2022 Annual Financial Report
Source: RNS
NOT FOR RELEASE, DISTRIBUTION OR PUBLICATION, IN WHOLE OR IN PART, IN OR INTO THE UNITED STATES OR TO US PERSONS
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27 July 2022
SME Credit Realisation Fund Limited
(the "Company")
Annual Financial Report
SME Credit Realisation Fund Limited (the "Company") has published its results for the year ended 31 March 2022.
The Annual Report and Accounts are attached to this release and are available on the Company's website (www.smecreditrealisation.com).
CONTACTS
Richard Boleat, Chairman
+44 (0) 1534 615 656
Richard.Boleat@smecreditrealisation.com
Secretary and Administrator
Sanne Group (Guernsey) Limited
+44 (0) 1481 739810
smecreditrealisation@sannegroup.com
Corporate Broker
Numis Securities
Nathan Brown
George Shiel
+44 (0) 207 260 1000
Investor Relations
Website
The ISIN number of the Ordinary Shares is GG00BNDB1G36, the SEDOL code is BNDB1G3 and the TIDM is SCRF.
The LEI number of the Company is 549300ZQIYQVNIZGOW60.
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ABOUT SME Credit Realisation Fund Limited
The Company is a registered closed-ended collective investment scheme registered pursuant to the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended and the Registered Collective Investment Scheme Rules 2018 issued by the Guernsey Financial Services Commission (''GFSC'').
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IMPORTANT NOTICES
This announcement contains "forward-looking" statements, beliefs or opinions. These forward-looking statements involve known and unknown risks and uncertainties, many of which are beyond the control of the Company and all of which are based on its directors' current beliefs and expectations about future events. Forward-looking statements are sometimes identified by the use of forward-looking terminology such as "believes", "expects", "may", "will", "could", "should", "shall", "risk", "intends", "estimates", "aims", "plans", "predicts", "projects", "continues", "assumes", "positioned" or "anticipates" or the negative thereof, other variations thereon or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events, assumptions or intentions. These forward-looking statements include all matters that are not historical facts. Forward-looking statements may and often do differ materially from actual results. They appear in a number of places throughout this announcement and include statements regarding the intentions, beliefs or current expectations of the Board or the Company with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the Company's business concerning, amongst other things, the financial performance, liquidity, prospects, growth and strategies of the Company. These forward-looking statements and other statements contained in this announcement regarding matters that are not historical facts involve predictions. No assurance can be given that such future results will be achieved; actual events or results may differ materially as a result of risks and uncertainties facing the Company. Such risks and uncertainties could cause actual results to vary materially from the future results indicated, expressed or implied in such forward-looking statements. The forward-looking statements contained in this announcement speak only as of the date of this announcement. Nothing in this announcement is, or should be relied on as, a promise or representation as to the future. The Company disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this announcement to reflect any change in its expectations or any change in events, conditions or circumstances on which such statements are based unless required to do so by applicable law, the Prospectus Rules, the Listing Rules or the Disclosure Rules and Transparency Rules of the FCA. No statement in this announcement is intended as a forecast or profit estimate.
Neither this announcement nor any copy of it may be made or transmitted into the United States of America (including its territories or possessions, any state of the United States of America and the District of Columbia) (the "United States"), or distributed, directly or indirectly, in the United States or to US Persons (as such term is defined in Regulation S under the US Securities Act of 1933, as amended (the "Securities Act"). Neither this announcement nor any copy of it may be taken or transmitted directly or indirectly into Australia, Canada, Japan or South Africa or to any persons in any of those jurisdictions, except in compliance with applicable securities laws. Any failure to comply with this restriction may constitute a violation of United States, Australian, Canadian, Japanese or South African securities laws. The distribution of this announcement in other jurisdictions may be restricted by law and persons into whose possession this announcement comes should inform themselves about, and observe, any such restrictions. This announcement does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for securities in the United States, Australia, Canada, Japan or South Africa or in any jurisdiction to whom or in which such offer or solicitation is unlawful.
SME CREDIT REALISATION FUND LIMITED
ANNUAL REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2022
FORWARD-LOOKING STATEMENTS
This report includes statements that are, or may be considered, "forward-looking statements". The forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative, or other variations or comparable terminology. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.
FINANCIAL HIGHLIGHTS
· Total comprehensive income for the year amounted to £13.13 million (2021: £4.58 million) which included a release of impairment loss provision on Credit Assets of £7.34 million (2021: additional provision of £11.94 million) and a loss on the movement in fair value of the Credit Assets of £2.25 million (2021: gain of £2.51 million) as presented in the consolidated statement of comprehensive income.
· Aggregate dividends of 5.25 pence per Ordinary share declared for the year ended 31 March 2022 (2021: 5.25 pence).
· The Company redeemed a total of 82,414,359 (2021: 124,126,432) shares for a total amount of £76,199,759 (2021: £105,499,718) during the year.
· In October 2021, the Company received cash of £1,568,666 and a portfolio of SME loans valued at £5,824,315 as settlement of its investment in the EIB transaction (discussed in more detail in note 4 and 5). This resulted in a net gain of on assets measured at fair value through profit and loss of £2,251,764 recognised in the consolidated statement of comprehensive income.
The information below is presented for the year ended 31 March 2022 or as at 31 March 2022 unless expressly stated to cover a different period.
|
Description |
Performance |
|
NAV per Ordinary share |
100.62p |
|
Total Net Assets |
£52mil |
|
Ordinary share price |
90.0p |
|
Market Capitalisation |
£47mil |
|
Premium/(Discount) |
(10.6%) |
|
Annualised Dividends per Ordinary share |
5.25p |
|
Earnings per Ordinary share |
18.19p |
|
Share Price Total Return (inception to date) |
32.6% |
|
NAV Total Return (inception to date) |
43.1% |
SUMMARY INFORMATION
About the Company
SME Credit Realisation Fund Limited (the "Company" or the "Fund") is a closed-ended investment company incorporated with liability limited by shares in Guernsey under The Companies (Guernsey) Law, 2008 (as amended), on 22 July 2015.
Group Structure
The Company holds a number of its investments in loans through Special Purpose Vehicles ("SPVs"). This annual report for the year ended 31 March 2022 (the "Annual Report") includes the results of Basinghall Lending Designated Activity Company ("Basinghall"), Tallis Lending Designated Activity Company ("Tallis"), and Queenhithe Lending Designated Activity Company ("Queenhithe"). The Company, Basinghall, Tallis, and Queenhithe are collectively referred to in this report as the "Group".
In the previous years, the Group included Lambeth Lending Designated Activity Company ("Lambeth"). Lambeth was put into liquidation in October 2020 and was fully dissolved in July 2021. Queenhithe was put into liquidation in December 2020. The proceedings for Queenhithe are still ongoing at the time of signing of these consolidated financial statements.
Refer to Business review on the Directors report for further information.
Capital Management
As at 31 March 2022 the total number of shares in issue was 51,750,563 (2021: 134,164,922).
The Company has been conducting a managed wind-down of its operations since 2019, and is in the process of returning capital through compulsory redemptions of shares and distributions of dividends, as the Group's portfolio of Credit Assets amortises.
The Company has redeemed a total of 82,414,359 (2021: 124,126,432) shares for a total amount of £76,199,759 (2021: £105,499,718) throughout the year. All shares redeemed throughout the year were redeemed at the prevailing NAV per share at the date of declaration.
CHAIRMAN'S STATEMENT
Dear Shareholder,
I am pleased to write to you to provide an update on the Company's progress for the year ended 31 March 2022. The Company continues to conduct a managed wind-down of its activities, with the objective of returning capital to shareholders promptly, whilst seeking to maximise returns.
COVID-19 Preponderance and Ukraine
Investors will be well aware that the global economy continues to be affected by these ongoing events. Quite apart from the human tragedies that these events have wrought, they have combined to generate macro conditions which could have barely been foreseen when I wrote this statement last year. In particular, dislocations to the global supply chain of raw and manufactured materials and the dramatic impact on the price of hydrocarbons have conspired to create an inflationary environment which has clearly wrong-footed central banks. These macro conditions, and central bank monetary policy responses, will inevitably have consequences for a great many businesses both large and small as 2022 develops into 2023, creating a highly uncertain macro outlook. The speed of change of impacting factors and range of possible outcomes mean that forecasting the future outlook for the Company is exceptionally challenging. However, the short weighted average life of the Company's remaining portfolio of Credit Assets means that these factors are likely to have a limited impact on the Company's net asset value or its managed wind-down process.
Performance Review and Net Asset Value ("NAV")
This report presents the financial position of the Company as at 31 March 2022.
You will have noted the announcement made by the Company on 20 April 2022 disclosing the Company's NAV at 31 March 2022 at £52 million (31 December 2021: £67 million) and NAV per Share at that date at 100.62 pence (31 December 2021: 96.26 pence). The improvement in NAV per Share was driven principally by a better than anticipated credit market environment compared to expectations as the pandemic continued and the demonstrably resilient performance of the Company's investments, which has also led to an upwards revaluation of the Company's interest in the EIB transaction that, as at 31 March 2021 attributed a value of £5,141,217 (2020: £nil). The EIB transaction has been settled during the 31 March 2022 financial year.
An analysis of the performance of the Company for the 6 month period to 31 March 2022 (with the 6 month period to 30 September 2021 for comparative purposes) is set out below:
Performance Since 31 March 2021
|
Return Attribution |
|
|
|
|
1 October 2021 to 31 March 2022 |
1 April 2021 to 30 September 2021 |
|
Gross Income |
5.44% |
3.14% |
|
Impairment*** |
6.73% |
2.40% |
|
FVTPL Adjustment* |
(2.29%) |
(0.33%) |
|
FVTOCI Adjustment** |
1.56% |
1.52% |
|
Gain on sale of NPLs |
- |
- |
|
Servicing Fees |
(0.28%) |
(0.31%) |
|
|
8.04% |
6.42% |
|
Operating Expenses |
(0.71%) |
(0.42%) |
|
FX Hedging Costs |
0.09% |
0.05% |
|
Loan Interest Expense |
- |
- |
|
Share Buybacks |
- |
- |
|
Share Redemption |
3.28% |
1.86% |
|
Net NAV Return |
10.70% |
7.91% |
*FVTPL Adjustment includes fair value movements on the Fund's interest in the EIB transaction
**FVTOCI Adjustment includes fair value movements on the portfolio of the credit assets held by the Fund, which moved to fair value accounting from 1 April 2020
***Positive figures represent release of previous impairment loss provisions
Data shows a largely positive outcome, quarter to quarter, compared to the expectations reflected in the Company's net asset value at 31 March 2021. The Board continues to closely monitor data points within the Company's loan portfolio to assess the extent to which borrowers continue to be impacted by the economic consequences of the pandemic and newly arising risk factors in their ability to satisfy their loan repayment obligations.
Return of Capital
You will note that the Company's net asset value has reduced from £79 million at 30 September 2021 to £52 million at 31 March 2022, as the Company continues to make distributions to shareholders. In the 6 month period to 31 March 2022, £32 million was distributed to shareholders through compulsory share redemptions and £1.5 million through dividend payments. The balance of the movement between the two period ends is reconciled by positive performance.
The Company will continue to return capital to investors predominantly by way of compulsory redemption of shares as liquidity arises through loan repayments or by other means. The directors may also seek to apply free cash to on-market share repurchases if such a strategy is deemed to be in the best interests of shareholders as a whole.
Potential Portfolio Sales and Basis Other Than Going Concern
In light of the rapid run off of the loan portfolio, the repayment of the leverage in the structure and in the interest of maximising returns to shareholders before the running costs of the structure become disproportionate to the NAV and while the loans remain at an attractive size to potential buyers, the Company will actively seek to enter discussion for the potential disposal of its loan portfolios in whole where pricing levels are attractive. There is therefore potential that the Company will sell some or all of its remaining loan portfolios and begin a liquidation process within twelve months of signing this report and as a result the accompanying consolidated financial statements have been prepared on a basis other than going concern, under which the assets are measured at their net realisable value, which continues to be their fair value.
Conclusion
As the Company draws towards the end of its life, it is pleasing to see the managed wind-down process having a positive net asset value outcome whilst enabling structural simplification. Credit for this goes to the team at Funding Circle who have worked hard to achieve a positive outcome for shareholders throughout the wind-down process. The board's attention is now focussed on optimising the exit of the remaining Credit Assets, and I will report to you further on this as circumstances develop.
My thanks go particularly to the Funding Circle team for their focus and diligence, and I would also like to thank my fellow directors and our service providers and advisers for their support and wise counsel throughout the year.
Yours faithfully
RICHARD BOLÉAT
Chairman of the Board of Directors
26 July 2022
STRATEGIC REPORT
Strategy and Business Model
The Group was established to provide shareholders with a sustainable and attractive level of dividend income, primarily by way of investment in Credit Assets originated both directly through the platform operated by Funding Circle and indirectly, in each case as detailed in the Company's original investment policy. The Group identified the Funding Circle platform as a leader in the growing direct lending space to small and medium sized enterprises ("SMEs") with its established infrastructure, scale of origination volumes and expertise in accurately assessing loan applications.
On 11 June 2019, the Company changed its Investment Objective and Policy to facilitate a managed wind-down of the Company in a prudent manner consistent with the principles of good investment management as required by the Listing Rules.
Investment Objective and Policy
In order to implement the managed wind-down, it was necessary to amend the Company's Investment Objective and Policy to reflect the objective of realising the Company's portfolio, as follows:
"The Company will be managed with the intention of realising all remaining assets in the portfolio in a prudent manner which achieves a balance between maximising the value from the realisation of the Company's investments and making timely returns of capital to shareholders."
The managed wind-down is being effected with a view to the Company realising all of its investments in accordance with the Investment Objective. Such realisations will comprise natural amortisation of the Company's investments in Credit Assets as well as potentially opportunistic portfolio sales.
As a result of the Company's change in investment objective and policy, for the purposes of accounting, the Company's business model changed from "hold to collect" to "hold to collect and sell" during the year ended 31 March 2020. The Company therefore reclassified the valuation of Credit Assets from amortised cost to fair value through other comprehensive income ("FVTOCI") from 1 April 2020.
The Company continues to explore opportunities for the disposal of its performing and non-performing loan portfolios as a whole, in light of the rapidly reducing size of the performing portfolios through natural loan amortisation.
The Company no longer allocates capital to Credit Assets, directly or indirectly via Leveraged Transactions or SPVs, or undertakes capital expenditure except where necessary in the reasonable opinion of the Board in order to protect or enhance the value of any existing investments or to facilitate orderly disposals.
As at 31 March 2022, the Company held indirect investments in Credit Assets through the following investing companies:
|
Investing Company |
Jurisdiction of Loans |
|
Basinghall |
United Kingdom |
|
Tallis |
Germany, the Netherlands and Spain |
|
|
|
The following analyses of the Group's investments in Credit Assets are provided as reference.
|
Region Split |
|
|
|
|
|
|
UK Investment |
% |
US Investment |
% |
CE Investment |
% |
|
South East |
25 |
Other |
39 |
Germany |
55 |
|
London |
15 |
California |
16 |
The Netherlands |
44 |
|
North East |
12 |
Texas |
9 |
Spain |
1 |
|
North West |
12 |
Florida |
8 |
|
|
|
Midlands |
11 |
Illinois |
7 |
|
|
|
South West |
8 |
Michigan |
5 |
|
|
|
Scotland |
6 |
Ohio |
4 |
|
|
|
Wales |
5 |
New York |
4 |
|
|
|
East Anglia |
4 |
Arizona |
4 |
|
|
|
Norther Ireland |
2 |
South Carolina |
4 |
|
|
|
Industry Split |
|
|
|
|
|
|
UK Investment |
% |
US Investment |
% |
CE Investment |
% |
|
Property and Construction |
20 |
Prof, Scientific and Technical Services |
17 |
Wholesale and Retail Trade |
32 |
|
Wholesale and Retail |
20 |
Other |
15 |
Construction |
12 |
|
Manufacturing and Engineering |
11 |
Retail trade |
15 |
Prof, Scientific and Technical Services |
12 |
|
Other |
12 |
Health Care and Social Assistance |
11 |
Other |
9 |
|
Professional and business support |
10 |
Accommodation and Food Services |
10 |
Transport and Storage |
8 |
|
I.T. & Telecommunications |
7 |
Construction |
9 |
Manufacturing |
7 |
|
Leisure & Hospitality |
7 |
Other Services (ex. Public Admin) |
8 |
Administrative and Support Activities |
7 |
|
Transport and Logistics |
5 |
Administrative and Support Activities |
7 |
Accommodation and Food Service |
6 |
|
Healthcare |
4 |
Manufacturing |
5 |
Information and Communication |
4 |
|
Automotive |
4 |
Educational Services |
3 |
Arts, Entertainment and Recreation |
3 |
Basinghall, Tallis and Queenhithe were formed solely in connection with the implementation of the previous investment policy of the Company. Loans acquired by Basinghall, Tallis and Queenhithe were funded, in whole or in part, by advances made by the Company under the note programmes.
The notes issued by Basinghall, Tallis and Queenhithe to the Company are listed on the Euronext Dublin.
The assets held by each of Basinghall, Tallis and Queenhithe are ring-fenced from other entities or SPV's and there is no cross-collateralisation between the SPV's in which the Company invests.
Borrowing Limitation
All of the Group's leverage facilities have been fully repaid as at 31 March 2022 and the loans that were previously held indirectly through the Fund's interest in the EIB SPV have been transferred to the Group's balance sheet at fair value in satisfaction of the Company's investment in the transaction SPV and are now consolidated directly.
Principal Risks and Risk Management
There are a number of actual, present and emerging risks and uncertainties which could have a material impact on the Group's actual results which may differ materially from expected and historical results, particularly given the ongoing managed wind-down of the Company, the impact of COVID-19 and the economic and inflationary pressures that have been exacerbated by the recent events in Ukraine.
The Board of Directors have overall responsibility for risk management and internal control within the context of achieving the Company's objectives. The Board agrees the strategy for the Company, approves the Company's risk appetite and monitors the risk profile of the Company. The Company also maintains a risk register to identify, monitor and control risk concentration, which has been updated to reflect the managed wind-down.
The Company maintains a risk matrix, consisting of the principal and emerging risks and the controls in place to mitigate those risks. The risk matrix provides a basis for the Audit Committee and the Board to regularly monitor the effective operation of the controls and to update the matrix when new risks are identified. The Board's responsibility for conducting a robust risk assessment are embedded in the Company's risk matrix and stress testing which helps position the Company to ensure compliance with The Association of Investment Companies Code of Corporate Governance's ("the AIC Code") requirements.
The Board continues to monitor the Company's systems of risk management and internal control and will continue to receive updates from the Company's external service providers to ensure that the principal risks and emerging risks faced by the Group are fully understood and managed appropriately. The Board did not identify any significant weaknesses during the year and up to the date of this Annual Report.
An overview of the principal risks and uncertainties that the Board considers to be currently faced by the Company are provided below, together with the mitigating actions being taken. The Directors have also linked the key performance indicators to the risks where relevant. Risks arising from the Group's use of financial instruments are set out in note 16 of the consolidated financial statements.
|
Principal risk |
Mitigation and update of risk assessment |
Company's financial Alternative Performance Measures ("APM") affected by risk |
|
COVID-19 The COVID-19 pandemic continues to have a significant economic and societal impact across the world. There remains uncertainty around future performance of the Company's portfolio but better than expected performance during the onset and duration of the pandemic have lifted lifetime performance expectations relative to expectations at the onset of the pandemic. The ability of SME borrowers to satisfy their loan repayment obligations, and therefore the performance of the Company, will continue to be affected by, inter alia, the path of COVID-19, the continued re-opening of economies following local and national lockdowns as well as fiscal and monetary response, about which uncertainty remains, albeit lesser than prior year.
Default risk Borrowers' ability to comply with their payment obligations in respect of loans may deteriorate due to adverse changes in economic and political factors, including the COVID-19 pandemic discussed above.
Actual defaults may be different than indicated by historical data and the timing of defaults may vary significantly from historical observations.
Wind-down risk Below are the key risks associated with the managed wind-down of the Company, beyond those inherent in the holding of amortising Credit Assets.
The macro risk in jurisdictions where the Group operates continues to evolve with inflationary pressures, supply chain issues and rising interest rates which have been exacerbated by the developments in Ukraine. The Board considers this as a key risk in the orderly wind down of the Company. The market volatility it creates may lead to increased probability of disorderly pricing of assets or higher than acceptable default on loans.
Price discovery processes associated with potential "en bloc" sales of credit assets are likely to be affected by such factors.
As the managed wind-down proceeds, and capital is returned to shareholders, the Company's fixed and variable costs, some of which are not capable of material mitigation due to the publicly listed status of the Company, are likely to rise as a proportion of the Company's net asset value, prior to dissolution of the Company.
The Company deploys surplus liquidity arising from portfolio amortisation and, potentially, portfolio sales, by way of capital return to shareholders. This capital return may take the form of dividends, share buybacks and compulsory redemptions of shares or any combination of these techniques. The balance of techniques used may result in greater or lesser share price volatility and varied tax treatments for investors.
As the size of the Company's non-UK portfolios decrease through amortisation (in the absence of portfolio sales), the Company's ability to deploy foreign currency hedges at appropriate cost may be impaired.
As the Company moves through the wind-down process, accounting standards will require the Company to prepare its accounts on a basis other than going concern.
|
The Directors continue to monitor delinquency and default levels on each of the separate loan portfolios closely, as well as the impact of government initiatives and forbearance measures implemented by Funding Circle.
The Directors have limited options available to them that will minimise the impact of the risk as the measures and initiatives being put in place are outside of their control.
Economic uncertainties or developments, as well as unemployment may impact upon default rates. The Board continues to monitor default rates closely on a monthly basis in line with developments with the pandemic and measures and initiatives being implemented.
