TIDMRECI
RNS Number : 9998Q
Real Estate Credit Investments Ltd
25 June 2020
This announcement contains inside information.
Date and time of release: 25 June 2020, 7:00am
Real Estate Credit Investments Limited (the "Company")
Annual Report for RECI LN (Ordinary Shares)
The Board of Directors of the Company announces the release of
the Company's Annual Report and Audited Financial Statements (the
"Financial Statements") for the year ended 31 March 2020.
View the Financial Statements.
http://www.recreditinvest.com/PDFs/2020/06/RECIAnnualReport2020.pdf
For further information, please contact:
Broker: Richard Bootle / Richard Crawley (Liberum Capital) +44
(0)20 3100 2222
Investor Relations: Alastair Perry (Cheyne) +44 (0)20 7968
7444
Real Estate Credit Investments Limited
Annual Report and Accounts 2020
Real Estate Credit
Investments Limited
www.recreditinvest.com
Real Estate Credit Investments is a specialist investor in
European real estate credit markets with a focus on fundamental
credit and value.
What do we offer:
-- Defensive credit exposure to UK and European real estate markets
- Stable dividend delivered consistently since October 2013
-- Highly granular portfolio with detailed disclosure
- 52 positions
- Top position: 12.0% of year end NAV (by commitment)
-- Robust mitigation against a rising rates environment
- Consistent dividend yield of 7%+ offering a significant buffer
to risk-free rates
- A high-yielding portfolio, combined with a short weighted
average life, ensures
minimal exposure to yield widening and the ability to redeploy
at higher rates quickly
-- Access to Cheyne's established real estate investment team and substantial
origination pipeline
Highlights
As at 31 March 2020
TOTAL ASSETS
GBP 441.8 m
(2019: GBP355.2m)
NET ASSETS
GBP 337.2 m
(2019: GBP253.2m)
NAV PER SHARE
GBP 1.47
(2019: GBP1.65)
Net (loss)/profit
GBP( 17.4 )m
(2019: GBP19.2m)
At a Glance
At a Glance
Our investment strategy continues to provide compelling
risk-adjusted returns.
Real Estate Credit Investments ("RECI") is a closed-ended
investment company which originates and invests in real estate debt
secured by commercial or residential properties in Western Europe,
focusing primarily on the United Kingdom, France and Germany.
The Company's aim is to deliver a stable quarterly dividend with
minimal portfolio volatility, across economic and credit cycles,
through a levered exposure to real estate credit investments.
Investments are predominantly in:
Loans
Real estate loans.
Bonds
Listed real estate debt securities such as commercial
mortgage-backed securities ("CMBS") bonds.
Investment Portfolio Composition
RECI's investment portfolio, a diversified book of 52 positions
in real estate bonds and loans, was valued at GBP375 million as at
31 March 2020, up from GBP302 million as at 31 March 2019. The
portfolio had a weighted average levered yield of 11.0% and an
average loan-to-value ratio of 64.4% as at 31 March 2020.
Portfolio by Geography
(funded fair value)
31 March 31 March
2020* 2019*
-------------- -------- --------
1 UK 68.9% 65.6%
-------------- -------- --------
2 France 20.2% 14.6%
-------------- -------- --------
3 Italy 4.9% 5.0%
-------------- -------- --------
4 Portugal 2.2% 2.7%
-------------- -------- --------
5 Finland 1.5% 1.1%
-------------- -------- --------
6 Germany 1.5% 9.3%
-------------- -------- --------
7 Netherlands 0.1% 0.2%
-------------- -------- --------
8 Ireland 0.0% 0.5%
-------------- -------- --------
* Excludes 0.7% (2019: 1.0%) held in bonds backed by assets in
multiple European countries.
Sector Breakdown (funded fair value)
Sector %
---------------------- ---
Mixed-Use 25%
---------------------- ---
Retail 18%
---------------------- ---
Hotel 13%
---------------------- ---
Student Accommodation 11%
---------------------- ---
Housebuilder 10%
---------------------- ---
Leisure 7%
---------------------- ---
Healthcare 6%
---------------------- ---
Residential 4%
---------------------- ---
Serviced Apartments 4%
---------------------- ---
Office 1%
---------------------- ---
Industrial 1%
---------------------- ---
NAV and Share Price
As at 31 March 2020
Net assets GBP337.2m
------------------------ ------------
Shares outstanding 229.3m
------------------------ ------------
NAV (per share) 147.0p
------------------------ ------------
Share price (per share) 116.0p
------------------------ ------------
Premium/(discount)
* 21.4%
------------------------ ------------
Dividend yield 10.4%
------------------------ ------------
Market capitalisation GBP264.9m
------------------------ ------------
Total NAV Return
YTD 1 yr 3 yr 5 yr
------ ----- ------ ------
-9.2% 8.8% 25.2% 49.3%
YTD = Calendar year, 1 yr = 2019, 3 yr = 2017-2019, 5 yr =
2015-2019
About the Company
About the Company
The Company invests in real estate debt secured by commercial
real estate in Western Europe, focusing primarily on the United
Kingdom, France and Germany.
Real Estate Credit Investments Limited ("RECI" or the "Company")
is incorporated in Guernsey, governed by the Companies (Guernsey)
Law, 2008 (the "Companies Law") and regulated as an authorised
closed-ended investment scheme by the Guernsey Financial Services
Commission. At the Annual General Meeting ("AGM") in September
2017, the continuation vote was passed and a further continuation
resolution will be subject to shareholder approval at the AGM to be
held in 2021.
The Company invests in real estate debt secured by commercial or
residential properties in the United Kingdom and Western Europe,
focusing primarily on those countries where it sees the changing
dynamics in the real estate debt market offering a sustainable deal
flow for the foreseeable future. The Company has adopted a
long-term strategic approach to investing and focuses on
identifying value in real estate debt. In making these investments,
the Company uses the expertise and knowledge of its Alternative
Investment Fund Manager ("AIFM"), Cheyne Capital Management (UK)
LLP ("Cheyne" or the "Investment Manager").
The Ordinary Shares are currently listed on the premium segment
of the Official List of the UK Listing Authority and trade on the
Main Market of the London Stock Exchange. Ordinary Shares offer
investors a leveraged exposure to a portfolio of real estate credit
investments and pay a quarterly dividend.
On 24 May 2019, the Company announced that it had raised gross
proceeds of GBP78.0 million through the issue of 45.9 million new
Ordinary Shares at 170 pence per new Ordinary Share.
On 1 October 2019, the Company announced that it had raised
gross proceeds of GBP17.0 million through the issue of a further
10.2 million new Ordinary Shares at 167 pence per New Ordinary
Share.
These Ordinary Shares were issued under the Company's 2018/19
Programme as set out in the Company's prospectus dated 2 November
2018. The Second Placing Programme expired on 1 November 2019,
having raised aggregate gross proceeds of GBP95.0 million and
further diversified RECI's ownership and enhanced the liquidity of
the Company's Ordinary Shares.
On 4 February 2020, the Company announced that it had raised
gross proceeds of GBP33.5 million through the issue of 19.9 million
new Ordinary Shares at 168 pence per new Ordinary Share. These
Ordinary Shares were issued under the Company's general authority
to allot and issue equity securities approved by Shareholders at
the September 2019 AGM.
On 21 February 2020, the Company launched a new placing
programme for the issue of up to 150 million new Ordinary Shares,
which was approved by Shareholders at an extraordinary general
meeting held on 10 March 2020.
Website and Share Price Information
The Company has a dedicated website, which can be found at
www.recreditinvest.com that contains information, including
regulatory announcements, share price information, financial
reports, investment objectives and strategy, investor contacts,
information on the Board and information on the Alternative
Investment Fund Managers Directive ("AIFMD").
Investment Objective and Investment Policy
Investment Objective
The Investment Objective of the Company is to provide
Shareholders with attractive and stable returns, primarily in the
form of quarterly dividends, by exposure to a diversified portfolio
of real estate credit investments, predominantly comprising real
estate loans and bonds.
Investment Policy
To achieve the Investment Objective, the Company invests and
will continue to invest in real estate debt secured by commercial
or residential properties in the United Kingdom and Western Europe
("Real Estate Credit Investments"). The Real Estate Credit
Investments may take different forms but are likely to be:
(i) secured real estate loans, debentures or any other forms of
debt instruments (together "Secured Debt"). Secured real estate
loans are typically secured by mortgages over the property or
charges over the shares of the property-owning vehicle. Individual
Secured Debt investments will have a weighted average life profile
ranging from six months to 15 years. Investments in Secured Debt
will also be directly or indirectly secured by one or more
commercial or residential properties, and shall not exceed a
loan-to-value ("LTV") of 85% at the time of investment;
(ii) listed debt securities and securitised tranches of real
estate related debt securities, for example, residential mortgage
backed securities and commercial mortgage backed securities
(together "MBS"). For the avoidance of doubt, this does not include
equity residual positions in MBS;
(iii) other direct or indirect opportunities, including equity
participations in real estate, save that no more than 20% of the
total assets will be invested in positions with an LTV in excess of
85% or in equity positions that are uncollateralised. On certain
transactions, the Company may be granted equity positions as part
of its loan terms. These positions will come as part of the
Company's overall return on its investments and may or may not
provide extra profit to the Company depending on market conditions
and the performance of the loan. These positions are deemed
collateralised equity positions. All other equity positions that
the Company may invest in are deemed uncollateralised equity
positions.
Dividend Policy
Subject to the applicable requirements and restrictions
contained in the Companies Law, the Company may consider making
interim dividend payments to Shareholders, having regard to the net
income remaining after the potential reinvestment of cash or other
uses of income, at a level the Directors deem appropriate, in their
sole discretion, from time to time. There is no fixed date on which
it is expected that dividends will be paid to Shareholders. The
Directors intend that the Company pays dividends to Shareholders
when it is able and appropriate to do so. It is the intention of
the Company to continue to pay a stable quarterly dividend with the
potential for additional payments if investment returns permit.
Chairman's Statement
Chairman's Statement
Delivering a stable quarterly dividend amid uncertain
markets
"We are reporting today upon the year ended 31 March 2020, which
prior to the impact of COVID-19 had been a busy and successful one
for your Company."
Bob Cowdell
Chairman
A year ago, we published our financial statements against a
background of ongoing Brexit concerns, related political
uncertainties and global economic challenges.
This year, it is the impact of the COVID-19 pandemic upon the
last month of our financial year ended 31 March 2020 and the
environment in which your Company has been operating since, which
dominates.
In addition to the health, social and economic impacts
worldwide, the response to COVID-19 by the UK and foreign
governments has inevitably affected economies and markets,
including the credit and underlying real estate markets in which
RECI participates.
I wrote last year that: "It is during times like these that the
specialist investment expertise, market experience and transaction
pipeline of our investment manager, Cheyne, come to the fore"; and
the sentiment is never more relevant than at present.
We are reporting today upon the year ended 31 March 2020, which
prior to the impact of COVID-19, had been a busy and successful one
for your Company. At 29 February 2020, the NAV was GBP1.67 per
Ordinary Share; the shares had traded at an average premium to NAV
of 1.95% for the first 11 months; the first three interim dividends
for the year had been paid at 3 pence each per share; and the
Company had continued to grow as Shareholders and new investors
supported further fundraisings.
The impact of COVID-19 was first keenly felt by markets during
March, exacerbated by the unprecedented lockdown introduced in the
UK and many other countries, resulting in the year ending with the
NAV per Ordinary Share of GBP1.47. It should be noted, however,
that as the Investment Manager's report more fully describes, the
20 pence month on month NAV per share decline during March (which
had reduced to 18 pence by the end of May) was mainly comprised of
unrealised losses.
The year-end NAV of GBP1.47, has been followed by the
announcements of a NAV of GBP1.48 at the end of April and GBP1.49
at the end of May. The current return of liquidity to the credit
markets and a general improvement in sentiment should support
further NAV recovery over the coming months.
Turning to share price performance, March saw severe corrections
in markets worldwide, as concerns over the negative implications of
the rising global pandemic took hold. The Board was concerned and
disappointed to see the sharp fall in the RECI share price during
March, April and early May, which led to a significant discount to
NAV. As often happens in times of uncertainty, financial markets
fell in anticipation of future losses and there is a tendency for
investments to be considered at a macro level, rather than
individually.
In response to the general financial market stress and seeking
to provide investors with a detailed understanding of RECI's
portfolio, which underpins the Company's published NAV, the Board
and Cheyne embarked upon a comprehensive and granular review of the
entire portfolio of loans and bonds and modelled the expected
impact on and outlook for, each individual holding.
The results of this exercise were published in an update to
Shareholders on 15 May 2020. The update provided a detailed report
of the consequences of COVID-19 disruption on the Company's
existing portfolio and our Manager's view of how markets may
develop and the future potential investment opportunities which may
arise.
To provide certainty for Shareholders, the Board, having
reviewed likely future cash flows and profits, decided to bring
forward and also announced on 15 May, the declaration of the fourth
interim dividend of 3 pence per share for the year ended 31 March
2020, to be paid to qualifying Shareholders on 30 July 2020. The
Board also confirmed that there would be no change to its dividend
policy for the current financial year ending 31 March 2021; and
that the Company intends to continue to pay a stable quarterly
dividend.
Investors will inevitably remain concerned about the broader
future impact of the economic consequences of the global pandemic
and the Board will remain vigilant; while being encouraged to note
that the RECI share price has risen by 35% since the announcements
of 15 May and the discount to NAV has significantly reduced.
Financial Performance
RECI reported a total net loss for the financial year ended 31
March 2020 of GBP17.4 million on year-end total assets of GBP441.8
million, compared with a GBP19.2 million net profit in the year
ended 31 March 2019, on year-end total assets of GBP355.2
million.
The NAV as at 31 March 2020 was GBP1.47 per Ordinary Share
(GBP1.65 per Ordinary Share as at 31 March 2019) which, combined
with the 12 pence per Share payable in respect of the year ended 31
March 2020, represents an annualised total return for Shareholders
of (1.77)% for the year.
During the financial year ended 31 March 2020, the Company's
Ordinary Shares traded at an average premium to NAV of 0.16% (1.50%
for the year ended 31 March 2019).
A fourth interim dividend of 3 pence per Ordinary Share was
declared on 15 May 2020, in respect of the year ended 31 March
2020. Total dividends declared in respect of the financial year
ended 31 March 2020 were 12 pence per share, returning GBP25.1
million to our Ordinary Shareholders.
During the last financial year, the Company utilised short-term
leverage at an average cost of borrowing of 1.80%; with average
gross leverage of 1.21x NAV.
As at 29 February 2020, just prior to the market impact of the
pandemic, RECI had gross leverage of 1.25x and leverage net of cash
of 1.1x. By 30 April 2020, responding to the impact of COVID-19,
RECI had reduced its gross leverage to 1.15x (1.06x net of cash);
with that modest level of gearing remaining at the end of May at
gross leverage of 1.16x (1.07x net of cash). The Board and Cheyne
will continue to consider and assess the appropriate level of
gearing for the Company and the pricing and structure of a range of
potential leverage options, including non-recourse lending on the
loan portfolio.
During the financial year to 31 March 2020, the Company invested
GBP218.6 million in the loan portfolio and purchased GBP84.0
million of new bonds for the portfolio. RECI also received cash
repayments and interest of GBP202.3 million in this year.
Placing Programmes and Tap Issue
On 24 May 2019, RECI announced that it had raised gross proceeds
of GBP78.0 million through the issue of 45,882,353 new Ordinary
Shares, pursuant to the Placing Programme launched on 2 November
2018 ("Second Placing Programme").
On 1 October 2019, RECI announced that it had raised gross
proceeds of GBP17.0 million through the issue of a further
10,208,480 new Ordinary Shares.
The Second Placing Programme expired on 1 November 2019, having
raised aggregate gross proceeds of GBP95.0 million; further
diversified RECI's ownership; and enhanced the liquidity of the
Company's Ordinary Shares.
