ALCENTRA EUROPEAN FLOATING RATE INCOME FUND LIMITED

INTERIM MANAGEMENT STATEMENT

Alcentra European Floating Rate Income Fund Limited (the "Company") is publishing this Interim Management Statement in accordance with DTR 4.3 of the FSA Handbook.

This Interim Management Statement has been produced solely to provide additional information to shareholders as a body to meet the relevant requirements of the UK Listing Authority's Disclosure and Transparency Rules. It should not be relied upon by any other party or for any other purpose. 

This Interim Management Statement relates to the period from 6 March 2012 (the date of the admission of the Company's shares to listing on the London Stock Exchange) to the date of publication of this interim management statement, unless otherwise specified. References to the "Group" below refer to the Company and its wholly-owned Luxembourg subsidiary, Alcentra European Floating Rate Income S.A.

Investment Policy & Objective

Alcentra Limited (the "Investment Manager") selects, from the primary and secondary markets, investments for the Group in the following asset classes:

·          secured loans, including senior loans, mezzanine loans and second lien loans;

·          senior secured floating-rate notes; and

·          senior secured and senior unsecured high-yield bonds,

in each case that may be considered to be non-investment grade. The Investment Manager seeks to identify investment opportunities that combine an attractive current return with a strong probability of ultimate return of capital.

Investment Manager Review

As at 31 July 2012, the Company's portfolio was fully invested with exposure to 47 issuers across 53 different individual assets. In line with the Investment Manager's original expectations set out at the time of its initial public offering, the Company's portfolio was fully invested by 5 April 2012.

Given the ongoing sovereign debt concerns in Greece, Spain, Portugal, Italy and Ireland, the Investment Manager has deliberately avoided taking any positions or making any investments which would expose the Company's portfolio to borrowers from those jurisdictions. 

Market Environment

Financial markets saw renewed volatility in Q2 2012, with the FTSE down 4.33% over the period and the Bank of America Merrill Lynch Euro High-Yield Bond Index down 1.26%.  In this context, the performance of the European Leveraged Loan Index ("ELLI"), which returned 0.55% for Q2 2012, was respectable. That brings the performance of the ELLI to +4.93% for the first six months of the year.

New issue leveraged loan volume was reasonable in the second quarter at €9.3bn, giving a total of €16.3bn for the year to date. This is lower than the new issue leveraged loan volume over the same period in 2011, when €27.6bn was issued during a very buoyant first half of the year (but which was then followed by a much weaker second half). The total issuance for the high yield bond market in the first half of 2012 was exactly the same as the new issue leveraged loan volume over the same period (that is, €16.3bn), although the high yield market dried up during the second quarter of 2012 after a very active first quarter. Nevertheless, these figures provide a good illustration of how the new issue leveraged loan and high yield markets have developed into a very similar size¹.

The pricing of European loans has continued to improve, despite the steady volume of issuance. S&P has calculated that the average institutional loan spread has hit a new record, reaching Euribor + 530bp in the second quarter of 2012. Taking into account new issue discounts and LIBOR floors, the average yield to maturity of primary institutional loans increased to 6.97%². Interestingly, in the same report, S&P calculated that this increase in senior loan margins has not come with a trade-off from higher senior leverage. S&P calculate that senior leverage has been stable, at about 3.5x for the past nine months³.

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Pipeline

Although there are new deal launches scheduled for July, in the Investment Manager's opinion it is unlikely that the loan market will see significant deal flow in August. The high yield bond market is likely to remain open only to the best quality issuer. However, given the ongoing market anxiety, the Investment Manager believes that any new loan issues will continue to offer attractive margins and present good investment opportunities.

The Company targets a dividend yield of 5.5% per share for the first year of full investment. Having reached full investment by 5 April 2012, the Investment Manager believes that this remains an appropriate target.

Having reached full investment with 43 different issuers, the Investment Manager intends to increase this to in excess of 50 issuers over the next quarter as it selectively adds new primary market positions to the portfolio.