The Board continues to monitor the impact of the COVID-19 pandemic, and inflation and supply chain impacts and changes in the valuation of the different loan portfolios before considering pursuing further price discovery processes and opportunistic portfolio sales.
The board actively monitors and controls price discovery processes to seek to ensure that they are operationally and economically optimised, however the board is aware that given the shortened timeline available for portfolio sales, due to the managed wind-down and the ongoing amortisation of the portfolio, the macro-economic environment could negatively impact the price that assets could be sold for. Independent valuation specialists provide regular updates to the Board on the loan portfolios which ensures they are priced relative to current market conditions.
The Board continues to actively seek to "right size" the Company's overhead base as net asset value reduces, through renegotiation with counterparties and potential restructuring of the Group to minimise unnecessary costs.
The Board seeks to manage the use of various capital return techniques so as to seek to fairly balance the differing outcomes of those techniques.
The Board seeks to maintain and enhance banking counterparty relationships to seek to retain access to institutional pricing.
The Board will review any adjustment required to the values of the Group's assets and liabilities when the basis of accounting changes to a basis other than going concern. In light of this assessment the Board has decided that an asset sale and subsequent commencement of liquidation procedures is likely within twelve months of the date of signing the accounts and the financial statements have thus been prepared on a basis other than going concern. The values in the balance sheet at the date of these financial statements are deemed to be realisable values, based on fair value.
|
Total distributions to the shareholders.
Credit losses.
Total distributions to the shareholders.
Credit losses.
Total distributions to the shareholders.
NAV total return.
Total distributions to the shareholders.
Share price volatility.
Total distributions to the shareholders.
Share price volatility and total distributions to shareholders.
|
As part of the process of evaluating principal risks, the Board also identifies emerging risks and how they impact on the Group's managed wind-down process. The likelihood of occurrence of each risk and the extent of financial effect to the Group are considered when the Board makes economic decisions. Along with the update on the principal risks to take into account the alleviating impact of the COVID-19 pandemic and the ongoing circumstances between Ukraine and Russia to the Group, the Board identified the following as other key operational risks:
Changes in the tax regulation in jurisdictions where the Group operates could have an impact on the treatment of income generated from loans held in subsidiaries
The Company holds assets indirectly through subsidiaries established in Ireland.
There is currently no indication that this will become a principal risk to the Group but the Board will continue to monitor any changes made in tax regulation across all jurisdictions in which the Group operates.
The Group has no employees and is reliant on the performance of third party service providers
The Company's investment administration functions have been outsourced to external service providers. Any failure by any external service provider to carry out its obligations could have a materially detrimental impact on the effective operation, reporting and monitoring of the Company's financial position. This may have an effect on the Company's ability to meet its investment objective successfully. The Board receives and reviews quarterly reports from its principal external service providers and also performs an annual quality review on the services provided by the external service providers. The results of the Board's review are reported to the Audit Committee.
Cybersecurity breaches
The Group is reliant on the functionality of Funding Circle's software and IT infrastructure to facilitate the process of servicing the Group's remaining Credit Assets. The Group is also reliant on the functionality of the IT infrastructure of its other service providers. These systems may be prone to operational, information security and related risks resulting from failures of, or breaches in, cybersecurity.
Along with other holders of risk assets generally, the Group is exposed to a range of macroeconomic, geopolitical and regulatory factors which could, in certain circumstances either individually or in combination have a negative effect on carrying values, portfolio returns, delinquencies and operating costs. The board acknowledges that there is an emerging risk from the lack of visibility of macro risk which may impact on performance of the remaining loan portfolio. These factors are kept under review by the Board and relevant Board committees as appropriate.
Hedging
The Board's policy is to seek to fully hedge currency exposure between Sterling and any other currency in which the Group's assets are denominated. During the year, the Company entered into forward foreign exchange contracts to minimise the risk of loss due to fluctuation of the Sterling to US Dollar exchange rate and the Sterling to Euro exchange rate in pursuance of this policy. The interest rate differential between Sterling and US Dollars moved favourably in the period while the hedging instrument offset some of this impact in order to reduce volatility in the Group's results.
Foreign currency hedging activity is carried out by a specialist third party on behalf of the Group, in accordance with the hedging policy that the Board maintains.
Financial Performance
The key transactions and events that had an impact on the Group's performance are set out in the Directors' Report.
The Board continues to monitor the following which are considered as the Group's alternative performance measures in the context of the managed wind-down:
· Share price total return
· NAV total return
· Share price premium or discount to NAV
· Dividend per share
· Fair value movements on Credit Assets
Refer to the definitions of each of the above included in the Glossary.
The Board notes that some or all of the key performance indicators used in the past are less relevant now that the Company has started the process of the managed wind-down.
Total return and share price premium/(discount)
For the period from inception to 31 March 2022, the total return on the ordinary share price was 32.6% and the NAV total return was 43.1%. The ordinary share was trading at a discount of 10.6% to the NAV per ordinary share as at 31 March 2022.
Dividend per share
The Board declared dividends during the year totalling 5.25 (2021: 5.25) pence per Ordinary share.
In addition to distributions made by way of the Compulsory Redemption process, or by means otherwise determined appropriate by the Directors, the Company currently intends to maintain quarterly dividend payments of 5.25 pence per Ordinary Share on an annualised basis, which may be partially uncovered. The Directors will continue to periodically review the Company's dividend policy in response to shareholder feedback and the progression of the managed wind-down.
Credit losses
The Board carefully monitors the level of defaults arising within the Group's portfolios. The credit loss provision prior to any fair value adjustments as at 31 March 2022 was £70.8m against outstanding principal and interest amounts of the loan portfolios of £107.4m (31 March 2021: provision of £61.2m against outstanding principal and interest amounts of the loan portfolio of £141.5m).
During the current financial year, a macroeconomic scenario continued to be utilised specifically for COVID-19 and consistent with portfolio modelling, however as the events unfolded and government support schemes began to wind-down, the timing of such stress was pushed to later periods as the performance remained resilient in the Company's loans. Additionally, multipliers are applied to individual loan probability of defaults ("PD") such that overall gross losses for the portfolio are anchored to portfolio model expectations.
For further information on the movement in credit losses, refer to note 4 of the consolidated financial statements.
Viability Statement
On 11 June 2019, the Company changed its Investment Objective and Policy to facilitate a managed wind-down of the Company in a prudent manner consistent with the principles of good investment management as required by the Listing Rules. In light of the limited weighted average life of the loans, and in the interests of returning capital to shareholders in a cost-effective manner it is anticipated that some or all the loans held by the entities of the Group will be sold and the Company will be placed into a formal liquidation process within twelve months of the publication of this report. Accordingly, the financial statements are prepared on a basis other than going concern and consequently it is considered unnecessary to prepare a Viability Statement.
Employees, Social, Human Rights and Environmental Issues
The Company has no employees and the Board comprises five non-executive Directors, all of whom, except Sachin Patel, are independent of Funding Circle. As an investment company, the Company has no direct impact on the community and as a result does not maintain specific policies in relation to these matters.
The Company operates by outsourcing significant parts of its operations to reputable professional companies, who are required to comply with all relevant laws and regulations and take account of social, environmental, ethical and human rights factors, where appropriate.
The Company's directors acknowledge the importance of operating responsibly and support the objectives of the Paris Agreement 2020 to substantially reduce greenhouse gas emissions. The Company has no greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emissions-producing sources, including those within its underlying investment portfolio.
In carrying out its investment activities and in relationships with suppliers, the Company aims to conduct itself responsibly, ethically and fairly.
Diversity and Inclusion
The Board of Directors of the Company comprises five male directors.
The Remuneration and Nominations Committee and the Board are committed to diversity at Board level and is supportive of increased gender and ethnic diversity but recognises that it may not always be in the best interest of shareholders to prioritise this above other factors. The Remuneration and Nominations Committee regularly reviews the structure, size and composition required of the Board, taking into account the challenges and opportunities facing the Company. In considering future candidates, appointments will be made on merit, including taking account of the specific skills, experience, independence, and knowledge needed to ensure a rounded Board and the diversity benefits each candidate can bring to the overall Board composition. The commencement of the managed wind-down is inevitably limiting in the Board's ability to implement enhanced diversity and inclusion strategies, given the limited future life of the Company.
Stakeholder Engagement
The AIC Code requires that matters set out in section 172 of the Companies Act, 2006 ("s172 of the Companies Act") are reported notwithstanding the Company is incorporated in Guernsey. As an investment company, the Company does not have any employees and conducts its core activities through third-party service providers. Each service provider is subjected to oversight and control, is required to have in place suitable policies to ensure they maintain high standards of business conduct, treat customers fairly, and employ corporate governance best practice. The Board considers the view of the Company's other key stakeholders as part of its discussions and decision making process. The Board's commitment to maintaining the high-standards of corporate governance recommended in the AIC Code, combined with the directors' duties incorporated into The Companies (Guernsey) Law, 2008, the constitutive documents, the Disclosure Guidance and Transparency Rules, and Market Abuse Regulation, ensures that shareholders are provided with frequent and comprehensive information concerning the Company and its activities. Whilst the primary duty of the Directors is owed to the Company as a whole consideration being given, the Board considers as part of its decision making process the interests of all stakeholders. Particular to the continued alignment between the activities of the Company and those that contribute to delivering the Board's strategy, which include the Portfolio Administrator. The Board respects and welcomes the views of all stakeholders. Any queries or areas of concern regarding the Company's operations can be raised with the Company Secretary and Administrator.
DIRECTORS' REPORT
The Directors present their annual report and audited consolidated financial statements for the year ended 31 March 2022. In the opinion of the Directors, the annual report and audited consolidated financial statements are fair, balanced and understandable and provide the information necessary for Shareholders to assess the Group's performance, business model and strategy.
Incorporation
The Company is a limited liability company registered in Guernsey under The Companies (Guernsey) Law, 2008 (as amended) with registered number 60680.
Activities
The Company is a registered and closed-ended collective investment scheme in Guernsey pursuant to The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended. Prior to the amendment of the Company's Investment Objective and Policy, the primary activity of the Company was investment in loans to small and medium sized enterprises in the United Kingdom, the United States and Continental Europe, in order to seek to provide shareholders with a sustainable and attractive level of dividend income. Following the result of the EGM on 11 June 2019, the Company has ceased investment into Credit Assets as the Company's Investment Objective and Policy were updated to facilitate the managed wind-down of the Company.
Results and dividends
The total comprehensive income for the year, determined under International Financial Reporting Standards ("IFRS"), amounted to £13.13 million (2021: £4.58 million). The payment of any dividend by the Company is subject to the satisfaction of a solvency test as required by The Companies (Guernsey) Law, 2008 (as amended). Following the result of the EGM, the Directors expect to maintain quarterly dividend payments of 5.25 pence per Ordinary Share on an annualised basis, which may be partially uncovered by income. Dividends declared during the year are disclosed in note 13.
Business review
The Strategic Report includes further information about the Company's principal activities, financial performance during the year and indications of likely future developments.
The Company redeemed a total of 82,414,359 shares (2021: 124,126,432) for a total amount of £76,199,758 (2021: £105,499,718) throughout the year.
In the previous years, the Group's results and financial position included Lambeth, a Company incorporated in Ireland. Lambeth was put into liquidation in October 2020 and the final proceedings to wind up its operations were completed in July 2021.
On 17 August 2020, Queenhithe fully repaid the remaining amount owed on its loan with Fleetbank. The remaining portfolio of Credit Assets held within Queenhithe were transferred to Basinghall on the same date for an amount equal to the principal and interest outstanding at 31 July 2020 being the economic cut-off date for the transaction. In December 2020, liquidators were formally appointed and commenced proceedings to wind up Queenhithe in an orderly manner. The proceedings are still ongoing as at the date of signing of these consolidated financial statements.
In October 2021, the Company received cash of £1,568,666 and a portfolio of SME loans valued at £5,824,315 as full repayment of its investment in the EIB transaction. The portfolio of loans was subsequently recognised in the Basinghall subsidiary of the Group in return for notes issued between the parent company and Basinghall. During the year, due to the resilient performance of the underlying loan portfolio, a net gain of £2,251,764 was recognised in the consolidated statement of comprehensive income and the SME loans were subsequently consolidated directly on the Group's balance sheet.
The Board continues to closely monitor the impact of COVID-19 and the emerging risk from the evolving lack of visibility of macro risk to the performance of the loan portfolio held by the Group. The Board receives updates on a regular basis from Funding Circle on current delinquency and default trends by geographic exposure. The Risk Committee also reviews a comprehensive range of other risks that may be impacted by COVID-19 and emerging economic risks.
From 2020, the impact of the COVID-19 pandemic led to the use of forbearance measures for eligible borrowers, including short term payment plans and payment holidays, to assist creditworthy borrowers whose businesses suffered a short-term liquidity shock as a result of the ongoing pandemic environment.
Borrowers that went on forbearance measures implemented by Funding Circle have demonstrated resilient performance since coming off their plan. The directors have seen a large proportion of borrowers returning to making full contractual repayments which has assisted in the stronger than expected performance by each of the portfolios in the latter stages of the year. All forbearance measures have been discontinued as businesses go back to normal operations.
The ongoing military operation in Ukraine, the related sanctions targeted against Russia and certain Russian nationals and the consequential impacts on European energy supply volumes and pricing is already impacting both the European and global economies. The Group does not have any direct exposure to Ukraine, Russia or Belarus. However, the impact on the general economic situation and exacerbation of other macroeconomic impacts such as rising inflation in particular, could impact certain assumptions and estimates in relation to the fair valuation and impairment assessment on Credit Assets in the future. This could lead to material adjustments to the carrying value of these assets within the next financial year. At this stage management is not able to reliably estimate the impact as events continue to unfold.
We remain vigilant in monitoring the macroeconomic environment and will adjust our business and risk strategy as required.
Going concern
The Directors are continuing with the managed wind-down of the Group's operations.
The Directors have considered the state of the wind-down and the average remaining contractual term of the loan portfolio and determined that the use of the going concern basis in preparing the financial statements of the Group is no longer appropriate. As such, the financial statements have been prepared on a basis other than going concern, under which the assets are measured at their net realisable value, which continues to be their fair value.
There were no adjustments made to the carrying values of the assets and liabilities of the Group in the current year as a result of this change in basis of preparation. The Directors consider the carrying values to be a reasonable approximate of their net realisable values.
There were no provisions for winding up costs recognised in the current financial year as these will be charged on an accruals basis as they are incurred or as the Group becomes obligated to make payments in the future. Any such costs are considered to be immaterial to the Group at the date of these financial statements.
The Directors confirm that they have a reasonable expectation that the Company will continue to be able to pay its liabilities as they fall due over the period of the managed wind-down.
Alternative Investment Fund Managers Directive ("AIFMD")
The AIFMD requires Alternative Investment Fund Managers ("AIFM") to comply with certain disclosure, reporting and transparency obligations for Alternative Investment Funds ("AIF") that it markets in the EU. The Company is a self-managed AlF for the purposes of the AIFMD and therefore has to comply with the disclosure requirements of the AIFMD.
The Company regularly publishes updates on the website in the form of factsheets. These, along with the regular announcements made through the Regulatory News Service ("RNS") of the FCA, cover the disclosures required by AIFMD.
The Directors consider that any change in respect of which a reasonable investor, becoming aware of such information, would reconsider its investment in the Company, including because the information could impact on the investor's ability to exercise its rights in relation to its investment, or otherwise prejudice that investor's (or any other investor's) interest in the Company should be considered material. In setting this threshold, the Directors have had regard to the current risk profile of the Company which outlines the relevant measures to assess the Company's exposure or potential exposure to those risks. As required by the Listing Rules, any material change to the investment policy of the Company will be made only with the approval of the shareholders and as such, shareholders' approval was sought at the EGM on 11 June 2019 to implement the modification of the Company's Investment Objective and Policy as noted in the Strategic Report.
The AIFMD also requires the Company to disclose the remuneration of its investment manager (if any) providing analysis between fixed and variable fees along with the information of how much of such remuneration was paid to senior management at the investment manager and how much was paid to members of staff. As a self-managed AIF, the Company has no investment manager and thus has no information to report.
United States of America Foreign Account Tax Compliance Act ("FATCA")
Guernsey has entered into an Intergovernmental Agreement ("IGA") with the US Treasury in order to comply with FATCA and has also entered into an IGA with the UK in order to comply with the UK's requirements for enhanced reporting of tax information in accordance with FATCA principles. Under such IGAs, the Company is regarded as a Foreign Financial Institution ("FFI") resident in Guernsey. The Board continues to monitor developments in the rules and regulations arising from the implementation of FATCA in conjunction with its tax advisors.
Common Reporting Standard ("CRS")
On 13 February 2014, the Organisation for Economic Co-operation and Development released the Common Reporting Standard ("CRS") designed to create a global standard for the automatic exchange of financial account information, similar to the information to be reported under FATCA. On 29 October 2014, 51 jurisdictions signed the multilateral competent authority agreement ("Multilateral Agreement") that activates this automatic exchange of FATCA-like information in line with the CRS.
Pursuant to the Multilateral Agreement, certain disclosure requirements may be imposed in respect of certain investors in the Company who are, or are entities that are controlled by one or more, residents of any of the signatory jurisdictions. It is expected that, where applicable, information that would need to be disclosed will include certain information about investors, their ultimate beneficial owners and/or controllers, and their investment in and returns from the Company and its subsidiaries.
Guernsey, along with 60 other jurisdictions, including some EU Member States, has adopted the CRS with effect from 1 January 2016, with the first reporting completed in 2017. The Group continues to comply with the requirements of CRS.
Corporate governance
The Company has been fully compliant with the AIC code of corporate governance throughout the year which is publicly available at https://www.theaic.co.uk/aic-code-of-corporate-governance.
Refer to the corporate governance report for further information.
Directors
The Directors who held office during the financial year end and up to the date of approval of this report were:
|
|
Date of appointment |
|
Frederic Hervouet |
12 August 2015 |
|
Jonathan Bridel |
19 August 2015 |
|
Richard Boléat |
19 August 2015 |
|
Richard Burwood |
12 August 2015 |
|
Sachin Patel |
18 May 2017 |
Tom Parachini, Global Head of Legal and Regulatory at Funding Circle, has been appointed as Alternate Director for Sachin Patel.
Directors' shares and interests
A list of all Directors who served during the year and up to the date of this report and their biographies are included at the back of this report.
The appointment and replacement of Directors is governed by the Company's Articles of Incorporation, The Companies (Guernsey) Law 2008 (as amended) and related legislation. The Articles of Incorporation themselves may be amended by special resolution of the Shareholders.
As at 31 March 2022, the Directors and/or their connected parties held the following Ordinary shares of the Company:
|
|
Number of shares |
|
|
|
2022 |
2021 |
|
Frederic Hervouet |
35,504 |
92,041 |
|
Jonathan Bridel |
25,286 |
65,552 |
|
Richard Boléat |
5,231 |
13,554 |
|
Richard Burwood |
13,409 |
24,784 |
|
Sachin Patel |
- |
- |
|
|
79,430 |
195,931 |
During the year, no Director had a material interest in a contract to which the Company was a party (other than his own letter of appointment). Mr. Patel is an employee of Funding Circle Ltd.
Movement in the number of shares held by each of the directors and/or connected parties during the year relates to the redemptions paid by the Company.
Substantial shareholdings
As at 31 March 2022, the Company had been informed of the following notifiable interests of 5% or more in the Company's voting rights in accordance with Disclosure and Transparency Rule 5.1.2:
|
Shareholder |
Number of Ordinary shares |
Percentage holding % |
|
Railways Pension Trustee Company Limited |
14,703,565 |
28.41 |
|
Rocket Internet |
12,749,496 |
24.64 |
|
BlackRock Investment Management (UK) Limited |
9,521,059 |
18.40 |
|
Amiral Gestion |
6,062,498 |
11.71 |
|
Almitas Capital |
3,090,025 |
5.97 |
Significant agreements
The Company is not a party to any significant agreements which take effect after or terminate upon a change of control of the Company, nor has the Company entered into any agreements with its Directors to provide for compensation for loss of office as a result of a takeover bid.
Information to be disclosed in accordance with UK Listing Rule 9.8.4
|
A statement of the amount of interest capitalised by the Company during the period under review with an indication of the amount and treatment of any related tax relief. |
The Company has not capitalised any interest in the year under review.
|
|
Any information required in relation to the publication of unaudited financial information. |
Not applicable.
|
|
Details of any long-term incentive schemes. |
Not applicable. |
|
Details of any arrangements under which a director of the Company has waived or agreed to waive any emoluments from the Company. |
Sachin Patel has waived his right to remuneration. |
|
Details of any pre-emptive issues of equity not for cash. |
Not applicable. |
|
Details of any non-pre-emptive issues of equity for cash by any unlisted major subsidiary undertaking. |
Not applicable. |
|
Details of parent participation in a placing by a listed subsidiary. |
Not applicable.
|
|
Details of any contract of significance in which a director is or was materially interested.
|
Sachin Patel and Tom Parachini are both employees of Funding Circle Ltd.
Sachin Patel and Tom Parachini are both Directors of Funding Circle Global Partners Limited ("FCGPL"). |
|
Details of any contract of significance between the Company (or one of its subsidiaries) and a controlling shareholder. |
Not applicable. |
|
Details of waiver of dividends by a shareholder. |
Not applicable. |
|
Board statement in respect of relationship agreement with the controlling shareholder. |
Not applicable.
|
Disclosure of information to the Auditor
The Directors who held office at the date of approval of this Directors' Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's Auditor is unaware and each Director has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company's Auditor is aware of that information.
Independent Auditor
PricewaterhouseCoopers CI LLP ("PwC CI") served as independent auditor during the financial year and has expressed its willingness to continue in office. A resolution to re-appoint PwC CI as independent auditor was approved in the Annual General Meeting.