Responding to investor demand, on 4 February 2020, the Company
announced that it had raised gross proceeds of GBP33.5 million
through the tap issue of 19,920,363 new Ordinary Shares, the
maximum available under the authority granted by Shareholders at
the September 2019 Annual General Meeting.
On 21 February 2020, RECI launched a new Placing Programme for
up to 150 million new Ordinary Shares, which was approved by
Shareholders at the Extraordinary General Meeting held on 10 March
2020.
The Board is grateful for the support of our Shareholders and
new investors in the Company during the last financial year.
Board Update
As part of ongoing Board development, John Hallam was appointed
as the Senior Independent Non-executive Director with effect from 1
October 2019, succeeding Graham Harrison, who remains a member of
the Board and its Committees.
During the financial year ended 31 March 2020 and prior to the
Company entering a closed period for trading on 25 May 2020,
members of the Board purchased an aggregate of 175,000 shares in
the Company, further aligning ourselves with our Shareholders.
I am grateful for the dedication of my fellow Directors and the
efforts of the staff of our Investment Manager and all our
advisers, as they have worked tirelessly to support RECI in our
response to the impacts of the COVID-19 pandemic, notwithstanding
the operational challenges of remote working during lockdown.
Outlook
It is only a few months ago that the COVID-19 pandemic arose and
impacted global markets and society. It brought with it the
uncertainties caused by a "one in a hundred year event" and the
completely unprecedented government lockdown responses worldwide.
These uncertainties and the potential economic ramifications are
forecast to continue for some time.
Against this background, your Board and Manager will remain
disciplined and continue to closely monitor the Company's loan and
bond portfolios, cash reserves, leverage, prevailing share price
and discount. We believe that RECI is well positioned to navigate
and potentially take advantage of these uncertain markets; and will
maintain an open dialogue with our investors as we seek to share
this message and continue to deliver an attractive return for our
Shareholders.
Bob Cowdell
Chairman
24 June 2020
Strategic Framework and Performance Highlights
Objectives
The opportunity set in senior loans and bonds remains compelling
and sustainable.
1. Provide investors with a diversified portfolio of real estate
credit investments.
Progress in YE 31 March 2020
-- Over the course of the last financial year RECI has invested
a total of GBP302.5 million, of which GBP218.6 million was in real
estate loan commitments and GBP84.0 million in real estate
bonds.
2. Deliver a stable quarterly dividend with minimal
volatility.
Progress in YE 31 March 2020
-- Paid out 3 pence per share each quarter, 12 pence over the year.
-- A total of GBP25.1 million returned to our Ordinary Shareholders.
3. Exploit opportunities in the real estate market.
Progress in YE 31 March 2020
-- Investment book has grown to GBP375.6 million as at 31 March 2020.
- Spread across 52 positions with a weighted average levered
gross yield of 11.0% and an average loan-to-value of 64.4%.
-- RECI also received cash repayments and interest of GBP202.3 million in the year.
4. Grow the Company through opportunities the Investment Manager
is delivering.
Progress in YE 31 March 2020
-- RECI's growth has continued in the year with three issues
raising gross proceeds of GBP128.5 million and a new Placing
Programme launched in February 2020.
-- The Investment Manager had substantially invested the
proceeds of these raises in investments pre COVID-19.
-- Post the impact of COVID-19 the Investment Manager continues
to see a robust pipeline of continued opportunities.
Portfolio
Key Performance Indicators
31 Mar 31 Mar
Balance Sheet 2020 2019
------------------------------------------- -------- -------
Net Asset Value ("NAV") per Ordinary Share GBP1.47 GBP1.65
Share price GBP1.16 GBP1.68
Premium/(discount) (21.40)% 1.70%
Average premium/(discount) in year* 0.16% 1.50%
Leverage (% of NAV)** 24.20% 39.50%
------------------------------------------- -------- -------
* Average Premium is the average of the difference in the share
price and the NAV per share divided by NAV per share.
** Leverage is the financing divided by the net assets.
31 Mar 31 Mar
Profit and Loss 2020 2019
-------------------------------------------------- ------- ------
(Loss)/earnings per Ordinary Share (8.7)p 13.1p
Dividends per Ordinary Share declared for the
year 12.0p 12.0p
NAV total return (including dividends) annualised (1.77)% 8.00%
-------------------------------------------------- ------- ------
Financial Highlights
31 Mar 31 Mar
Balance Sheet 2020 2019
----------------------------------------------- ---------- -----------
Fair value of bilateral loans and bonds* GBP287.3m GBP210.0m
Fair value of market bonds* GBP87.9m GBP92.5m
Financing** GBP(97.0)m GBP(100.1)m
Cash, cash equivalents and cash held by brokers GBP52.0m GBP39.9m
Other assets and liabilities GBP7.0m GBP10.9m
Net assets GBP337.2m GBP253.2m
----------------------------------------------- ---------- -----------
* The Company's two reportable segments have changed for the
year ending 31 March 2020 to reflect the separate management of the
two portfolios by the Investment Manager. Please refer to Note 16
to the financial statements for further detail.
** Financing comprised of short-term repo financing.
31 Mar 31 Mar
Profit and Loss 2020 2019
------------------------------------------------ ---------- ---------
Operating (loss)/income GBP(9.5)m GBP25.2m
Finance costs GBP(1.5)m GBP(1.2)m
Operating expenses GBP(5.6)m GBP(4.8)m
Provision for expected credit losses GBP(0.9)m -
Net (loss)/profit* GBP(17.4)m GBP19.2m
Weighted average yield of bilateral loan and
bond portfolio (unlevered)** 10.20% 8.80%
Weighted average yield of market bond portfolio
(unlevered)*** 10.60% 5.80%
------------------------------------------------ ---------- ---------
* Net (loss)/profit may not sum due to rounding
** The effective yield of the loans is the accounting yield
based on the funded loan balances, which includes interest and
fees. Some loans also enjoy equity upside participation, which is
only recognised following evidenced high probability of receipt,
which can result in significant incremental gains in excess of the
accounting yield. The yield is based on Cheyne Capital's pricing
assumptions and actual returns may differ materially from those
expressed or implied herein.
*** The weighted average effective yield is based on Cheyne
Capital's pricing assumptions and actual returns may differ
materially from those expressed or implied herein.
Further Information
Monthly fact sheets as well as quarterly update presentations
are also available on the Company's website,
www.recreditinvest.com .
Strategic Report
Strategic Report
The Strategic Report describes the business of the Company and
details the principal risks and uncertainties associated with its
activities.
Investment Objective, Investment Policy and Business Model
The Investment Objective and Investment Policy are set out on
page 5, and further to this the Company's business model is
detailed in the Investment Manager's report. There is also an
"About the Company" section on page 4 explaining in more detail the
corporate structure and listing of the Company's Ordinary
shares.
RECI is externally managed by Cheyne, a UK investment manager
authorised and regulated by the Financial Conduct Authority
("FCA"). Cheyne is a limited liability partnership registered in
England and Wales on 8 August 2006 and is authorised and regulated
in the conduct of investment business in the United Kingdom by the
FCA. Cheyne is also the AIFM of the Company.
Current and Future Development
A review of the year and outlook is contained in the Investment
Manager's report and also within the Chairman's statement.
Performance
A review of performance is contained in the Key Performance
Indicators ("KPIs") and financial highlights section and the
Investment Manager's report.
A number of performance measures are considered by the Board and
the Investment Manager in assessing the Company's success in
achieving its objectives and considering its progress and
performance. The KPIs are shown on page 9.
Duties and Responsibilities
The Board has overall responsibility for maximising the
Company's success by directing and supervising the affairs of the
business and meeting the appropriate interests of Shareholders and
relevant stakeholders, while enhancing the value of the Company and
also ensuring the protection of investors. A summary of the Board's
responsibilities is as follows:
-- statutory obligations and public disclosure;
-- strategic matters and financial reporting;
-- risk assessment and management including reporting,
compliance, governance, monitoring and control; and
-- other matters having a material effect on the Company.
The Board is responsible to the Shareholders for the overall
management and strategy of the Company but has delegated day-to-day
operations to the Investment Manager and Citco Fund Services
(Guernsey) Limited (the "Administrator"), while reserving the
powers of decision making relating to the determination of the
Investment Policy, corporate structure and the management of the
share capital of the Company.
The Board is further responsible for financial reporting and
controls and determining the dividend and accounting policies.
While the Investment Manager manages the portfolio of the Company,
the Board retains responsibility for overseeing the Investment
Manager and ensuring the establishment and ongoing operation of a
sound system of internal control. Any material contracts and those
not in the normal course of business, are also subject to approval
by the Board.
The Board is also responsible for its own structure, size and
effectiveness, with the delegation of some duties to Committees
made up of its members. The Board retains the control of the
Committees and requires that they report to the full Board on a
regular basis providing their findings and recommendations. The
Nomination Committee reviews Directors' remuneration and, as
appropriate, makes recommendations to the Board; the Board sets the
levels of remuneration, which are clearly communicated to
Shareholders.
The Board performs a formal and rigorous review of its own
performance and continually scrutinises its independence and
transparency.
The Board's responsibilities for the Annual Report are set out
in the Directors' responsibility statement. The Board is also
responsible for issuing appropriate half-yearly financial reports
and other price-sensitive public reports.
Long-term Viability
The Directors have assessed the prospects of the Company over a
longer period than the 12 months required by the "Going Concern"
provision. The Board has chosen a period of three years for the
following reasons:
(i) The Company's planning horizon covers a three year period;
(ii) The next continuation vote is due in 2021 and a three year
plan takes the Company past this date. There is no indication
currently that the next continuation vote won't be passed; and
(iii) The weighted average life of the bond portfolio is 2.2
years as at 31 March 2020 and the usual term of a new loan at
origination is between 3 to 5 years, so the majority of the assets
could be expected to be realised in a three-year period, or shortly
thereafter.
The three-year review considers the Company's cash flows arising
from the loan and bond portfolios, including interest received and
proceeds from realisations, obligations of the Company and dividend
cover. Further considerations are the inherent sensitivities within
the loan and bond portfolios, their impact on the cash flows,
continuation vote in 2021 and the ability to issue further shares
as per the Placing Programme.
The Board has identified a number of principal risks, which are
detailed below. The Board has taken these into account when
considering the long-term viability of the Company.
The Board routinely conducts these three year reviews, stress
testing the performance against a number of adverse scenarios, such
as the fair value write down of the investments, or reduced cash
flows from the investment portfolio. The fair value stress test was
considered relevant to factor in any potential events affecting the
underlying assets or credit concerns about the borrowers which
potentially could impact on the fair value. The reduced cash flows
stress test was considered relevant in the event of potential
defaults arising on the loan portfolio and the inability to recover
the interest or principal back in full.
In the current environment the Company has also considered the
future of its manager when looking at its own viability, and given
the size of the manager's platform away from the Company and the
locked up capital it manages in numerous other funds, the manager
is expected to be able to continue to manage RECI for the
foreseeable future.
Further consideration has been given with respect to the current
market environment, including the economic impacts of the current
global COVID-19 pandemic and UK and overseas governments'
lockdowns, as well as potential Brexit departure impacts. The
Investment Manager has prepared sensitivity analyses including
various stress scenarios. An evaluation was performed for each of
the positions in light of the likely long-term impact of the
COVID-19 economic crisis on operating models and valuations and
hence recovery prospects for certain individual positions. The
output of this analysis was used to
i) report fair value movements, and
ii) update all the cash and income forecasting for the
portfolio.
The Investment Manager performed a granular analysis of the
future liquidity profile of the Company. A detailed cash flow
profile of each investment was completed, incorporating the
probability of likely delays to repayments and additional cash
needs.
Even taking these stress scenarios into account and bearing in
mind the leverage and liquidity of the bond portfolio, the Company
is expected to be able to meet its liabilities over the three-year
period.
Risk Management
It is the role of the Board of Directors to review and manage
all risks associated with the Company, mitigating these either
directly or through the delegation of certain responsibilities to
the Audit Committee and Investment Manager.
The Board considers that the following risks are the principal
risks and uncertainties faced and has identified the mitigating
actions in place to manage them.
Long-term Strategic Risk
T he Company is subject to the risk that its long-term strategy
and its level of performance fail to meet the expectations of its
Shareholders. The shares may trade at a continuing discount to NAV
and Shareholders may be unable to realise their investments through
the secondary market at NAV per share. The Board monitors the level
of premium or discount of share price to NAV per share.
The Board monitors investment strategy and performance on an
ongoing basis and regularly reviews the Investment Objective and
Investment Policy in light of prevailing investor sentiment to
ensure the Company remains attractive to its Shareholders. While
the Board may seek to enhance NAV per share and potentially reduce
any discount to NAV through share buybacks, this will only be done
when cash resources permit and there can be no certainty that they
will do so and/or that an enhancement to share price will be
achieved.
The Company has the authority to make market purchases of fully
paid shares of up to 14.99% of each class of shares in issue, and
renewal of this authority will be sought from Shareholders at the
AGM in September 2020 and at each subsequent AGM, or earlier at an
Extraordinary General Meeting if the Directors consider it
appropriate.
Target Portfolio Returns and Dividend
The Company's targeted returns are based on estimates and
assumptions that are inherently subject to significant business and
economic uncertainties and contingencies, and the actual rate of
return may be materially lower than the targeted returns. In
addition, the pace of investment may be slower than expected, or
principal may be repaid earlier than anticipated, causing the
return on affected investments to be less than expected. In
addition, if repayments are not promptly re-invested this may
result in cash drag which may lower portfolio returns. However, as
the Company is able to invest in both bonds and loans, the
Investment Manager has the ability to adjust the asset mix towards
bonds, thereby helping the Company mitigate potential cash drag
when loan repayments are made.
As a result the level of dividends and other distributions to be
paid by the Company may fluctuate and there is no guarantee that
any such distributions will be paid.
The Investment Manager regularly provides the Board with reports
on pipeline opportunities, which include analysis of the expected
returns available. The Directors also regularly receive information
on the performance of the existing loans which includes analysis of
the likelihood of any early repayments which may impact
returns.
Valuation
The valuation and performance of the Company's investments that
comprise its portfolio of real estate debt instruments are the key
value drivers for the Company's NAV and interest income. Judgements
over fair value estimates could significantly affect these key
performance indicators.
The Company categorises its financial assets and liabilities in
accordance with IFRS 9 and establishes fair value utilising the
methodology in accordance with IFRS 13, as set out in Note 15(d) to
the financial statements.
Credit Risk
Credit risk is the risk that a counterparty to a financial
instrument will fail to discharge an obligation or commitment that
it has entered into with the Company.
Bonds - The Company is subject to the risk that issuers of asset
backed securities in which it invests may default on their
obligations and that certain events may occur which have an
immediate and significant adverse effect on the value of such
instruments. There can be no assurance that an issuer of an
instrument in which the Company invests will not default or that an
event which has an immediate and significant adverse effect on the
value of such instruments will not occur, and that the Company will
not sustain a loss on the transaction as a result. The Company
seeks to mitigate this risk by monitoring its portfolio of
investments, reviewing the underlying credit quality of its
counterparties, on a monthly basis.
Loans - The Company is subject to the risk that the borrowers to
the loans in which it invests, may default on their obligations and
that certain events may occur which have an immediate and
significant adverse effect on the value of such instruments. Any
loan may become a defaulted obligation for a variety of reasons,
including non-payment of principal or interest, as well as covenant
violations by the borrower in respect of the underlying loan
documents. In the event of any default on the Company's investment
in a loan by the borrower, the Company will bear a risk of loss of
principal and accrued interest on the loan, which could have a
material adverse effect on the Company's investment. There can be
no assurance that a borrower will not default, that there will not
be an issue with the underlying real estate security or that an
event which has an immediate and significant adverse effect on the
value of these loans will not occur, and that the Company will not
sustain a loss on the transaction as a result. The Company seeks to
mitigate this risk by performing due diligence and monitoring its
portfolio of investments, reviewing the underlying credit quality
of its borrowers, performance of the underlying asset, and loan
covenant compliance against
financial information received and the performance of the
security, on a quarterly basis.
