floating rate of interest. Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Trust is exposed to cash flow interest rate risk on financial instruments with floating interest rates. Financial instruments with fixed interest rates expose the Trust to fair value interest The Trust's exposure to interest rate risk also arises from cash and cash equivalents, which earn/charge a The following table summarises the Trust’s exposure to interest rate risk: (a) Market risk (continued) (iii) Price risk Price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk). The Trust predominantly invests in debt securities. As a result, the price risk arising from the Trust's investments is impacted by movements in interest rates and is reflected in note 16(a)(ii). The fair value of the Trust's investments exposed to price risk was as follows: Floating interest rate $'000 Fixed rate $'000 interest Non-interest bearing $'000 Total $'000 Blank Units in fixed income trust a 30 June 2020 $'000 30 June 2019 $'000 82,599 82,599 49,712 49,712 30 June 2020 Financial assets Cash and cash equivalents Debt securities Derivatives Financial liabilities Derivatives 30 June 2019 Financial assets Cash and cash equivalents Debt securities Financial liabilities Derivatives - - 11,942 156,544 - 175,448 482 11,942 331,992 482 2,968 2,968 Floating interest rate $'000 Fixed rate $'000 interest Non-interest bearing $'000 Total $'000 149,358 137,963 - 109,354 149,358 247,317 - 692 692 - - - - - - - The table presented in note 16(a)(iv) summarises sensitivity analysis to interest rate risk. This analysis assumes that all other variables, in particular foreign currency exchange rates remain constant. The table presented in note 16(a)(iv) summarises sensitivity analysis to price risk. This analysis assumes that all other variables remain constant. (iv) Sensitivity analysis The following table summarises the sensitivity of the profit and net assets attributable to unitholders to interest rate risk and price risk. The reasonably possible movements in the risk variables have been determined based on Investment Manager's best estimate, having regard to a number of factors, including historical levels of changes in interest rates and historical correlation of the Trust's investments with the relevant benchmark and market volatility. However, actual movements in the risk variables may be greater or less than anticipated due to a number of factors, including unusual large market movements resulting from changes in the performance of and/or correlation between the performance of the economies, markets and securities in which the Trust invests. As a result, historic variations in risk variables should not be used to predict future variations in the risk variables. blank Interest rate risk blank blank Price risk Units in fixed income trust Sensitivity rates Impact on profit/net assets attributable to unitholders 30 June 2020 $'000 1,279 (1,279) - - 4,130 (4,130) +0.25% -0.25% +0.5% -0.5% +5% -5% 30 June 2019 $'000 - - 1,436 (1,436) 2,486 (2,486) -36- -37- ANNUAL FINANCIAL REPORT 2020 | 37 Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 16 Financial risk management (continued) (b) Credit risk Credit risk is the risk that a counterparty will be unable to pay amounts when they fall due. The main concentration of counterparty credit risk, to which the Trust is exposed to, arises predominantly from the Trust's investments in debt securities. The Trust is also exposed to counterparty credit risk on derivative financial instruments, cash and cash equivalents, and receivables for securities sold. The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets. None of these assets are impaired nor past due but not impaired. The Trust determines credit risk and measures expected credit losses for financial assets measured at amortised cost using probability of default, exposure at default and loss given default. Investment Manager considers relevant, historical analysis and forward looking information in determining any expected credit loss. At the reporting date, all receivables and cash and cash equivalents are held with approved counterparties and are either callable on demand or due within 30 days. Investment Manager considers the probability of default to be low, as a result, no loss allowance has been recognised based on 12-month expected credit losses as any such impairment would be wholly insignificant to the Trust. (i) Debt securities Investment management processes include the consideration of counterparty risk. The Investment Manager may refer to the credit ratings issued by rating agencies to assess the creditworthiness of counterparties. The Investment Manager consider (among other things) branding, stability and security marketability of counterparties and consistently monitor exposure through electronic systems. The Investment Manager monitors the credit ratings of debt securities on a regular basis. The table below sets out the analysis of debt securities by credit ratings as issued by Standard & Poor's: 30 June 2020 Debt securities 30 June 2019 Debt securities AAA to AA- $'000 A+ to A- $'000 - - 37,489 37,489 AAA to AA- $'000 A+ to A- $'000 BBB+ to BBB- $'000 149,639 149,639 BBB+ to BBB- $'000 BB+ to B- $'000 NON- RATED $'000 Total $'000 15,299 15,299 129,565 129,565 331,992 331,992 BB+ to B- $'000 NON- RATED $'000 Total $'000 19,962 19,962 31,094 31,094 105,322 105,322 10,054 10,054 80,885 80,885 247,317 247,317 Debt securities that are not rated by Standard & Poor's may be rated by other rating agencies. (ii) Derivative financial instruments The risk of counterparty default in a derivative transaction is minimised by predominantly using exchange traded derivatives (except for currency hedging, contracts for differences, and occasionally other approved over the counter instruments). The exchange traded derivatives are only executed and cleared through approved members of the exchanges. For over the counter derivatives, minimum credit ratings apply for counterparties at the time of entering into a contract and ISDA agreements are put in place with counterparties. -38- 38 | PERPETUAL CREDIT INCOME TRUST Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 16 Financial risk management (continued) 16 Financial risk management (continued) (b) Credit risk (continued) (iii) Cash and cash equivalents The exposure to credit risk for cash and cash equivalents is low as all counterparties have a rating of A or higher (as determined by Standard & Poor's). (iv) Receivables