The maintenance and integrity of the Group and Company's website is the responsibility of the Directors. The work carried out by the independent auditor does not involve consideration of these matters and accordingly, the auditor accepts no responsibility for any changes that may have occurred to the consolidated financial statements since they were initially presented on the website. Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Company Secretary
The Company Secretary is Sanne Group (Guernsey) Limited of De Catapan House, Grange Road, St Peter Port, Guernsey GY1 2QG.
Taxation
The Company is subject to taxation under The Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 act and the investing companies are subject to taxation in Ireland under the Irish Finance Act 2021. During the year, the interest limitation rule ("ILR") as contemplated by Article 4 of the Anti-Tax Avoidance Directive which was adopted as Council Directive (EU) 2016/1164 on 12 July 2016 was introduced in Ireland by the Finance Act 2021. The ILR will apply to Irish taxable entities with respect to accounting periods commencing on or after 1 January 2022. We do not expect the ILR to apply negatively to Basinghall, Tallis and Queenhithe as each entity earns only income which is expected to be treated as interest equivalent income for Irish tax purposes, together with future potential income. See note 11 for further information.
On behalf of the Board
RICHARD BOLÉAT
Chairman of the Board of Director
CORPORATE GOVERNANCE REPORT
The Financial Reporting Council ("FRC"), the UK's independent regulator for corporate reporting and governance responsible for the Corporate Governance Code, has endorsed the AIC Code meaning that companies who report in accordance with the AIC Code fully meet their obligations under the UK Corporate Governance Code (the "Code") and the related disclosure requirements contained in the Listing Rules.
Statement of how the principles of the AIC Code are applied
Throughout the financial year ended 31 March 2022 the Company has been in compliance with the relevant provisions set out in the AIC Code and the relevant provisions of the Code. The Code includes provisions relating to: the roles of the chief executive, executive directors' remuneration; and the need for an internal audit function, each of which is not considered by the Board to be relevant to the Company. The Company has therefore not reported further in respect of these provisions. The financial statements have not complied with the requirement to prepare a Viability Statement, this is discussed in more detail in the Strategic Report.
Board of Directors
The Board is comprised of five Directors, all of whom are non-executive. All the Directors are independent except for Sachin Patel who is an employee of Funding Circle Ltd. Richard Boléat is the Chairman of the Board and Jonathan Bridel is the Senior Independent Director. The Company did not use an external search consultancy nor any open advertising in the selection of the Chairman and the non-executive Directors. The Company was satisfied that the formal selection process from a pool of candidates with the relevant expertise and skills was appropriate for the needs of the Company. Biographies of the Directors are shown at the back of this report and demonstrate the range and depth of skills and experience each brings to the Board.
The Directors ensure that, at all times, the Board is composed of members who, as a whole, have the required knowledge, abilities and expert experience to properly complete their tasks and are sufficiently independent. A Board member is considered independent if he has no business or personal relations which cause a conflict of interest with those of the Company. Every member of the Board ensures that he has sufficient time to perform his mandate. The Board considers the skills, competence and independence of candidates in the context of the overall board composition. The Board has put in place appropriate insurance cover in respect of any legal action against the Directors.
The Board has not stipulated a maximum term of any directorship, including the tenure of the Chairman given the annual election/re-election process discussed below and commencement of the managed wind-down.
Copies of the letters of appointment are available on request from the Company Secretary.
Independence of Directors
In accordance with the AIC Code, the Board has reviewed the independence of the individual directors and the Board as a whole. Each of the Directors except Sachin Patel is considered independent.
Board evaluation
A formal Board evaluation process has been put in place in line with the Board's policy to monitor and improve performance of the Directors. The Board previously carried out a formal evaluation process on an annual basis. The Directors completed self-assessment forms which were reviewed and discussed with the Chairman. The Senior Independent Director performed an annual review of the Chairman's performance. The Directors carried out an annual review of the Board as a whole discussing its composition, size and structure and ensuring that there is a good balance of skills and experience. The answers to these questionnaires were discussed by the Remuneration and Nominations Committee. However, given the Company's change in investment objective, managed wind-down and the limited future life of the Company, the annual board evaluations are no longer taking place or being discussed by the Remuneration and Nominations Committee.
The Board shall offer induction training to any new Directors about the Company, its key service providers, the Directors' duties and obligations and other matters as may be relevant from time to time. A regular review will be undertaken by the Board to ensure that the Directors' ongoing training and development needs are met.
Election/Re-election of Directors
It is the Company's policy that at each Annual General Meeting of the Company all Directors shall retire from office, but, subject to the Articles, shall be eligible for re-appointment.
Committees of the Board
Audit, Risk, Management Engagement and Remuneration and Nominations Committees have been established by the Board and each Committee has formally delegated duties, responsibilities and terms of reference, which are available from the Company Secretary upon request.
An outline of the responsibilities of each of the Committees is set out below.
Audit Committee
The Board has established an Audit Committee comprising of all the Directors except for Sachin Patel and is chaired by Jonathan Bridel. The Audit Committee meets at least three times a year and is responsible for ensuring, inter alia, that the financial performance of the Company is properly reported on and monitored and provides a forum through which the Company's external auditor may report to the Board. The Audit Committee reviews and recommends to the Board the adoption and approval of the annual and half yearly consolidated financial statements, results, internal control systems and procedures and accounting policies of the Company.
Risk Committee
The Company has established a risk committee, which comprises of all of the Directors, with Frederic Hervouet as chairman. The risk committee meets four times a year or more often if required. The risk committee takes responsibility for the risk management policies of the Company's operations and oversight of the operation of the Company's risk management framework as well as completing all risk reporting for regulatory purposes.
Management Engagement Committee
The Company has established a Management Engagement Committee which is chaired by Richard Burwood and comprises of all the Directors except for Sachin Patel. The Management Engagement Committee meets at least once a year or more often if required. The principal duties of the Committee are to review the actions and judgments of Funding Circle and also the terms of agreements appointing each of them. The Committee is also responsible for monitoring the compliance of other service providers with the terms of their respective agreements.
Remuneration and Nominations Committee
The Company has established a Remuneration and Nominations Committee which is chaired by Richard Boléat and comprises all of the Directors. The Directors believe that the appointment of the chairman of the Remuneration and Nominations Committee does not affect his independence.
The Board believes it is appropriate for all Directors to be a member of the Remuneration and Nominations Committee as Sachin Patel has waived his right to remuneration from the Company and all other Directors are independent non-executive Directors.
The Remuneration and Nominations Committee meets at least once a year or more often if required. The duties of the Committee include:
• determining and agreeing with the Board the framework or broad policy for the remuneration of the Company's Chairman and non-executive Directors pursuant to the Company's Articles of Incorporation;
• reviewing the structure, size and composition (including the skills, knowledge and experience) required of the Board compared to its current position and make recommendations to the Board with regard to any changes necessary; and
• giving full consideration to succession planning of Directors, taking into account the challenges and opportunities facing the Company.
Meetings and attendance
There were 5 Board meetings held during the financial year ended 31 March 2022. The attendance record of each of the Directors was as follows:
|
|
|
|
Number of attendances during the year |
|
Frederic Hervouet |
|
|
3 |
|
Jonathan Bridel |
|
|
5 |
|
Richard Boléat |
|
|
5 |
|
Richard Burwood |
|
|
5 |
|
Sachin Patel or designated alternate |
|
|
5 |
There were 4 Risk Committee meetings and 5 Audit Committee meetings held during the financial year ended 31 March 2022. A Management Engagement Committee meeting was held subsequent to the year end in April 2022.This meeting was fully attended by the above Directors.
The attendance record of each of the Committee members was as follows:
|
|
Number of attendances during the year |
||
|
|
|
Audit Committee |
Risk Committee |
|
Frederic Hervouet |
|
3 |
3 |
|
Jonathan Bridel |
|
5 |
4 |
|
Richard Boléat |
|
5 |
4 |
|
Richard Burwood |
|
5 |
4 |
|
Sachin Patel |
|
N/A |
4 |
Board Observers
Funding Circle Limited has the right (pursuant to the Services Agreement) to nominate up to two observers to attend meetings of the Board. Those nominees may (other than in limited circumstances) attend each such meeting as observers, but do not have any rights to participate in the conduct of the business of the Company or to vote on any matter.
The Board may require that those nominees not attend the part of any Board meeting which considers (i) the termination of any agreement to which Funding Circle is party, or (ii) any dispute or litigation between Funding Circle and the Company.
Company Secretary
The Board appointed Sanne Group (Guernsey) Limited to act as Company Secretary on 22 July 2015. The principal duties of the Company Secretary are to monitor compliance with the established corporate governance framework, report to the Board and to arrange and host Board and Committee meetings.
Internal Control Review
The Board is responsible for ensuring the maintenance of a robust system of internal control and risk management and for reviewing the effectiveness of the Company's overall internal control arrangements and processes following recommendations from the Audit Committee. In performing their duties, the Board considered the relevant guidance published by the FRC as they apply to the Group. The systems and controls in place have been in place for the year under review and up to the date of signing of this annual report and audited consolidated financial statements. The results of the Board's review of the systems and controls are presented within the Audit Committee Report.
The Directors may delegate certain functions to other parties such as Funding Circle UK, Funding Circle US, Funding Circle CE, FCGPL, the Administrator and other service providers. In particular, the Directors have appointed Funding Circle UK, Funding Circle US and Funding Circle CE to service the Company's investments in loans and FCGPL to provide corporate services to the Company. Notwithstanding these delegations, the Directors have responsibility for exercising overall control and supervision of the services provided by Funding Circle UK, Funding Circle US and Funding Circle CE, for the risk management of the Company and otherwise for the Company's management and operations.
The Management Engagement Committee carries out regular reviews of the performance of Funding Circle UK, Funding Circle US and Funding Circle CE together with other service providers appointed by the Company.
Investor Relations
All shareholders have the opportunity to attend and vote, in person or by proxy, at the AGM or other meetings of shareholders. The notice of the AGM, which is sent out at least fourteen days in advance, sets out the business of the meeting. Shareholders are encouraged to attend the AGM and to participate in proceedings. The Chairman of the Board and the Directors, together with representatives of Funding Circle, will be available to answer shareholders' questions at the AGM.
Shareholders and other interested parties are able to contact the Company through a dedicated investor relations function. Contact details are as follows:
Email: ir@smecreditrealisation.com
Shareholders are also able to contact the Company via the Chairman or Company Secretary as follows:
Richard Boléat
Tel: +44 (0) 1534 615 656
Email: Richard.Boleat@smecreditrealisation.com
Sanne Group (Guernsey) Limited
Tel: +44 (0) 1481 739 810
Email: smecreditrealisation@sannegroup.com
AUDIT COMMITTEE REPORT
Membership
Jonathan Bridel - Chairman (Independent non-executive Director)
Richard Burwood (Independent non-executive Director)
Fred Hervouet (Independent non-executive Director)
Richard Boléat (Company Chairman* and Independent non-executive Director)
* The Board believes it is appropriate for the Company Chairman to be a member of the Audit Committee as he is a Fellow of the Institute of Chartered Accountants in England & Wales and is an independent Director.
Key Objectives
The provision of effective governance over the appropriateness of the Company's financial reporting, taking into account the consolidation of its subsidiaries, including the adequacy of related disclosures, the performance of the external auditor and the management of the Company's systems of internal controls and business risks.
Responsibilities
The primary responsibilities of the Audit Committee are:
§ reviewing the Company's financial results announcements and financial statements and monitoring compliance with relevant statutory and listing requirements;
§ reporting to the Board on the appropriateness of the Company's accounting policies and practices including critical accounting policies and practices;
§ advising the Board on whether the Committee believes the annual report and financial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy;
§ scrutiny of the loans held at fair value through other comprehensive income;
§ compiling a report on its activities to be included in the Company's annual report;
§ overseeing the relationship with and appointment of the external auditor;
§ agreeing with the external auditor the audit plan including discussions on the key risk areas within the consolidated financial statements;
§ considering the financial and other implications on the independence of the auditor arising from any non-audit services to be provided by the auditor; and
§ considering the appropriateness of appointing the auditor for non-audit services.
The Audit Committee members have a wide range of financial and commercial expertise necessary to fulfil the Committee's duties. The Chairman of the Committee, Jonathan Bridel, is a Fellow of the Institute of Chartered Accountants in England and Wales, and has recent and relevant financial experience, as required by the AIC Code. He serves as Audit Chairman on other listed companies and previously worked in senior positions in banking and finance and investment management including SME lending. The Board is satisfied he has recent and relevant financial experience and has designated him as its financial expert on the Committee. The Committee as a body has the competence and experience relevant to the sector. The qualification of the members of the committee are noted in the biographies section at the back of this report.
Committee Meetings
The Committee meets formally at least three times a year. Only members of the Audit Committee have the right to attend Audit Committee meetings. However, other Directors and representatives of Funding Circle and the Administrator are invited to attend Audit Committee meetings on a regular basis and other non-members may be invited to attend all or part of the meetings as and when appropriate and necessary. The Company's external auditor, PricewaterhouseCoopers CI LLP ("PwC CI"), is also invited to meetings as is appropriate.
Main Activities during the year
The Committee assists the Board in carrying out its responsibilities in relation to financial reporting requirements, risk management and the assessment of internal controls and key procedures adopted by the Company's service providers. The Committee also manages the Company's relationship with the external auditor and considers the appointment of external auditor, discusses with the external auditor the nature and scope of the audit, keeps under review the scope, results, cost and effectiveness of the audit and reviews the independence of the external auditor. The Committee also considers the objectivity of the auditor and reviews the external auditor's letter of engagement and management letter.
Meetings of the Committee generally take place prior to a Company Board meeting. The Committee reports to the Board, as part of a separate agenda item, on the activity of the Committee and matters of particular relevance to the Board in the conduct of their work. The Board requires that the Committee advise it on whether it believes the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.
At its meetings during the year, the Committee focused on:
Financial reporting
The primary role of the Committee in relation to financial reporting is to review with Funding Circle, the Administrator and the external auditor the appropriateness of the half-yearly and annual consolidated financial statements concentrating on, amongst other matters:
§ The quality and acceptability of accounting policies and practices;
§ The clarity of the disclosures and compliance with financial reporting standards and relevant financial and governance reporting requirements including the application of IFRS 9 and IFRS 10;
§ Material areas in which significant judgments have been applied or where there has been discussion with the external auditor;
§ Appropriateness of the going concern basis of preparation;
§ Whether the annual report and consolidated financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy; and
§ Any correspondence from regulators and listing authorities in relation to financial reporting.
To aid its review, the Committee considers reports from Funding Circle and the Administrator.
Significant issues
In relation to the annual report and consolidated financial statements for the year ended 31 March 2022, the following significant issues were considered by the Audit Committee as they are most relevant to the nature of the Group's business:
§ Valuation of loans advanced
Loans advanced recorded at fair value through other comprehensive income ("FVTOCI") represent the largest balance in the statement of financial position. Furthermore, the FVTOCI basis of measurement under IFRS 9 mandates that management evaluate the expected credit losses on the loan portfolio and account for them through the profit and loss, with movement on fair value going through the OCI. Valuation of the loans advanced is received from a third party valuation expert on a quarterly basis. The Audit Committee regularly reviews and has satisfied itself as to the inputs used in the valuation methodology of the loans advanced in the consolidated financial statements at 31 March 2022.
§ Fraud risk in income recognition
The presumed risk of fraud in revenue recognition in relation to pressure management may feel to achieve the forecast results. The directors acknowledge that there is a rebuttable risk of fraud in income recognition. Mitigating factors were reviewed through the risk register and internal controls framework which is reviewed and approved by the Committee on a regular basis. The Committee has considered and challenged as appropriate the assessment of risks within these documents and obtained evidence about the effective operation of the internal controls in place, including critically assessing reporting provided by Funding Circle. The Audit Committee is satisfied that the accounting policy for recognition of the interest earned on loans is in line with the relevant accounting standards.
§ Use of going concern assumption
The Directors have considered the state of the wind-down and the average remaining contractual term of the loan portfolio and determined that the use of the going concern basis in preparing the financial statements of the Group is no longer appropriate. Whilst this has not been considered a significant risk it is a significant issue that needed due consideration in relation to the preparation of this Annual Report and hence is included here for completeness.
The Committee in conjunction with the Board and Funding Circle continue to monitor the impact of COVID-19, and new risk factors such as inflation and the events in Ukraine on the consolidated financial statements of the Group.
Internal Control and Risk Management
The Committee along with the Risk Committee has established a process for identifying, evaluating and managing all major risks faced by the Group. The process is subject to regular review by the Board and accords with the AIC Code of Corporate Governance. The Board is responsible overall for the Group's system of internal control and for reviewing its effectiveness. However, such a system is designed to manage rather than eliminate risks of failure to achieve the Company's business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.
The Committee receives reports from the Risk Committee on the Group's risk evaluation process and reviews changes to significant risks identified. The Committee has undertaken a full review of the Group's business risks, which have been analysed and recorded in a risk report, which is reviewed and updated regularly. Each quarter a Funding Circle report outlines the steps taken to monitor the areas of risk including those that are not directly the responsibility of Funding Circle and reports the details of any known internal control failures.
Separately, Funding Circle has established an internal control framework to provide reasonable but not absolute assurance on the effectiveness of the internal controls operated on behalf of its clients. The effectiveness of the internal controls is assessed by Funding Circle's compliance and risk department on an on-going basis. Funding Circle's controls processes have also been outlined to the Board. The Board's assessment of the Company's principal risks and uncertainties is set out in the Strategic Report. By means of the procedures set out above, the Board confirms that it has reviewed the effectiveness of the Group's system of internal controls for the year ended 31 March 2022 and subsequently and that no material issues have been noted.
External Audit
The effectiveness of the external audit process is dependent on appropriate audit risk identification at the start of the audit cycle. The Committee received a detailed audit plan from PwC CI, identifying their assessment of these audit risks. For the year ended 31 March 2022 significant risks were identified in relation to the valuation of loans advanced and the risk of fraud in revenue recognition (in addition to the risk of management override of controls). These risks are tracked through the year and the Committee challenged the work done by the auditor to test management's assumptions and estimates around these areas. The Committee has assessed the effectiveness of the audit process addressing these matters through the reporting received for the year-end consolidated financial statements. In addition, the Committee will seek feedback from the Administrator on the effectiveness of the audit process. For the year ended 31 March 2022, the Committee was satisfied that there had been appropriate focus and challenge on the primary areas of audit risk and assessed the quality of the audit process to be good.
Appointment and Independence
The Committee considers the reappointment of PwC CI, including the rotation of the Audit Engagement Leader, and assesses their independence on an annual basis. The external auditor is required to rotate the Audit Engagement Leader responsible for the Company's audit every five years. The Audit Engagement Leader has not yet served on the external audit for this defined period and as such continues as Audit Engagement Leader for the current year's audit. In its assessment of the independence of the auditor, the Committee receives details of any relationships between the Company and PwC CI that may have a bearing on their independence and receives confirmation that they are independent of the Company. The Committee approved the fees for audit services for the year ended 31 March 2022 after a review of the level and nature of work to be performed and after being satisfied that the fees were appropriate for the scope of the work required.
Non-audit Services
To safeguard the objectivity and independence of the external auditors from becoming compromised, the Committee has a formal policy governing the engagement of the external auditors to provide non-audit services. No material changes have been made to this policy during the year. The auditor and the Directors have agreed that all non-audit services require the pre-approval of the Audit Committee prior to commencing any work. Fees for non-audit services are tabled annually so that the Audit Committee can consider the impact on auditor's objectivity. The auditor (and their affiliated network firms) was remunerated £210,448 (2021: £264,792) for their audit and non-audit services rendered for the year ended 31 March 2022. The Committee assessed whether PwC should be appointed in relation to certain tax and other non-audit services related services and concluded that it would be in the best interest of the Group to do so.
PwC were remunerated as follows for the year ended 31 March 2022:
|
|
2022 |
|
2021 |
||
|
Type of service |
PwC CI |
PwC Ireland |
|
PwC CI |
PwC Ireland |
|
|
£ |
£ |
|
£ |
£ |
|
Audit of the financial statements |
114,330 |
72,218 |
|
126,030 |
77,234 |
|
Review of half yearly financial statements |
23,900 |
- |
|
22,000 |
- |
|
Tax related services |
- |
- |
|
- |
38,328 |
|
Other non-audit services |
- |
- |
|
1,200 |
- |
|
|
138,230 |
72,218 |
|
149,230 |
115,562 |
The current length of PwC's tenure is 7 years and the last time tendering took place was in October 2015.
The Committee is satisfied with the effectiveness of the audit provided by PwC CI and is satisfied with the auditor's independence. The Committee has therefore recommended to the Board that PwC CI be reappointed as external auditor for any succeeding audits required until the Company's wind down process has been completed. Accordingly, a resolution proposing the reappointment of PwC as auditor will be put to the shareholders at the 2022 AGM.
Committee Evaluation
The Committee's activities form part of the performance evaluation that will be carried out by the Board.
Jonathan Bridel
Chairman of the Audit Committee
26 July 2022
DIRECTORS' REMUNERATION REPORT
The Board has established a Remuneration and Nominations Committee which met once during the current financial year.
Composition
The Remuneration and Nominations Committee was formed on 28 September 2015, comprising all the members of the Board. The Board has appointed Richard Boléat as Chairman of the Committee.
The Directors and Company Secretary are the only officers of the Company. Copies of the Directors' letters of appointment are available upon request from the Company Secretary at the registered office and will be available for inspection at the AGM. The Company Secretary is engaged under a Company Secretarial Agreement with the Company. The Company has no employees.
The Directors are each entitled to serve as non-executive Directors on the boards of other companies and to retain any earnings from such appointments.