Market Risk
Market risk is the risk that the fair value and future cash
flows of a financial instrument will fluctuate because of changes
in market factors. Market risk is comprised of interest rate risk,
currency risk, price risk and liquidity risk.
The Company's strategy on the management of market risk is
driven by the Company's Investment Objective as detailed on page 5
and in Note 1 to the financial statements.
The Company's market risk is managed on a daily basis by the
Investment Manager in accordance with policies and procedures
detailed in the latest Prospectus and summarised in the financial
statements.
Interest Rate Risk
Interest rate risk is the risk that the fair value and future
cash flows of a financial instrument will fluctuate because of
changes in market interest rates.
The Company invests in both direct real estate loans and
floating rate real estate debt securities, which include mortgage
backed securities ("MBS").
Real estate loans can have fixed interest coupons and are
therefore potentially exposed to the wider effects of changes in
interest rates. For bonds, the interest rate risk arises from the
effects of fluctuations in the prevailing levels of market interest
rates on the fair value of financial assets and liabilities and
future cash flows. A segment of the portfolio consists of floating
rate debt investments which are exposed to interest rate risk
through changes in interest rates potentially having an effect on
prepayments and defaults of the underlying loans of the
securitisations.
While retaining the ability to do so the Company does not
currently enter into hedging arrangements in respect of interest
rate fluctuations.
Currency Risk
Currency risk is the risk that the fair value or future cash
flows of a financial instrument will fluctuate because of changes
in foreign exchange rates. The Company is exposed to currency risk
to the extent that foreign exchange rates fluctuate in relation to
financial instruments that are denominated in currencies other than
GBP.
The Company manages its foreign exchange risk on a portfolio
basis. The Company may bear a level of currency risk that could
otherwise be hedged where it considers that bearing such risks is
appropriate. The Company manages its foreign exposure via forward
foreign currency exchange contracts.
Liquidity Risk
Liquidity risk is the risk that the Company will encounter
difficulty in meeting obligations associated with financial
liabilities on a timely basis.
The Company's liquidity risk is managed on a daily basis by the
Investment Manager in accordance with policies and procedures
detailed in Note 15(c) to the financial statements. Where needed,
the Investment Manager will seek to liquidate positions to increase
cash or reduce leverage.
Much of the market for MBS and real estate loans is relatively
illiquid. In addition, investments that the Company purchases in
privately negotiated (also called "over the counter" or "OTC")
transactions may not be registered under relevant securities laws
or otherwise may not be freely tradable, resulting in restrictions
on their transfer, sale, pledge or other disposition except in a
transaction that is exempt from the registration requirements of,
or is otherwise in accordance with, those laws. As a result of this
illiquidity, the Company's ability to vary its portfolio in a
timely fashion and to receive a fair price in response to changes
in economic and other conditions may be limited.
Furthermore, where the Company acquires investments for which
there is not a readily available market, the Company's ability to
deal in any such investment or obtain reliable information about
the value of such investment or risks to which such investment is
exposed may be limited.
For further information on risks please refer to Note 15 to the
financial statements.
Brexit Impact Assessment
Following a UK-wide referendum in June 2016 in which 52% voted
to leave the European Union ("EU"), the British government formally
announced the country's withdrawal in March 2017 and the UK left
the EU on 31 January 2020. It is acknowledged that uncertainty
exists in relation to the United Kingdom's future relationship with
the EU. The Company has been closely monitoring this and indeed all
other Brexit related developments to ensure that any potential
impact to the valuation of financial assets at fair value through
profit or loss. Future valuation might change significantly in
future due to Brexit.
COVID-19 Impact Assessment
The current worldwide Coronavirus outbreak (COVID-19),declared
by the World Health Organization as a global health emergency on 30
January 2020, has caused disruption to businesses and economic
activity which has been reflected in recent fluctuations in global
stock markets. COVID-19 has and continues to impact the wider
global markets. The immediate impact, continuing and future
uncertainty, and the currently unknown length and depth of the
upcoming recession might all potentially impact the value of the
underlying real estate assets, their performance, and the stability
of the borrowers and the wider markets. Since the onset of this
crisis and the resultant market turbulence, the Company moved to
take the following measures:
-- An evaluation of each of its positions in light of the likely
long-term impact of the crisis on operating models and valuations
and hence recovery prospects for the individual positions. The
output of this analysis was to write down the value of just two of
its mezzanine positions.
-- Engaged positively with every one of its borrower
counterparts to put in place mitigation and de-risking strategies
for the long term.
-- Improved the resilience and flexibility of the Company by
increasing its cash balances and reducing its net leverage.
-- Performed a granular analysis of the future liquidity profile
of the Company. A detailed cash flow profile of each investment was
completed, incorporating the probability of likely delays to
repayments (and additional cash needs). The results of Cheyne's
analysis was published on 15 May 2020 to update all
Shareholders.
COVID-19 might therefore impact one or many of the other risks
highlighted above, and these will continue to be monitored or
considered by the Board and Investment Manager.
Investment Manager's Report
Investment Manager's Report
Delivering a diversified real estate debt portfolio
In looking back over the year, it is important to hold in mind
the core aims of RECI, which are to provide its investors with a
stable dividend yield by originating and making investments in
conservative real estate debt in the European real estate
markets.
That aim needs to hold true through economic cycles, which it
has consistently done through the economic crisis periods of 2009
(credit crunch), 2011 (sovereign crisis) and 2016 (Brexit). We
believe that RECI's profile, investments and rapid response to the
current market leave it well placed, not only to see through the
current market dislocation and disruption, but also eventually to
emerge and thrive as it has previously.
RECI has made good progress towards its core aims during the
year, and as at 31 May 2020:
-- its portfolio comprised a diverse book of 48 deals with a conservative WA LTV of 63.0%;
-- it is dominated by senior bilateral loans, which make up 77%
of its Gross Asset Value ("GAV"); and
-- it retains a conservative balance sheet, with a gearing level of 15.5% of NAV.
The Company has also successfully maintained its net income from
its NAV, by deploying into loans and bonds with a WA gross yield of
11.0%(1) , thus being able to pay its quarterly dividends that have
remained at a stable 7% on NAV since 2013.
In addition to these, the Company has at the same time grown its
investor base and size, raising GBP128.5 million in the year which
it successfully invested with minimal delay and launching a new
Placing Programme for the issue of up to 150 million new Ordinary
Shares in February 2020.
The rapid escalation of the novel coronavirus (COVID-19) from
March this year presented the Company with unique challenges to
deal with. The immediate concern of the Company was to defend its
current investments and to strengthen its balance sheet quickly to
ensure the long-term performance of its underlying investments and
the success of the Company in the face of what is likely to be a
prolonged period of uncertainty.
Post year end, the bulk of that work has been completed. We, as
Investment Manager, released a substantial report on the Company
and its individual positions in a comprehensive update on 15 May
2020.
With the severe market impact of COVID-19, between the end of
February and the end of May, RECI's NAV declined by 18 pence per
share. The majority of this reduction comprised an un-realised
mark-to-market decline on its bond portfolio (8 pence), a fair
value adjustment on its mezzanine loans (6 pence), the March
dividend payment (3 pence) with just 2 pence being the realised
loss on sales made.
Portfolio Construction and Investment Approach
RECI's investment focus is on European real estate credit
comprising loans (mainly senior loans) and bonds. Since the 2016
Brexit vote, RECI has benefited from pivoting its investment
strategy away from mezzanine (and subordinate) loans towards lower
risk senior loans and bonds. This repositioning reflected the fact
that global volatility and uncertainty were likely to persist and
economic cycles were likely to be increasingly short.
As the Company has grown, it has also moved its origination away
from the small/mid market borrowers and towards the larger, well
capitalised and experienced borrower counterparties. These pivots
positioned the Company's investment book well coming into the
present crisis.
RECI's balance sheet leverage and liquidity have been managed to
position it well for periods of stress. Coming into this crisis,
RECI had gross leverage of 25.3% (net leverage of 9.5%) as at 29
February. As at 31 May 2020, the Company's leverage was just 15% of
NAV or 1.16x (7% of NAV or 1.07x on a net look through basis).
Response to COVID-19
Since the onset of this crisis and the resultant market
turbulence, RECI moved to take the following measures:
-- An evaluation of each of its positions in light of the likely
long-term impact of the crisis on operating models and valuations
and hence recovery prospects for the individual positions. The
output of this analysis was to write down the value of just two of
its mezzanine positions. These impairments are not realised losses,
but provisions for potential losses recognised today.
-- Engaged positively with every one of its borrower
counterparts to put in place mitigation and de-risking strategies
for the long term.
-- Improved the resilience and flexibility of the Company by
increasing its cash balances and reducing its net leverage to just
1.06x as at 30 April 2020. This was achieved by a combination of
repayments of loans as well as sales of select liquid bonds.
-- Performed a granular analysis of the future liquidity profile
of the Company. A detailed cashflow profile of each investment was
completed, incorporating the probability of likely delays to
repayments (and additional cash needs).
The outcome of this work is described in detail in our Company
Update report to investors on 15 May 2020, which is available on
the website www.recreditinvest.com.
Maintaining Dividend Stability
Since 2013, the Company has maintained a dividend on its NAV of
7% or better.
The Company has announced a dividend of 3 pence per Ordinary
Share which will be paid on 30 July 2020. This represents a
dividend yield of 9.6% on NAV of 31 May 2020.
It is the Company's policy to pay out substantially all of its
income to investors by way of sustainable dividends. Dividend
sustainability will depend on both income coverage and cash
coverage. Our granular cash forecasting and stress scenarios give
us the confidence that the Company can maintain its dividend cash
coverage. To maintain and improve the Company's income coverage,
the Company will gradually deploy into the increasingly attractive
investment pipeline.
It remains the Company's intension to maintain a stable
quarterly dividend paying capability through economic cycles.
Portfolio Composition
RECI's investment portfolio, a diversified book of 52 positions
in real estate bonds and loans, was valued at GBP375.2 million as
at 31 March 2020, up from GBP302.5 million as at 31 March 2019. The
portfolio had a weighted average levered yield of 11.0% and an
average loan-to-value of 64.4% as at 31 March 2020.
Portfolio by Geography
(funded fair value)
31 March 31 March
2020* 2019*
------------ -------- --------
UK 68.9% 65.6%
------------ -------- --------
France 20.2% 14.6%
------------ -------- --------
Italy 4.9% 5.0%
------------ -------- --------
Portugal 2.2% 2.7%
------------ -------- --------
Finland 1.5% 1.1%
------------ -------- --------
Germany 1.5% 9.3%
------------ -------- --------
Netherlands 0.1% 0.2%
------------ -------- --------
Ireland 0.0% 0.5%
------------ -------- --------
*
Excludes 0.7% (2019: 1.0%) held in bonds backed by assets in
multiple European countries.
Portfolio by Investment Strategy
(funded fair value)
Description Commitment LTV Asset type Manager commentary
--------------------------------- ---------- --- ---------------------- -----------------------------
Income producing prime
central Paris retail
Paris prime resi/retail and residential (for
1 building GBP48.4m 67% Core+ rent)
--------------------------------- ---------- --- ---------------------- -----------------------------
Income producing granular
UK portfolio (mainly
residential for rent
UK mixed use portfolio, and sale, offices, light
2 predominantly office/residential GBP38.0m 74% Core+ industrial)
--------------------------------- ---------- --- ---------------------- -----------------------------
Substantially complete
office and residential
development project.
Office is fully pre-let.
London mixed use development, Residential is substantially
3 predominantly office/residential GBP34.8m 45% Development pre-sold
--------------------------------- ---------- --- ---------------------- -----------------------------
Development in progress.
Expected completion
4 Lisbon aparthotel GBP34.6m 63% Development in early 2022
--------------------------------- ---------- --- ---------------------- -----------------------------
Substantially complete
(delivery scheduled
London mixed use development, for Dec 2020), partially
5 predominantly residential/office GBP27.2m 64% Development pre-let
--------------------------------- ---------- --- ---------------------- -----------------------------
Development in progress.
Expected completion
6 Cambridge aparthotel GBP25.4m 65% Development in Q4 2021
--------------------------------- ---------- --- ---------------------- -----------------------------
Stable, income producing
7 UK care homes GBP23.2m 73% Core UK care homes
--------------------------------- ---------- --- ---------------------- -----------------------------
Stable income producing
UK student accommodation
8 UK student housing GBP22.4m 78% Value Add/Transitional assets
--------------------------------- ---------- --- ---------------------- -----------------------------
Development completed,
commercial accommodation
is fully let. Residential
9 London office to residential GBP20.0m 36% Development pre-sales at 20%
--------------------------------- ---------- --- ---------------------- -----------------------------
Stable income producing
10 London hotels GBP15.0m 75% Core assets
--------------------------------- ---------- --- ---------------------- -----------------------------
* Balance sheet value of amounts drawn by the borrowers.
1 Based on total commitment of bonds and loans.
2 The weighted average ("WA") loan-to-value("LTV") has been
calculated by reference to the latest value of the relevant
collateral of the relevant bond or loan.
3 WA based on commitment. WA effective yield is based on:
(i) for the bonds the effective yield is based on the current
levered yield on the bonds using prices as at 31 March 2020;
(ii) for the loans the yield stated is the effective accounting
yield based on the funded loan balances, which includes interest
and fees.
Bilateral Loan and Bond Portfolio
The drawn fair value of the bilateral loan and bond portfolio,
excluding accrued interest, had increased from GBP210.0 million as
at 31 March 2019 to GBP287.3 million as at 31 March 2020. During
the year, the Company made GBP218.6 million of commitments to new
deals, taking total loan commitments to GBP270.4 million as at 31
March 2020. The average loan portfolio LTV exposure as at 31 March
2020 was 66.6%. The portfolio continues to provide attractive
risk-adjusted returns with a weighted average unlevered yield of
10.2% per annum, before any back end fees, profit share or equity
element contributions are taken into account.
Bilateral Loan and Bond Portfolio
Summary as at 31 March 2020
Number of bilateral loans and
bonds 24
------------------------------------ -----
Drawn value (GBP millions) 287.3
------------------------------------ -----
Undrawn loan and bond commitments
(GBP millions) 62.3
------------------------------------ -----
Weighted average yield of portfolio 10.2%
------------------------------------ -----
Weighted average yield of portfolio
(levered) 11.1%
------------------------------------ -----
Weighted average LTV of portfolio 66.6%
------------------------------------ -----
Weighted average life of portfolio
(years) 1.2
------------------------------------ -----
Market Bond Portfolio
As at 31 March 2020, the market bond portfolio of 28 bonds
(excluding the self-originated bonds) was valued at GBP87.9
million, compared to GBP92.5 million as at 31 March 2019. The
recorded interest income on the bonds in the year ended 31 March
2020 was GBP4.2 million compared to GBP2.4 million in the year
ended 31 March 2019.
The market bond portfolio has the potential for strong defensive
returns:
-- The portfolio is characterised by a short duration (2.2
years) and high coupon, which is defensive to interest rate rise
and provides resilience in turbulent markets.
-- The weighted average unlevered yield of the market bond
portfolio as at 31 March 2020 was 10.6%, and the weighted average
levered yield of the market bond portfolio as at 31 March 2020 was
18.2%.
-- The average leverage of the portfolio over the financial year
was 20.7%, achieved through the provision of short-term flexible
financing. The Company enters into repurchase arrangements
agreements with several banks to provide leverage. This financing
is collateralised against certain of the Company's market bond
portfolio assets with a fair value totalling GBP108.1 million (31
March 2019: GBP128.3 million) and a weighted average cost as at 31
March 2020 of 1.80% (31 March 2019: 1.80%) per annum. The average
period to maturity of the repurchase arrangements is two
months.
Market Bond Portfolio
Summary as at 31 March 2020
Number of market bonds 28
------------------------------------ -----
Fair value (GBP millions) 87.9
------------------------------------ -----
Weighted average yield of portfolio 10.6%
------------------------------------ -----
Weighted average yield of portfolio
(levered) 18.2%
------------------------------------ -----
Weighted average LTV of portfolio 57.3%
------------------------------------ -----
Weighted average life of portfolio
(years) 2.2
------------------------------------ -----
Placement Programme and Deployment
RECI's capital raising continued in the year.