for securities sold All transactions in debt securities are settled/paid for upon delivery using approved brokers. The risk of default is considered low, as delivery of securities sold is only made once the broker has received payment from the counterparty. Payments on securities acquired are only made after the broker has received the securities. The trade will fail if either party fails to meet its obligations. All transactions in unlisted unit trusts are settled/unitised when unit prices are issued. The risk of default is considered low except when trading in a suspended unlisted unit trust. (i) Debt securities (c) Liquidity risk Liquidity risk is the risk that the Trust will not be able to meet its financial obligations as they fall due. The Trust is a closed end vehicle and not exposed to any cash redemptions. The Trust's investment in Perpetual Loan Fund is considered illiquid as the redemption is subject to the withdrawal offer made by its responsible entity. The following table summarises the contractual maturities of financial liabilities, including interest payments where applicable: 30 June 2020 Non-derivative financial liabilities Distributions payable to unitholders Payables for securities purchased Payables Total Derivative financial liabilities Futures Swaps Outflow Inflow Total Carrying amount $'000 At call $'000 Contractual cash flows less than 6 months $'000 6 - 12 months $'000 more than 12 months $'000 - - - - - - - - - 1,210 4,475 364 6,049 447 - 599 (329) 717 - - - - - - - - - - 599 (329) 270 - - 27,010 (24,958) 2,052 1,210 4,475 364 6,049 447 2,521 - - 2,968 -39- ANNUAL FINANCIAL REPORT 2020 | 39 (b) Credit risk Credit risk is the risk that a counterparty will be unable to pay amounts when they fall due. The main concentration of counterparty credit risk, to which the Trust is exposed to, arises predominantly from the Trust's investments in debt securities. The Trust is also exposed to counterparty credit risk on derivative financial instruments, cash and cash equivalents, and receivables for securities sold. The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets. None of these assets are impaired nor past due but not impaired. The Trust determines credit risk and measures expected credit losses for financial assets measured at amortised cost using probability of default, exposure at default and loss given default. Investment Manager considers relevant, historical analysis and forward looking information in determining any expected credit loss. At the reporting date, all receivables and cash and cash equivalents are held with approved counterparties and are either callable on demand or due within 30 days. Investment Manager considers the probability of default to be low, as a result, no loss allowance has been recognised based on 12-month expected credit losses as any such impairment would be wholly insignificant to the Trust. Investment management processes include the consideration of counterparty risk. The Investment Manager may refer to the credit ratings issued by rating agencies to assess the creditworthiness of counterparties. The Investment Manager consider (among other things) branding, stability and security marketability of counterparties and consistently monitor exposure through electronic systems. The Investment Manager monitors the credit ratings of debt securities on a regular basis. The table below sets out the analysis of debt securities by credit ratings as issued by Standard & Poor's: 30 June 2020 Debt securities 30 June 2019 Debt securities AAA to AA- $'000 A+ to A- $'000 - - 37,489 37,489 AAA to AA- $'000 A+ to A- $'000 BBB+ to BBB- $'000 149,639 149,639 BBB+ to BBB- $'000 BB+ to B- $'000 NON- RATED $'000 15,299 15,299 129,565 129,565 331,992 331,992 BB+ to B- $'000 NON- RATED $'000 Total $'000 Total $'000 19,962 19,962 31,094 31,094 105,322 105,322 10,054 10,054 80,885 80,885 247,317 247,317 Debt securities that are not rated by Standard & Poor's may be rated by other rating agencies. (ii) Derivative financial instruments The risk of counterparty default in a derivative transaction is minimised by predominantly using exchange traded derivatives (except for currency hedging, contracts for differences, and occasionally other approved over the counter instruments). The exchange traded derivatives are only executed and cleared through approved members of the exchanges. For over the counter derivatives, minimum credit ratings apply for counterparties at the time of entering into a contract and ISDA agreements are put in place with counterparties. -38- Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 16 Financial risk management (continued) (c) Liquidity risk (continued) Carrying amount $'000 At call $'000 Contractual cash flows less than 6 months $'000 6 - 12 months $'000 more than 12 months $'000 342 4,526 440 5,308 236 456 - - 692 - - - - - - - - - 342 4,526 440 5,308 - - - - - - - - 236 - 443 (316) 363 - - 7,211 (7,557) (346) - - 10,789 (10,974) (185) 30 June 2019 Non-derivative financial liabilities Distributions payable to unitholders Payables for securities purchased Payables Total Derivative financial liabilities Futures Swaps Outflow Inflow Total (d) Fair value measurement The Trust classifies fair value measurement of its financial assets and liabilities using a fair value hierarchy model that reflects the subjectivity of the inputs used in making the measurements. The fair value hierarchy has the following levels: • Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); • • Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2); and Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3). (i) Fair value in an active market (level 1) The fair value of financial assets and liabilities traded in active markets is based on quoted market prices at the end of the reporting period without any deduction for estimated future selling costs. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. Listed securities and exchange traded derivatives are valued at the last traded price. For the majority of these financial instruments, information provided by the independent pricing services is relied upon for valuation. (ii) Fair value in an inactive or unquoted market (level 2 and level 3) The fair value of financial assets and liabilities that are not traded in an active market is determined by using valuation techniques. These include the use of recent arm's length transactions, reference to current fair value of a substantially similar other instrument, discounted cash flow techniques, option pricing models or any other valuation techniques that provide a reliable estimate of prices obtained in actual market transactions. -40- 40 | PERPETUAL CREDIT INCOME TRUST Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 16 Financial risk management (continued) 16 Financial risk management (continued) (c) Liquidity risk (continued) 30 June 2019 Non-derivative financial liabilities Distributions payable to unitholders Payables for securities purchased Derivative financial liabilities Payables Total Futures Swaps Outflow Inflow Total Carrying amount $'000 At call $'000 Contractual cash flows less than 6 months $'000 6 - 12 months $'000 more than 12 months $'000 342 4,526 440 5,308 236 456 - - 692 - - - - - - - - - 342 4,526 440 5,308 236 - 443 (316) 363 - - - - - - - - - - - - 7,211 (7,557) (346) 10,789 (10,974) (185) (d) Fair value measurement The Trust classifies fair value measurement of its financial assets and liabilities using a fair value hierarchy model that reflects the subjectivity of the inputs used in making the measurements. The fair value hierarchy has the following levels: • • (level 3). • Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2); and Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (i) Fair value in an active market (level 1) The fair value of financial assets and liabilities traded in active markets is based on quoted market prices at the end of the reporting period without any deduction for estimated future selling costs. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. Listed securities and exchange traded derivatives are valued at the last traded price. For the majority of these financial instruments, information provided by the independent pricing services is relied upon for valuation. (ii) Fair value in an inactive or unquoted market (level 2 and level 3) The fair value of financial assets and liabilities that are not traded in an active market is determined by using valuation techniques. These include the use of recent arm's length transactions, reference to current fair value of a substantially similar other instrument, discounted cash flow techniques, option pricing models or any other valuation techniques that provide a reliable estimate of prices obtained in actual market transactions. (d) Fair value measurement (continued) (ii) Fair value in an inactive or unquoted market (level 2 and level 3) (continued) Valuation models use observable data to the extent practicable. However, areas such as credit risk (both own and counterparty), volatilities and correlations require Investment Manager to make estimates. Changes in the assumptions about these factors could affect the reported fair value of financial instruments. The output of a model is always an estimate or approximation of a value that cannot be determined with certainty, and valuation techniques employed may not fully reflect all factors relevant to the positions held. Debt securities are generally valued using broker quotes. Where discounted cash flow techniques are used, estimated future cash flows are based on Investment Manager's best estimates and the discount rate used is a market rate at the end of the reporting period applicable for an instrument with similar terms and conditions. The fair value of derivatives that are not exchange traded is estimated at the amount that would be received or paid to terminate the contract at the end of the reporting period taking into account current market conditions (volatility and appropriate yield curve) and the current creditworthiness of the counterparties. Investments in unlisted unit trusts are recorded at the redemption value per unit as reported by the Investment Managers of such trusts. The Scheme's level 3 asset include Perpetual Loan Fund which is valued using the redemption value per unit as reported by the Investment Manager without any adjustment. The following tables present the Trust's financial assets and liabilities (by class) measured at fair value according to the fair value hierarchy: 30 June 2020 Level 1 $'000 Level 2 $'000 Level 3 $'000 Total $'000 Financial assets at fair value through profit or loss Derivatives Futures Swaps Debt securities Unlisted unit trusts Total Financial liabilities at fair value through profit or loss Derivatives Futures Swaps Total 24 - 5,204 - 5,228 - 458 326,788 - 327,246 - - - 82,599 82,599 24 458 331,992 82,599 415,073 447 - 447 - 2,521 2,521 - - - 447 2,521 2,968 -40- -41- ANNUAL FINANCIAL REPORT 2020 | 41 Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 16 Financial risk management (continued) (d) Fair value measurement (continued) 30 June 2019 Level 1 $'000 Level 2 $'000 Level 3 $'000 Total $'000 Financial assets at fair value through profit or loss Debt securities Unlisted unit trusts Total Financial liabilities at fair value through profit or loss Derivatives Futures Swaps Total Transfers between levels 2,305 - 2,305 245,012 - 245,012 - 49,712 49,712 247,317 49,712 297,029 236 - 236 - 456 456 - - - 236 456 692 The Trust's policy is to recognise transfers into and transfers out of fair value hierarchy levels at the end of the reporting period. There were no transfers between levels for the years ended 30 June 2020 and 30 June 2019. Fair value measurements using significant unobservable inputs (level 3) The following tables present the movement in level 3 instruments, by class of financial instruments, for the years ended 30 June 2020 and 30 June 2019: 30 June 2020 Opening balance Purchases Gains/(losses) recognised in profit or loss Closing balance Total unrealised gains/(losses) for the year included in the statement of comprehensive income for financial assets and liabilities held at the end of the year Unlisted unit trusts $'000 Total $'000 49,712 35,850 (2,963) 82,599 49,712 35,850 (2,963) 82,599 (2,963) (2,963) -42- 42 | PERPETUAL CREDIT INCOME TRUST Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 16 Financial risk management (continued) 16 Financial risk management (continued) (d) Fair value measurement (continued) (d) Fair value measurement (continued) Fair value measurements using significant unobservable inputs (level 3) (continued) 30 June 2019 Level 1 $'000 Level 2 $'000 Level 3 $'000 Total $'000 30 June 2019 Opening balance Purchases Gains/(losses) recognised in profit or loss Closing balance Total unrealised gains/(losses) for the year included in the statement of comprehensive income for financial assets and liabilities held at the end of the period