Responsibilities
The primary responsibilities of the Committee are:
§ determine and agree with the Board the framework or broad policy for the remuneration of the Company's Chairman and non-executive directors pursuant to the Company's Articles of Incorporation;
§ review the ongoing appropriateness and relevance of the remuneration policy;
§ ensure that contractual terms on termination, and any payments made, are fair to the individual and the Company, that failure is not rewarded and that the duty to mitigate loss is fully recognised;
§ annually review the structure, size and composition (including the skills, knowledge and experience) required of the Board compared to its current position and make recommendations to the Board with regard to any changes as necessary;
§ give full consideration to succession planning of directors, taking into account the challenges and opportunities facing the Company, and what skills and expertise are therefore needed on the Board in the future; and
§ keep under review the leadership needs of the Company with a view to ensuring the continued ability of the Company to compete effectively in the Platform.
Remuneration Policy
In setting the Company's remuneration policy, the Remuneration and Nominations Committee has sought (so far as it considers appropriate for a company with a non-executive Board) to align the interests of the Board with those of the Company and to incentivise the Directors to help the Company to achieve its investment objective.
The Directors shall be paid such remuneration by way of fees for their services as is defined in each of the Directors' letters of appointment. Under the terms of their appointments as non-executive Directors of the Company, the Directors (other than Sachin Patel who has waived his entitlement to an annual fee) are entitled to the following annual fees:
|
|
Annual fee £ |
Notes |
|
Frederic Hervouet |
40,000 |
Chairman of the Risk Committee |
|
Jonathan Bridel |
40,000 |
Chairman of the Audit Committee |
|
Richard Boléat |
50,000 |
Chairman of the Board and Chairman of the Remuneration and Nominations Committee |
|
Richard Burwood |
30,000 |
Chairman of the Management Engagement Committee
|
|
Sachin Patel |
- |
Waived annual Director's fee |
|
|
160,000 |
|
The Directors are not entitled to any other fixed or variable remuneration.
No Director has a service contract with the Company, nor are any such contracts proposed. The retirement, disqualification and removal provisions relating to the Directors (in their capacity as Directors) are set out in their letters of appointment.
No annual bonus will be paid to any Director and the Company does not operate a long-term incentive plan.
The Directors are entitled to be repaid by the Company all properly incurred out-of-pocket expenses reasonably incurred in the execution of their duties.
In setting the level of each non-executive Director's fees, the Company has had regard to; the time commitments expected, the level of skill and experience of each Director, the current market, the fee levels of companies of similar size and complexity.
On termination of their appointment, Directors shall only be entitled to such fees as may have accrued to the date of termination, together with reimbursement in the normal way of any expenses properly incurred prior to that date. If the Board considers it appropriate to appoint a new director, the new director remuneration will comply with the current policy.
Directors' remuneration and Share interests
The total remuneration of the Directors for the year ended 31 March 2022 was as follows:
|
|
|
31 March 2022 |
31 March 2021 |
|
|
|
£ |
£ |
|
Frederic Hervouet |
|
40,000 |
40,000 |
|
Jonathan Bridel |
|
40,000 |
40,000 |
|
Richard Boléat |
|
50,000 |
50,000 |
|
Richard Burwood |
|
30,000 |
37,257 |
|
|
|
160,000 |
167,257 |
There were no other items in the nature of remuneration, pension entitlements or incentive scheme arrangements which were paid or accrued to the Directors during this year.
As at 31 March 2022, the Director held the following Ordinary shares, representing the below voting rights.
|
|
31 March 2022 |
31 March 2021 |
31 March 2022 |
31 March 2021 |
|
|
Shares held |
Shares held |
Voting Rights % |
Voting Rights % |
|
Frederic Hervouet |
35,504 |
92,041 |
0.0686 |
0.0316 |
|
Jonathan Bridel |
25,286 |
65,552 |
0.0489 |
0.0225 |
|
Richard Boléat |
7,025 |
13,554 |
0.0136 |
0.0047 |
|
Richard Burwood |
13,409 |
24,784 |
0.0259 |
0.0085 |
|
|
81,224 |
195,931 |
0.1570 |
0.0673 |
Directors who held shares during the year have received dividends in line with the distribution made by the Company as shown in note 13.
During the year no remuneration was received by any Director in a form other than cash. Furthermore, no payments were made for loss of office, other benefits or other compensation for extra services to any Director or former Director of the Company.
The Company has no employees other than its Directors who are all non-executive. When periodically considering the level of fees, the Remuneration and Nominations Committee evaluates the contribution and responsibilities of each Director and the time spent on the Company's affairs. Following this evaluation, the Committee will determine whether the fees as set out in the Remuneration Policy continue to be appropriate. Although the Company has not to date consulted shareholders on remuneration matters, it has reviewed the remuneration of Directors of other investment companies of similar size and complexity and to the limits set out in the Company's Articles of Incorporation. The Company welcomes any views the shareholders may have on its remuneration policy.
Richard Boléat
Chairman of the Remuneration and Nominations Committee
26 July 2022
STATEMENT OF DIRECTORS' RESPONSIBILITIES
IN RESPECT OF THE FINANCIAL STATEMENTS
The Directors are responsible for preparing the Directors' Report and the consolidated financial statements in accordance with applicable law and regulations.
The Companies (Guernsey) Law, 2008 (as amended) requires the Directors to prepare financial statements for each financial year and under that law they have elected to prepare the consolidated financial statements in accordance with IFRS as issued by the International Accounting Standards Board ("IASB").
The consolidated financial statements are required by law to give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for that year.
In preparing these consolidated financial statements, the Directors are required to:
• Select suitable accounting policies and then apply them consistently;
• Make judgements and estimates that are reasonable and prudent;
• State whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the consolidated financial statements; and
• Prepare the consolidated financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business. As explained in note 2 to the financial statements, the Directors do not believe the going concern basis to be appropriate for the preparation of the financial statements of the Group and accordingly the financial statements of the Group have not been prepared on a going concern basis. No provision has been made for the costs of winding up the Company as these will be charged to the income statement on an accruals basis as they are incurred or as the Company becomes obligated to make such payments in the future. In the view of the Directors, such costs are likely to be immaterial.
The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and to enable them to ensure that the consolidated financial statements comply with The Companies (Guernsey) Law, 2008 (as amended). They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
The Directors confirm that they have complied with the above requirements in preparing the consolidated financial statements and that to the best of their knowledge and belief:
• This annual report includes a fair review of the development and performance of the business and the position of the Group together with a description of the principal risks and uncertainties that the Group faces;
• The consolidated financial statements, prepared in accordance with IFRS issued by the IASB and interpretations issued by the IFRS Interpretations Committee, give a true and fair view of the assets, liabilities, financial position and results of the Group; and
• The annual report and consolidated financial statements, taken as a whole, provide the information necessary to assess the Group's position and performance, business model and strategy and is fair, balanced and understandable.
Richard Boléat Jonathan Bridel
Chairman Chairman of the Audit Committee
26 July 2022 26 July 2022
Independent auditor's report to the members of SME Credit Realisation Fund Limited
Report on the audit of the consolidated financial statements
Our opinion
In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of SME Credit Realisation Fund Limited (the "company") and its subsidiaries (together the "group") as at 31 March 2022, and of their consolidated financial performance and their consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards and have been properly prepared in accordance with the requirements of The Companies (Guernsey) Law, 2008.
What we have audited
The group's consolidated financial statements comprise:
● the consolidated statement of financial position as at 31 March 2022;
● the consolidated statement of comprehensive income for the year then ended;
● the consolidated statement of changes in shareholders' equity for the year then ended;
● the consolidated statement of cash flows for the year then ended; and
● the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing ("ISAs"). Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements of the group, as required by the Crown Dependencies' Audit Rules and Guidance. We have fulfilled our other ethical responsibilities in accordance with these requirements.
Emphasis of matter - consolidated financial statements prepared on a basis other than going concern
In forming our opinion on the consolidated financial statements, which is not modified, we draw attention to note 2(c) of the consolidated financial statements, the Directors' Report and to the Viability Statement which describe the directors' reasons why the consolidated financial statements have been prepared on a basis other than going concern.
Our audit approach
Our audit of the group for the year ended 31 March 2022 was planned and executed having considered the key activities of the group during the year.
At the Extraordinary General Meeting on 11 June 2019 the shareholders of the company voted to amend the company's investment objective and policy to implement a managed wind-down of the company by means of natural amortisation of the company's investments in loans advanced as well as potential, opportunistic portfolio sales.
Considering the stage of the wind-down and the average remaining contractual term of the loan portfolio the use of the going concern basis in preparing the consolidated financial statements was determined to no longer be appropriate by the directors.
The Group's investment in the EIB structured finance transaction that had been classified as a financial asset at fair value through profit or loss was also settled during the year after the leverage in the structure was paid down and settled through consideration of the transfer of the loan assets at their fair value to the group (the "EIB transaction"). The transferred loan assets have been subsequently measured at fair value through other comprehensive income in the consolidated financial statements at 31 March 2022.
Other than the key activities noted above our assessment is that the primary operations of the group remained largely unchanged from the prior year up until 31 March 2022.
Overview
Audit scope
● The company is based in Guernsey, with subsidiaries located in Ireland, and engages Funding Circle Ltd (the "Portfolio Administrator") to administer its loan portfolio. The consolidated financial statements are a consolidation of the company and all its subsidiaries.
● We conducted our audit of the consolidated financial statements using information provided by Sanne Group (Guernsey) Limited (the "Administrator"), to whom the board of directors has delegated the provision of certain functions. We also had significant interaction with the Portfolio Administrator in completing aspects of our overall audit work.
● We conducted our audit work in Guernsey and we tailored the scope of our audit, taking into account the types of investments within the group, the involvement of the third parties referred to above, the accounting processes and controls, and the industry in which the group operates.
Key audit matters
Valuation of loans advanced
Materiality
● Overall group materiality: GBP 1.3 million (2021: GBP 3 million) based on 2.5% of consolidated net assets (2021: 2.5% of consolidated net assets).
● Performance materiality: GBP 1.0 million (group).
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated financial statements. In particular, we considered where the directors made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
This is not a complete list of all risks identified by our audit.
|
Key audit matter |
How our audit addressed the key audit matter |
|
Valuation of loans advanced Refer to Note 2 to the consolidated financial statements, Note 3 to the consolidated financial statements, Note 4 to the consolidated financial statements and Audit Committee Report.
Loans advanced are recorded at fair value through other comprehensive income ("FVTOCI") in the consolidated statement of financial position and amounted to £37.4 million as at 31 March 2022.
They represent the largest balance in the consolidated statement of financial position. Furthermore, the FVTOCI basis of measurement under IFRS 9 mandates that the directors evaluate the expected credit losses on the loan portfolio and account for them through the profit and loss, with movements on fair value going through other comprehensive income.
The valuation of loans advanced, and related expected credit losses are subject to significant estimates and judgements applied by the directors such that changes to key inputs to the estimates and judgements made can result in material changes to their valuation.
|
We understood and assessed the methodology and assumptions applied in determining the fair value of loans advanced and related expected credit losses, by reference to accounting standards and industry practice.
We obtained an understanding of the design of the fair value models developed by management's experts and assessed whether the approach is in accordance with recognised industry methodology.
We understood and evaluated the internal controls relating to the reconciliation, accounting and reporting of loans advanced.
Our procedures related to the data used in the determination of the fair value of loans included: · testing the integrity of the data used in the fair value and expected credit loss models and its completeness and accuracy, including loans advanced which were transferred as part of the EIB transaction; · discussing the logic of the fair value models to understand the application of discounted cash flow methodology; · assessing the accuracy of forecasting by comparing the historical forecasted cash flows in the valuation models to the actual figures, as well as considering expected credit losses and default history compared to previous assumptions; and · testing the inputs in the loan models, including interest rates and loan maturity, and agreeing to the legal loan documentation on a sample basis.
With the assistance of PwC valuation experts, we assessed whether the valuation approach used by management's expert is in accordance with recognised industry methodology and recalculated the net present value of the loan portfolios by applying the assumptions used by management's expert in our own valuation model.
We then analysed the performance reports of the loan portfolio to better understand the performance of the underlying loans to identify and consider the key assumptions used to determine the fair value of the loans and the related expected credit loss. Our testing included the following: · reviewed and challenged, as appropriate, reasonableness of macroeconomic assumptions, selection of economic scenarios, prepayment rates, probabilities of default rates, loss given default, exposure at default, recovery rates and discount margins applied in the various models by benchmarking these to independent market data and knowledge; · assessed key assumptions used, such as those relating to when a significant increase in credit risk has occurred; and · reviewed and analysed macroeconomic scenarios developed by management, and assessed whether they are consistent with the loan portfolio modelling and evaluated multipliers applied to individual loan probability of default rates such that overall gross losses for the portfolio are in line with portfolio model expectations.
We concluded that the recording of loans advanced at fair value through other comprehensive income was consistent with the accounting policies and that the models and assumptions used to calculate the expected credit loss provision (recognised in profit or loss) and the movement in fair value (recognised in other comprehensive income) was supported by appropriate evidence. |
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the consolidated financial statements as a whole, taking into account the structure of the group, the accounting processes and controls, and the industry in which the group operates.
We have considered whether the consolidated subsidiary entities included within the group comprise separate components for the purpose of our audit scope. However, we have taken account of the group's financial reporting system and the related controls in place at the Administrator and Portfolio Administrator, and based on our professional judgement have tailored our audit scope to account for the group's consolidated financial statements as a single component.
The company is based in Guernsey with three underlying subsidiaries located in Ireland. The consolidated financial statements are a consolidation of the company and all underlying subsidiaries.
Scoping was performed at the group level, irrespective of whether the underlying transactions took place within the company or within the subsidiaries. The group audit was led, directed and controlled by PricewaterhouseCoopers CI LLP and audit work for material items within the consolidated financial statements was performed in Guernsey by PricewaterhouseCoopers CI LLP. All subsidiaries and the parent that make up the group were in scope for our audit procedures over the consolidated financial statements.
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the consolidated financial statements as a whole.
Based on our professional judgement, we determined materiality for the consolidated financial statements as a whole as follows:
|
Overall group materiality |
GBP 1.3 million (2021: GBP 3 million). |
|
How we determined it |
2.5% of consolidated net assets |
|
Rationale for benchmark applied |
We believe that consolidated net assets are the most appropriate benchmark because this is the key metric of interest to investors. It is also a generally accepted measure used for companies in this industry. |
We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance materiality was 75% (2021: 75%) of overall materiality, amounting to GBP 1.0 million (2021: GBP 2.2 million) for the group financial statements.
In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment and aggregation risk and the effectiveness of controls - and concluded that an amount at the upper end of our normal range was appropriate.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above GBP 65,000 (2021: GBP 149,000) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Reporting on other information
The other information comprises all the information included in the Annual Report and Audited Consolidated Financial Statements (the "Annual Report") but does not include the consolidated financial statements and our auditor's report thereon. The directors are responsible for the other information.
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
Responsibilities for the consolidated financial statements and the audit
Responsibilities of the directors for the consolidated financial statements
As explained more fully in the Statement of Directors' Responsibilities, the directors are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards, the requirements of Guernsey law and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the directors are responsible for assessing the group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so. See note 2 c) to the consolidated financial statements, which refers to the directors' conclusion on preparing the consolidated financial statements on a basis other than going concern.
Auditor's responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are 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 ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We will often seek to target particular items for testing based on their size or risk characteristics. In other cases, we will use audit sampling to enable us to draw a conclusion about the population from which the sample is selected.
As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:
· Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
· Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group's internal control.
· Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.
· Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group's ability to continue as a going concern over a period of at least twelve months from the date of approval of the consolidated financial statements. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report.
· Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
· Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
Use of this report
This report, including the opinions, has been prepared for and only for the members as a body in accordance with Section 262 of The Companies (Guernsey) Law, 2008 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Report on other legal and regulatory requirements
Corporate Law exception reporting
Under The Companies (Guernsey) Law, 2008 we are required to report to you if, in our opinion:
● we have not received all the information and explanations we require for our audit;
● proper accounting records have not been kept; or
● the consolidated financial statements are not in agreement with the accounting records.
We have no exceptions to report arising from this responsibility.
Corporate governance Statement
The Listing Rules require us to review the directors' statements in relation to going concern, longer-term viability and that part of the corporate governance statement relating to the company's compliance with the provisions of the UK Corporate Governance Code specified for our review. Our additional responsibilities with respect to the corporate governance statement as other information are described in the Reporting on other information section of this report.
The company has reported compliance against the 2019 AIC Code of Corporate Governance (the "Code") which has been endorsed by the UK Financial Reporting Council as being consistent with the UK Corporate Governance Code for the purposes of meeting the company's obligations, as an investment company, under the Listing Rules of the FCA.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement, included within the Strategic Report and the Directors' Report is materially consistent with the consolidated financial statements and our knowledge obtained during the audit, and, other than the matter referred to in the Emphasis of matter paragraph above which impacts on the directors' statements about going concern and their assessment of the group's prospects, we have nothing material to add or draw attention to in relation to:
· The directors' confirmation that they have carried out a robust assessment of the emerging and principal risks;
· The disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify emerging risks and an explanation of how these are being managed or mitigated;
· The directors' statement in the consolidated financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the group's ability to continue to do so over a period of at least twelve months from the date of approval of the consolidated financial statements;
· The directors' explanation as to their assessment of the group's prospects, the period this assessment covers and why the period is appropriate; and
· The directors' statement as to whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of its assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the consolidated financial statements and our knowledge obtained during the audit:
· The directors' statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the information necessary for the members to assess the group's position, performance, business model and strategy;
· The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and
· The section describing the work of the Audit Committee.
We have nothing to report in respect of our responsibility to report when the directors' statement relating to the company's compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified under the Listing Rules for review by the auditors.
Other matter
As required by the Financial Conduct Authority Disclosure Guidance and Transparency Rule 4.1.14R, these consolidated financial statements will form part of the ESEF-prepared annual financial report filed on the National Storage Mechanism of the Financial Conduct Authority in accordance with the ESEF Regulatory Technical Standard ("ESEF RTS"). This auditor's report provides no assurance over whether the annual financial report will be prepared using the single electronic format specified in the ESEF RTS.
Tony Corbin
For and on behalf of PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognised Auditor
Guernsey, Channel Islands
26 July 2022
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2022
|
|
|
|
2022 |
2021 |
|
|
|
Notes |
£ |
£ |
|
Operating income |
|
|
|
|
|
Interest income on loans advanced |
|
4 |
6,398,665 |
14,715,117 |
|
Interest income on class B notes |
|
5 |
1,691,666 |
- |
|
Net realised gain on financial assets at fair value through profit or loss |
|
5 |
560,098 |
5,141,217 |
|
Unrealised gain on foreign exchange |
|
16 |
1,057,767 |
- |
|
Bank interest income |
|
|
3,452 |
21,409 |
|
Gain on sale of non-performing loans |
|
|
- |
605,402 |
|
Total operating income |
|
|
9,711,648 |
20,483,145 |
|
Operating expenditure |
|
|
|
|
|
(Reversal of)/additional impairment of loans |
|
4 |
(7,342,224) |
11,936,141 |
|
Net realised losses on foreign currency derivatives |
|
16 |
- |
2,742,932 |
|
Loan servicing fees |
|
15 |
596,575 |
1,319,418 |
|
Company administration and secretarial fees |
|
15 |
215,303 |
314,229 |
|
Directors' remuneration and expenses |
|
14 |
160,425 |
167,267 |
|
Audit, audit-related and non-audit related fees |
|
15 |
210,448 |
260,546 |
|
Corporate broker services |
|
|
35,000 |
50,000 |
|
Corporate services fees |
|
15 |
91,257 |
184,969 |
|
Registrar fees |
|
|
75,516 |
86,796 |
|
Regulatory fees |
|
|
51,141 |
59,060 |
|
Loan interest expense |
|
|
- |
63,600 |
|
Legal and professional fees |
|
|
16,014 |
304,548 |
|
Commitment fee |
|
|
- |
187,500 |
|
Other operating expenses |
|
|
218,779 |
385,611 |
|
Total operating expenditure |
|
|
(5,671,766) |
18,062,617 |
|
Operating income for the year before taxation |
|
|
15,383,414 |
2,420,528 |
|
Taxation for the year |
|
11 |
(500) |
(348,809) |
|
Operating income after taxation for the year |
|
|
15,382,914 |
2,071,719 |
|
Other comprehensive income: Items that may be reclassified to profit or loss (Loss)/gain on movement in fair value of loans advanced |
|
4 |
(2,248,378) |
2,507,892 |
|
Total comprehensive income for the year |
|
|
13,134,536 |
4,579,611 |
Other comprehensive income
The other comprehensive income recognised above relates to the unrealised (loss)/gain on the movement in fair valuation of the Group's portfolio of loans advanced.
There were no other items of other comprehensive income in the current or prior year.