In May 2019, the Company raised gross proceeds of GBP78 million.
This was followed in October with another raise of GBP17 million.
While the previous Programme expired in November 2019, the Company
also closed an oversubscribed tap issue in February 2020, raising
gross proceeds of GBP33.5 million.
Following this, and to cater for anticipated demand, the Company
established a new Placing Programme in March 2020, for the issue of
up to 150 million new Ordinary Shares.
RECI has benefited from prior periods of economic crises by
virtue of its flexible approach to real estate credit. It is
capable of addressing the dislocations in liquid bond markets
(where the distress is becoming especially acute now) by the
provision of loan capital to institutional borrowers and projects
desperately in need of expert financing solutions.
Real Estate Team
RECI is managed by the Real Estate team at Cheyne which is now
one of the largest non-bank stand-alone real estate credit
businesses in Europe, with AUM of $3.5 billion, 33 dedicated people
and the support of Cheyne Capital's infrastructure. It has
consistently delivered through cycles and economic shocks (2009,
2011, 2016 Brexit vote), and the continuing supportive dynamics and
established infrastructure underpin it as a long-term, stable
business.
Of particular relevance to this period of uncertainty, the team
has, since 2008, engaged extensively in numerous distressed debt
investments which entailed complex restructuring and workouts. The
team also has an in-house capacity to take ownership of assets and
develop them where necessary.
RECI continues to benefit from this and the opportunity to
participate in Cheyne's strong pipeline of investments, which at
the time of writing reflect the new environment for lending with
lower risk points and substantially higher margins.
Outlook
This novel crisis will likely proceed along many unpredictable
paths. The immediate priority of the Company is to ensure that it,
and its investment portfolio, are best positioned to weather that
uncertainty.
Looking ahead, the Company should seek to capitalise on the
myriad of opportunities that the crisis will (and has already begun
to) offer. The Company has already made large strides towards
defending its long-term success and delivery of stable dividends,
which leaves it in a comfortable position to start thinking of the
next phase in its evolution.
Cheyne Capital Management (UK) LLP
24 June 2020
Board of Directors
Board of Directors
Bob Cowdell
Chairman (UK resident)
Bob Cowdell is an independent non-executive Director who has
focused on the financial sector throughout his career; initially as
a solicitor and then as a corporate broker and adviser. He was
previously co-founder and Head of the ABN AMRO Global Investment
Funds Team and then Head of Financials at RBS Hoare Govett. He is
currently chairman of Castel Underwriting Agencies Limited and a
non-executive director of Thomas Miller Holdings Limited; and a
former non-executive director of Baillie Gifford UK Growth Fund
Plc, Catlin Underwriting Agencies Limited, Catlin Insurance Company
(UK) Limited, XL London Market Limited and XL Insurance Company SE.
A Freeman of the City of London, he is a member of the Institute of
Directors and the Chartered Insurance Institute. He has been a
member of the Board since June 2015.
Susie Farnon
Chairman of the Audit Committee (Guernsey resident)
Mrs Farnon is a Fellow of the Institute of Chartered Accountants
in England and Wales and qualified as an accountant in 1983. She is
a former Banking and Finance partner of KPMG Channel Islands from
1990 until 2001 and head of the Channel Island Audit Practice from
1999. She has served as President of the Guernsey Society of
Chartered and Certified Accountants and as a member of the States
of Guernsey Audit Commission and as vice-chairman of the Guernsey
Financial Services Commission. Susie is a non-executive director of
a number of property and investment companies listed on the London
Stock Exchange or elsewhere and is a board member of the
Association of Investment Companies. She has been a member of the
Board since February 2018.
John Hallam
Senior Independent Director (Guernsey resident)
Mr Hallam is a Fellow of the Institute of Chartered Accountants
in England and Wales and qualified as an accountant in 1971. He is
a former partner of PricewaterhouseCoopers having retired in 1999
after 27 years with the firm both in Guernsey and in other
countries. He is the chairman of NB Distressed Debt Investment Fund
Ltd as well as being a director of a number of financial services
companies, some of which are listed on recognised stock exchanges.
He served for many years as a member of the Guernsey Financial
Services Commission from which he retired in 2006 having been its
chairman for the previous three years. He has been a member of the
Board since March 2016.
Graham Harrison
(Guernsey resident)
Mr Harrison is co-founder and managing director of Asset Risk
Consultants Limited, an investment consulting practice based in
Guernsey. After obtaining a Masters in Economics from the London
School of Economics, he began his career working in structured
finance for Midland Montagu in London and then as a project
economist for the Caribbean Development Bank in Barbados. In 1993,
he moved back to Guernsey to help develop investment-related
business for the Bachmann Group and in 2002 he led a management
buy-out which saw Asset Risk Consultants Limited become an
independent business. A Chartered Fellow of the Chartered Institute
for Securities and Investment, he has been on the Board of the
Company since launch. He is also currently a non-executive director
of a number of investment and asset management companies including
BH Global Limited and Volta Finance Limited.
Management Team
Management Team
Ravi Stickney
Head of Cheyne Real Estate/Portfolio Manager
Ravi is Head of the Real Estate Team. He joined Cheyne in 2008
and has 20 years' experience in the real estate debt markets.
Previously, he was on ING Bank's proprietary investments desk (2005
to 2008), with sole responsibility for managing a EUR400 million
long/short portfolio of European commercial real estate credits and
CMBS. Prior to that, he was at Lehman Brothers (2002 to 2005),
structuring and executing UK and European CMBS/RMBS and commercial
real estate mezzanine loans. He acted as sole operating adviser on
the restructuring and eventual sale of the first distressed UK CMBS
deal, and he continues to play an active role in the direction of
various distressed European real estate credits. He began his
career on the UK commercial real estate desk at Ernst & Young
in 1998.
Richard Lang
Co-Portfolio Manager/Head of Business Management
Richard is Business Manager of the real estate desk, and is a
partner at Cheyne, having joined in 2007. Before joining Cheyne,
Richard worked at Barclays Capital, and prior to that was at
Deutsche Bank, where he was responsible for the controlling of the
commercial mortgage-backed securities and Securitised Products
businesses. Before that, he worked in management roles within the
fixed income areas of RBS and Paine Webber. He is a Fellow of the
Institute of Chartered Accountants in England and Wales, having
qualified as a chartered accountant in 1999.
Arron Taggart
UK Origination
Arron has over 20 years' experience in the real estate markets.
He joined Cheyne in August 2012 to originate real estate loans in
the UK and Northern Europe. Prior to Cheyne, Arron was a Property
Specialist and Partner at Clydesdale Bank responsible for the
origination and execution of real estate loans in London and the
South of England. He was also responsible for the management of the
loan portfolio and setting regional strategy. Prior to Clydesdale
Bank, he was at Bank of Scotland and Hitachi Capital.
Raphael Smadja
French Origination
Raphael joined Cheyne in January 2014 and has 10 years'
experience. Prior to Cheyne, he was an Associate Director in Real
Estate Finance at Deutsche Pfandbriefbank, responsible for sourcing
and structuring commercial real estate loans across Europe. Prior
to that, he held positions within the Real Estate Finance and CMBS
space at Moody's, UBS and Morgan Stanley.
Daniel Schuldes
German Origination
Daniel has over 10 years' experience in the European real estate
debt and ABS markets. He joined Cheyne in 2007 and specialises in
the origination, structuring, negotiation and execution of German
real estate credit transactions. He was previously an associate on
Credit Suisse's asset finance team in London, which was responsible
for originating and structuring the bank's European
securitisations. He focused on fundamental analysis of RMBS
collateral.
Sa'ad Malik
Structured Credit
Sa'ad joined Cheyne in 2016. Prior to joining Cheyne, he founded
Rhino Investment Management LLP in 2011, an FCA-authorised boutique
investment and advisory firm, active in the European commercial
real estate market. Among his responsibilities were strategy,
origination, client management, structuring and execution. He
previously worked for Lehman Brothers International (Europe) in
2004, and for Credit Suisse Securities (Europe) Limited in 2005,
when he was Director in their European Real Estate Finance &
Securitisation area, and had a central role in building the Titan
Europe CMBS platform. Sa'ad started his career in 2000 with
Commerzbank Securities in Asset-Backed-Finance.
Lydia Boos
Legal Counsel
Lydia is Legal Counsel for the Cheyne Real Estate Team. Prior to
joining Cheyne in 2018, Lydia was a senior associate at Bryan Cave
Leighton Paisner LLP where she worked since starting her legal
training in 2008. Lydia joined BCLP's real estate finance
department upon qualifying as a solicitor in September 2010. At
BCLP, Lydia was responsible for advising a range of lender and
sponsor clients on real estate focused investment and development
transactions across a variety of sectors, often including complex
intercreditor structures.
Sophie Turner
Investor Relations/Business Manager
Sophie is a Business Manager for the Real Estate Team focusing
on Investor Relations for RECI. Prior to this, Sophie worked at
Cheyne in Investor Relations as Client Services Manager and Product
Specialist for Convertible Bonds, and before that, as Assistant
Business Manager for the Real Estate Team. Prior to joining Cheyne
in 2008, she worked at the University of Exeter's Business School,
co-ordinating executive education programmes for corporates such as
3i plc. Sophie earned her BSc in Business Administration from
Cardiff University.
Directors' Report
Directors' Report
The Directors present their annual report and the audited
financial statements for the year ended 31 March 2020.
General Information
The Company was incorporated in Guernsey on 6 September 2005
with registered number 43634.
The "About the Company" section of the Annual Report on page 4
provides information regarding the structure of the Company, the
investment objective and the listing details of the shares of the
Company.
The Company's investment management activities are managed by
the Investment Manager, who is also the AIFM. The Company has
entered into an Investment Management Agreement under which the
Investment Manager manages its day-to-day investment operations,
subject to the supervision of the Company's Board of Directors. The
Company is an Alternative Investment Fund ("AIF") within the
meaning of the Alternative Investment Fund Manager Directive
("AIFMD") and accordingly the Investment Manager has been appointed
and registered as AIFM of the Company.
Principal Activity and Business Review
The principal activity of the Company during the year was that
of an investment company investing in Real Estate Credit
Investments. For full details of the Investment Policy of the
Company see page 5.
A placing programme ("2018/19 Programme") which was announced on
2 November 2018 was approved at an Extraordinary General Meeting of
the Company on 29 November 2018. The 2018/19 Programme was intended
to enable the Company to raise additional capital through the issue
of up to 100 million new Ordinary Shares before expiry on 1
November 2019, with net proceeds to be used to acquire investments
in accordance with the investment objective and policy. The 2018/19
Programme expired on 1 November 2019, having raised aggregate gross
proceeds of GBP95 million, further diversified RECI's ownership and
enhanced the liquidity of the Company's Ordinary Shares.
A new placing programme was announced on 21 February 2020, and
approved at an Extraordinary General Meeting of the Company held on
10 March 2020. This programme is intended to enable the Company to
raise additional capital through the issue of up to 150 million new
Ordinary Shares before its expiry on 20 February 2021.
Results and Dividends
The results for the year and the Company's financial position as
at year end are shown on pages 44 and 45. Dividends totalling
GBP25.1 million (31 March 2019: GBP17.6 million) were paid on the
Ordinary Shares during the year.
A fourth interim dividend for the year ended 31 March 2020 of 3
pence per Ordinary Share (31 March 2019: 3 pence per share) was
declared by the Directors on 15 May 2020 and is payable on 30 July
2020. This fourth interim has not been included as a liability in
these financial statements.
Capital Structure
Details of the authorised, issued and fully paid Ordinary Share
capital, together with details of the movements in the Company's
issued share capital during the current and prior year are shown in
Note 14 to the financial statements.
The Company has one class of Ordinary Shares which carry no
right to fixed dividends. Each Ordinary Share carries the right to
one vote at general meetings of the Company.
No person has any special rights of control over the Company's
share capital.
Board of Directors
The Directors of the Company who served during the year and to
the date of this report were:
Directors
Bob Cowdell (Chairman)
Susie Farnon
John Hallam
Graham Harrison
The following summarises the Directors' directorships in other
public companies listed on the London Stock Exchange:
Director Company Name
--------------- -----------------------------
Susie Farnon Apax Global Alpha Limited
BH Global Limited
HICL Infrastructure PLC
--------------- -----------------------------
John Hallam NB Distressed Debt Investment
Fund Ltd
--------------- -----------------------------
Graham Harrison BH Global Limited
Volta Finance Limited
--------------- -----------------------------
Mr Harrison and Mrs Farnon both sit on the board of BH Global
Limited, but the Company believes that this does not impact their
ability to be considered independent. All Directors are independent
of the Investment Manager and free from any business or other
relationship that would materially interfere with the exercise of
their independence.
With regard to the appointment and replacement of Directors, the
Company is governed by its Articles of Incorporation (the
"Articles") and The Companies (Guernsey) Law, 2008. The Articles
themselves may be amended by special resolution of the
Shareholders. The powers of Directors are described in the Articles
and in the financial statements in the Corporate Governance
Statement. Under its Articles, the Company has authority to issue
an unlimited number of Ordinary Shares of no par value.
The Directors' interests in the share capital of the Company
(some of which are held directly or by entities in which the
Directors may have a beneficial interest) are:
Number
of Ordinary
Shares % of Company
----------------------- ------------ ------------
Bob Cowdell (Chairman) 140,000 0.06%
----------------------- ------------ ------------
Susie Farnon 38,000 0.02%
----------------------- ------------ ------------
John Hallam 100,000 0.04%
----------------------- ------------ ------------
Graham Harrison 25,000 0.01%
----------------------- ------------ ------------
Substantial Interests in Share Capital
Chapter 5 of the Disclosure and Transparency Rules, requires
disclosure of major shareholder acquisitions or disposals (over 5%
of the shares) in the Company (see list on the following page of
major Shareholders). During the year, there were 4 notifications of
such transactions, (31 March 2019: 3 notifications).
List of major Ordinary Shareholders as at 31 March 2020:
Total Ordinary % Ordinary
Shares Shares
Name Held Held
------------------------------ -------------- ----------
Close Brothers Group 19,600,115 8.55
AXA SA 19,494,350 8.50
Premier Miton Group 18,560,985 8.09
Bank Leumi Le Israel 17,938,509 7.82
Fidelity Worldwide Investment
(FIL) 17,401,817 7.59
Canaccord Genuity Group Inc 16,885,437 7.36
Smith & Williamson 15,674,994 6.84
------------------------------ -------------- ----------
Issued Share Capital
The issued share capital of the Company consisted of 229.3
million Ordinary Shares (31 March 2019: 153.3 million Ordinary
Shares).
Directors and Officers Liability Insurance
Directors and Officers liability insurance is in place and due
for renewal on 5 July 2021.
Listing Information
The Ordinary Shares are currently listed on the premium segment
of the Official List of the UK Listing Authority and trade on the
Main Market of the London Stock Exchange.
Website
The Directors are responsible for the oversight of the website
but delegate to Cheyne responsibility for the maintenance and
integrity of the financial and corporate information included on
it.
The Investment Manager
Having reviewed the performance of the Investment Manager, the
Directors are satisfied that the continued appointment of the
Investment Manager on the terms agreed is in the best interests of
the Shareholders and the Company. The Company has entered into the
Investment Management Agreement under which the Investment Manager
manages its day-to-day investment operations. Details of the
Investment Management Agreement can be found in Note 18 to the
financial statements.
Auditor
Deloitte LLP has been the Company's external auditor since the
Company's incorporation. Further information on the work of the
auditor is set out in the Audit Committee report. The Company
undertook a competitive tender process during Autumn 2018 and
Deloitte was reappointed.
The Audit Committee reviews the appointment of the auditor on an
annual basis.
Principal Risks and Uncertainties
Principal risks and uncertainties are discussed in the Strategic
Report.
Related Party Transactions
Related party transactions are disclosed in Note 18 to the
financial statements. There have been no material changes in the
related party transactions described in the last annual report.