Unlisted unit trusts $'000 Total $'000 - 49,887 (175) 49,712 - 49,887 (175) 49,712 (175) (175) 17 Offsetting financial assets and financial liabilities Financial assets and liabilities are offset and the net amount is reported in the balance sheet when 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 asset and settle the liability simultaneously. The gross and net positions of financial assets and liabilities that have been offset in the balance sheet are disclosed in the first three columns of the table below: 30 June 2020 Financial assets Margin accounts Derivative financial instruments Total Financial liabilities Derivative financial instruments Total Effects of offsetting on the balance sheet Gross amounts set off in the balance sheet $'000 Net amounts presented in the balance sheet $'000 Gross amounts $'000 Related amounts not offset Amounts subject to master netting arrange- ments $'000 Net amounts $'000 - - - - - 2,542 482 3,024 (697) - (697) 1,845 482 2,327 (2,968) (2,968) 697 697 (2,271) (2,271) 2,542 482 3,024 (2,968) (2,968) -43- ANNUAL FINANCIAL REPORT 2020 | 43 Financial assets at fair value through profit or loss Debt securities Unlisted unit trusts Total Financial liabilities at fair value through profit or loss Derivatives Futures Swaps Total Transfers between levels reporting period. 2,305 - 2,305 245,012 - 245,012 49,712 49,712 247,317 49,712 297,029 236 - 236 - 456 456 236 456 692 - - - - The Trust's policy is to recognise transfers into and transfers out of fair value hierarchy levels at the end of the There were no transfers between levels for the years ended 30 June 2020 and 30 June 2019. Fair value measurements using significant unobservable inputs (level 3) The following tables present the movement in level 3 instruments, by class of financial instruments, for the years ended 30 June 2020 and 30 June 2019: 30 June 2020 Opening balance Purchases Closing balance year Gains/(losses) recognised in profit or loss Total unrealised gains/(losses) for the year included in the statement of comprehensive income for financial assets and liabilities held at the end of the Unlisted unit trusts $'000 Total $'000 49,712 35,850 (2,963) 82,599 49,712 35,850 (2,963) 82,599 (2,963) (2,963) -42- Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 17 Offsetting financial assets and financial liabilities (continued) Effects of offsetting on the balance sheet Gross amounts set off in the balance sheet $'000 Net amounts presented in the balance sheet $'000 Gross amounts $'000 Related amounts not offset Amounts subject to master netting arrange- ments $'000 Net amounts $'000 1,095 1,095 (692) (692) - - - - 1,095 1,095 (236) (236) 859 859 (692) (692) 236 236 (456) (456) 30 June 2019 Financial assets Margin accounts Total Financial liabilities Derivative financial instruments Total Master netting arrangement - not currently enforceable Agreements with derivative counterparties are based on the ISDA Master Agreements. Under the terms of these arrangements, only where certain credit events occur (such as default), the net position owing/receivable to a single counterparty in the same currency will be taken as owing and all the relevant arrangements terminated. As the Trust does not presently have a legally enforceable right of set-off, these amounts have not been offset in the balance sheet, but have been presented separately in this note. 18 Derivative financial instruments A derivative is a financial instrument or other contract which is settled at a future date and whose value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign currency exchange rates, index of prices or rates, credit rating or credit index or other variables. Derivative financial instruments require no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. Derivative transactions include many different instruments such as foreign exchange forward contracts, futures and options. Derivatives are considered to be part of the investment process and the use of derivatives is an essential part of the Trust's portfolio management. Derivatives are not managed in isolation. Consequently, the use of derivatives is multifaceted and includes: • • • hedging to protect an asset or liability of the Trust against a fluctuation in market values or to reduce volatility; a substitution for trading of physical securities; and adjusting asset exposures within the parameters set in the investment strategy, and adjusting the duration of fixed interest portfolios or the weighted average maturity of cash portfolios. While derivatives are used for trading purposes, they are not used to gear (leverage) a portfolio. Gearing a portfolio would occur if the level of exposure to the markets exceeds the underlying value of the Trust. -44- 44 | PERPETUAL CREDIT INCOME TRUST 17 Offsetting financial assets and financial liabilities (continued) Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) Effects of offsetting on the Related amounts not balance sheet offset Gross amounts set off in the balance sheet $'000 Net amounts presented in the balance sheet $'000 Amounts subject to master netting arrange- ments $'000 Net amounts $'000 - - - - 1,095 1,095 (236) (236) 859 859 (692) (692) 236 236 (456) (456) Gross amounts $'000 1,095 1,095 (692) (692) 30 June 2019 Financial assets Margin accounts Total Financial liabilities Derivative financial instruments Total Master netting arrangement - not currently enforceable Agreements with derivative counterparties are based on the ISDA Master Agreements. Under the terms of these arrangements, only where certain credit events occur (such as default), the net position owing/receivable to a single counterparty in the same currency will be taken as owing and all the relevant arrangements terminated. As the Trust does not presently have a legally enforceable right of set-off, these amounts have not been offset in the balance sheet, but have been presented separately in this note. 18 Derivative financial instruments A derivative is a financial instrument or other contract which is settled at a future date and whose value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign currency exchange rates, index of prices or rates, credit rating or credit index or other variables. Derivative financial instruments require no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in Derivative transactions include many different instruments such as foreign exchange forward contracts, futures and options. Derivatives are considered to be part of