The accompanying notes form part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
|
AS AT 31 MARCH 2022 |
|
|
|
|
|
|
31 March 2022 |
31 March 2021 |
|
|
Notes |
£ |
£ |
|
ASSETS |
|
|
|
|
Cash and cash equivalents |
7 |
15,183,371 |
30,784,718 |
|
Other receivables and prepayments |
|
23,550 |
9,870 |
|
Fair value of currency derivatives |
8 |
- |
768,964 |
|
Financial asset at fair value through profit or loss |
5 |
- |
5,141,217 |
|
Loans advanced |
4 |
37,403,665 |
83,355,445 |
|
TOTAL ASSETS |
|
52,610,586 |
120,060,214 |
|
EQUITY AND LIABILITIES |
|
|
|
|
CAPITAL AND RESERVES |
|
|
|
|
Share capital |
10 |
81,313,389 |
157,513,148 |
|
Retained deficit |
|
(29,500,141) |
(40,782,264) |
|
Other reserves |
|
259,514 |
2,507,892 |
|
TOTAL SHAREHOLDERS' EQUITY |
|
52,072,762 |
119,238,776 |
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
Fair value of currency derivatives |
8 |
191,363 |
- |
|
Accrued expenses and other liabilities |
9 |
346,461 |
821,438 |
|
TOTAL LIABILITIES |
|
537,824 |
821,438 |
|
TOTAL EQUITY AND LIABILITIES |
|
52,610,586 |
120,060,214 |
|
|
|
|
|
|
|
|
|
|
|
NAV per share outstanding |
|
100.62p |
88.87p |
The consolidated financial statements were approved and authorised for issue by the Board of Directors on 26 July 2022 and were signed on its behalf by:
Richard Boléat Jonathan Bridel
Chairman Chairman of the Audit Committee
The accompanying notes form part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED 31 MARCH 2022
|
|
|
Share capital |
Other reserves |
Retained deficit |
Total |
|
|
Notes |
£ |
£ |
£ |
£ |
|
Balance at 1 April 2021 |
|
157,513,148 |
2,507,892 |
(40,782,264) |
119,238,776 |
|
Operating profit after taxation |
|
- |
- |
15,382,914 |
15,382,914 |
|
Other comprehensive loss |
|
- |
(2,248,378) |
- |
(2,248,378) |
|
Transactions with owners in their capacity as owners: |
|
|
|
|
|
|
Compulsory redemption of ordinary shares |
10 |
(76,199,759) |
- |
- |
(76,199,759) |
|
Dividends declared |
13 |
- |
- |
(4,100,791) |
(4,100,791) |
|
|
|
|
|
|
|
|
Balance at 31 March 2022 |
|
81,313,389 |
259,514 |
(29,500,141) |
52,072,762 |
|
Balance at 1 April 2020 |
|
263,017,723 |
- |
(33,007,021) |
230,010,702 |
|
Operating profit after taxation |
|
- |
- |
2,071,719 |
2,071,719 |
|
Other comprehensive income |
|
- |
2,507,892 |
- |
2,507,892 |
|
Transactions with owners in their capacity as owners: |
|
|
|
|
|
|
Compulsory redemption of ordinary shares |
10 |
(105,499,718) |
- |
- |
(105,499,718) |
|
Share repurchases |
10 |
(4,857) |
- |
- |
(4,857) |
|
Dividends declared |
13 |
- |
- |
(9,846,962) |
(9,846,962) |
|
Balance at 31 March 2021 |
|
157,513,148 |
2,507,892 |
(40,782,264) |
119,238,776 |
The accompanying notes form part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 MARCH 2022
|
|
|
|
|
|
|
|
2022 |
2021 |
|
|
Notes |
£ |
£ |
|
Operating activities |
|
|
|
|
Operating income for the year before taxation |
|
15,383,414 |
2,420,528 |
|
Adjustments for: |
|
|
|
|
Foreign exchange (gain)/loss |
16 |
(3,731,985) |
5,295,103 |
|
Interest income on loans advanced |
4 |
(6,398,665) |
(14,715,117) |
|
Interest income on class B notes |
5 |
(1,691,666) |
- |
|
Net gain on financial assets at fair value through profit or loss |
5, 16 |
(560,098) |
(5,141,217) |
|
(Reversal of impairment)/impairment of loans |
4 |
(7,342,224) |
11,936,141 |
|
Fair value movement of currency derivatives |
16 |
960,327 |
(4,169,664) |
|
Operating cash flows before movements in working capital |
|
(3,380,897) |
(4,374,226) |
|
Loans advanced |
|
- |
- |
|
Principal and interest collections on loans advanced |
4 |
64,543,722 |
118,670,288 |
|
Principal and interest collections on financial asset at fair value through profit or loss |
5* |
1,568,666 |
- |
|
(Increase)/decrease in other receivables and prepayments |
|
(13,682) |
38,663 |
|
Decrease in accrued expenses and other liabilities |
|
(475,476) |
(1,329,795) |
|
Net cash generated from operating activities |
|
62,242,333 |
113,004,930 |
|
Financing activities |
|
|
|
|
Loans issued |
|
- |
- |
|
Loans repayment paid |
|
- |
(11,531,076) |
|
Dividends paid |
13 |
(4,100,791) |
(9,846,962) |
|
Repurchase of shares |
10 |
- |
(4,857) |
|
Compulsory redemption of shares |
10 |
(76,199,759) |
(105,499,718) |
|
Net cash used in financing activities |
|
(80,300,550) |
(126,882,613) |
|
Net decrease in cash and cash equivalents |
|
(18,058,217) |
(13,877,683) |
|
Cash and cash equivalents at the beginning of the year |
|
30,784,718 |
46,602,238 |
|
Foreign exchange gain on cash and cash equivalents |
|
2,456,870 |
(1,939,837) |
|
Cash and cash equivalents at the end of the year |
|
15,183,371 |
30,784,718 |
Reconciliation of movement in net debt
|
|
Liabilities |
Cash |
Net Debt |
|
Opening balance as at 1 April 2021 |
- |
30,784,718 |
30,784,718 |
|
Cash movement during the year |
- |
(15,601,347) |
(15,601,347) |
|
Closing balance as at 31 March 2022 |
- |
15,183,371 |
15,183,371 |
*In October 2021, the Company was eligible for a £1,691,666 interest distribution from the EIB transaction after settlement of the senior leverage in the vehicle. The payment received was net of £123,000 which was retained in the vehicle to cover liquidation costs of Finch Lending Designated Activity Company Limited and a portfolio of SME loans valued at £5,824,315 as settlement of its investment in the EIB transaction. This portfolio of loans was allocated within Basinghall loans advanced in return for notes issued in Basinghall. (discussed in more detail in note 4 and 5)
The accompanying notes form part of these consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2022
1. GENERAL INFORMATION
The Company is a closed-ended limited liability company incorporated under The Companies (Guernsey) Law, 2008 (as amended) with registration number 60680. The Company is a registered and closed ended investment scheme in Guernsey and admitted to trading on the London Stock Exchange's Main Market and listed on the United Kingdom Listing Authority ("UKLA's") premium segment. The Company's home member state for the purposes of the EU Transparency Directive is the United Kingdom. As such, the Company is subject to regulation and supervision by the Financial Conduct Authority, being the financial markets supervisor in the United Kingdom. The registered office of the Company is De Catapan House, Grange Road, St Peter Port, Guernsey GY1 2QG.
The Company was established to provide shareholders with sustainable and attractive levels of dividend income, primarily by way of investment in loans originated both directly through the Platforms operated by Funding Circle and indirectly, in each case as detailed in the investment policy. The Company identified Funding Circle as a leader in the growing Platform lending space with its established infrastructure, scale of origination volumes and expertise in accurately assessing loan applications.
On 21 May 2019, the Company published a circular and notice of extraordinary general meeting ("EGM") which sets out details of, and sought shareholder approval for, certain Proposals. The Proposals involved modifying the Company's Investment Objective and Policy to reflect a realisation strategy and amending its Articles to include a mechanism to enable the Company to redeem shares in the Company compulsorily so as to return cash to shareholders.
On 11 June 2019, the Proposals were approved at the EGM as discussed in detail in the Strategic Report.
The Company publishes net asset value statements on its website at www.smecreditrealisation.com.
2. BASIS OF PREPARATION
a) Statement of compliance
The consolidated financial statements, which give a true and fair view, have been prepared in accordance with International Financial Reporting Standards ("IFRS") as promulgated by the International Accounting Standards Board and are in compliance with The Companies (Guernsey) Law, 2008 (as amended).
The Directors of the Company have elected to only prepare consolidated financial statements for the year under Section 244 of The Companies (Guernsey) Law 2008 (as amended).
Assets and liabilities of the Group have been presented in the Statement of Financial Position in their order of liquidity as permitted by International Accounting Standard 1, Presentation of Financial Statements.
On 5 April 2019, the Company announced that following consultation with shareholders accounting for over two thirds of the register, the Board acknowledged their preference to cease investment in new Credit Assets and commence a process to return capital in an orderly and expeditious manner with the objective of optimising returns to shareholders.
As noted above, the Company published a circular and notice of EGM which sets out details of, and sought shareholder approval for, certain Proposals. On 11 June 2019, the shareholders approved the Proposals which resulted in, amongst other things, the change to the Company's Investment Policy and Objective to achieve a managed wind-down of the Company.
As a result of the Company's managed wind-down and exploration of portfolio sales, for the purposes of accounting, the Company's business model was deemed to have changed from hold to collect to hold to collect and sell during the 31 March 2020 financial year end. The Company is therefore required to report under fair value accounting for the valuation of Credit Assets from 1 April 2020. This change in methodology is discussed further in note 16.
The Directors have considered the state of the wind-down and the average remaining contractual term of the loan portfolio and determined that the use of the going concern basis in preparing the financial statements of the Group is no longer appropriate. Please refer to the Going Concern section of Note 2 for further detail on the conclusion reached above.
In light of the rapid run off of the loan portfolio, the repayment of the leverage in the structure and in the interests of maximising returns to shareholders before the running costs of the structure become disproportionate to the NAV and while the loans remain at an attractive size to potential buyers, the Company will actively seek to enter discussions for the potential disposal of its loan portfolios in whole where pricing levels are attractive. In light of this it is expected that the Company will sell the loan portfolio and begin a liquidation process within twelve months of signing this report and as a result the Company's results have been prepared on a basis other than going concern. At the date of these financial statements the carrying value of the assets and liabilities are representative of the net realisable value and therefore no adjustments are needed to reflect the managed wind-down and preparation on a basis other than going concern.
New Accounting Standards, amendments to existing Accounting Standards and/or interpretations of existing Accounting Standards (separately or together, "New Accounting Requirements") adopted in the current year
In the Directors' opinion, all non-mandatory New Accounting Requirements are either not yet permitted to be adopted, or would have no material effect on the reported performance, financial position or disclosures of the Group and consequently have neither been adopted nor listed.
b) Basis of measurement and consolidation
These consolidated financial statements have been prepared on a historical cost basis, as modified by the valuation of derivative financial instruments and the Company's investment in the EIB transaction at fair value through profit or loss and for the period beginning 1 April 2020, the loans advanced at fair value through other comprehensive income. The methods used to measure fair value are further disclosed in note 16.
The Company owns 100% of the Profit Participating Notes issued by Basinghall, Tallis and Queenhithe. Basinghall, Tallis and Queenhithe are companies incorporated in the Republic of Ireland.
Basinghall used to own the Notes issued by Lambeth and Queenhithe. In 2020, both Lambeth and Queenhithe transferred their portfolios of Credit Assets to Basinghall for amounts equal to the outstanding amount of principal and accrued interest, with EUR 1 principal amount outstanding on the class B Notes issued. The liquidation process was completed for Lambeth in July 2021 whilst this remains ongoing for Queenhithe as at 31 March 2022. Any residual cash remaining after the settlement of all outstanding liabilities for each entity is payable to Basinghall.
The Directors believe that the Company's ownership of the Profit Participating Notes issued by Basinghall, Tallis and Queenhithe constitute control as it exposes the Company to variability of returns from its involvement with the financial and operating activities of these entities. Therefore, these financial statements have been prepared on a consolidated basis.
Intercompany transactions including intercompany gains and losses on currency translation between the Company and its subsidiaries were eliminated in the consolidation process.
c) Going concern
In addition to the detail in Note 2(a), The Directors have considered the state of the wind-down and the average remaining contractual term of the loan portfolio and determined that the use of the going concern basis in preparing the financial statements of the Group is no longer appropriate. As such, the financial statements have been prepared on a basis other than going concern, under which the assets are measured at their net realisable value.
There were no adjustments made to the carrying values of the assets and liabilities of the Group in the current year as a result of this change in basis of preparation. The Directors consider the carrying values in the balance sheet at the date of these financial statements are deemed to be realisable values, based on fair value.
There were no provisions for winding up costs recognised in the current financial year as these will be charged on an accruals basis as they are incurred or as the Group becomes obligated to make payments in the future.
d) Functional and presentation currency
These consolidated financial statements are presented in Pound Sterling, which is the functional currency of each of the entities in the Group and the presentation currency of the Group. In the Directors' opinion, Pound Sterling is the functional currency of the Company, Basinghall, Lambeth and Queenhithe because substantially all their financing and operating activities are carried out in Pound Sterling. The Directors believe that the functional currency of Tallis is Pound Sterling as its operations are carried out as an extension of the Company's operations. The Group hedges the projected cash flows from its US dollar and Euro investments such that its principal exposure is to Pound Sterling.
e) Use of estimates and judgements
The preparation of financial statements in accordance with IFRS requires the Board to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities and income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on a quarterly basis by the Board. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years.
In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements are included in the following:
Judgements
• Note 2(b) - The assumption that the Company's business model of holding Credit Assets to collect is no longer deemed appropriate. As a result of the Company's managed wind-down and potential portfolio disposals, the Company's business model has changed from hold to collect to hold to collect and sell from 1 April 2020.
• Note 2(c) - The basis of preparation being that other than going concern.
• Note 2(d) - Tallis has its primary assets and liabilities denominated in Euro. The Directors assessed whether the functional currency is the Euro or Pound Sterling. The subsidiary's operations are considered to be an extension of the operations of the Company and therefore the Directors believe that the appropriate functional currency for the subsidiary is Pound Sterling, the functional currency of the Company.
• Note 2(b) - The accounting treatment of Queenhithe as consolidated subsidiary based on the assessment that the Company still maintains an element of control following the transfer of the entity's loan portfolio to Basinghall and still maintains the right to variability of returns from its involvement with the financial and operating activities indirectly of Queenhithe throughout the process of liquidation.
• Note 3(k) - The Directors assessed whether the Group had a single operating segment based on its original business model (origination of loans) or several operating segments based on the jurisdictions where loans were originated. After consideration of the financial information that the Board regularly reviews in making economic decisions, the Board concluded that operating segments based on jurisdiction is a more appropriate basis.
Estimates
• Note 2(b) - The Company has reported under fair value accounting for the valuation of Credit Assets from 1 April 2020. Therefore, these portfolios are recognised at fair value through other comprehensive income and have been estimated by discounting future cash flows expected to be received from the Credit Assets (note 16).
• Note 3(b) - The estimation of impairment of loans requires judgement based on the model set out above. This utilises a macroeconomic scenario developed specifically for COVID-19 and consistent with portfolio modelling. Additionally, multipliers are applied to individual loan PDs such that overall gross losses for the portfolio are anchored to portfolio model expectations.
• Note 16 - The determination of fair value of the Group's investment in the EIB transaction requires estimation of future cash flows and judgement on the appropriate market discount rate to apply. The fair value of the EIB transaction had been estimated by discounting future cash flows expected from the investment (note 16). However the EIB transaction was fully settled during the current financial year.
3. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently throughout the year and the prior year.
a) Foreign transactions
Transactions in foreign currencies are initially translated at the foreign currency exchange rate ruling at the date of the transaction. Monetary assets and monetary liabilities denominated in foreign currencies are translated to Pound Sterling at the foreign currency closing exchange rate ruling at the reporting date.
None of the Group entities have a functional currency different to presentation currency.
b) Financial instruments
i) Classification and measurement
IFRS 9 requires financial assets to be classified into the following measurement categories: (i) those measured at fair value through profit or loss; (ii) those measured at fair value through other comprehensive income; and, (iii) those measured at amortised cost. The determination is made at initial recognition. Unless the option to designate a financial asset as measured at fair value through profit or loss is applicable, the classification depends on the entity's business model for managing its financial instruments and the contractual cash flow characteristics of the instrument.
The Group classifies its financial instruments in the following measurement categories:
· fair value through profit or loss; or
· amortised cost; or
· fair value through other comprehensive income.
The Group holds debt instruments and derivative financial instruments. Debt instruments are those that meet the definition of a financial liability from the issuer's perspective, such as the Group's loans advanced, investment in the EIB structured finance transaction and loans payable. Classification and subsequent measurement of these debt instruments depend on:
· the Group's business model for managing the instrument; and
· cash flow characteristics of the instrument.
Derivative financial instruments relate to the Group's forward foreign exchange transactions that are covered in more detail later in this note.
Amortised cost
Financial assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest ("SPPI"), and that are not designated at fair value through profit or loss, are measured at amortised cost. The carrying amount of these assets is adjusted by any expected credit loss allowance measured as described below. Interest income from these financial assets is included in the 'interest income on loans advanced'.
The Group's cash and cash equivalents and other receivables are included in this category.
b) Financial instruments
Fair value through other comprehensive income
Financial assets that are held for collection of contractual cash flows and for selling the assets, where the assets' cash flows represent solely payments of principal and interest, and that are not designated at fair value through profit or loss, are measured at fair value through other comprehensive income. Movements in the carrying amount are taken through other comprehensive income, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses on the instrument's amortised cost which are recognised in profit or loss.
Reclassification of loans advanced from financial assets at amortised cost to financial assets at fair value through other comprehensive income
For financial assets, reclassification is required between fair value through other comprehensive income ("FVTOCI") and amortised cost, if and only if the entity's business model objective for its financial assets changes so its previous model assessment would no longer apply.
If reclassification is appropriate, it must be done prospectively from the reclassification date which is defined as the first date of the first reporting year following the change in business model. An entity does not restate any previously recognised gains, losses, or interest.
The Group's loans advanced have been reclassified and now fall within this category from 1 April 2020 due to the change in business model during the year ended 31 March 2020. This is the second reporting year showing the loans advanced at fair value through other comprehensive income.
The fair value of the loans advanced has been estimated by discounting expected future cash flows from the loans advanced using a discount rate determined by the Directors based on appropriate market comparatives and conditions. Refer to note 16 for further information.
Disposals
On disposal of any financial asset measured at FVTOCI, any related balance within the FVTOCI reserve is reclassified to other gains/(losses) within profit or loss.
Fair value through profit or loss
Assets that do not meet the criteria for amortised cost or fair value through other comprehensive income are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognised in profit or loss within 'net income on financial asset at fair value through profit or loss'. Interest income from these financial assets is included within the same line using the effective interest rate method.
The Group's investment in the EIB structured finance transaction fell within this category and was measured at fair value through profit or loss as this investment had exposure to returns that were affected by the profitability of the underlying SPV. The Directors believe that the contractual cash flows were not solely linked to payments of principal and interest consistent with a basic lending arrangement.
ii) Impairment of financial assets
At initial recognition, an impairment allowance is required for expected credit losses ("ECL") on financial assets measured at amortised cost and debt instruments measured at FVTOCI resulting from possible default events within the next 12 months. When an event occurs that increases the credit risk of the counterparty, an allowance is required for ECL for possible defaults over the term of the financial instrument. The change in credit risk of the counterparty will also have an impact on the recognition of income on the financial asset.
The model for estimating impairment losses calculates the ECL on either a 12-month or lifetime basis depending on whether significant increase in credit risk has occurred since initial recognition or whether an asset is considered to be credit-impaired.
These metrics used to calculate the 12-month and lifetime expected credit losses are forecast for each loan for the next 12 months and to maturity, then a 12-month and lifetime expected credit loss can be calculated. These future losses are discounted at the Effective Interest Rate (EIR) individually for each loan.
Probability of default scores are not updated for individual loans post origination and thus cannot be used to indicate a significant increase in credit risk, therefore stage 2 criteria is based on loan payment performance. As a result, lifetime expected credit losses are taken as an impairment for loans which have missed a single payment within the last 6 months and are less than 91 days late.
The Group classifies that loans are 91 or more days late as credit impaired or defaulted for which lifetime expected loss is taken as an impairment charge. Stage 3 includes loans that have fallen 91 or more days late as a result of forbearance measures introduced in April 2020 as a response to COVID-19, which have not been contractually defaulted. The treatment of defaulted loans is the same as the Group's policy before adoption of IFRS 9 on 1 April 2018.
If, in a subsequent year, the amount of the default allowance decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor's credit rating), the reversal of the previously recognised default allowance is recognised in the Consolidated Statement of Comprehensive Income.
Where a loan is not recoverable, it is written off within the related provision for loan impairment. Subsequent recoveries of amounts previously written off are reflected against the impairment losses recorded in the Consolidated Statement of Comprehensive Income.
Use of forward-looking information
Forecast Probability of Default ("PD") for loans are adjusted to take into account the current and future macroeconomic environment. This method was previously based on a modelled relationship with key macroeconomic variables, with forecasts for a base case scenario and for multiple alternative scenarios.
iii) Financial asset at fair value through profit or loss
The Group's investment in the EIB structured finance transaction was classified as a financial asset at fair value through profit or loss. This investment had exposure to returns that were affected by the profitability of the underlying SPV. This investment was measured initially and subsequently at fair value with changes in fair value recognised in the Consolidated Statement of Comprehensive Income. During the year, the Group's investment in the EIB structure was settled after the leverage in the structure was paid down and was settled through consideration of the transfer of the loan assets at their fair value to the Group, which are subsequently measured at FVTOCI.
iv) Derivative financial instruments
The Group holds derivative financial instruments to minimise its exposure to foreign exchange risks. Derivatives are classified as financial assets or financial liabilities (as applicable) at fair value through profit or loss. They are initially recognised at fair value with attributable transaction costs recognised in the Consolidated Statement of Comprehensive Income when incurred. Subsequent to initial recognition, derivatives are measured at fair value and changes therein are recognised in the Consolidated Statement of Comprehensive Income. The fair values of derivative transactions are measured at their market prices at the reporting date.
v) Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount is reported within assets and liabilities where there is a legally enforceable right to set-off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
vi) Derecognition of financial instruments
Financial assets, or a portion thereof, are derecognised when the contractual rights to receive the cash flows from the assets have expired, or when they have been transferred and either (i) the Group transfers substantially all the risks and rewards of ownership, or (ii) the Group neither transfers nor retains substantially all the risks and rewards of ownership and the Group has not retained control.