Going Concern
The Directors believe it is appropriate to adopt the going
concern basis in preparing the financial statements as, after due
consideration, they consider that the Company has adequate
resources to continue in operational existence for a period of at
least twelve months from the date of signing the financial
statements.
As highlighted in the long-term viability section of the
Strategic Report, the Investment Manager performed an evaluation of
each of its positions in light of the likely long- term impact of
the COVID-19 crisis on operating models and valuations, and
performed a granular analysis of the future liquidity profile of
the Company. A detailed cash flow profile of each investment was
completed, incorporating the probability of likely delays to
repayments (and additional cash needs).
Taking account of the updated forecasting, the Directors
consider that the cash resources available as at 31 March 2020 of
GBP27.0 million together with the cash held at the broker of
GBP25.0 million, the liquidity of the market bond portfolio and the
financing available through activities such as repurchase
agreements are sufficient to cover normal operational costs and
current liabilities, including the proposed dividend, as they fall
due for a period of at least twelve months from the date of signing
the financial statements.
AGM
The AGM of the Company will be held at 10:30 am on 17 September
2020. Details of the resolutions to be proposed at the AGM,
together with explanations, will appear in the Notice of Meeting to
be distributed to Shareholders together with a copy of this Annual
Report.
Members of the Board will be in attendance at the AGM and will
be available to answer shareholder questions.
On behalf of the Board on 24 June 2020.
Bob Cowdell Susie Farnon
Director Director
Directors' Remuneration Report
The Directors of the Company are entitled to receive an annual
fee for their services as Directors. Each Director shall be
entitled to be repaid all expenses reasonably incurred in the
performance of their duties as Director to the Company. If by
arrangement by the Board, any Director shall perform or render any
special duties or services outside of his ordinary duties as a
Director, he may be paid such reasonable additional remuneration as
the Board may determine.
Each of the Directors has signed a letter of appointment with
the Company setting out the terms of their appointment.
The Company has not established a Remuneration Committee as the
Company does not have any executive Directors or employees.
Remuneration Policy
The Company's Remuneration Policy is that fees payable to the
Directors should reflect the time spent by the Directors on the
Company's affairs and the responsibilities borne by the Directors
and be sufficient to attract, retain and motivate Directors of a
quality required to run the Company successfully. No element of the
Directors' remuneration is performance related.
Shareholders will be given the opportunity to approve the
Remuneration Report at the next AGM.
Directors' annual fees are listed in the table below:
2020/2019 2019/2018
GBP GBP
------------------------------ --------- ---------
Bob Cowdell (Chairman) 75,000 75,000
Susie Farnon (Audit Committee
Chairman) 45,000 40,000
John Hallam 35,000 40,000
Graham Harrison 35,000 35,000
------------------------------ --------- ---------
Directors' remuneration for the years ended 31 March 2020 and
2019 and 31 March 2019 was as follows:
Year ended Year ended
31 Mar 31 Mar
2020* 2019*
GBP GBP
----------------------- ---------- ----------
Bob Cowdell (Chairman) 85,000 85,000
Susie Farnon 50,000 45,000
John Hallam 40,000 45,000
Graham Harrison 40,000 40,000
----------------------- ---------- ----------
215,000 215,000
----------------------- ---------- ----------
* The Directors' remuneration for the years ended 31 March 2020
and 2019 each include a transaction fee of GBP10,000 for the
Chairman and GBP5,000 each for the other Directors in relation to
the Placing Programme launched in February 2020 and the 2018/19
Programme.
Corporate Governance Statement
Corporate Governance Statement
Statement of Compliance with Corporate Governance
The Company is a member of the Association of Investment
Companies (the "AIC") and by complying with the February 2019
edition of the AIC code of Corporate Governance for investment
companies ("AIC Code") is deemed to comply with both the UK and
Guernsey Codes of Corporate Governance.
To comply with the UK Listing Regime, the Company must comply
with the requirements of the UK Corporate Governance Code.
The Board has considered the principles and recommendations of
the AIC Code, by reference to the guidance notes provided by the
AIC Guide, and considers that reporting against these will provide
appropriate information to Shareholders. To ensure ongoing
compliance with these principles the Board reviews a report from
the Corporate Secretary identifying how the Company is in
compliance and identifying any changes that might be necessary.
The Company has complied with the recommendations of the AIC
Code throughout the accounting period, except as set out below.
The AIC Code includes provisions relating to:
-- the role of the chief executive;
-- executive Directors' remuneration;
-- the remuneration committee; and
-- the whistle-blowing policy.
T he Board considers some of these provisions are not relevant
to the position of the Company as it is an externally managed
investment company. The Directors are non-executive and the Company
does not have employees and the Board is satisfied that any
relevant issues that arise can be properly considered by the Board
or by shareholders at AGMs. The Board as a whole considers matters
relating to Directors' remuneration. An external assessment of
Directors' Remuneration has not been undertaken. The Company's
Remuneration policy is that fees payable to the Directors should
reflect the time spent by the directors on the Company's affairs
and the responsibilities borne by the Directors and be sufficient
to attract, retain and motivate Directors of a quality required to
run the Company successfully. Please refer to the Directors'
Remuneration Report on page 25.
The Board
The Directors details are listed in the Directors' Report, which
set out their range of investment, financial and business skills
and experience.
The Board meets at least four times a year and, in addition,
there is regular contact between the Board, the Investment Manager
and the Company Secretary including an annual strategy meeting and
Investment Manager due diligence visits, when the Board attends the
offices of the Investment Manager and meets with senior executives.
Further, the Board requires that it is supplied in a timely manner
with information by the Investment Manager, the Company Secretary
and other advisers in a form and of a quality appropriate to enable
it to discharge its duties.
Duties and Responsibilities
The Board has overall responsibility for optimising the
Company's performance by directing and supervising the affairs of
the business and meeting the appropriate interests of Shareholders
and relevant stakeholders, while enhancing the value of the Company
and also ensuring the protection of investors. A summary of the
Board's responsibilities is as follows:
-- statutory obligations and public disclosure;
-- strategic matters and financial reporting;
-- risk assessment and management including reporting,
compliance, governance, monitoring and control; and
-- other matters having a material effect on the Company.
The Board is responsible to Shareholders for the overall
management of the Company. The Board has delegated the day-to-day
operation of the Company to the Investment Manager, Administrator
and the Company Secretary. The Board reserves the powers of
decisions relating to the determination of the Investment Policy,
the approval of changes in strategy, capital structure, statutory
obligations, public disclosure and the entering into of any
material contracts by the Company.
The following table shows the number of regularly scheduled
meetings held by the Board and each committee for the year ended 31
March 2020 as well as the number of attendances at each
meeting.
Management
Nomination Engagement
Scheduled Committee Audit Committee Committee
Board Meetings Meeting Meeting Meeting
Attendance Attendance Attendance Attendance
----------------------- --------------- ----------- --------------- -----------
Number of meetings 4 2 3 1
Attendance by:
Bob Cowdell (Chairman) 4 2 3 1
Susie Farnon 4 2 3 1
John Hallam 4 2 3 1
Graham Harrison 4 2 3 1
----------------------- --------------- ----------- --------------- -----------
Additionally, a number of ad-hoc meetings were held during the
year which, as they dealt primarily with administrative and
transaction matters, were attended by those Directors available at
the time.
Chairman
The Chairman, Mr Cowdell, is responsible for leadership of the
Board, ensuring its effectiveness on all aspects of its role and
setting its agenda. The Chairman is also responsible for ensuring
that the Directors receive accurate, timely and clear information.
The Chairman is responsible for effective communication with
Shareholders and can be contacted through the Company
Secretary.
Senior Independent Director ("SID")
Mr Hallam is the SID and, as such, his primary roles are to
support the Chairman and act as an intermediary for the other
non-executive Directors in matters relating to the Chairman,
including leading them in the annual performance evaluation of the
Chairman. The SID is also available to Shareholders who may have
any concerns which contact through the normal channels of the
Chairman and AIFM has failed to resolve or for which such contact
is inappropriate. Mr Hallam can also be contacted through the
Company Secretary.
Board Independence
For the purposes of assessing compliance with the AIC Code 6th
Principles and Provisions, the Board considers whether the current
Directors are independent of the Investment Manager and free from
any business or other relationship that could materially interfere
with the exercise of their independent judgement. In making this
assessment, consideration is also given to all other factors which
might be relevant including length of service. The Board has
concluded that all Directors remain independent.
Committees of the Board
In accordance with the AIC Code, the Board has established an
Audit Committee, a Nomination Committee and a Management Engagement
Committee, in each case with formally delegated duties and
responsibilities within written terms of reference.
Audit Committee
The Audit Committee is chaired by Mrs Farnon, and its other
members are Mr Cowdell, Mr Harrison and Mr Hallam.
The terms of reference of the Audit Committee state that it will
meet not less than three times in each financial year. The Audit
Committee report on pages 32 to 34 sets out the role and activities
of this Committee and its relationship with the external
auditor.
Nomination Committee
The Nomination Committee is chaired by Mr Cowdell and its other
members are Mr Hallam, Mr Harrison and Mrs Farnon. The members of
the Nomination Committee are and will be independent Directors. The
terms of reference state that the Nomination Committee will meet
not less than once a year; will have responsibility for considering
the size, structure and composition of the Board; and retirements
and appointments of additional and replacement Directors;
consideration of Board remuneration; and that the Nomination
Committee will make appropriate recommendations to the Board.
The Board aims to have a balance of skills, experience,
diversity (including gender) and length of service and knowledge of
the industry. The Board undertakes an evaluation of its performance
on an annual basis. The performance of each Director is considered
as part of a formal review by the Nomination Committee.
The position of Chairman of each Committee will be reviewed on
an annual basis by the Nomination Committee and their membership
and terms of reference are kept under review.
The performance of the Chairman of the Board will be assessed by
the Senior Independent Director through discussions with the other
Directors.
Management Engagement Committee
The Management Engagement Committee is chaired by Mrs Farnon,
with its other members being Mr Hallam, Mr Cowdell and Mr Harrison.
The Committee will meet at least once a year for the purpose of
evaluating the performance of the Company's service providers, the
review of service agreements and service level statements and the
level and method of their remuneration.
Director Re-Election Tenure and Induction
The Nomination Committee has considered the question of a policy
on Board tenure. It is strongly committed to striking the correct
balance between the benefits of continuity and those that come from
the introduction of new perspectives to the Board. As provided for
in the AIC guidelines and in order to phase future retirements and
appointments the Board has not, at this stage, adopted any specific
limits to terms, but expects to refresh the Board at appropriate
intervals.
The Board regards all Directors as being independent. The Board
has adopted a policy whereby all Directors will be proposed for re-
election each year and so all Directors will be proposed for
re-election at the forthcoming AGM. Details of Directors' tenure
are disclosed on pages 18 and 19.
Mr Harrison has served on the Board in excess of nine years, but
his skillset, experience and contribution, which clearly
demonstrate his independence, should be and remains of considerable
value to the Board and the Company.
Internal Controls
The Board has established a continuous process for identifying,
evaluating and managing the significant risks the Company faces.
The Board regularly reviews the process, which has been in place
from the start of the financial year to the date of approval of
this report. The Board is responsible for the Company's system of
internal control and for reviewing its effectiveness. Such a system
is designed to manage rather than eliminate the risk of failure to
achieve business objectives, and can only provide reasonable and
not absolute assurance against material misstatement or loss.
In compliance with the Principles and Provisions of the AIC
Code, the Board regularly reviews the effectiveness of the
Company's system of internal control. The Board's monitoring covers
all controls, including financial, operational and compliance
controls and risk management. It is based principally on reviewing
reports from the Investment Manager in order to consider whether
all significant risks are identified, evaluated, managed and
controlled and whether any significant weaknesses are promptly
remedied and indicate a need for more extensive monitoring. To this
end a Risk Matrix is maintained, which identifies the significant
risks faced by the Company together with the controls intended to
manage them and is reviewed at each scheduled Board meeting. The
Board has also performed a specific assessment considering all
significant aspects of internal control arising during the year
covered by this report. The Audit Committee assists the Board in
discharging its review responsibilities.
During the course of its review of the system of internal
control, the Board has not identified nor been advised of any
failings or weaknesses which it has determined to be
significant.
While investment management is provided by Cheyne Capital
Management (UK) LLP, the Board is responsible for setting the
overall Investment Policy and monitors the actions of the
Investment Manager at regular Board meetings. Administration
services are provided by Citco Fund Services (Guernsey) Limited.
Regular compliance reports from both the Investment Manager and the
Administrator are received by the Board. In addition, the
Administrator makes available its Global Fund Accounting and
Custody Controls Examination, SOC 1 report to the Board on an
annual basis.
Custody of assets is undertaken by the Depositary, The Bank of
New York Mellon (International) Limited.
The Investment Manager has established an internal control
framework and reviews the segregation of duties within this to
ensure that control functions are segregated from the trading and
investing functions. As a part of this framework, the valuation of
financial instruments is overseen by an internal pricing committee
which is supported by resources which ensure that it is able to
function at an appropriate level of quality and effectiveness.
Specifically, the Investment Manager's pricing committee is
responsible for establishing and monitoring compliance with
valuation policy. Within the trading and investing functions, the
Investment Manager has established policies and procedures that
relate to the approval of all new transactions, transaction pricing
sources and fair value hierarchy coding within the financial
reporting system.
The Directors of the Company clearly define the duties and
responsibilities of their agents and advisers, whose appointments
are made by the Board after due consideration. The Board monitors
the ongoing performance of such agents and advisers. Each agent and
adviser maintains its own systems of internal control on which it
reports to the Board. The systems are designed to ensure effective
and efficient operation, internal control and compliance with laws
and regulations. In establishing the systems of internal control,
regard is paid to the materiality of relevant risks, the likelihood
of costs being incurred and costs of control. It follows,
therefore, that the systems of internal control can only provide
reasonable but not absolute assurance against the risk of material
misstatement or loss.
The Board has reviewed the need for an internal audit function
and has decided that the systems and procedures employed by the
Administrator, Sub- Administrator and Investment Manager, including
their own internal controls and procedures, provide sufficient
assurance that a sound system of risk management and internal
control, which safeguards Shareholders' investment and the
Company's assets, is maintained. An internal audit function
specific to the Company is therefore considered unnecessary.
Shareholder Engagement
The Board believes that the maintenance of good relations with
Shareholders is important for the long-term prospects of the
Company and seeks engagement with investors. Where appropriate, the
Chairman, and other Directors are available for discussion about
governance and strategy with major Shareholders and the Chairman
ensures communication of Shareholders' views to the Board. The
Board receives feedback on the views of Shareholders from Liberum
Capital Limited (the "Corporate Broker") and the Investment
Manager, and Shareholders are welcome to contact the Chairman or
any Director at any time via the Company Secretary. Additionally,
the Investment Manager held a presentation for investors at its
offices on 11 September 2019. The presentation is available on the
Company's website.
The Directors believe that the AGM provides an appropriate forum
for Shareholders to communicate with the Board and encourages
participation. There is an opportunity for individual Shareholders
to question the Chairmen of the Board and the Audit Committee at
the AGM. The Board assesses the results of AGMs considering whether
the number of votes against or withheld in respect of resolutions
are such as to require discussion in the subsequent Annual
Report.
Corporate Social Responsibility
The Board keeps under review developments involving social and
environmental issues, and will report on those to the extent they
are considered relevant to the Company's operations.
UK Criminal Finances Act 2017
In respect of the UK Criminal Finances Act 2017 which has
introduced a new Corporate Criminal Offence of "failing to take
reasonable steps to prevent the facilitation of tax evasion", the
Board confirms that it is committed to zero tolerance towards the
criminal facilitation of tax evasion.
GDPR
The Board confirms that the Company has considered GDPR and
taken measures itself and with its service providers, to meet the
requirements of GDPR and equivalent Guernsey law.