Material Events and Transactions

The initial public offering of the Company took place on 29 February 2012, raising gross proceeds of €94,911,682 (£80,720,941).

On 29 February 2012, the Company announced its fund raising of gross proceeds of approximately £80 million and its listing application made to the UK Listing authority for 80,720,941 sterling ordinary shares to be listed on the premium segment listing segment of the Official List and to trading on the main market for listed securities of the London Stock Exchange.

On 6 March 2012, the Company's ordinary shares were admitted to the premium listing segment of the Official List of the UK Listing Authority and to trading on the London Stock Exchange's main market for listed securities. The Company acquired its first asset on 10 March 2012.

Dividend

On 12 July 2012, the Company declared the first interim dividend of 1.06p per ordinary share, in line with the Company's dividend objective. The dividend will be paid to shareholders on 17 August 2012.

Report and Accounts

The Company's first annual report and accounts will be for the period ended 31 March 2013 and will be made public within four months following the period end.

Financial Highlights

The rate of exchange prevailing at the NAV date were as follows:

1 0.785400 GBP: 1 EUR

2 0.833725 GBP: 1 EUR

3 0.835125 GBP: 1 EUR

The financial information for the period ended 31 July 2012 contained within this Interim Management Statement (including the above table) has not been audited.

Background Information

The Company is a Guernsey closed-ended collective investment scheme listed on the main market of the London Stock Exchange which invests predominantly in senior secured loans and senior secured bonds issued by European corporates and targets returns (net of fees and expenses) of 7% to 10% per annum. The Company targets a dividend yield of 5.5% on the £1.00 issue price of the initial offering of shares in the Company for the first full year of investment, paid quarterly.

The Company's share capital consists of ordinary shares denominated in Sterling.

By order of the Board

BNP Paribas Fund Services (Guernsey) Limited, for and on behalf of

Alcentra European Floating Rate Income Fund Limited

as Company Secretary

The information contained in this document is given as at the date of its publication (unless otherwise marked), has not been audited and is subject to verification, updating, revision and amendment. No reliance may be placed for any purpose whatsoever on the information or opinions contained in this document or on its completeness, accuracy or fairness.  This document has not been approved by any competent regulatory authority.

This document is preliminary in nature and made available for information purposes only. This document does not contain any representations, does not constitute an offer to sell or the solicitation of an offer to acquire or subscribe for any securities of the Company. 

This document is intended only for the person to whom it has been delivered. No recipient may distribute, or make available, this document (directly or indirectly) to any other person and no part of this document may be reproduced in any manner without the written permission of the Company.  This document and the information contained herein is not for release, publication or distribution (directly or indirectly) in or into the United States, Canada, Australia or Japan or to any "US person" as defined in Regulation S under the United States Securities Act of 1933, as amended (the "Securities Act") or into any other jurisdiction where applicable laws prohibit its release, distribution or publication. It does not constitute an offer of securities for sale anywhere in the world, including in or into the United States, Canada, Australia or Japan.  Recipients of this document in jurisdictions outside the UK should inform themselves about and observe any applicable legal requirements in their jurisdictions. In particular, the distribution of this document may in certain jurisdictions be restricted by law. Accordingly, recipients represent that they are able to receive this document without contravention of any applicable legal or regulatory restrictions in the jurisdiction in which they reside or conduct business.

This document includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements include, without limitation, statements typically containing words such as "believes", "considers",  "intends", "expects", "anticipates", "targets", "estimates", "will", "may", or "should" and words of similar import.  The forward-looking statements are based on the Investment Manager's beliefs, assumptions and expectations of future performance and market development, taking into account information currently available. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known or within the Investment Manager's control.  If a change occurs, the Company's business, financial condition, liquidity and results of operations may vary materially from those expressed in the forward-looking statements.

This document has been prepared by the Company and is the sole responsibility of the Company. Alcentra Limited, the Investment Manager, is regulated and authorised in the United Kingdom by the FSA. Its registered address is at 10 Gresham Street, London EC2V 7JD.