the investment process and the use of derivatives is an essential part of the Trust's portfolio management. Derivatives are not managed in isolation. Consequently, the use of derivatives is multifaceted and includes: hedging to protect an asset or liability of the Trust against a fluctuation in market values or to reduce a substitution for trading of physical securities; and adjusting asset exposures within the parameters set in the investment strategy, and adjusting the duration of fixed interest portfolios or the weighted average maturity of cash portfolios. While derivatives are used for trading purposes, they are not used to gear (leverage) a portfolio. Gearing a portfolio would occur if the level of exposure to the markets exceeds the underlying value of the Trust. market factors. volatility; • • • Perpetual Credit Income Trust Notes to the financial statements For the year ended 30 June 2020 (continued) 18 Derivative financial instruments (continued) The Trust held the following derivative instruments during the year: (a) Futures Futures are contractual obligations to buy or sell financial instruments on a future date at a specified price established in an organised market. The futures contracts are collateralised by cash or marketable securities. Changes in futures contracts' values are usually settled net daily with the exchange. (b) Swaps Swaps are derivative instruments in which two counterparties agree to exchange one stream of cash flow against another stream. Cross currency swaps are valued at fair value which is based on the estimated amount the Trust would pay or receive to terminate the currency derivatives at the balance sheet date, taking into account current interest rates, foreign exchange rates, volatility and the current creditworthiness of the currency derivatives counterparties. Cross currency swaps are used to hedge the Trust’s interest rate and foreign currency exposure. However, hedge accounting has not been applied. Risk exposures and fair value measurements Information about the Trust's exposure to financial risks and the methods and assumptions used in determining fair values is provided in note 16. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of the derivative financial instruments. 19 Segment information The Trust is organised into one main operating segment with only one key function, being the investment of funds predominantly in Australia together with opportunistic investments globally in accordance with its investment objective and guidelines. 20 Events occurring after the reporting period On 27 July 2020, the Directors declared a distribution of 0.3157 cents per ordinary unit which amounted to $1,263,935 and was paid on 10 August 2020. The uncertainty around COVID-19 is expected to continue to present social and economic challenges in the next financial year and the resulting impact on the capital markets remain uncertain. Since the reporting date, there have been no significant changes in the valuation of the Trust's investment portfolio arising from the changes in the estimates and assumptions in relation to COVID-19. The Directors are closely monitoring the liquidity of the Trust and any impact on the valuation of the Trust's investment portfolio. No other significant events have occurred since the reporting date which would have impact on the financial position of the Trust disclosed in the balance sheet as at 30 June 2020 or on the results and cash flows of the Trust for the year ended on that date. 21 Contingent assets, liabilities and commitments There were no outstanding contingent assets, liabilities or commitments as at 30 June 2020 and 30 June 2019. -44- -45- ANNUAL FINANCIAL REPORT 2020 | 45 DiRECTORS’ DECLARATiON Directors' declaration Perpetual Credit Income Trust Directors' declaration For the year ended 30 June 2020 In the opinion of the Directors of Perpetual Trust Services Limited, the Responsible Entity of Perpetual Credit Income Trust: (a) the annual financial report and notes, set out on pages 17 to 45, are in accordance with the Corporations Act 2001, including: (i) (ii) complying with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and giving a true and fair view of the Trust's financial position as at 30 June 2020 and of its performance for the financial year ended on that date; there are reasonable grounds to believe that the Trust will be able to pay its debts as and when they become due and payable; and note 2(a) confirms that the annual financial report complies with International Financial Reporting Standards and Interpretations issued by the International Accounting Standards Board. (b) (c) This declaration is made in accordance with a resolution of the Directors. Director Sydney 21 August 2020 -46- 46 | PERPETUAL CREDIT INCOME TRUST Perpetual Credit Income Trust Directors' declaration For the year ended 30 June 2020 Directors' declaration Income Trust: Act 2001, including: In the opinion of the Directors of Perpetual Trust Services Limited, the Responsible Entity of Perpetual Credit (a) the annual financial report and notes, set out on pages 17 to 45, are in accordance with the Corporations (i) complying with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of the Trust's financial position as at 30 June 2020 and of its performance for the financial year ended on that date; (b) there are reasonable grounds to believe that the Trust will be able to pay its debts as and when they become due and payable; and (c) note 2(a) confirms that the annual financial report complies with International Financial Reporting Standards and Interpretations issued by the International Accounting Standards Board. This declaration is made in accordance with a resolution of the Directors. Director Sydney 21 August 2020 iNDEPENDENT AUDiTOR’S REPORT TO THE UNITHOLDERS OF PERPETUAL CREDIT INCOME TRUST Lead Auditor’s Independence Declaration under Independent Auditor’s Report Section 307C of the Corporations Act 2001 To the unitholders of Perpetual Credit Income Trust To the Directors of Perpetual Trust Services Limited as the Responsible Entity of Opinion Perpetual Credit Income Trust We have audited the Financial Report of Perpetual Credit Income Trust (the Trust). I declare that, to the best of my knowledge and belief, in relation to the audit of Perpetual Credit Income In our opinion, the accompanying Financial Trust for the financial year ended 30 June 2020 there have been: Report of the Trust is in accordance with the Corporations Act 2001, including: changes in equity, and Statement of cash flows for the no contraventions of the auditor independence requirements as set out in the year then ended Corporations Act 2001 in relation to the audit; and • Statement of comprehensive income, Statement of • Balance sheet as at 30 June 2020 The Financial Report comprises: i. ii. no contraventions of any applicable code of professional conduct in relation to the audit. • Notes including a summary of significant accounting • giving a true and fair view of the Trust's financial position as at 30 June 2020 and of its financial performance for the year ended on that date; and policies • Directors' Declaration. • complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit KPMG evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Partner Jessica Davis Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. Sydney We are independent of the Trust in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. 