Anti-Bribery and Corruption Policy
The Board has adopted a formal Anti-bribery and Corruption
Policy. The policy applies to the Company and to each of its
Directors. Furthermore, the policy is shared with each of the
Company's main service providers.
Whistle-Blowing
As the Company has no employees of its own, it does not have a
whistle-blowing policy but in its review of service providers the
Management Engagement Committee ensures that they do.
Employees and Socially Responsible Investment
The Company has a management contract with the Investment
Manager. It has no employees and all of its Directors are
non-executive, with day-to-day activities being carried out by
third parties. There are therefore no disclosures to be made in
respect of employees.
The Company's main activities are carried out by the Investment
Manager who was one of the initial signatories to the Standards
Board for Alternative Investments (formerly known as the Hedge Fund
Standards Board) and is a signatory to the United Nations-
supported Principles for Responsible Investment ("PRI").
ESG
The Investment Manager applies a Responsible Investment policy
to its investment process. The Real Estate Team analyses ESG
factors in relation to the Company's real estate lending
transactions, and seeks to engage with the borrowers (to the extent
relevant) to implement appropriate Responsible Investing ("RI")
policies. Key factors taken into consideration, where appropriate
and possible, are best-in-class environmental, design and
construction standards, focus on Building Research Establishment
Environmental Assessment "BREEAM" ratings, governance rights and
engagement with sponsors. By following these steps, the Investment
Manager seeks to ensure that the environmental, social and
governance aspects of Company's investments are taken into account.
While RECI seeks to consider all aspects of ESG, climate change is
not something that is directly impacted by the investment activity
of the Company.
Gender Metrics
The Board has chosen not to adopt a definitive policy with
quantitative targets for Board diversity. However, gender,
knowledge, skills, experience, residency and governance credentials
are all considered by the Nominations Committee when recommending
appointments to the Board and in formulating succession plans. The
Board currently has 25% female representation, complying with the
Hampton Alexander Report for companies of RECI's size.
Principal Risks and Uncertainties
The Board has carried out a robust assessment to identify the
principal risks and any emerging risks that could affect the
Company, including those that would threaten its business model,
future performance, solvency or liquidity. It has adopted a
controls based approach to its risk monitoring requiring each of
the relevant service providers, including the Investment Manager,
to establish the necessary controls to ensure that all known risks
are monitored and controlled in accordance with agreed procedures.
The Directors receive periodic updates at their Board meetings on
key risks and have adopted their own control review to ensure where
possible, risks are monitored appropriately.
Each Director is aware of the principal risks and uncertainties
inherent in the Company's business and understands the importance
of identifying, evaluating and monitoring these risks.
The Board has adopted procedures and controls that enable it to
manage these principal risks and uncertainties within acceptable
limits and to meet all of its legal and regulatory obligations.
The Board considers the process for identifying, evaluating and
managing these principal risks and uncertainties faced by the
Company on an on-going basis and these principal risks and
uncertainties are reported and discussed at Board meetings. It
ensures that effective controls are in place to mitigate these
risks and that a satisfactory compliance regime exists to ensure
all applicable local and international laws and regulations are
upheld.
The Company's principal risks are discussed in the Strategic
Report and in the Company's Prospectus, available on the Company's
website (www.recreditinvest.com) while those specifically relating
to financial reporting are discussed in the Audit Committee report
and Note 15 to the financial statements.
Changes in Regulation
The Board monitors and responds to changes in regulation as it
impacts the Company and its policies.
Stakeholder Engagement
Section 172 Statement
The Board is committed to promoting the long-term success of the
Company whilst conducting business in a fair, ethical and
transparent manner. Whilst directly applicable to companies
incorporated in the UK, the Board recognises the intention of the
AIC Code that matters set out in section 172 of the Companies Act,
2006 are reported on. The Board strives to understand the views of
the Company's key stakeholders and to take these into consideration
as part of its discussions and decision -- making process. As an
investment company, the Company does not have any employees and
conducts its core activities through third-party service providers.
Each provider has an established track record and through
regulatory oversight is required to have in place suitable policies
and procedures to ensure they maintain high standards of business
conduct, treat shareholders fairly, and employ corporate governance
best practice. The Company strongly believes that fostering healthy
and constructive relationships with its broad range of stakeholders
should result in increased shareholder value over the long
term.
Key stakeholder groups over the last year:
Shareholders: Institutional and Retail shareholders
Commercial service providers: Investment Manager, Administration
agent, Corporate broker, Legal advisers, Auditor
Key service providers retained, providing continuity of service
and familiarity with the objectives of the Company
How RECI has communicated and engaged:
-- Annual general meeting
-- Regular market announcements
-- Investor communications including monthly factsheets and quarterly updates
-- Dedicated RECI website
-- Investor roadshows
-- Investor Day
-- Annual and interim reports
-- Views and feedback sought from institutional shareholders via corporate broker
-- Regular Board meetings during the period attended by
representatives from the Investment Manager
-- Annual service provider questionnaire
Key Information Document
In accordance with the EU Packaged Retail and Insurance- based
Investment Products Directive on 1 January 2018, a Key Information
Document is available on the Company's website at:
http://recreditinvest.com/PDFs/RECI-KID.pdf
Audit Committee Report
Audit Committee Report
Dear Shareholder,
On the following pages, we present the Audit Committee's report
for 2020, setting out the responsibilities of the Audit Committee
and its key activities during the year ended 31 March 2020. As in
previous years, the Audit Committee has reviewed the Company's
financial reporting, the independence and effectiveness of the
Independent Auditor and the internal control and risk management
systems of the Company's service providers. In order to assist the
Audit Committee in discharging these responsibilities, regular
reports are received and reviewed from the Investment Manager,
Administrator and Independent Auditor.
A member of the Audit Committee will be available at each AGM to
respond to any shareholder questions on the activities of the Audit
Committee.
Susie Farnon
Chairman of the Audit Committee
Membership of the Audit Committee
The Audit Committee is chaired by Mrs Farnon, and its other
members are Mr Cowdell, Mr Harrison and Mr Hallam. The FRC Guidance
on Audit Committees recommends that such a committee should
comprise solely of independent non-executive directors and, as
noted in the Corporate Governance Statement, the Board has
considered the independence of its members and has concluded that
they all remain independent. The Company Chairman currently serves
as a member of the Audit Committee. The terms of reference state
that the Audit Committee will meet not less than three times in the
year and meet the external auditors a minimum of twice a year on
which occasions the need to meet without representatives of either
the Investment Manager or the Administrator being present is
considered. The terms of reference include all matters indicated in
the Disclosure and Transparency Rule 7.1 and the AIC Code.
The Board has taken note of the requirement that at least one
member of the Committee should have recent and relevant financial
experience and is satisfied that the Committee is properly
constituted in that respect with all members being highly
experienced and Mr Hallam and Mrs Farnon being chartered
accountants who also sit on other audit committees.
Responsibilities
The Audit Committee has regard to the AIC Code and examines the
effectiveness of the Company's internal control systems, the
integrity of the annual and half-yearly reports and financial
statements and ensures that they are fair, balanced and
understandable and provide the necessary information. They also
consider the auditors' remuneration and engagement, as well as the
auditors' independence and any non-audit services provided by them.
Other areas of responsibility include:
-- Consideration of the fair value of the Company's investments
and income generated from the portfolio;
-- Consideration of the accounting policies of the Company;
-- Meeting with the external auditor to discuss the proposed audit plan and reporting;
-- Assess the effectiveness of the external auditor and audit process;
-- Consideration of the need for an internal audit function;
-- Review of any independent reports in respect of the
Investment Manager, the Administrator or the Depositary;
-- Consideration of the risks facing the Company including the
Company's anti-bribery, corruption and similar obligations; and
-- Monitoring the Company's procedures for ensuring compliance
with statutory regulations and other reporting requirements.
In addressing all of the above considerations, the Audit
Committee seeks the appropriate input from the auditors, Investment
Manager, Administrator, Company Secretary and Legal Counsel and
makes a recommendation to the Board of the Company as
appropriate.
Meetings
The Audit Committee meets at least three times annually,
including shortly before the Board meets to consider the Company's
half-yearly and annual financial reports, and reports to the Board
on its deliberations and recommendations. It also has an annual
planning meeting with the auditor and other ad-hoc meetings as
considered necessary.
The Audit Committee operates within clearly defined terms of
reference and provides a forum through which the Company's external
auditors report to the Board. The terms of reference of the Audit
Committee are available from the Company's registered office. The
Audit Committee receives information from the Company's service
providers with the majority of information being directly sourced
from the Company Secretary, Administrator, the Investment Manager
and the external auditors. The Audit Committee considers the
nature, scope and results of the auditor's work and reviews their
performance annually prior to providing a recommendation to the
Board on the reappointment or removal of the auditor.
Significant Issues Considered Over Financial Reporting
The Audit Committee has determined that the key risks of
misstatement of the Company's financial statements relate to the
judgements in respect of the fair value of the Company's portfolio
and income recognition.
Additional information regarding principal risks and
uncertainties is provided in the Strategic Report and in Note 15 to
the financial statements.
The Board considers a report from the Investment Manager at each
Board meeting which sets out a review of the portfolio and its
performance. The report also details earnings forecasts and asset
class analysis. As a result, the Board is able to interrogate the
Investment Manager on the basis of the assumptions made and the
validity of the expected forecasts.
Valuation of Portfolios
The Audit Committee conducted a detailed review, which was
enhanced this year as a result of COVID-19, of each loan position
through discussions with the AIFM's relevant individual asset
managers challenging them as appropriate. Such discussions covered
aspects such as:
-- Available and recent professional valuations.
-- Credit quality of the individual borrower.
-- Quality of the underlying collateral.
-- Status of development schedules compared to original plans.
-- Planning or other disputes.
-- Comparison between effective and actual yields.
-- Whether or not any value should be ascribed to contingent
fees and potential profit participations provided for in
contractual arrangements.
When considering the bond investments the Audit Committee
considered a number of factors including, but not restricted
to:
-- Pricing sources.
-- The valuation approach used to value certain bonds by the
independent pricing adviser and challenging the AIFM's assessment
of the comparable securities used in determining the valuation of
these bonds.
-- Comparison between effective and actual yields.
-- Depth of prices and any disparity between different marks.
-- Indicative liquidity.
-- Comparison of realised prices with previous valuations.
Having conducted this process the Committee concluded that any
assumptions used were reasonable and that the valuations were in
accordance with the applicable standards.
Income Recognition
The Audit Committee and the Board as a whole considered and
challenged the Investment Manager's expected realisation or
maturity dates and the resultant expected cash flows. The Committee
found that the assumptions used were reasonable and that whilst it
is possible that the expected realisation dates may change over
time the Committee and the Board are satisfied that the assumed
realisation dates and the Investment Manager's methods of
calculating income are reasonable and in line with International
Financial Reporting Standards ("IFRS").
Risk Management
The Company's risk assessment process and the way in which
significant business risks are managed is a key area of focus for
the Committee. The work of the Audit Committee is driven primarily
by the Company's assessment of its principal risks and
uncertainties as set out in the Strategic Report and in Note 15 to
the financial statements, and it receives reports from the
Investment Manager on the Company's risk evaluation process and
reviews changes to significant risks identified.
Internal Audit
The Committee considers at least once a year whether or not
there is a need for an internal audit function. Currently, the
Committee believes that, given the Company has no employees, the
SOC 1 internal control report provided by the Administrator and the
reporting provided by the Investment Manager are sufficient and has
made a recommendation to the Board to this effect.
External Audit
Deloitte LLP has been the Company's external auditor since the
Company's inception.
The objectivity of the auditor is reviewed by the Committee
which also reviews the terms under which the external auditor may
be appointed to perform non-audit services. Auditor independence is
maintained through limiting non-audit services to audit-related
work that falls within defined categories for example acting as
Reporting Accountant in connection with the Placing Programme. All
engagements with the auditor are subject to pre- approval from the
Audit Committee and fully disclosed within the Annual Report for
the relevant period. A new lead audit partner is appointed every
five years and the Audit Committee ensures the auditor has
appropriate internal mechanisms in place to ensure its
independence.
When evaluating the external auditor, the Committee has regard
to a variety of criteria including industry experience,
independence, reasonableness of audit plan, ability to deliver
constructive criticism, effectiveness of communication with the
Board and the Company's service providers, quality control
procedures, management of audit process, price and added value
beyond assurance in audit opinion.
In order to maintain auditor independence, Deloitte LLP ensured
the following safeguards were in place:
-- review and challenge of key decisions by the Quality Review
Partner and engagement quality control review by a member of the
Independent Professional Standard Review Team.
This is the fifth year that David Becker has served as an
engagement partner on the audit. John Clacy, who has been proposed
as the replacement, previously served as the audit partner for
years ending 31 March 2011 to 31 March 2015. The Audit Committee
has considered this in light of guidance and the changes to the
business since this time, and as such, they are satisfied that his
independence is not impaired.
The Committ ee r eviews the scope and results of the audit, its
cost effectiveness and the independence and objectivity of the
auditor, with particular regard to the level of non-audit fees.
During the year, Deloitte charged non-audit fees of GBP63,000 for
work performed on the 2020 Placing Programme and GBP28,840 for the
30 September 2019 interim review.
Notwithstanding the provisions of such services, the Audit
Committee considers Deloitte LLP to be independent of the Company
and that the provision of such non-audit services is not a threat
to the objectivity and independence of the conduct of the audit as
appropriate safeguards are in place.
To fulfil its responsibility regarding the independence of the
auditor, the Audit Committee considers:
-- discussions with or reports from the auditor describing its
arrangements to identify, report and manage any conflicts of
interests; and
-- the extent of non-audit services provided by the auditor and
arrangements for ensuring the independence, objectivity and
robustness and perceptiveness of the auditor and their handling of
key accounting and audit judgements.
To assess the effectiveness of the auditor and the audit
process, the Committee reviews:
-- the auditor's fulfilment of the agreed audit plan and variations from it;
-- discussions or reports highlighting the major issues that
arose during the course of the audit;
-- feedback from other service providers evaluating the performance of the audit team;
-- arrangements for ensuring independence and objectivity; and
-- robustness of the auditor in handling key accounting and audit judgements.
The Audit Committee was satisfied with the audit process and
Deloitte LLP's effectiveness and independence as an auditor having
considered the degree of diligence and professional scepticism
demonstrated by them.
On behalf of the Audit Committee.
Susie Farnon
Chairman of the Audit Committee
24 June 2020
Directors' Responsibility Statement
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulations.
The Companies (Guernsey) Law, 2008 requires the Directors to
prepare financial statements for each financial year. Under that
law the Directors have elected to prepare the Company financial
statements in accordance with IFRS. Under company law the Directors
must not approve the accounts unless they are satisfied that they
give a true and fair view of the state of affairs of the Company
and of the profit or loss of the Company for that year. In
preparing these financial statements, International Accounting
Standard 1 ("IAS 1") requires that Directors:
-- properly select and apply accounting policies;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- provide additional disclosures when compliance with the
specific requirements in IFRS are insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the entity's financial position and financial
performance; and
-- make an assessment of the Company's ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements comply with the Companies (Guernsey) Law,
2008. They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in Guernsey governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
We confirm that to the best of our knowledge:
(i) The financial statements, prepared in accordance with IFRS,
give a true and fair view of the assets, liabilities, financial
position and profit or loss of the Company;
(ii) The Chairman's Statement, the Strategic Report and the
Investment Manager's report include a fair review of the
development and performance of the business and the position of the
Company together with a description of the principal risks and
uncertainties they face; and
(iii) So far as each Director is aware, there is no relevant
audit information of which the Company's auditors are unaware, and
each Director has taken all the steps that he/she ought to have
taken as a Director in order to make himself/herself aware of any
relevant audit information and to establish that the Company's
auditors are aware of that information. This confirmation is given
and should be interpreted in accordance with the provisions of
section 249 of the Companies (Guernsey) Law, 2008 (as amended).