There may be instances when the Group renegotiates or otherwise modifies the contractual cash flows of loans to customers. When this happens, the Group assesses whether or not the new terms are substantially different to the original terms. If the terms are substantially different, the Group derecognises the original financial asset and recognises a 'new' asset initially at fair value and recalculates a new effective interest rate for the asset.
Financial liabilities and derivative financial instruments are derecognised when they are extinguished or when the obligation specified in the contract is discharged, cancelled or expired.
vii) Financial liabilities
In both the current and prior year, the Group's loans payable and accrued expenses and other liabilities are classified as subsequently measured at amortised cost. The Group does not hold any financial liabilities that meet the criteria for subsequent measurement at fair value through profit or loss.
c) Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand and highly liquid interest-bearing securities with original maturities of three months or less.
d) Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of Ordinary shares are recognised as a deduction from the proceeds.
Shares purchased by the Company during the year are held in Treasury until cancelled and formally withdrawn on a quarterly basis throughout the year.
e) Treasury shares
Treasury shares are classified as equity and are measured at cost.
f) Earnings per share
The Company presents basic and diluted earnings per share ("EPS") data for its Ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to Ordinary shareholders by the weighted average number of Ordinary shares outstanding during the year. The diluted EPS is calculated by adjusting the profit or loss attributable to Ordinary shareholders for the effects of all dilutive potential Ordinary shares. For further details, see note 12.
g) Income
Income on loans held at FVTOCI is recognised under the effective interest rate method, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the loan to its net carrying amount on initial recognition.
In calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees received and paid and costs borne that are an integral part of the effective interest rate and all premiums or discounts above or below market rates.
Bank interest and other income receivable are accounted for on an accrual basis.
h) Expenses and fees
Expenses are accounted for on an accrual basis and are recognised in the Consolidated Statement of Comprehensive Income.
i) Taxation
The Company is classified as exempt for taxation purposes under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 (as amended) and as such incurs a flat fee (presently £1,200 per annum). No other taxes are incurred in Guernsey.
Basinghall, Tallis and Queenhithe are Irish resident companies that are subject to corporation tax in Ireland at a rate of 25% on their profits.
The tax currently payable by Basinghall, Tallis and Queenhithe is based on the taxable profit of the companies for the year. Taxable profit differs from net profit as reported in the Consolidated Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted at the reporting date.
Deferred tax is the tax expected to be payable or recoverable on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax rates that have been enacted or substantively enacted at the Consolidated Statement of Financial Position date.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
j) Dividends payable
Dividends payable on the Company's shares are recognised in the Consolidated Statement of Changes in Shareholders' Equity when declared by the Directors or, where applicable, when approved by the Shareholders. The Directors consider declaration of a dividend on a quarterly basis, having regard to various considerations, including the financial position of the Company. The payment of any dividend by the Company is subject to the satisfaction of a solvency test as required by The Companies (Guernsey) Law, 2008 (as amended).
k) Segment reporting
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses. The Group has three operating segments based on jurisdiction: UK, US and CE.
4. LOANS ADVANCED
|
|
|
31 March 2022 At FVTOCI |
31 March 2021 At FVTOCI |
|
|
|
£ |
£ |
|
Balance at the beginning of the year |
|
83,355,445 |
200,094,129 |
|
Additions from settlement of EIB transaction* |
|
5,824,315 |
- |
|
Interest income |
|
6,398,665 |
14,715,117 |
|
Principal and interest collections** |
|
(64,543,722) |
(118,670,288) |
|
Impairment release/(allowance) for the year |
|
7,342,224 |
(11,936,141) |
|
Foreign exchange losses/(gains) |
|
1,275,116 |
(3,960,666) |
|
(Loss)/gain on movement in fair value through other comprehensive income |
|
(2,248,378) |
2,507,892 |
|
Realised gain on sale of NPL loans |
|
- |
605,402 |
|
Balance at the end of the year |
|
37,403,665 |
83,355,445 |
*Loans consolidated within the EIB transaction are made up of £22,808,956 principal and £16,984,641 expected credit losses.
**The sale of non-performing loans by Basinghall in October 2020 is included within the principal and interest collections line.
The Group predominantly made unsecured loans in previous years and prior to the modification of the Company's investment policy during the prior year. The carrying value of loans secured by charges over properties are valued at nil in the current and prior years.
Information about the gain recognised on the movement of the loans at FVTOCI and information about the methods and assumptions used in determining the fair value is provided in note 16.
Each loan has a contractual payment date for principal and interest. The Group classifies loans that are 91 or more days late as credit impaired or defaulted for which lifetime expected loss are taken as an impairment charge.
The following table shows the movement in impairment allowance during the year.
|
|
31 March 2022 |
31 March 2021 |
|
|
£ |
£ |
|
Impairment allowance at beginning of the year |
61,204,749 |
59,019,908 |
|
Impairment (release)/allowance for the year |
(7,342,224)
|
11,936,141
|
|
Additions from loans consolidated following settlement of EIB transaction*
|
16,984,641 |
- |
|
Sale of Non-performing loans during the year |
- |
(9,751,300) |
|
Impairment allowance at the end of the year |
70,847,166 |
61,204,749 |
*Loans consolidated within the EIB transaction are made up of £22,808,956 principal and £16,984,641 expected credit losses.
During the year the loans from the EIB transaction were transferred to the Group in consideration of the Group's interest in the structure which was settled as a result. The assets were transferred at an initial fair value of £5,824,315. Refer to Note 5 for further detail surrounding the EIB transaction. Within the impairment allowance table above the addition of loans from the EIB transaction represents the impairment allowance relative to the gross outstanding principal and interest on initial recognition which on a net basis equalled the fair value. This initial recognition within the impairment allowance did not impact the consolidated statement of comprehensive income, however subsequent movements in the allowance did.
While the gross impairment allowance has increased as a result of the recognition of the EIB transaction loans at fair value, the balance of the allowance has decreased for the year due to ongoing amortisation of the loan portfolio and better than anticipated performance of loans across the Group's portfolio of loans advanced, particularly those that went into stage 3 as a result of forbearance measures but were subsequently able to continue making contractual repayments. Impairment losses impacting the consolidated statement of comprehensive income decreased by £7,342,224 during the year, while the initial recognition of the ECL from the loans received as settlement of the EIB transaction of £16,984,641 did not impact the consolidated statement of comprehensive income, resulting in a balance of £70,847,166.
The table below shows an analysis of the principal and interest of the loans along with the amount recognised as an impairment allowance analysed by the stages described within IFRS 9:
|
|
|
31 March 2022 |
||
|
|
|
|
Principal and interest £ |
Impairment allowance £ |
|
Stage 1 - 1 to 30 days late and no missed payments |
27,732,405 |
2,704,168 |
||
|
Stage 2 - 31+ days late/missed a payment in last 6 months |
6,945,481 |
767,111 |
||
|
Stage 3 - Legally defaulted & 90+ days late |
72,685,086 |
67,375,887 |
||
|
|
|
|
107,362,972 |
70,847,166 |
Stage 3 includes loans that have fallen 91 or more days late as a result of forbearance measures introduced in April 2020 as a response to COVID-19, which have not been contractually defaulted.
The table below shows an analysis of the principal and interest of the loans along with the amount recognised as an impairment allowance as at 31 March 2021:
|
|
|
31 March 2021 |
||
|
|
|
|
Principal and interest £ |
Impairment allowance £ |
|
Stage 1 - 1 to 30 days late and no missed payments |
62,728,086 |
5,747,801 |
||
|
Stage 2 - 31+ days late/missed a payment in last 6 months |
23,195,119 |
1,815,713 |
||
|
Stage 3 - Legally defaulted & 90+ days late |
55,523,697 |
53,641,235 |
||
|
|
|
|
141,446,902 |
61,204,749 |
In October 2020, Basinghall received proceeds of £2,203,183 for the sale of a pool of UK non-performing loans to a third party at a recovery rate which is consistent with historical recovery rates observed on the portfolio.
Structured Finance Transactions
In June 2016, the Company entered into a structured finance transaction with the European Investment Bank (the "EIB transaction"). The transaction involved the Company participating in the financing of an Irish domiciled special purpose vehicle ("EIB SPV"). The Company invested £25 million into the junior Class B Note issued by the EIB SPV whilst the European Investment Bank ("EIB") committed £100 million in a senior loan to the EIB SPV.
In August 2018, the Group entered into a transaction to provide lending to a special purpose vehicle, Queenhithe, which makes loans to UK small businesses. The Group, through Basinghall, provided an initial funding of approximately £9.2 million through subscription into the Class B note issued by Queenhithe.
Queenhithe has been accounted for in these consolidated financial statements as a subsidiary consolidated into the results of the Group. In November 2018, the transaction was updated whereby the Department for Business, Energy and Industrial Strategy ("BEIS") - the British Business Bank's ("BBB") sole shareholder - agreed to provide up to £150 million of funding via a senior floating rate, loan to Queenhithe. Following the result of the EGM on 11 June 2019, the Group has ceased any further investment through Queenhithe
5. FINANCIAL ASSET AT FAIR VALUE THROUGH PROFIT OR LOSS
|
|
|
|
31 March 2022 |
31 March 2021 |
|
|
|
|
£ |
£ |
|
Balance at the beginning of the year |
|
|
5,141,217 |
- |
|
Interest collections |
|
|
(1,691,666) |
- |
|
Net gain on the change in fair value of financial asset at fair value through profit or loss during the year* |
|
|
2,251,764 |
5,141,217 |
|
Cash left in Finch vehicle for liquidation |
|
|
123,000 |
- |
|
Non-cash repayment |
|
|
(5,824,315) |
- |
|
Balance at the end of the year |
|
|
- |
5,141,217 |
*Presented gross of interest distributions of class B note of £1,691,666.
In June 2016, the Company entered into a structured finance transaction with the European Investment Bank (the "EIB transaction"). The transaction involved the Company participating in the financing of an Irish domiciled special purpose vehicle ("EIB SPV"). The Company invested £25 million into the junior Class B Note issued by the EIB SPV whilst the European Investment Bank ("EIB") committed £100 million in a senior loan to the EIB SPV.
In October 2021, a portfolio of SME loans valued at £5,824,315 was received as settlement of the Company's investment in the EIB transaction (discussed in more detail in note 4) by Basinghall. This was by way of an issue of notes from Basinghall to the Company to the value of the portfolio received. During the current year a net gain of £2,251,764 has been recognised in the consolidated statement of comprehensive income driven by upwards valuation of the loans from their resilient performance. The Company received net cash of £1,568,666, made up of £1,691,666 in respect of interest accrued and £123,000 of cash to remain within Finch Lending Designated Activity Company Limited in order to settle anticipated liquidation costs.
6. SEGMENTAL REPORTING
The Group holds assets in the UK, US, Germany, Spain and the Netherlands. For financial reporting purposes, Germany, Spain and the Netherlands combine to make up the Continental Europe operating segment.
The measurement basis used for evaluating the performance of each segment is consistent with the policies used for the Group as a whole. Assets, liabilities, profits and losses for each reportable segment are recognised and measured using the same accounting policies as the Group.
Except for the EIB transaction, all of the Group's investments are loans to SMEs. Each individual SME loan does not generate income that exceeds 10% of the Group's total income.
The structured finance transaction and the corresponding income have been reported under the 'UK' segment below. All items of income and expenses not directly attributable to specific reportable segments have been included in 'Other income and expenses' column.
Segment performance for the year ended 31 March 2022
|
|
UK |
US |
CE |
Other income and expenses |
Consolidated |
|
||||
|
|
£ |
£ |
£ |
£ |
£ |
|
||||
|
Total revenue |
3,718,092 |
2,204,093 |
1,537,699 |
(1,670,958) |
5,788,926 |
|
||||
|
Release of impairment of loans |
5,752,838 |
1,029,831 |
559,555 |
- |
7,342,224 |
|
||||
|
Net gain on the change in fair value of financial asset at fair value through profit or loss |
- |
2,251,764 |
- |
- |
2,251,764 |
|
||||
|
Net loss on change in fair value of loans advanced |
(701,385) |
(904,856) |
(642,137) |
- |
(2,248,378) |
|
||||
|
Total comprehensive income |
8,769,545 |
4,580,832 |
1,455,117 |
(1,670,958) |
13,134,536 |
|
||||
|
|
|
|
|
|
|
|
||||
|
|
UK |
US |
CE |
Other assets and liabilities |
Consolidated |
|
|
|||
|
|
£ |
£ |
£ |
£ |
£ |
|
|
|||
|
Assets |
29,204,092 |
14,506,658 |
8,899,836 |
- |
52,610,586 |
|
|
|||
|
Liabilities |
(95,659) |
(364,252) |
(77,913) |
- |
(537,824) |
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
Segment performance for the year ended 31 March 2021
|
|
UK |
US |
CE |
Other income and expenses |
Consolidated |
|
||||
|
|
£ |
£ |
£ |
£ |
£ |
|
||||
|
Total revenue |
9,254,957 |
1,684,813 |
1,637,817 |
21,409 |
12,598,996 |
|
||||
|
Impairment of loans |
(8,424,952) |
(1,265,682) |
(2,245,507) |
- |
(11,936,141) |
|
||||
|
Net gain on the change in fair value of financial asset at fair value through profit or loss |
5,141,217 |
- |
- |
- |
5,141,217 |
|
||||
|
Net gain on change in fair value of loans advanced |
889,003 |
1,330,180 |
288,709 |
- |
2,507,892 |
|
||||
|
Total comprehensive income |
4,537,154 |
1,139,121 |
(1,118,072) |
21,409 |
4,579,611 |
|
||||
|
|
|
|
|
|
|
|
||||
|
|
UK |
US |
CE |
Other assets and liabilities |
Consolidated |
|
|
|||
|
|
£ |
£ |
£ |
£ |
£ |
|
|
|||
|
Assets |
83,967,266 |
15,735,112 |
20,357,836 |
- |
120,060,214 |
|
|
|||
|
Liabilities |
(487,118) |
(145,039) |
(189,281) |
- |
(821,438) |
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
7. CASH AND CASH EQUIVALENTS
|
|
31 March 2022 |
31 March 2021 |
|
|
£ |
£ |
|
Cash at bank |
11,490,415 |
7,969,502 |
|
Cash equivalents |
3,692,956 |
22,815,216 |
|
Balance at the end of the year |
15,183,371 |
30,784,718 |
Cash equivalents are term deposits held with different banks with maturities between overnight and 90 days.
8. DERIVATIVES
Foreign exchange swaps are held to hedge the currency exposure generated by US dollar assets and Euro assets held by the Group (see note 16). The hedges have been put in place taking into account the fact that derivative positions, such as simple foreign exchange swaps, could cause the Group to require cash to fund margin calls on those positions. The Group negotiated the terms of the contracts with each counterparty such that no collateral is required on the initial transaction and in instances of temporary negative fair value positions.
Fair value of currency derivatives
|
|
Fair value 31 March 2022 |
Fair value 31 March 2021 |
||
|
|
£ |
£ |
||
|
Valuation of currency derivatives |
(191,363) |
768,964 |
||
|
|
(191,363) |
768,964 |
||
|
|
|
Fair value 31 March 2022 £ |
Fair value 31 March 2021 £ |
|
|
|
Euro |
4,960 |
(33,918) |
|
|
|
USD |
9,607 |
1,780 |
|
|
|
GBP |
(205,930) |
801,102 |
|
|
|
Total |
(191,363) |
768,964 |
|
|
|
|
|
|
|
9. ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
|
31 March 2022 |
31 March 2021 |
|
|
|
£ |
£ |
|
Service fees payable |
|
83,050 |
145,785 |
|
Audit fees payable |
|
183,971 |
252,807 |
|
Legal fees payable |
|
13,817 |
12,154 |
|
Administration fees payable |
|
31,303 |
- |
|
Taxation payable |
|
500 |
348,130 |
|
Directors' fees payable |
|
- |
5,416 |
|
Other liabilities |
|
33,820 |
57,146 |
|
|
|
346,461 |
821,438 |
10. SHARE CAPITAL
|
Issued and fully paid |
Number of shares |
Shares issued amount |
Issue costs |
Net Shares amount |
|
|
Ordinary shares |
|
|
£ |
£ |
£ |
|
At 1 April 2021 |
134,164,922 |
163,258,048 |
(5,744,900) |
157,513,148 |
|
|
Shares redeemed |
(82,414,359) |
(76,199,759) |
- |
(76,199,759) |
|
|
At 31 March 2022 |
51,750,563 |
87,058,289 |
(5,744,900) |
81,313,389 |
|
|
|
|
|
|
|
|
|
Issued and fully paid |
Number of shares |
Shares issued amount |
Issue costs |
Net Shares amount |
|
|
Ordinary shares |
|
|
£ |
£ |
£ |
|
At 1 April 2020 |
258,301,354 |
268,762,623 |
(5,744,900) |
263,017,723 |
|
|
Share repurchases |
(10,000) |
(4,857) |
- |
(4,857) |
|
|
Shares redeemed |
(124,126,432) |
(105,499,718) |
- |
(105,499,718) |
|
|
At 31 March 2021 |
134,164,922 |
163,258,048 |
(5,744,900) |
157,513,148 |
|
|
|
|
|
|
|
|
In the prior years, the Company purchased a total of 43,746,667 shares from the market. Following the COVID-19 pandemic and the uncertainty around its impact, the directors resolved to suspend the programme of repurchases of the Company's shares on 2 April 2020 until further notice.
The Company has redeemed a total of 82,414,359 (2021: 124,126,432) shares for a total amount of £76,199,759 (2021: £105,499,718) throughout the year. All shares redeemed throughout the year were redeemed at the prevailing NAV per share at the date of declaration.
As at the balance sheet date, there was 51,750,563 ordinary shares in issue of with a nominal value of 100p each. The excess of the Net Share Amount of £29,562,826 is recognised as share premium.
Rights attaching to the Ordinary share class
All shareholders have the same voting rights in respect of the share capital of the Company. Every member who is present in person or by a duly authorised representative or proxy shall have one vote on a show of hands and on a poll every member present shall have one vote for each share of which he is the holder, proxy or representative. All shareholders are entitled to receive notice of the Annual General Meeting and any other General meetings.
Each Ordinary share will rank in full for all dividends and distributions declared after their issue and otherwise pari passu in all respects with each existing Ordinary share and will have the same rights (including voting and dividend rights and rights on a return of capital) and restrictions as each existing Ordinary share.
11. TAXATION
|
|
|
31 March 2022 |
31 March 2021 |
|
|
|
£ |
£ |
|
Operating income for the year before taxation |
|
15,382,914 |
2,420,528 |
|
Tax at the standard Guernsey income tax rate of 0% |
|
- |
- |
|
Effects of tax rates in other jurisdictions |
|
(500) |
(348,809) |
|
Taxation expense |
|
(500) |
(348,809) |
The Group may be subject to taxation under the tax rules of the jurisdictions in which it invests. During the year, Basinghall, Tallis and Queenhithe, which are consolidated into the Group's results were subject to a corporation tax rate of 25% in Ireland.
From 1 January 2020 new tax rules were applicable under the legislative changes made to the Irish Finance Act 2019. These rules included changes to the anti-hybrid and anti-avoidance rules in section 110 TCA of the legislation.
Basinghall paid class B profit participating note interest to the Company in February 2020 totaling £1,392,467, which were considered disallowable for tax purposes in Ireland following the legislative changes discussed above and so a 25% tax charges were levied totaling £348,117. This charge relates to the financial year ended 31 March 2020 and was accrued in the prior year due to the timing of the completion of the impact assessment. The Group has been advised by its legal advisors that changes made to its structural arrangements have caused Basinghall to fall outside the scope of the legislative changes discussed above with effect from 1 April 2020.
During the year, the interest limitation rule ("ILR") as contemplated by Article 4 of the Anti-Tax Avoidance Directive which was adopted as Council Directive (EU) 2016/1164 on 12 July 2016 was introduced in Ireland by the Finance Act 2021. The ILR will apply to Irish taxable entities with respect to accounting periods commencing on or after 1 January 2022. We do not expect the ILR to apply negatively to the Basinghall or Tallis as each entity earns only income which is expected to be treated as interest equivalent income for Irish tax purposes, together with future potential income.
12. EARNINGS PER SHARE ("EPS")
The calculation of the EPS is based on the following information:
|
|
|
31 March 2022 |
31 March 2021 |
|
|
|
£ |
£ |
|
Profit for the purposes of EPS |
|
15,382,914 |
2,071,719 |
|
Weighted average number of ordinary shares |
|
84,586,082 |
197,065,272 |
|
EPS |
|
18.19p |
1.05p |
13. DIVIDENDS
The following table shows a summary of dividends declared during the year, and previous year, in relation to Ordinary shares.
|
31 March 2022 |
Date declared |
Ex-dividend date |
Per share |
Total |
||
|
|
|
|
|
Pence |
£ |
|
|
Ordinary shares |
|
|
|
|
||
|
Interim dividend |
20 April 2021 |
29 April 2021 |
1.3125 |
1,384,312 |
||
|
Interim dividend |
20 July 2021 |
29 July 2021 |
1.3125 |
1,124,870 |
||
|
Interim dividend |
20 October 2021 |
28 October 2021 |
1.3125 |
912,383 |
||
|
Interim dividend |
19 January 2022 |
27 January 2022 |
1.3125 |
679,226 |
||
|
Total |
|
|
|
|
5.250 |
4,100,791 |
|
|
|
|
|
|
|
|
|
31 March 2021 |
Date declared |
Ex-dividend date |
Per share |
Total |
|||
|
|
|
|
|
Pence |
£ |
||
|
Ordinary shares |
|
|
|
|
|||
|
Interim dividend |
20 April 2020 |
23 April 2020 |
1.3125 |
3,132,722 |
|||
|
Interim dividend |
24 July 2020 |
30 July 2020 |
1.3125 |
2,805,335 |
|||
|
Interim dividend |
21 October 2020 |
29 October 2020 |
1.3125 |
2,147,990 |
|||
|
Interim dividend |
20 January 2021 |
28 January 2021 |
1.3125 |
1,760,915 |
|||
|
Total |
|
|
|
|
5.250 |
9,846,962 |
|
|
|
|
|
|
|
|
|
|
14. DIRECTORS' REMUNERATION AND EXPENSES
|
|
|
31 March 2022
|
31 March 2021 |
|
|
|
£ |
£ |
|
Directors' fees |
|
160,000 |
167,257 |
|
Directors' expenses |
|
425 |
10 |
|
|
|
160,425 |
167,267 |
None of the Directors have any personal financial interest in any of the Group's investments other than indirectly through their shareholding in the Group.