21 August 2020 -46- KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. Liability limited by a scheme approved under Professional Standards Legislation. ANNUAL FINANCIAL REPORT 2020 | 47 Key Audit Matters Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report of the current period. These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Valuation and existence of financial assets ($415m) and financial liabilities ($3m) at fair value through profit or loss Refer to Notes 9 and 10 to the Financial Report The key audit matter How the matter was addressed in our audit Financial assets and liabilities at fair value through profit or loss (FVTPL) are comprised of investments in: • Unlisted unit trusts (Perpetual Loan Fund); • Debt securities, including corporate bonds, international bonds, mortgage backed securities, and floating rate notes; and • Derivative liabilities, including futures and swaps. Valuation and existence of financial assets and financial liabilities at FVTPL is a key audit matter due to the: • size of the Trust’s investments which are significant to its financial position. The investment in Perpetual Loan Fund and the investments in debt securities comprise 19% and 76%, respectively, of the Trust’s total assets at year end; • Trust outsources certain financial reporting processes and controls in relation to the valuation and existence of these assets and liabilities to external service organisations. These service organisations include the custodian, the fund administrator, which provide administrative support to the Trust, and the investment manager. This requires us to understand processes, assess controls and the flow of information between these service organisations, relevant to the Trust’s financial reporting; and • importance of the performance of Perpetual Loan Fund and debt securities in driving the Trust’s investment income and capital performance, as Our procedures included: • We assessed the appropriateness of the accounting policies applied by the Trust, including those relevant to the fair value hierarchy of investments against the requirements of the accounting standards. • We obtained and read the Trust’s custodian’s and fund administrator’s GS007 (Guidance Statement 007 Audit Implications of the Use of Service Organisations for Investment Management Services) assurance reports to understand the custodian’s and fund administrator’s processes and controls to record and value the Trust’s financial assets and liabilities. • We obtained and read the Trust’s investment manager’s GS007 assurance report to understand the investment manager’s processes and controls to maintain and provide transactional information to the Trust’s custodian. • We assessed the reputation, professional competence and independence of the auditors of the GS007 assurance reports. • We checked the valuation of the unit holdings in Perpetual Loan Fund, as recorded in the Trust’s Financial Report, to the audited financial report of Perpetual Loan Fund. • With the involvement of our valuation specialists, we performed the valuation of the underlying assets of Perpetual Loan Fund using independently sourced market data for observable inputs, such as, published credit spreads and margins. We compared these 48 | PERPETUAL CREDIT INCOME TRUST Key Audit Matters Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report of the current period. These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Valuation and existence of financial assets ($415m) and financial liabilities ($3m) at fair value through profit or loss Refer to Notes 9 and 10 to the Financial Report The key audit matter How the matter was addressed in our audit Financial assets and liabilities at fair value through Our procedures included: profit or loss (FVTPL) are comprised of investments in: • Unlisted unit trusts (Perpetual Loan Fund); • Debt securities, including corporate bonds, international bonds, mortgage backed securities, and floating rate notes; and • Derivative liabilities, including futures and swaps. • We assessed the appropriateness of the accounting policies applied by the Trust, including those relevant to the fair value hierarchy of investments against the requirements of the accounting standards. • We obtained and read the Trust’s custodian’s and fund administrator’s GS007 (Guidance Statement 007 Audit Implications of the Use of Service Valuation and existence of financial assets and Organisations for Investment Management financial liabilities at FVTPL is a key audit matter Services) assurance reports to understand the due to the: • size of the Trust’s investments which are significant to its financial position. The investment custodian’s and fund administrator’s processes and controls to record and value the Trust’s financial assets and liabilities. in Perpetual Loan Fund and the investments in • We obtained and read the Trust’s investment debt securities comprise 19% and 76%, manager’s GS007 assurance report to understand respectively, of the Trust’s total assets at year the investment manager’s processes and controls end; • Trust outsources certain financial reporting to maintain and provide transactional information to the Trust’s custodian. processes and controls in relation to the valuation • We assessed the reputation, professional and existence of these assets and liabilities to competence and independence of the auditors of external service organisations. These service the GS007 assurance reports. organisations include the custodian, the fund administrator, which provide administrative