Responsibility Statement of the Directors in Respect of the
Annual Report under the AIC Code
The Directors are responsible for preparing the Annual Report in
accordance with applicable law and regulations. Having taken advice
from the Audit Committee, the Directors consider the Annual Report
and financial statements, taken as a whole, as fair, balanced and
understandable and that it provides the information necessary for
Shareholders to assess the Company's performance, business model
and strategy.
By order of the Board
Bob Cowdell Susie Farnon
Director Director
24 June 2020
Financial Statements
Independent Auditor's Report to the Members of Real Estate
Credit Investments Limited
Report on the audit of the financial statements
1. Opinion
In our opinion the financial statements of Real Estate Credit
Investments Limited ('the Company'):
-- give a true and fair view of the state of the Company's
affairs as at 31 March 2020 and of the Company's loss for the year
then ended;
-- have been properly prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European
Union; and
-- have been prepared in accordance with the requirements of the
Companies (Guernsey) Law, 2008.
We have audited the financial statements which comprise:
-- the statement of comprehensive income;
-- the statement of financial position;
-- the statement of changes in equity;
-- the statement of cash flows; and
-- the related notes 1 to 22.
The financial reporting framework that has been applied in their
preparation is applicable law and IFRSs as adopted by the European
Union.
2. Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
auditor's responsibilities for the audit of the financial
statements section of our report.
We are independent of the Company in accordance with the ethical
requirements that are relevant to our audit of the financial
statements in the UK, including the Financial Reporting Council's
(the 'FRC's') Ethical Standard as applied to listed entities, and
we have fulfilled our other ethical responsibilities in accordance
with these requirements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
3. Summary of our audit approach
Key audit matters The key audit matters that we identified in the current
year were:
Valuation of bond investments; and
Valuation of loan investments.
Within this report, key audit matters are identified as
follows:
------------------- --------------------------------------------------------------
Newly identified Similar level of risk
Increased level of risk Decreased level of risk
------------------- ------------------------------ ------------------------------
Materiality The materiality that we used in the current year was GBP6.7
million which was determined based on approximately 2%
of net assets of the Company.
------------------- --------------------------------------------------------------
Scoping Audit work to respond to the risks of material misstatement
was performed directly by the audit engagement team.
------------------- --------------------------------------------------------------
Significant changes There have been no significant changes in our audit approach
in our approach apart from the change to key audit matters.
We also note that we have ceased to identify interest
income recognised from investments as a key audit matter
on the basis that revenue is derived from contractual
rates and linked to the valuations. It therefore does
not have the most significant effect on the overall audit
strategy, the allocation of resources or direction of
efforts of the audit team.
------------------- --------------------------------------------------------------
4. Conclusions relating to going concern, principal risks and
viability statement
4.1. Going concern Going concern is the basis
We have reviewed the directors' statement of preparation of the financial
in note 2 to the financial statements about statements that assumes an
whether they considered it appropriate to entity will remain in operation
adopt the going concern basis of accounting for a period of at least 12
in preparing them and their identification months from the date of approval
of any material uncertainties to the Company's of the financial statements.
ability to continue to do so over a period
of at least twelve months from the date We confirm that we have nothing
of approval of the financial statements. material to report, add or
draw attention to in respect
We considered as part of our risk assessment of these matters.
the nature of the Company, its business
model and related risks including where
relevant the impact of the COVID-19 pandemic
and Brexit, the requirements of the applicable
financial reporting framework and the system
of internal control. We evaluated the directors'
assessment of the Company's ability to continue
as a going concern, including challenging
the underlying data and key assumptions
used to make the assessment, and evaluated
the directors' plans for future actions
in relation to their going concern assessment.
We are required to state whether we have
anything material to add or draw attention
to in relation to that statement required
by Listing Rule 9.8.6R(3) and report if
the statement is materially inconsistent
with our knowledge obtained in the audit.
------------------------------------------------------------ ---------------------------------
4.2. Principal risks and viability statement Viability means the ability
Based solely on reading the directors' statements of the Company to continue
and considering whether they were consistent over the time horizon considered
with the knowledge we obtained in the course appropriate by the directors.
of the audit, including the knowledge obtained
in the evaluation of the directors' assessment We confirm that we have nothing
of the Company's ability to continue as material to report, add or
a going concern, we are required to state draw attention to in respect
whether we have anything material to add of these matters.
or draw attention to in relation to:
* the disclosures on pages 11-13 that describe the
principal risks, procedures to identify emerging
risks, and an explanation of how these are being
managed or mitigated;
* the directors' confirmation on page 29 that they have
carried out a robust assessment of the principal and
emerging risks facing the Company, including those
that would threaten its business model, future
performance, solvency or liquidity; or
* the directors' explanation on page 11 as to how they
have assessed the prospects of the Company, over what
period they have done so and why they consider that
period to be appropriate, and their 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 their assessment, including any related
disclosures drawing attention to any necessary
qualifications or assumptions.
We are also required to report whether the
directors' statement relating to the prospects
of the Company required by Listing Rule
9.8.6R(3) is materially inconsistent with
our knowledge obtained in the audit.
------------------------------------------------------------ ---------------------------------
5. Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included 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 were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters.
5.1. Valuation of bond investments
-----------------------------------------------------------------------------------------
Key audit matter Bond investments of GBP238 million (31 March 2019: GBP163
description million) make up 54% (31 March 2019: 46%) of total assets
and are a key value driver for the Company's Net Asset
Value (NAV) and interest income.
The primary pricing sources for the bonds are those quoted
by IHS Markit ('Markit') or Bloomberg Valuation Service
('BVAL') and an independent pricing provider (IHS Markit
Private Team). Markit and BVAL prices are direct quotes
for an individual bond asset, whereas prices generated
by the independent pricing provider are not. The IHS Markit
Private Team values the bonds using a market based valuation
methodology, which makes material assumptions relating
to comparable observable bond prices and yields.
As a result of COVID-19 and volatility witnessed in quoted
markets, management have changed their approach to the
valuation of the bond investments at the year end to calibrate
with a secondary pricing source, being counterparty quotes
on repurchase agreements ('Repo').
This situation has contributed to a heightened risk of
fraud and error associated with the valuation approach
applied, whether this is acceptable or consistent with
IFRS 13 Fair value measurement, and that inappropriate
inputs have been used leading to a material misstatement
of fair value. The key inputs to valuation of the bond
investments are:
* The use and application of secondary pricing sources
to the bond portfolio;
* The Repo financing counterparty price;
* The quoted Markit and BVAL prices; and
* The pricing of self-originated bonds by the IHS
Markit Private Team, including the comparable bonds
selected to determine the YTM of the self-originated
bonds.
There is also a risk that there are significant unobservable
inputs used to determine the fair value of the bonds at
the balance sheet date to the extent that these inputs
will impact the classification in the Fair Value Hierarchy
under IFRS 13.
The accounting policies related to this key audit matter
can be found in note 2 to the financial statements, with
the valuation described as one of the key sources of estimation
uncertainty in note 3 and 15 to the financial statements.
This is further described in the Audit Committee Report
on page 33.
----------------------- ----------------------------------------------------------------
How the scope To respond to the key audit matter, we have performed
of our audit responded the following audit procedures:
to the key audit * Obtained an understanding of relevant controls in
matter relation to the valuation process;
* Conducted inquiries and assessed the Company's
processes for challenging the reliability of the
independent prices through discussions with
management and review of the Price Committee minutes;
* Reviewed the 31 March 2020 bond surveillance reports
to identify any evidence of fair value changes
including whether the bonds are not performing, any
delinquency in contractual payments or signs of
financial distress by the borrower;
* Evaluated the competence, capabilities and
objectivity of IHS Markit Private Team;
* Alongside our internal valuation specialists,
assessed management's approach to the valuation of
the bonds and the application of a management
override in response to COVID-19;
* Alongside our internal valuation specialists,
benchmarked the valuation methodology used by IHS
Markit Private Team to value the bonds against
accepted market practices, including (on a sample
basis) the comparable yields used;
* Re-performed the valuation analysis to determine bond
prices using independently sourced prices;
* Performed sensitivity analysis on the portfolio fair
value, including weighting of pricing sources applied
by management in response to COVID-19;
* On a sample basis, assessed the position of the bond
in the capital stack and tested inputs used in 31
March 2020 'Loan Surveillance Reports', including the
accuracy of covenant calculations, Loan to Value
ratios, valuation of the underlying collateral and
other financial & non-financial information;
* Challenged management's judgement over the
classification of the bonds in the Fair Value
Hierarchy under IFRS 13 by assessing the significance
of observable inputs used to determine fair value;
* Performed back testing by verifying proceeds received
from the sale of bonds, if any, both during the year
and subsequent to 31 March 2020, against their fair
value prior to the sale; and
* Reviewed the post-year end performance of the
portfolio and the post-year end prices against the
fair value as at 31 March 2020.
----------------------- ----------------------------------------------------------------
Key observations We concluded that the assumptions applied by management,
in arriving at the fair value of the Company's bond investments
were reasonable, and that the resulting valuations are
appropriately stated.
----------------------- ----------------------------------------------------------------
5.2. Valuation of loan investments
------------------------------------------------------------------------------------
Key audit matter Loan investments of GBP138 million (31 March 2019: GBP139
description million) make up 31% (31 March 2019: 39%)of total assets
and are a key value driver for the Company's Net Asset
Value (NAV) and interest income.
There is a risk of fraud and error associated with the
incorrect recognition and measurement criteria applied
to loan investments through potentially complex structures
or agreements. Any material changes in the estimated
performance of a loan (including return on collateral,
timing of exit and related cash flows) or market movements
could have a significant impact on the fair value. Judgements
over the credit quality of the borrower and underlying
collateral along with the valuation of equity participation
positions in certain loans, which impact fair value
estimates, could significantly affect key performance
indicators and the fair value of loan investments where
applicable. The investment manager prepares cash flow
models and documents judgements in relation to estimated
performance of the loans within 'Loan Surveillance Reports'.
These are presented to the Board when determining fair
value of the loan portfolio.
In addition to this, COVID-19 further increased judgement
in relation to assumptions adopted for certain asset
valuations, notably those with a significant leisure
or retail elements, and can be reflected through one
or more of the following:
* decreased return assumptions;
* delayed exit assumptions; and
* reduced cash flow assumptions.
The accounting policies related to this key audit matter
can be found in note 2 to the financial statements,
with the valuation described as one of the key sources
of estimation uncertainty in note 3 and 15 to the financial
statements. This is further described in the Audit Committee
Report on page 33.
---------------- ------------------------------------------------------------------
How the scope To respond to the key audit matter, we have performed
of our audit the following audit procedures:
responded to * Obtained an understanding of relevant controls in
the key audit relation to the valuation process;
matter
* Tested, on a sample basis, inputs used in 31 March
2020 'Loan Surveillance Reports', including the
accuracy of covenant calculations, Loan to Value
ratios, valuation of the underlying collateral and
other financial & non-financial information;
* Reviewed the 31 March 2020 'Loan Surveillance
Reports' to identify any evidence of fair value
changes including whether the loans are not
performing, any covenant breaches, delinquency in
contractual payments or signs of financial distress
by the borrower;
* Where indicators or changes to fair value have been
identified, including in relation to the impact of
COVID-19, challenged the assumptions made by the
investment manager in assessing whether the loans are
properly valued at the statement of financial
position date. For a sample of loans, this included:
* benchmarking return assumptions for borrowers against
of operations of businesses in similar industries;
* benchmarking collateral values against latest market
data; and
* reconciling loan cash flow assumptions with the
latest business plans of the borrower and any agreed
forbearance.;
* Performed back testing by verifying proceeds received
from loans repayment, both during the year and
subsequent to 31 March 2020, against their fair value
prior to the repayment;
* Challenged Company's assessment of any equity uplifts
with reference to the valuation and performance of
underlying collateral; and
* Reviewed the developments in the lending and relevant
real estate markets at a macro level to assess
changes in lending rates and potential changes in
collateral values.
---------------- ------------------------------------------------------------------
Key observations We concluded that the assumptions applied by management,
in arriving at the fair value of the Company's loan
investments were reasonable, and that the resulting
valuations are appropriately stated.
---------------- ------------------------------------------------------------------
6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the
financial statements that makes it probable that the economic
decisions of a reasonably knowledgeable person would be changed or
influenced. We use materiality both in planning the scope of our
audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality
for the financial statements as a whole as follows:
Company Materiality GBP6.7 million (2019: GBP5.0 million)
--------------------- --------------------------------------------------------------
Basis for determining 2% (2019: 2%) of Net Asset Value.
materiality
--------------------- --------------------------------------------------------------
Rationale for We believe Net Asset Value is the most appropriate benchmark
the benchmark as it is considered one of the principal considerations
applied for members of the Company in assessing financial performance
and represents total shareholders' interest.
--------------------- --------------------------------------------------------------
6.2. Performance materiality
We set performance materiality at a level lower than materiality
to reduce the probability that, in aggregate, uncorrected and
undetected misstatements exceed the materiality for the financial
statements as a whole. Performance Materiality was set at 70% of
materiality for the 2020 audit (2019: 70%). In determining
performance materiality, we considered the following factors:
-- our risk assessment, including our assessment of the
Company's overall control environment; and
-- our past experience of the audit, which has indicated a low
number of corrected and uncorrected misstatements identified in
prior periods.
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the
Committee all audit differences in excess of GBP335,000 (2019:
GBP250,000), as well as differences below that threshold that, in
our view, warranted reporting on qualitative grounds. We also
report to the Audit Committee on disclosure matters that we
identified when assessing the overall presentation of the financial
statements.
7. An overview of the scope of our audit
7.1. Scoping
Our audit was scoped by obtaining an understanding of the
Company and its environment, including internal control, and
assessing the risks of material misstatement. Audit work to respond
to the risks of material misstatement was performed directly by the
audit engagement team.
7.2. Our consideration of the control environment
The accounting function for the Company is provided by Citco
Fund Services (Guernsey) Limited ('the Administrators'). We have
obtained an understanding of relevant controls at the
Administrators that are relevant to the business processes of the
Company.
8. Other information
The directors are responsible for the other information. The
other information comprises the information included in the annual
report, other than the financial statements and our auditor's
report thereon.
Our opinion on the 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 financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent
material misstatements, we are required to determine whether there
is a material misstatement in the financial statements or a
material misstatement of the other information. 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.
In this context, matters that we are specifically required to
report to you as uncorrected material misstatements of the other
information include where we conclude that:
-- Fair, balanced and understandable - the statement given by
the directors that they consider 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 position and performance, business model and
strategy, is materially inconsistent with our knowledge obtained in
the audit; or
-- Audit committee reporting - the section describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee; or
-- Directors' statement of compliance with the UK Corporate
Governance Code - the parts of the directors' statement required
under the Listing Rules relating to the company's compliance with
the UK Corporate Governance Code containing provisions specified
for review by the auditor in accordance with Listing Rule 9.8.10R
(2) do not properly disclose a departure from a relevant provision
of the UK Corporate Governance Code.
We have nothing to report in respect of these matters.
9. Responsibilities of directors
As explained more fully in the directors' responsibilities
statement, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true
and fair view, and for such internal control as the directors
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the Company'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 Company or to cease
operations, or have no realistic alternative but to do so.
10. Auditor's responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the 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 (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
A further description of our responsibilities for the audit of
the financial statements is located on the FRC's website at:
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditor's report.
11. Matters on which we are required to report by exception
11.1. Adequacy of explanations received and accounting
records
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; or
-- proper accounting records have not been kept; or
-- the financial statements are not in agreement with the accounting records.
We have nothing to report in respect of these matters.
12. Use of our report
This report is made solely to the company's members, as a body,
in accordance with Section 262 of the Companies (Guernsey) Law,
2008. Our audit work has been undertaken so that we might state to
the company's members those matters we are required to state to
them in an auditor's report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company and the company's
members as a body, for our audit work, for this report, or for the
opinions we have formed.