15. FEES AND EXPENSES
Loan origination and servicing
Funding Circle UK has been appointed pursuant to the UK Origination Agreement, UK Servicing Agreement and the Services Agreement. Funding Circle US (as defined in the Prospectus) has been appointed pursuant to the US Origination Agreement and the US Servicing Agreement.
Funding Circle Nederlands B.V. ("Funding Circle Netherlands") has been appointed pursuant to the Dutch Origination Agreement and the Dutch Servicing Agreement. Funding Circle Espana SLU ("Funding Circle Spain") has been appointed pursuant to the Spanish Origination Agreement and the Spanish Servicing Agreement. Funding Circle CE GmbH ("Funding Circle CE") has been appointed pursuant to the German Origination Agreement and the German Servicing Agreement. Each of Funding Circle Netherlands and Funding Circle Spain has agreed to designate Funding Circle CE as sub-contracting agent for the purposes of their respective Origination Agreements and Servicing Agreements.
The Group does not pay Funding Circle any fees on the initial origination of loans.
Funding Circle UK is entitled to receive loan servicing fees equal to 1 per cent. Per annum, calculated daily, on the aggregate outstanding principal balance of the portfolio of loans held by each of Basinghall, Lambeth and Queenhithe excluding any loans which have been charged off as defined in the Servicing Agreement. Servicing fees to Funding Circle UK of £316,069 were incurred during the year (2021: £678,191). Servicing fees outstanding as at 31 March 2022 were £36,211 (2021: £74,569). Following the transfer of Credit Assets by Lambeth to Basinghall on 17 June 2020, Lambeth's servicing agreement in place with Funding Circle UK was terminated on the same date. Following the transfer of Credit Assets by Queenhithe to Basinghall on 17 August 2020, Queenhithe's servicing agreement in place with Funding Circle UK was terminated on the same date.
FCGPL is also entitled to receive fees under the Services Agreement at an annual rate of 0.1 per cent. Of net asset value of the Group. This fee accrued from the date on which the Group made investments in respect of loans in an amount equal to 80 per cent. Of the gross IPO issue proceeds of £150 million. During the year ended 31 March 2022, £91,257 (2021: £184,970) was incurred under the Services Agreement. Corporate servicing fees outstanding as at 31 March 2022 was £nil (2021: £nil).
Funding Circle US is entitled to receive loan servicing fees equal to 1 per cent. Per annum, calculated daily, on the aggregate outstanding principal balance of the portfolio of loans held by the Group which have been originated in the US excluding any loans which have been charged off as defined in the Servicing Agreement. Servicing fees to Funding Circle US of £125,925 were incurred during the year (2021: £327,599). Servicing fees outstanding as at 31 March 2022 were £6,165 (2021: £34,165).
Funding Circle Netherlands is entitled to receive loan servicing fees equal to 1 per cent. Per annum, calculated daily, on the aggregate outstanding principal balance of the portfolio of loans held by Tallis excluding any loans which have been charged off as defined in the Servicing Agreement.
Funding Circle Spain is entitled to receive loan servicing fees equal to 1 per cent. Per annum, calculated daily, on the aggregate outstanding principal balance of the portfolio of loans held by Tallis excluding any loans which have been charged off as defined in the Servicing Agreement.
Funding Circle Deutschland GmbH is entitled to receive loan servicing fees equal to 1 per cent. Per annum, calculated daily, on the aggregate outstanding principal balance of the portfolio of loans held by Tallis excluding any loans which have been charged off as defined in the Servicing Agreement.
Funding Circle CE receives servicing fees for Funding Circle Netherlands, Funding Circle Spain and Funding Circle Deutschland GmbH as per the sub-contracting agency agreement. Servicing fees to Funding Circle CE during the year amounted to £154,581 (2021: £313,628). Servicing fees outstanding as at 31 March 2022 were £40,674 (2021: £37,051).
Each of the Funding Circle entities is entitled to additional fees of up to 40 per cent. Of collections received on charged off assets under each of the relevant Services Agreement in reimbursement of costs incurred in respect of collection charges and external legal fees. No such additional fees were charged to the Group during the current year or the prior year.
Administration, company secretarial and cash management
Sanne Group (Guernsey) Limited ("Sanne Guernsey") has been appointed as Administrator to the Company pursuant to the Administration Agreement. The Administrator also acts as Company Secretary and Cash Manager of the Company.
Sanne Guernsey is entitled to receive an annual fee equal to five basis points of the net asset value of the Group subject to a minimum amount of £85,000 (2021: £85,000). Administration fees of £114,138 were incurred during the year (2021: £150,303) of which £31,303 was outstanding as at 31 March 2022 (2021: £nil).
Sanne Capital Markets Ireland Limited ("Sanne Ireland") has been appointed as Administrator to Basinghall, Tallis and Queenhithe and is entitled to receive an annual fee for each entity of £58,000 (2021: £58,000). Administration fees (including fees for out-of-scope work performed) of £101,165 were incurred during the year (2021: £138,598) of which £nil was outstanding as at 31 March 2022 (2021: £nil).
Intertrust Management Ireland Limited ("Intertrust Ireland") was appointed as Administrator to Queenhithe and is entitled to receive an annual fee of £23,000. There were no outstanding administration fees payable to Intertrust Ireland as at 31 March 2022 and 31 March 2021.
Registrar
Link Asset Services (the "Registrar") has been appointed as the Company's Registrar to undertake maintenance of the statutory books of the Company and to perform such related activities as are required to carry out the registrar function. The Registrar is entitled to an annual maintenance fee per shareholder subject to a minimum charge of £4,500 (2021: £4,500) per annum. Registrar service fees of £75,516 were incurred during the year (2021: £86,796). Registrar service fees outstanding as at 31 March 2022 amounted to £nil (2021: £13,589).
Currency management fee
Record Currency Management Limited has been appointed as currency manager. The currency manager is entitled to fees calculated based on the GBP equivalent amount of the US Dollar and EUR denominated exposure being hedged within the Group's portfolio. Fees of £29,032 were incurred during the year (2021: £43,768). Fees outstanding as at 31 March 2022 amounted to £4,271 (2021: £8,935).
Audit, audit related and non-audit related services
Remuneration for all work carried out for the Group by the statutory audit firm in each of the following categories of work is disclosed below:
|
|
31 March 2022 |
|
31 March 2021 |
||
|
Type of service |
PwC CI |
PwC Ireland |
|
PwC CI |
PwC Ireland |
|
|
£ |
£ |
|
£ |
£ |
|
Audit of the financial statements |
114,330 |
72,218 |
|
126,030 |
77,234 |
|
Review of half-yearly financial statements |
23,900 |
- |
|
22,000 |
- |
|
Tax related services |
- |
- |
|
- |
38,328 |
|
Other non-audit services |
- |
- |
|
1,200 |
- |
|
|
138,230 |
72,218 |
|
149,230 |
115,562 |
16. FINANCIAL RISK MANAGEMENT
The Board of Directors has overall responsibility for the establishment and oversight of the Group's risk management framework. The Group's risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies are reviewed regularly to reflect changes in market conditions and the Group's activities, including the basis of preparation being other than going concern whilst the entity is in managed wind-down. Below is a summary of the risks that the Group is exposed to as a result of its use of financial instruments.
i) Operational risk
The directors outsource most of the Company's operations to third parties which increases the operational risk in which the Company is exposed to.
The Group is dependent on Funding Circle's resources and on the ability and judgement of the employees of Funding Circle and its professional advisers to originate and service the Credit Assets purchased by the Group. Failure of Funding Circle's Platform or inconsistent operational effectiveness of the internal controls at Funding Circle may result in financial losses to the Group.
The Board manages this risk by performing a regular evaluation of Funding Circle's performance against the terms and conditions of the Group's agreements with Funding Circle.
ii) Market risk
Market risk is the risk of changes in market rates, such as interest rates, foreign exchange rates and equity prices, affecting the Group's income and/or the value of its holdings in financial instruments.
The Board of Directors regularly reviews the Credit Assets portfolios and industry developments to ensure that any events which impact the Group are identified and considered in a timely manner.
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair value of financial instruments.
The Group is exposed to risks associated with the effect of fluctuations in the prevailing levels of market interest rates on its cash balances and indirectly on the pricing of and returns from Credit Assets.
Loans are held by the Group at fair value through other comprehensive income and bear fixed interest rates. The Board has not performed an interest rate sensitivity analysis on these loans. Financial instruments with floating interest rates that reset as market rates change are exposed to cash flow interest rate risk. As at 31 March 2022, the Group had £15.2 million (31 March 2021: £30.7 million) of the total assets classified as cash and cash equivalents with floating interest rates. At 31 March 2022, had interest rates increased or decreased by 100 basis points, in light of central banks attempts to curb inflationary pressures through interest rate hikes, with all other variables held constant (2021: 25 basis points), the change in the value of future expected cash flows of these assets would have been £151,757 (31 March 2021: £76,962). The Board of Directors believes that a change in interest rate of 100 basis points is a reasonable measure of sensitivity in interest rates based on their assessment of market interest rates at the year end.
The Group was also previously exposed to interest rate risk in respect of its external loans payable however no remaining interest risk exposure in respect to external loans as they were fully repaid in the prior year.
Currency risk
Currency risk is the risk that the value of the Group's net assets will fluctuate due to changes in foreign exchange rates.
Aside from GBP, the Group has invested in loans denominated in US Dollars and Euro and may invest in loans denominated in other currencies. Accordingly, the value of such assets may be affected favourably or unfavourably by fluctuations in currency rates. The Board of Directors monitors the fluctuations in foreign currency exchange rates and uses forward foreign exchange swaps to seek to hedge the currency exposure of the Group arising from US Dollar and Euro denominated investments.
The currency risk of the Group's non-GBP monetary financial assets and liabilities as at 31 March 2022 including the effect of a change in exchange rates by 5% is shown below. The effect of a 5% change is shown below by applying an increase (for favourable change in currency rates) or a decrease (for unfavourable change in currency rates) to the reported amounts of the assets and liabilities of the Group. The Directors believe that a change of 5% in currency exchange rates is a reasonable measure of sensitivity based on available data on currency rates at the year end.
|
|
Carrying amount as at 31 March 2022 |
Effect of a 5% change in currency rate |
Carrying amount as at 31 March 2021 |
Effect of a 5% change in currency rate |
|
|
£ |
£ |
£ |
£ |
|
US Dollar |
5,204,398 |
197,638 |
15,256,783 |
552,902 |
|
Euro |
8,859,457 |
374,334 |
19,986,113 |
851,259 |
|
Total |
14,063,855 |
571,972 |
35,242,896 |
1,404,161 |
The Group's exposure has been calculated as at the year end and may not be representative of the year as a whole. Furthermore, the above currency risk estimate does not take into account the effect of the Group's foreign exchange hedging policy. The net foreign exchange gain charged to the Consolidated Statement of Comprehensive Income during the year was £1,057,767 (2021: loss of £2,742,932). The details of the net foreign exchange gain or loss are shown below.
|
|
|
31 March 2022 |
31 March 2021 |
|
|
|
£ |
£ |
|
Unrealised foreign currency gains/(losses) |
|
1,181,756 |
(6,035,985) |
|
Realised gains on currency derivatives |
|
1,022,455 |
2,930,944 |
|
Realised losses on currency derivatives |
|
(186,117) |
(3,807,555) |
|
Unrealised fair value (losses)/gains on currency derivatives |
|
(960,327) |
4,169,664 |
|
|
|
1,057,767 |
(2,742,932) |
iii) Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Substantially all of the non-cash assets held by the Group are illiquid.
The Board of Directors manages liquidity risk through active monitoring of amortising cash flows and reviewing the Group cash flow forecast on a regular basis. Prior to the EGM on 11 June 2019, the Group was allowed to borrow up to 0.5 times the then-current net asset value of the Group at the time of borrowing. The Board will focus on achieving a managed wind-down of the Company and any further borrowing is not anticipated.
Maturity profile
While the following tables show the contractual maturity of the financial assets and financial liabilities of the Group, it should be noted that as the financial statements have been prepared on a basis other than going concern, the expectation is that the majority of the assets and liabilities will be liquidated within twelve months of the signing of these accounts, and so may fall earlier than they are contractually due:
As at 31 March 2022
|
|
Within one year |
One to five years |
Over five years |
Total |
|
|
£ |
£ |
£ |
£ |
|
Financial assets |
|
|
|
|
|
Cash and cash equivalents |
15,183,371 |
- |
- |
15,183,371 |
|
Loans advanced |
76,093,906 |
31,269,066 |
- |
107,362,972 |
|
Other receivables |
23,550 |
- |
- |
23,550 |
|
|
91,300,827 |
31,269,066 |
- |
122,569,893 |
|
|
Within one year |
One to five years |
Over five years |
Total |
|
|
£ |
£ |
£ |
£ |
|
Financial liabilities |
|
|
|
|
|
Accrued expenses and other liabilities |
346,461 |
- |
- |
346,461 |
|
Fair value of currency derivatives |
191,363 |
- |
- |
191,363 |
|
|
537,824 |
- |
- |
537,824 |
As at 31 March 2021
|
|
Within one year |
One to five years |
Over five years |
Total |
|
|
£ |
£ |
£ |
£ |
|
Financial assets |
|
|
|
|
|
Cash and cash equivalents |
30,784,718 |
- |
- |
30,784,718 |
|
Loans advanced |
82,899,529 |
58,547,373 |
- |
141,446,902 |
|
Financial assets at fair value through profit and loss |
5,141,217 |
- |
- |
5,141,217 |
|
Fair value of currency derivatives |
768,964.00 |
- |
- |
768,964 |
|
Other receivables |
9,870 |
- |
- |
9,870 |
|
|
119,604,298 |
58,547,373 |
- |
178,151,671 |
|
|
Within one year |
One to five years |
Over five years |
Total |
|
|
£ |
£ |
£ |
£ |
|
Financial liabilities |
|
|
|
|
|
Accrued expenses and other liabilities |
821,438 |
- |
- |
821,438 |
|
|
821,438 |
- |
- |
821,438 |
iv) Credit risk and counterparty risk
Credit risk is the risk of financial loss to the Group if a counterparty to a financial instrument fails to meet its contractual obligations. The carrying amounts of financial assets best represent the maximum credit risk exposure at the reporting date. Impairment recognised on the loans advanced is disclosed in note 4.
The Group's credit risks arise principally through exposures to loans advanced by the Group, which are subject to the risk of borrower default. As disclosed in note 4, the loans advanced by the Group are predominantly unsecured, but the Group holds assets as security for certain property-related loans.
Credit quality
The credit quality of loans is assessed on an ongoing basis through evaluation of various factors, including credit scores, payment data and other information related to counterparties. This information is subject to stress testing on a regular basis.
Set out below is the analysis of the Group's loan investments by internal grade rating:
|
|
Carrying value 31 March 2022 |
% of Carrying 31 March 2022 |
Carrying value 31 March 2021 |
% of Carrying 31 March 2021 |
|
Internal grade |
£ |
% |
£ |
% |
|
A+ |
6,914,473 |
18.94 |
8,511,443 |
10.61 |
|
A |
12,115,836 |
33.18 |
29,407,644 |
36.64 |
|
B |
7,939,373 |
21.74 |
19,496,527 |
24.30 |
|
C |
5,260,953 |
14.40 |
12,013,516 |
14.97 |
|
D |
3,005,204 |
8.23 |
7,621,654 |
9.50 |
|
E |
1,279,966 |
3.51 |
3,191,367 |
3.98 |
|
|
36,515,805 |
100.00 |
80,242,151 |
100.00 |
The internal grade risk rating assigned to a borrower is based on Funding Circle's proprietary credit scoring methodology to evaluate each loan application. Analysis has regard to all the relevant application data gathered so far as well as information obtained from commercial and consumer credit bureaus. It also includes analysis of the borrower's financial information.
The scale of ratings from A+ to E reflects the relative credit risk of the asset with A+ considered to have the lowest credit risk and E rated loan the highest.
Allocation limits
The Board of Directors implemented the following portfolio limits to manage the concentration risk exposure of the Group:
The proportionate division between loans originated through the various Platforms must fall within the ranges set out below. The actual proportion within the ranges will be determined by Funding Circle UK (and communicated by Funding Circle UK to Funding Circle US, Funding Circle CE, and other Funding Circle group entities, as appropriate) pursuant to the Services Agreement:
• originated through the UK Platform - between 50 per cent. and 100 per cent. of the gross asset value of the Group
• originated through the US Platform - between 0 per cent. and 50 per cent. of the gross asset value of the Group
• originated through the CE Platform - between 0 per cent. and 15 per cent. of the gross asset value of the Group
Other limitations
In addition to the allocation limits described above, in no circumstances will loans be acquired by the Group, nor will indirect exposure to loans be acquired, if such acquisition or exposure would result in:
• excess of 50 per cent. of the gross asset value being represented by loans in respect of which the relevant borrower is located in the US; or
• the amount of the relevant loan or borrowing represented by any one loan exceeding or resulting in the Group's exposure to a single borrower exceeding (at the time such investment is made) 0.75 per cent. of the net asset value.
The allocation limits and other limitations shown above no longer apply after shareholders passed the resolutions at the EGM on 11 June 2019.
Banking counterparties
The Group is also exposed to credit risk in relation to cash placed with its banking counterparties. The Directors monitor the credit quality of these banking counterparties on a regular basis.
The Group may invest cash held for working capital purposes and pending investment or distribution in cash or cash equivalents, government or public securities, money market instruments, bonds, commercial paper or other debt obligations with banks or other counterparties having a "BBB" (or equivalent) or higher credit rating as determined by any internationally recognised rating agency selected by the Board.
The Group held cash with the following financial institutions:
|
|
Amount as at 31 March 2022 |
Short term credit rating (S&P) |
Amount as at 31 March 2021 |
Short term credit rating (S&P) |
|
|
£ |
|
£ |
|
|
HSBC |
14,948,118 |
A-1 |
6,307,209 |
A-1 |
|
Barclays |
185,531 |
A-2 |
24,364,947 |
A-2 |
|
AIB |
49,722 |
A-2 |
112,562 |
A-2 |
|
Total |
15,183,371 |
|
30,784,718 |
|
In addition, the Group uses forward foreign currency transactions to seek to minimise the Group's exposure to changes in foreign exchange rates. The Group is exposed to counterparty credit risk in respect of these transactions. The Board of Directors employs various techniques to limit actual counterparty credit risk, including the requirement for cash margin payments or receipts for foreign currency derivative transactions on a regular basis. As at year end, the Group's derivative counterparties were State Street and Northern Trust. The long term-credit rating of State Street as at 31 March 2022 assigned by Moody's was Aa1 (31 March 2021: Aa1). The long term-credit rating of Northern Trust as at 31 March 2022 assigned by Moody's was Aa2 (2021: Aa2). The Directors monitor the credit quality of these banking counterparties on a regular basis.
v) Fair value estimation
The Group classifies fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:
· Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities. Investments, whose values are based on quoted market prices in active markets and are therefore classified within Level 1, include active listed equities. The quoted price for these instruments is not adjusted;
· Level 2 - 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). Financial instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within Level 2. As Level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information; and
· Level 3 - inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs).
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability. The determination of what constitutes "observable" requires significant judgement by the Group. The Group considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary and provided by independent sources that are actively involved in the relevant market.
The Group's only financial instruments measured at fair value as at 31 March 2022 are its currency derivatives and its loans advanced. In the prior year, the Group also had an investment in the EIB transaction measured at fair value through profit or loss which was settled before the end of the year.
The fair value of the currency derivatives held by StateStreet and Northern Trust were estimated by Record Currency Management Limited based on the GBP-USD forward exchange rate, the GBP-EUR forward exchange rate, the GBP-USD spot rate and the GBP-EUR spot rate as at 31 March 2022.
As at 31 March 2021, as a result of resilient performance seen on the portfolio of loans held by the EIB SPV, it was estimated by a third party valuation expert that the Company would receive future cashflows from its investment in the EIB transaction and as such this resulted in a fair value gain of £5,141,217 being recognised in the consolidated statement of comprehensive income for the previous year.
In October 2021, the Company received cash of £1,568,666 and a portfolio of SME loans valued at £5,824,315 as full repayment of its investment in the EIB transaction. The portfolio of loans was subsequently recognised in the Basinghall subsidiary of the Group in return for notes issued between the parent company and Basinghall. During the year, due to the resilient performance of the underlying loan portfolio, a net gain of £2,251,764 was recognised in the consolidated statement of comprehensive income and the SME loans were subsequently consolidated directly on the Group's consolidated statement of financial position.