support to the Trust, and the investment manager. This requires us to understand processes, assess controls and the flow of • We checked the valuation of the unit holdings in Perpetual Loan Fund, as recorded in the Trust’s Financial Report, to the audited financial report of Perpetual Loan Fund. information between these service organisations, • With the involvement of our valuation specialists, relevant to the Trust’s financial reporting; and we performed the valuation of the underlying • importance of the performance of Perpetual Loan Fund and debt securities in driving the Trust’s investment income and capital performance, as assets of Perpetual Loan Fund using independently sourced market data for observable inputs, such as, published credit spreads and margins. We compared these reported in the Financial Report. As a result, this was the area with greatest effect on our overall audit strategy and allocation of senior resources in planning and performing our audit. In assessing this Key Audit Matter, we involved our valuation specialists, who understand the Trust’s investment profile and business and the economic environment it operates in. valuations to the fair value of the underlying assets. • We assessed the valuation of the unit price of Perpetual Loan Fund against the net assets per unit held of the Perpetual Loan Fund. • With the involvement of our valuation specialists, we assessed the fair value of debt securities by re-performing the valuation by comparing observable inputs, including broker-quoted prices to independently sourced market data providers. • With the involvement of our valuation specialists, we independently recalculated the valuation of derivative liabilities using independently sourced market data for observable inputs, such as interest rates and foreign exchange rates. We compared this valuation to the fair value of derivative liabilities recognised by the Trust. • We checked the ownership and quantity of investments to external custody reports as at 30 June 2020. • We assessed quantitative and qualitative disclosures, including those relevant to the fair value hierarchy of investments, against the requirements of the accounting standards. Other Information Other Information is financial and non-financial information in Perpetual Credit Income Trust’s annual reporting which is provided in addition to the Financial Report and the Auditor’s Report. The Directors of Perpetual Trust Services Limited (the Responsible Entity) are responsible for the Other Information. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not and will not express an audit opinion or any form of assurance conclusion thereon. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. ANNUAL FINANCIAL REPORT 2020 | 49 Responsibilities of the Directors for the Financial Report The Directors of Perpetual Trust Services Limited (the Responsible Entity) are responsible for: • preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 • implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error • assessing the Trust's ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Trust or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objective is: • to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error; and • to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: https://www.auasb.gov.au/admin/file/content102/c3/ar2_2020.pdf. This description forms part of our Auditor’s Report. KPMG Jessica Davis Partner Sydney 21 August 2020 50 | PERPETUAL CREDIT INCOME TRUST Responsibilities of the Directors for the Financial Report The Directors of Perpetual Trust Services Limited (the Responsible Entity) are responsible for: • preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 • implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error • assessing the Trust's ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Trust or to cease operations, or have no realistic alternative but to do so. • to obtain reasonable assurance about whether the Financial Report as a whole is free from material Our objective is: misstatement, whether due to fraud or error; and • to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: https://www.auasb.gov.au/admin/file/content102/c3/ar2_2020.pdf. This description forms part of our Auditor’s Report. KPMG Jessica Davis Partner Sydney 21 August 2020 ASX ADDiTiONAL iNFORMATiON Perpetual Credit Income Trust ARSN 626 053 496 ASX additional information Additional information required by the Australian Securities Exchange Limited Listing Rules and not disclosed elsewhere in this report is as follows. The information is current as at 31 July 2020 unless otherwise indicated. A. Corporate Governance Statement Refer to the annual financial report, page 10. B. Substantial unitholders There are no substantial unitholders. C. Classes of units Refer to the annual financial report, note 7, page 29. Auditor’s responsibilities for the audit of the Financial Report D. Voting rights Voting rights which may attach to or be imposed on any unit or class of units is as follows: (a) on a show of hands each unitholder has one vote; and (b) on a poll, each unitholder has one vote for each dollar of the value of the total units they have in Trust. E. Distribution of units Analysis of numbers of unitholders by size of holding: Size of holding BLANK 1 - 1000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Blank Number of holders Total units Percentage 89 587 914 6,221 614 8,425 23,053 1,964,419 7,699,242 229,322,653 161,324,515 400,333,882 0.01% 0.49% 1.92% 57.28% 40.30% 100.00% The number of unitholders holding less than a marketable parcel is 71 and they hold 8,757 units. F. Twenty largest unitholders The names of the twenty largest unitholders are listed below: Unitholder HSBC Custody Nominees (Australia) Limited Navigator Australia Ltd BNP Paribas Nominees Pty Ltd Netwealth Investments Limited (Wrap Services A/C) Elizikat Investments Pty Ltd (Doughan Investment A/C) The Corporation Of The Trustees Of The Order Of The Sisters Of Mercy In QLD Beluga Blue Pty Ltd (GTF Family A/C) Geat Incorporated (Geat-Preservation Fund A/C) B Plus Enterprises Pty Ltd (Alpha Plus Investments A/C) Netwealth Investments Limited (Super Services A/C) J P Morgan Nominees Australia Pty Limited The Art Gallery Board AK Clough Holdings Pty Ltd Mrs Gillian Mary Smith Milpera Pty Ltd (Delaney Executive S/F A/C) The Law Society Of SA Legal Practitioners Fidelity Fund Numbers of units 12,485,661 7,351,202 6,871,533 1,675,588 1,651,744 