The Company has appointed a third-party valuation expert to provide quarterly valuations of its Credit Assets. The fair value of the Credit Assets has been estimated by discounting expected future cash flows from the loans advanced using a discount rate determined by the Directors based on appropriate market comparatives and conditions. The fair value of the Group's Credit Assets as at 31 March 2022 was £37,403,665 (31 March 2021: £83,355,445). The most relevant unobservable input to the fair valuation was the discount rate, which has been summarised below based on the geography of each of the Group's portfolios:
|
|
31 March 2022 |
31 March 2022 |
31 March 2022 |
31 March 2021 |
31 March 2021 |
31 March 2021 |
|
|
UK |
US |
CE |
UK |
US |
CE |
|
|
|
|
|
|
|
|
|
Discount rate |
9.07% |
8.29% |
7.55% |
7.66% |
7.51% |
6.90% |
|
Fair value |
£25,205,229 |
£4,209,292 |
£7,989,144 |
£50,896,298 |
£13,678,529 |
£18,780,618 |
The Board of Directors believe that the fair value of the currency derivatives falls within Level 2 in the fair value hierarchy described above. The fair value of the EIB transaction and the Credit Assets falls within Level 3 in the fair value hierarchy due to the unobservable inputs used in the valuation which include discount rate, timing and amounts of cash flows and performance of the underlying loan portfolios. Refer to notes 4 and 5 for the movement on these financial instruments during the year.
The Directors have prepared the below sensitivity analysis for the Credit Assets based on a movement in discount rate of 1% with an increase in discount rate of 1% causing a £233,939 reduction in fair value and a 1% decrease causing a £236,412 increase in fair value of loans advanced. In light of recent inflationary pressures, exacerbated by the events in the Ukraine, and central banks' actions to curb these through raising interest rates, it is considered likely that increases in the discount rate applied to Credit Assets is more reasonably possible than decreases, and could result in a material deviation from management's estimation in the future.
|
|
UK |
US |
CE |
Total |
|
1% decrease in discount rate |
£159,561 |
£21,826 |
£55,025 |
£236,412 |
|
1% increase in discount rate |
(£157,884) |
(£21,647) |
(£54,408) |
(£233,939) |
The following table presents the fair value of the Group's assets and liabilities not measured at fair value as at 31 March 2022 but for which fair value is disclosed:
|
|
31 March 2022 |
|||
|
|
Level 1 |
Level 2 |
Level 3 |
Total |
|
|
£ |
£ |
£ |
£ |
|
Cash and cash equivalents |
15,183,371 |
- |
- |
15,183,371 |
|
Other receivables and prepayments |
- |
23,550 |
- |
23,550 |
|
Accrued expenses and other |
|
|
|
|
|
liabilities
|
- |
(346,461) |
- |
(346,461) |
|
|
15,183,371 |
(322,911) |
- |
14,860,460 |
|
|
31 March 2021 |
|||
|
|
Level 1 |
Level 2 |
Level 3 |
Total |
|
|
£ |
£ |
£ |
£ |
|
Cash and cash equivalents |
30,784,718 |
- |
- |
30,784,718 |
|
Other receivables and prepayments |
- |
9,870 |
- |
9,870 |
|
Accrued expenses and other |
|
|
|
|
|
liabilities
|
- |
(821,438) |
- |
(821,438) |
|
|
30,784,718 |
(811,568) |
- |
29,973,150 |
The Board of Directors believe that the carrying values for cash and cash equivalents, other receivables and prepayments, loans payable and accrued expenses and other liabilities approximate their fair values.
In the case of cash and cash equivalents, other receivables and prepayments, and accrued expenses and other liabilities the amount estimated to be realised in cash are equal to their value shown in the Consolidated Statement of Financial Position due to their short term nature.
There were no transfers between levels during the year or the prior year.
The managed wind-down of the Company is being operated with a view to the Company realising all of its investments in accordance with the Investment Objective. Such realisations will comprise natural amortisation of the Company's investments in Credit Assets as well as potentially opportunistic portfolio sales.
During the year ended 31 March 2020, the Company ran an auction process as the Board explored a potential sale of a portion of the Company's assets during which it received a high level of interest from potential buyers. During the year ended 31 March 2021 a sale of non-performing loans was concluded to the value of £605,402. The Company continues to explore asset sales and considers the likelihood of a sale within 12 months of the date of signing to be high. This is due to the composition of the portfolio being more weighted towards non-performing loans within the next 12 months.
Capital risk management
The Board's policy is to reflect a realisation strategy in line with the investment objective and policy, with the intention of realising all remaining assets in the portfolio in a prudent manner which achieves a balance between maximising the value from the realisation of the Company's investments and making timely returns of capital to shareholders. The Group's capital is represented by Ordinary share capital and retained earnings. The capital of the Group is managed in accordance with its investment policy, in pursuit of its investment objectives. The return of capital to investors is managed in line with the Company's investment objective and managed wind-down process.
The Company continues to return capital through compulsory redemptions of shares and distributions of dividends, as the Group's portfolio of Credit Assets amortises
The Group is not subject to externally imposed capital requirements. However, certain calculations on the employment of leverage are required under the AIFMD. This directive requires more information to be reported if the Group's leverage exceeds three times its net asset value. All of the Group's leverage facilities have now been fully repaid.
17. RELATED PARTY DISCLOSURE
The Directors, who are the key management personnel of the Group, are remunerated per annum as follows:
|
|
|
|
£ |
|
Chairman |
|
|
50,000 |
|
Audit Committee Chairman |
|
|
40,000 |
|
Risk Committee Chairman |
|
|
40,000 |
|
Other Directors |
|
|
30,000 |
|
|
|
|
160,000 |
Sachin Patel has waived his fees as a director of the Company.
The Directors and/or their connected parties held the following number of shares as at 31 March 2022 and 31 March 2021:
|
|
As at 31 March 2022 |
|
As at 31 March 2021 |
||
|
|
Number of shares |
% of total shares in issue |
|
Number of shares |
% of total shares in issue |
|
Richard Boléat |
5,231 |
0.0101 |
|
13,554 |
0.0069 |
|
Jonathan Bridel |
25,286 |
0.0489 |
|
65,552 |
0.0333 |
|
Richard Burwood |
13,409 |
0.0259 |
|
24,784 |
0.0126 |
|
Frederic Hervouet |
35,504 |
0.0686 |
|
92,041 |
0.0467 |
|
Sachin Patel |
- |
- |
|
- |
- |
|
|
79,430 |
0.1535 |
|
195,931 |
0.0995 |
Movement in the number of shares held by each of the directors during the year relates to the redemptions paid by the Company and the purchase of further shares which were approved and cleared for issue at the time of purchase.
The Group had no employees during the current year or the prior year.
The Directors delegate certain functions to other parties. In particular, the Directors appointed Funding Circle UK, Funding Circle US and Funding Circle CE to originate and service the Group's investments in loans and FCGPL to provide corporate services.
Notwithstanding these delegations, the Directors have responsibility for exercising overall control and supervision of the services provided by the Funding Circle entities, for risk management of the Group and otherwise for the Group's management and operations.
The transaction amounts incurred during the year and amounts payable to each of Funding Circle UK, FCGPL, Funding Circle US and Funding Circle CE are disclosed below.
|
|
|
Expense during the year ended 31 March 2022 |
Payable as at 31 March 2022 |
Expense during the year ended 31 March 2021 |
Payable as at 31 March 2021 |
|
|
Transaction |
£ |
£ |
£ |
£ |
|
Funding Circle UK |
Servicing fee |
316,069 |
36,211 |
678,191 |
74,569 |
|
FCGPL |
Corporate services fee |
91,257 |
- |
184,970 |
- |
|
FCGPL |
Reimbursement of expenses |
- |
- |
24,331 |
490 |
|
Funding Circle US |
Servicing fee |
125,925 |
6,165 |
327,599 |
34,165 |
|
Funding Circle CE |
Servicing fee |
154,581 |
40,674 |
313,628 |
37,051 |
18. INVESTMENT IN SUBSIDIARIES
The Company accounts for its interest in the following entities as subsidiaries, in accordance with the definition of subsidiaries and control set out in IFRS 10:
|
|
Country of incorporation |
Principal activity |
Transactions |
Outstanding amount as at 31 March 2022 £ |
Outstanding amount as at 31 March 2021 £ |
|
Basinghall Lending Designated Activity Company |
Ireland |
Invested in Credit Assets originated in the UK |
Subscription of notes issued |
29,245,042 |
55,733,625 |
|
Tallis Lending Designated Activity Company |
Ireland |
Invested in Credit Assets originated in Germany, the Netherlands and Spain |
Subscription of notes issued |
9,266,553 |
19,658,656 |
|
Lambeth Lending Designated Activity Company* |
Ireland |
Invested in Credit Assets originated in UK |
Subscription of notes issued (through Basinghall) |
- |
71,757 |
|
Queenhithe Lending Designated Activity Company** |
Ireland |
Invested in Credit Assets originate in the UK |
Subscription of notes issued (through Basinghall) |
- |
65,682 |
|
|
|
|
|
38,511,595 |
75,529,720 |
*Lambeth Lending Designated Activity Company has fully been liquidated as at the end of the year 31 March 2022.
**Queenhithe Lending Designated Activity Company is, at the date of these financial statements, still undergoing liquidation.
19. SUBSEQUENT EVENTS
On 20 April 2022, the Company declared a quarterly dividend of 1.3125 pence per share payable on 23 May 2022. The Company also returned approximately £13.4m on 6 May 2022 by way of a compulsory partial redemption of shares.
The Directors have assessed at the time of the issue of these consolidated financial statements that there are no other material subsequent events that require adjustment to the balances as at the year-end or disclosure in the financial statements.
BOARD OF DIRECTORS
Richard Boléat
Chairman, Remuneration and Nominations Committee Chairman, Non-executive Director
Richard Boléat was born in Jersey in 1963. He is a Fellow of the Institute of Chartered Accountants in England & Wales, having trained with Coopers & Lybrand in Jersey and the United Kingdom. After qualifying in 1986, he subsequently worked in the Middle East, Africa and the UK for a number of commercial and financial services groups before returning to Jersey in 1991. He was formerly a Principal of Channel House Financial Services Group from 1996 until its acquisition by Capita Group plc ("Capita") in September 2005. Mr Boléat led Capita's financial services client practice in Jersey until September 2007, when he left to establish Governance Partners, L.P., an independent corporate governance practice. He currently acts as Chairman of CVC Credit Partners European Opportunities Limited and Audit Committee Chairman of M&G Credit Income Investment Trust plc. He also serves on the board of Third Point Investors Limited, and a number of other substantial private market collective investment and investment management entities established in Jersey, the Cayman Islands and Luxembourg. He is regulated in his personal capacity by the Jersey Financial Services Commission.
Jonathan Bridel
Audit Committee Chairman, Non-executive Director
Mr Bridel is currently a non-executive Chairman or director of listed investment funds. These include Sequoia Economic Infrastructure Income Fund Limited until 3rd August 2022 which is listed on the premium segment of the London Stock Exchange. He is also Chairman of DP Aircraft 1 Limited and a director of Fair Oaks Income Fund Limited. He was until 2011 Managing Director of Royal Bank of Canada's investment businesses in Guernsey and Jersey. This role had a strong focus on corporate governance, oversight, regulatory and technical matters and risk management. He is a Chartered Accountant and has specialised in Corporate Finance and Credit. After qualifying as a Chartered Accountant in 1987, Mr Bridel worked with Price Waterhouse Corporate Finance in London and subsequently served in a number of senior management positions in Australia and Guernsey in corporate and offshore banking and specialised in credit. This included heading up an SME Lending business for a major bank in South Australia. He was also chief financial officer of two private multi-national businesses, one of which raised private equity. He holds qualifications from the Institute of Chartered Accountants in England and Wales where he is a Fellow, the Chartered Institute of Marketing and the Australian Institute of Company Directors. He graduated with an MBA from Durham University in 1988. Mr Bridel is a Chartered Marketer and a member of the Chartered Institute of Marketing, a Chartered Director and a Fellow of the Institute of Directors and is a Chartered Fellow of the Chartered Institute for Securities and Investment.
Richard Burwood
Management Engagement Committee Chairman, Non-executive Director
Mr Burwood is a resident of Guernsey with 30 years experience in banking and investment management. During his 18 years with Citibank London, Mr Burwood spent 11 years as a fixed income portfolio manager spanning both banks/finance investments and Asset Backed Securities.
Mr Burwood has lived in Guernsey since 2010, initially working as a portfolio manager for EFG Financial Products, managing the treasury department's ALCO Fixed Income portfolio. From 2011 to 2013, Mr Burwood worked as the Business and Investment Manager for Man Investments, Guernsey.
In January 2013, Mr Burwood joined the board of TwentyFour Income Fund, a London listed closed-ended fund which targets less liquid, higher yielding asset backed securities. In January 2014, Mr Burwood joined the board of RoundShield, a Guernsey private equity fund, focused on European small to mid-cap real estate opportunities. In August 2015, he became a Board Member of Funding Circle SME Income Fund, now SME Credit Realisation Fund Limited, the Company. Mr Burwood also serves on the boards of Habrok, a Cayman-registered hedge fund specialising in Indian equities, and EFG International Finance, a structured note issuance vehicle based in Guernsey.
Frederic Hervouet
Risk Committee Chairman, Non-executive Director
Fred Hervouet is a resident of Guernsey and has dual nationality with both British and French citizenship. He has more than 20 years of experience in Hedge Funds and Capital Markets roles.
Until end of 2013, Fred was Managing Director and Head of Commodity Derivatives Asia for BNP Paribas including Trading, Structuring and Sales. Prior to BNP Paribas, he also worked for two multi-billion, multi-strategy hedge funds including Quantitative strategies (CTAs), Convertible Arbitrage, Event Driven, Fixed Income Relative Value, Equity & Commodity Long-short, Global Macro, and Emerging Markets Debt Fund. In the last 20 years, Fred has worked in different aspects of the Financial Markets and Asset Management Industry. His experience includes Derivatives Markets, Structured Finance, Structured Products and Hedge Funds, Trading and Risk Management.
Fred has worked in Singapore, Switzerland, United Kingdom and France. Most recently, Mr Hervouet was a member of BNP Paribas Commodity Group Executive Committee and BNP Paribas Credit Executive Committees on Structured Finance projects (structured debt and Trade Finance).
Fred now acts as a full time dedicated Non-executive Director of a number of listed and non-listed companies. He is the Chairman of Chenavari Toro Income Fund listed on the Special Fund Market of the London Stock Exchange and a director of Crystal Amber
Fund Limited. He is also a director of the General Partners of a number of Guernsey Private Equity Funds (Terra Firma, Lakestar, Telstra Ventures, LCH Partners).
Fred graduated from the University of Paris Dauphine, France achieving a Masters (DESS 203) in Financial Markets, Commodity Markets and Risk Management and an MSc in Applied Mathematics and International Finance.
Fred has provided investment and risk management services to corporations and institutions worldwide and worked with CEOs, CFOs and Head of Investment Divisions. Appearances on financial programs include CNBC, Bloomberg and other networks. He is a member of various financial services interest Groups including the UK Association of Investment Companies.
Sachin Patel
Non-executive Director
Sachin Patel is the Chief Capital Officer at Funding Circle, leads the Global Capital Markets group and is responsible for investor strategy. Previously, Sachin was Vice President in the cross-asset structured products and solutions businesses at Barclays Capital and, prior to this, at J.P. Morgan, advising a wide variety of investors including insurance companies, pension funds, discretionary asset managers and private banks.
By virtue of Sachin's role at Funding Circle Ltd, Sachin is not an independent Director. Notwithstanding this, Sachin has undertaken in his service contract with the Company to communicate to the Board any actual or potential conflict of interest arising out of his position as a Director and the other Directors have satisfied themselves that procedures are in place to address potential conflicts of interest.
Sachin is not entitled to any fee for the services provided and to be provided in relation to his directorship, although the Company shall, during the course of his appointment, reimburse all properly incurred out-of-pocket expenses incurred in the execution of his duties as a Director.
AGENTS AND ADVISORS
|
SME Credit Realisation Fund Limited Company registration number: 60680 (Guernsey, Channel Islands) |
|
|
|
|
Registered office De Catapan House Grange Road |
|
Portfolio Administrator Funding Circle Ltd United Kingdom |
|
|
Company Secretary and Administrator Sanne Group (Guernsey) Limited Grange Road |
|
Corporate broker and Bookrunner and Sponsor Numis Securities Limited
|
|
|
Legal advisors as to Guernsey Law Mourant Royal Chambers
|
|
UK Transfer Agent and Receiving Agent Link Market Services Limited Kent BR3 4TU United Kingdom
|
|
|
Legal advisors as to English Law Herbert Smith Freehills LLP (London) Exchange House, Primrose Street, London EC2A, 2EG United Kingdom
|
|
Registrar Link Market Services (Guernsey) Limited Mont Crevelt House Bulwer Avenue St Sampson Guernsey GY2 4LH Channel Islands |
|
|
Legal advisors as to Irish Law Matheson 70 Sir John Rogerson's Quay Dublin 2 Ireland
|
|
Independent Auditor PricewaterhouseCoopers CI LLP St Peter Port
|
|
|
|
|
|
|
GLOSSARY
Definitions and explanations of methodologies used are shown below. The Company's prospectus contains a more comprehensive list of defined terms.
|
"Administrator" |
Sanne Group (Guernsey) Limited
|
|
"Affiliates" |
With respect to any specified person means: (a) any person that directly or indirectly controls, is directly or indirectly controlled by or is directly or indirectly under common control with such specified person; (b) any person that serves as a director or officer (or in any similar capacity) of such specified person; (c) any person with respect to which such specified person serves as a general partner or trustee (or in any similar capacity). For the purposes of this definition, ''control'' (including ''controlling'', ''controlled by'' and ''under common control with'') means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise.
|
|
"AGM" |
Annual General Meeting
|
|
"AIC Code" |
The AIC Code of Corporate Governance
|
|
"AIC" |
The Association of Investment Companies, of which the Company is a member
|
|
"AIFM" |
Alternative Investment Fund Manager, appointed in accordance with the AIFMD
|
|
"AIFMD" |
The Alternative Investment Fund Managers Directive
|
|
"Available Cash" |
Cash determined by the Board as being available for use by the Company in accordance with the Investment Objective, and, in respect of Basinghall, Tallis and Queenhithe, cash determined by the Board of each of Basinghall, Tallis and Queenhithe Board (having regard to the terms of the Origination Agreement and the Note) for use by Basinghall, Tallis and Queenhithe and excluding (without limitation) amounts held as reserves or pending distribution
|
|
"CE" |
Continental Europe |
|
"Company Secretary" |
Sanne Group (Guernsey) Limited |
|
"Credit Assets" |
Loans or debt or credit instruments of any type originated through any of the Platforms |
|
"Dividend Per Share" |
A measure of performance showing dividend either declared or paid for each share issued and outstanding in the Company |
|
"EGM" |
The Extraordinary General Meeting on 11 June 2019 |
|
"Fair value movement on Credit Assets" |
The gain or loss recognised through other comprehensive income relating to the movement in valuation of Credit Assets |
|
"Funding Circle" |
FCGPL, Funding Circle UK, Funding Circle US, Funding Circle CE or either of their respective Affiliates (as defined in the Prospectus of the Company), or any or all of them as the context may require
|
|
"Funding Circle CE" |
Funding Circle CE GmbH, Funding Circle Deutschland GmbH, Funding Circle Nederlands B.V. and Funding Circle Espaňa SLU |
|
"FCGPL" |
Funding Circle Global Partners Limited |
|
"Funding Circle UK" |
Funding Circle Ltd
|
|
"Funding Circle US" |
FC Platform, LLC |
|
"NAV Total Return" |
A measure of performance showing how the NAV per share has performed over a period of time. This is calculated by comparing the NAV per share at the beginning of a period to the NAV per share at the end of a period removing the effect of capital returns and dividend payments. |
|
"Near Affiliates" |
The relevant Irish subsidiary of the Company and any other SPV or entity which, not being an Affiliate of the Company, has been or will be formed in connection with the Company's direct or indirect investment in Credit Assets and which (save in respect of any nominal amounts of equity capital) is or will be financed solely by the Company or any Affiliate of the Company |
|
"Note" or "Profit Participating Note" |
Notes issued by Basinghall Lending Designated Activity Company and Tallis Lending Designated Activity Company under their separate note programmes |
|
"Origination Agreements" |
The German Origination Agreement, the Dutch Origination Agreement, the Spanish Origination Agreement, the UK Origination Agreement, the US Origination Agreement, and the CE Origination Agreements |
|
"Platforms" |
The platforms operated in the UK, US and CE by Funding Circle, together with any similar or equivalent platform established or operated by Funding Circle in any jurisdiction. |
|
"Proposals" |
The proposals contained in the circular issued on 21 May 2019 which were subsequently approved at the EGM on 11 June 2019.
These included the proposals to (1) modify the Company's Investment Objective and Policy to reflect a realisation strategy; (2) amend its Articles of Incorporation (the "Articles") to include a mechanism to enable the Company to redeem shares in the Company compulsorily so as to return cash to shareholders; (3) appoint Funding Circle Global Partners Limited ("FCGPL") to facilitate potential portfolio sales on behalf of the Company and to (4) change the name of the Company into SME Credit Realisation Fund Limited ("SCRF") consistent to the proposed modification of the Company's Investment Objective and Policy.
|
|
"Prospectus" |
The prospectus issued on the initial IPO on 30 November 2015 and subsequently revised in February 2017 and in August 2018 |
|
"PwC" |
PricewaterhouseCoopers CI LLP, PricewaterhouseCoopers Ireland |
|
"PwC CI" |
PricewaterhouseCoopers CI LLP |
|
"PwC Ireland" |
PricewaterhouseCoopers Ireland |
|
"Share Price Premium or Discount to NAV" |
A measure of performance showing difference between the Group's NAV per share and the prevailing share price. |
|
"Share Price Total Return" |
A measure of performance showing how the share price has performed over a period of time. This is calculated by comparing the change in NAV per share (after removing the effect of capital returns and dividend payments) over a period to the share price of the Company.
|
|
"Share Redemption" |
A mechanism to enable the Company to redeem shares compulsorily so as to return cash to Shareholders as disclosed in the EGM circular published on 21 May 2020. |
|
"Share Repurchases" |
The Company's programme of repurchasing its own shares in the secondary market. |
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