Percentage 3.12% 1.84% 1.72% 0.42% 0.41% 1,363,636 1,363,636 1,359,372 1,300,000 1,109,924 1,108,017 1,090,909 1,021,103 963,000 909,091 909,090 0.34% 0.34% 0.34% 0.32% 0.28% 0.28% 0.27% 0.26% 0.24% 0.23% 0.23% -51- ANNUAL FINANCIAL REPORT 2020 | 51 F. Twenty largest unitholders (continued) Unitholder Sisters Of The Perpetual Adoration Of The Blessed Sacrament Ltd Mr John William Downer Karang Pty Ltd Lunara Pty Limited Numbers of units 909,090 900,000 900,000 878,000 Percentage 0.23% 0.22% 0.22% 0.22% G. Stock exchange listing The Trust's units are listed on the Australian Securities Exchange (ASX) and are traded under the code PCI. H. Voluntary escrow There are no restricted units in the Trust or units subject to voluntary escrow. I. Unquoted units There are no unquoted units on issue. J. Review of operations and activities for the reporting period Refer to Directors' report at page 6-7 of the annual financial report. K. On-market buy back There is no current on-market buy back. L. Cash and Assets used During the year, the Trust invested in accordance with the investment objective and guidelines as set out in the latest Product Disclosure Statement of the Trust dated 8 March 2019 and in accordance with the Trust's Constitution. M. List of investments held by the Trust at 30 June 2020 Investments held as at 30 June 2020 XXXXXXXXXXXX XXX XXX Fair Value $'000 Unlisted unit trust XXX Perpetual Loan Fund Total Unlisted unit trust Debt securities XXX ANZ Banking Group Apollo Trust SR 2017-2 APT Pipeline Limited Aroundtown SA Asciano Financial Limited Aurizon Network Pty Limited Australian Prime Property Banco Santander SA Bank Of Queensland Limited Barclays Bank PLC Barminco Finance Pty Limited Bendigo And Adelaide Bank Bluescope Finance BNP Paribas Boral Finance Pty Limited Brisbane Airport Byrns Smith Unit Trust Centuria Capital 2 Fund 52 | PERPETUAL CREDIT INCOME TRUST XXX -52- 82,599 82,599 996 2,809 1,772 2,134 4,434 4,062 9,227 9,062 4,934 15,594 7,256 9,518 10,916 8,350 1,148 2,757 8,189 259 Numbers of units Percentage 909,090 900,000 900,000 878,000 0.23% 0.22% 0.22% 0.22% The Trust's units are listed on the Australian Securities Exchange (ASX) and are traded under the code PCI. F. Twenty largest unitholders (continued) Sisters Of The Perpetual Adoration Of The Blessed Sacrament Ltd Unitholder Mr John William Downer Karang Pty Ltd Lunara Pty Limited G. Stock exchange listing H. Voluntary escrow There are no restricted units in the Trust or units subject to voluntary escrow. I. Unquoted units There are no unquoted units on issue. J. Review of operations and activities for the reporting period Refer to Directors' report at page 6-7 of the annual financial report. K. On-market buy back There is no current on-market buy back. L. Cash and Assets used During the year, the Trust invested in accordance with the investment objective and guidelines as set out in the latest Product Disclosure Statement of the Trust dated 8 March 2019 and in accordance with the Trust's Constitution. M. List of investments held by the Trust at 30 June 2020 Investments held as at 30 June 2020 XXXXXXXXXXXX XXX XXX Fair Value $'000 Unlisted unit trust XXX Perpetual Loan Fund Total Unlisted unit trust Debt securities XXX ANZ Banking Group Apollo Trust SR 2017-2 APT Pipeline Limited Aroundtown SA Asciano Financial Limited Aurizon Network Pty Limited Australian Prime Property Banco Santander SA Bank Of Queensland Limited Barclays Bank PLC Barminco Finance Pty Limited Bendigo And Adelaide Bank Bluescope Finance BNP Paribas Boral Finance Pty Limited Brisbane Airport Byrns Smith Unit Trust Centuria Capital 2 Fund XXX -52- 82,599 82,599 996 2,809 1,772 2,134 4,434 4,062 9,227 9,062 4,934 15,594 7,256 9,518 10,916 8,350 1,148 2,757 8,189 259 M. List of investments held by the Trust at 30 June 2020 (continued) Civmec Holdings Limited Conquest Trust Srs2018-1 Credit Agricole S.A David Jones Finance DBNGP Finance Co Pty Limited Downer Grp Finance Pty Limited FBG Finance Pty Limited Flexi Trust Srs2019-2 FP Turbo Srs2019-1 Goldman Sachs Group Ins Heritage Bank Limited Illawara Trust Incitec Pivot Limited Insurance Australia Group Limited Kingfisher Trust Series 2019-1 Liberty Funding Pty Ltd Srs 2019-1SME Liberty Funding Pty Srs 2020-1A Light Trust Srs2019-1 Lloyds Banking Group Plc Longwall Relocation Syndicated Loan Lonsdale Finance Pty Limited Macquarie Bank Limited Mineral Resources Limited National Australia Bank Nextdc Limited Omni Bridgeway Limited Optus Finance Pty Limited Origin Energy Finance Pacific National Finance Peet Limited Qantas Airways Limited Shinhan Bank Spark Finance Limited The Superannuation Member Srs 2019-2 The Superannuation Members Srs 2019-1 The Superannuation Members Srs2016-1 Think Tank Trust Srs 2019-1 Torrens Trust Series 2019-1 Verizon Communications Vicinity Centres Vodafone Group PLC WSO Finance Pty Limited Zenith Pacific Pty Limited Total Debt securities Derivatives Futures Swaps Total Derivatives Total N. Investment transactions XXX XXX XXX 5,482 497 2,721 10,159 4,397 10,030 5,607 4,374 500 1,301 3,322 201 8,496 15,466 9,066 6,026 1,094 3,532 3,407 2,332 9,006 11,384 5,441 12,834 13,041 10,849 4,396 3,027 3,932 4,128 4,830 6,443 2,025 10,836 5,218 1,527 2,262 5,964 503 7,258 557 1,609 3,495 331,992 (423) (2,063) (2,486) 412,105 The total number of transactions entered during the year was 594. The total brokerage paid during the year was $26,585. O. Total Management Fees paid or accrued during the year Refer to the annual financial report, note 5, page 26. -53- ANNUAL FINANCIAL REPORT 2020 | 53 This page intentionally left blank. 54 | PERPETUAL CREDIT INCOME TRUST 54 | PERPETUAL CREDIT INCOME TRUST ANNUAL FINANCIAL REPORT 2020 | 55 DiRECTORY RESPONSiBLE ENTiTY Perpetual Trust Services Limited ABN 48 000 142 049 AFSL 236 648 REGiSTERED OFFiCE Level 18, Angel Place 123 Pitt Street Sydney NSW 2000 DiRECTORS Glenn Foster Vicki Riggio Richard McCarthy Simone Mosse Phillip Blackmore (Alternate) COMPANY SECRETARiES Gananatha Nayanajith Minithantri Sylvie Dimarco iNVESTMENT MANAGER Perpetual Investment Management Limited Level 18, 123 Pitt Street Sydney NSW 2000 AFSL 234 426 AUDiTOR KPMG International Towers Sydney 3 300 Barangaroo Avenue Sydney NSW 2000 AUSTRALiAN SECURiTiES EXCHANGE CODE ASX:PCI UNiT REGiSTRY Automic Pty Ltd Level 5, 126 Phillip Street Sydney NSW 2000 WEBSiTE www.perpetualincome.com.au 0 2 8 0 _ 6 2 5 1 0 L P 56 | PERPETUAL CREDIT INCOME TRUST 

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