David Becker
For and on behalf of Deloitte LLP
Recognised Auditor
St Peter Port, Guernsey
24 June 2020
Statement of Comprehensive Income
For the year ended 31 March 2020
31 Mar 31 Mar
2020 2019
Note GBP GBP
--------------------------------------------- ---- ------------ -----------
Interest income 6 26,432,416 22,314,473
Net (loss)/gain on financial assets and
liabilities at fair value through profit
or loss 4 (35,925,496) 2,955,459
--------------------------------------------- ---- ------------ -----------
Operating (loss)/income (9,493,080) 25,269,932
--------------------------------------------- ---- ------------ -----------
Operating expenses 5 (5,580,012) (4,833,548)
--------------------------------------------- ---- ------------ -----------
Provision for expected credit losses (860,151) -
--------------------------------------------- ---- ------------ -----------
(Loss)/profit before finance costs (15,933,243) 20,436,384
--------------------------------------------- ---- ------------ -----------
Finance costs 6 (1,488,720) (1,203,559)
--------------------------------------------- ---- ------------ -----------
Net (loss)/profit (17,421,963) 19,232,825
Other comprehensive income - -
--------------------------------------------- ---- ------------ -----------
Total comprehensive (loss)/income (17,421,963) 19,232,825
--------------------------------------------- ---- ------------ -----------
(Loss)/earnings per Ordinary Share
Basic and diluted 8 (8.7)p 13.1p
Weighted average Ordinary Shares outstanding
Basic and diluted 8 199,894,182 146,485,788
--------------------------------------------- ---- ------------ -----------
All items in the above statement are derived from continuing
operations.
The accompanying notes form an integral part of the financial
statements.
Statement of Financial Position
As at 31 March 2020
31 Mar 31 Mar
2020 2019
Note(s) GBP GBP
--------------------------------------- ------- ----------- -----------
Non-current assets
Financial assets at fair value through
profit or loss 9 375,160,577 302,450,512
--------------------------------------- ------- ----------- -----------
375,160,577 302,450,512
--------------------------------------- ------- ----------- -----------
Current assets
Cash and cash equivalents 9 27,019,773 38,644,984
Cash collateral at broker 9, 17 24,956,945 1,421,450
Derivative financial assets 9, 10 - 652,002
Other assets 9, 11 14,641,472 11,981,115
--------------------------------------- ------- ----------- -----------
66,618,190 52,699,551
--------------------------------------- ------- ----------- -----------
Total assets 441,778,767 355,150,063
--------------------------------------- ------- ----------- -----------
Equity and liabilities
Equity
Reserves 337,157,197 253,198,289
--------------------------------------- ------- ----------- -----------
337,157,197 253,198,289
--------------------------------------- ------- ----------- -----------
Current liabilities
Financing agreements 2, 13 96,966,878 100,109,879
Cash collateral due to broker 9 - 136,621
Derivative financial liabilities 9, 10 6,176,905 -
Other liabilities 9, 12 1,477,787 1,705,274
--------------------------------------- ------- ----------- -----------
Total liabilities 104,621,570 101,951,774
--------------------------------------- ------- ----------- -----------
Total equity and liabilities 441,778,767 355,150,063
--------------------------------------- ------- ----------- -----------
Shares outstanding 14 229,332,478 153,321,282
Net asset value per share GBP1.47 GBP1.65
--------------------------------------- ------- ----------- -----------
The accompanying notes form an integral part of the financial
statements.
Signed on behalf of the Board of Directors by:
Bob Cowdell Susie Farnon
Director Director
24 June 2020
Statement of Comprehensive Income
For the year ended 31 March 2020
31 Mar 31 Mar
2020 2019
Note GBP GBP
--------------------------------------------- ---- ------------ -----------
Interest income 6 26,432,416 22,314,473
Net (loss)/gain on financial assets and
liabilities at fair value through profit
or loss 4 (35,925,496) 2,955,459
--------------------------------------------- ---- ------------ -----------
Operating (loss)/income (9,493,080) 25,269,932
--------------------------------------------- ---- ------------ -----------
Operating expenses 5 (5,580,012) (4,833,548)
--------------------------------------------- ---- ------------ -----------
Provision for expected credit losses (860,151) -
--------------------------------------------- ---- ------------ -----------
(Loss)/profit before finance costs (15,933,243) 20,436,384
--------------------------------------------- ---- ------------ -----------
Finance costs 6 (1,488,720) (1,203,559)
--------------------------------------------- ---- ------------ -----------
Net (loss)/profit (17,421,963) 19,232,825
Other comprehensive income - -
--------------------------------------------- ---- ------------ -----------
Total comprehensive (loss)/income (17,421,963) 19,232,825
--------------------------------------------- ---- ------------ -----------
(Loss)/earnings per Ordinary Share
Basic and diluted 8 (8.7)p 13.1p
Weighted average Ordinary Shares outstanding
Basic and diluted 8 199,894,182 146,485,788
--------------------------------------------- ---- ------------ -----------
All items in the above statement are derived from continuing
operations.
The accompanying notes form an integral part of the financial
statements.
Statement of Financial Position
As at 31 March 2020
31 Mar 31 Mar
2020 2019
Note(s) GBP GBP
--------------------------------------- ------- ----------- -----------
Non-current assets
Financial assets at fair value through
profit or loss 9 375,160,577 302,450,512
--------------------------------------- ------- ----------- -----------
375,160,577 302,450,512
--------------------------------------- ------- ----------- -----------
Current assets
Cash and cash equivalents 9 27,019,773 38,644,984
Cash collateral at broker 9, 17 24,956,945 1,421,450
Derivative financial assets 9, 10 - 652,002
Other assets 9, 11 14,641,472 11,981,115
--------------------------------------- ------- ----------- -----------
66,618,190 52,699,551
--------------------------------------- ------- ----------- -----------
Total assets 441,778,767 355,150,063
--------------------------------------- ------- ----------- -----------
Equity and liabilities
Equity
Reserves 337,157,197 253,198,289
--------------------------------------- ------- ----------- -----------
337,157,197 253,198,289
--------------------------------------- ------- ----------- -----------
Current liabilities
Financing agreements 2, 13 96,966,878 100,109,879
Cash collateral due to broker 9 - 136,621
Derivative financial liabilities 9, 10 6,176,905 -
Other liabilities 9, 12 1,477,787 1,705,274
--------------------------------------- ------- ----------- -----------
Total liabilities 104,621,570 101,951,774
--------------------------------------- ------- ----------- -----------
Total equity and liabilities 441,778,767 355,150,063
--------------------------------------- ------- ----------- -----------
Shares outstanding 14 229,332,478 153,321,282
Net asset value per share GBP1.47 GBP1.65
--------------------------------------- ------- ----------- -----------
The accompanying notes form an integral part of the financial
statements.
Signed on behalf of the Board of Directors by:
Bob Cowdell Susie Farnon
Director Director
24 June 2020
Statement of Changes in Equity
For the year ended 31 March 2020
31 Mar
2020
Note GBP
---------------------------------------- ---- ------------
Balance as at 31 March 2019 253,198,289
Total comprehensive loss (17,421,963)
Issue of Ordinary Shares of the Company 14 126,495,426
Ordinary Share dividends 7 (25,114,555)
---------------------------------------- ---- ------------
Balance as at 31 March 2020 337,157,197
---------------------------------------- ---- ------------
31 Mar
2019
Note GBP
---------------------------------------- ---- ------------
Balance as at 31 March 2018 228,523,912
Total comprehensive income 19,232,825
Issue of Ordinary Shares of the Company 14 23,003,808
Ordinary Share dividends 7 (17,562,256)
---------------------------------------- ---- ------------
Balance as at 31 March 2019 253,198,289
---------------------------------------- ---- ------------
The accompanying notes form an integral part of the financial
statements.
Statement of Cash Flows
For the year ended 31 March 2020
31 Mar 31 Mar
2020 2019
Note GBP GBP
------------------------------------------------ ---- ------------- ------------
(Loss)/profit before finance costs (15,933,243) 20,436,384
Purchases of financial assets (107,020,062) (9,071,142)
Purchases of derivative financial liabilities 2,986,108 -
Movement in realised and unrealised gains
of financial assets 4 34,309,998 113,736
Movement in derivative financial assets and
liabilities 3,842,798 (468,219)
------------------------------------------------ ---- ------------- ------------
Operating cash flows before movement in working
capital (81,814,401) 11,010,759
------------------------------------------------ ---- ------------- ------------
Increase in other assets (2,660,357) (7,086,686)
(Decrease)/increase in other liabilities (227,487) 410,216
Movement in cash collateral at/due to broker (23,672,116) 1,078,563
------------------------------------------------ ---- ------------- ------------
Movement in working capital (26,559,960) (5,597,907)
------------------------------------------------ ---- ------------- ------------
Net cash flow from operating activities (108,374,361) 5,412,852
Financing activities
Ordinary Shares issued 126,495,426 23,003,808
Distributions paid to Ordinary Shareholders (25,114,555) (17,562,256)
Net (repayments)/drawing under financing
agreement and the related finance charges (4,631,721) 20,567,602
------------------------------------------------ ---- ------------- ------------
Net cash inflow from financing activities 96,749,150 26,009,154
------------------------------------------------ ---- ------------- ------------
Net (decrease)/increase in cash and cash
equivalents (11,625,211) 31,422,006
Cash and cash equivalents at the start of
the year 38,644,984 7,222,978
------------------------------------------------ ---- ------------- ------------
Cash and cash equivalents at the end of the
year 27,019,773 38,644,984
------------------------------------------------ ---- ------------- ------------
The accompanying notes form an integral part of the financial
statements.
Notes to the Financial Statements
For the year ended 31 March 2020
1. General Information
Real Estate Credit Investments Limited ("RECI" or the "Company")
was incorporated in Guernsey, Channel Islands on 6 September 2005
with registered number 43634. The Company commenced its operations
on 8 December 2005.
The Company invests in real estate debt secured by commercial or
residential properties in the United Kingdom and Western Europe,
focusing primarily on those countries where it sees the changing
dynamics in the real estate debt market offering a sustainable deal
flow for the foreseeable future. The Company has adopted a
long-term strategic approach to investing and focuses on
identifying value in real estate debt. In making these investments
the Company uses the expertise and knowledge of its Alternative
Investment Fund Manager ("AIFM"), Cheyne Capital Management (UK)
LLP ("Cheyne" or the "Investment Manager").
The ordinary shares ("Ordinary Shares") are currently listed on
the premium segment of the Official List of the UK Listing
Authority and trade on the Main Market of the London Stock
Exchange. Ordinary Shares offer investors a levered exposure to a
portfolio of Real Estate Credit Investments and aim to pay a
quarterly dividend.
The Company's investment management activities are managed by
the Investment Manager, who is also the AIFM. The Company has
entered into an Investment Management Agreement (the "Investment
Management Agreement") under which the Investment Manager manages
its day-to-day investment operations, subject to the supervision of
the Company's Board of Directors. The Company is an Alternative
Investment Fund ("AIF") within the meaning of the Alternative
Investment Fund Manager Directive ("AIFMD") and accordingly the
Investment Manager has been appointed as AIFM of the Company, which
has no employees of its own. For its services, the Investment
Manager receives a monthly management fee, expense reimbursements
and accrues a performance fee (see Note 18). The Company has no
ownership interest in the Investment Manager.
Citco Fund Services (Guernsey) Limited is the Administrator and
provides all administration services to the Company in this
capacity. The Bank of New York Mellon (International) Limited is
the Depositary and undertakes the custody of assets. Aztec
Financial Services (Guernsey) Limited is the Company Secretary.
2. Significant Accounting Policies
Statement of Compliance
The financial statements of the Company have been prepared in
accordance with International Financial Reporting Standards
("IFRS"), which comprise standards and interpretations approved by
the International Accounting Standards Board ("IASB"), and
International Accounting Standards and Standing Interpretations
Committee interpretations approved by the International Accounting
Standards Committee ("IASC") that remain in effect, together with
applicable legal and regulatory requirements of Guernsey Law and
the Listing Rules of the UK Listing Authority. The same accounting
policies, presentation and methods of computation have been
followed in these financial statements as were applied in the
preparation of the Company's audited financial statements for the
year ended 31 March 2019.
New Standards, Amendments and Interpretations Issued and
Effective for the Financial Year Beginning 1 April 2019
IFRS 16 Leases
IFRS 16 was issued in January 2016 in replacement of IAS 17
Leases. It requires the recognition of substantially all lease
assets and lease liabilities on the Statement of Financial
Position, with the exception of short-term leases. Certain
disclosures of key information about leasing agreements have also
been amended. Under the new guidance, a lessee would record a
right-of-use ("ROU") asset representing its rights to use the
underlying assets during the lease term and a corresponding
liability. IFRS 16 is effective for annual periods beginning on or
after 1 January 2019. The adoption of IFRS 16 had no material
impact on the financial statements as the Company does not have any
lease contracts as defined by the standard.
IFRIC 23 Uncertainty over Income Tax Treatments
IFRIC 23 was published in June 2017. It addresses whether an
entity considers uncertain tax treatments separately; the
assumptions an entity makes about the examination of tax treatments
by taxation authorities; how an entity determines taxable profit
(tax loss), tax bases, unused tax losses, unused tax credits and
tax rates; and how an entity considers changes in fact and
circumstances.
Guidance contained in IFRIC 23 includes; (i) if an entity
concludes it is probable that the taxation authority will accept an
uncertain tax treatment, the entity shall determine the taxable
profit (tax loss), tax bases, unused tax losses, unused tax credits
or tax rates consistently with the tax treatment used or planned to
be used in its income tax filings; and (ii) if an entity concludes
it is not probable that the taxation authority will accept an
uncertain tax treatment, the entity shall reflect the effect of
uncertainty in determining the related taxable profit (tax loss),
tax bases, unused tax losses, unused tax credits or tax rates. An
entity shall reflect the effect of uncertainty for each uncertain
tax treatment by using either of the following methods, depending
on which method the entity expects to better predict the resolution
of the uncertainty; (a) the most likely amount - the single most
likely amount in a range of possible outcomes. The most likely
amount may better predict the resolution of the uncertainty if the
possible outcomes are binary or are concentrated on one value; (b)
the expected value - the sum of the probability- weighted amounts
in a range of possible outcomes. The expected value may better
predict the resolution of the uncertainty if there is a range of
possible outcomes that are neither binary nor concentrated on one
value. IFRIC 23 is effective for annual periods beginning on or
after 1 January 2019. The adoption of IFRIC 23 had no material
impact on the financial statements of the Company.
New Standards, Amendments and Interpretations Issued but not
Effective for the Financial Year Beginning 1 April 2019 and not
Early Adopted
Effective for periods
Title beginning on or after
--------------------------------------------------- ----------------------
Amendments to References to Conceptual Framework
in IFRS Standard 1 January 2020
Amendments to IFRS 3 - Definition of a Business 1 January 2020
IFRS 17 Insurance Contracts 1 January 2021
Amendments to IAS 1 - Classification of Liabilities
as Current or Non-current 1 January 2022
--------------------------------------------------- ----------------------
Amendments to IFRS 3 has no material impact on the financial
statements as the Company has not entered into business
combinations.
IFRS 17 Insurance Contracts has no material impact on the
financial statements as the Company does not have insurance
contracts.
Amendments to IAS 1 affect only the presentation of liabilities
in the Statement of Financial Position and not the amount or timing
of recognition of any asset, liability income or expenses, or the
information that the Company disclose about those items.
Basis of Preparation
The financial statements of the Company are prepared under IFRS
on the historical cost or amortised cost basis except for financial
assets and liabilities classified at fair value through profit or
loss which have been measured at fair value.
The functional and presentation currency of the Company is GBP
(GBP), which the Board considers best represents the economic
environment in which the Company operates.
Going Concern
The Directors believe it is appropriate to adopt the going
concern basis in preparing the financial statements as, after due
consideration, they consider that the Company has adequate
resources to continue in operational existence for a period of at
least twelve months from the date of signing the financial
statements.
As highlighted in the long-term viability section of the
Strategic Report, the Investment Manager performed an evaluation of
each of its positions in light of the likely long-term impact of
the COVID-19 crisis on operating models and valuations, and
performed a granular analysis of the future liquidity profile of
the Company. A detailed cash flow profile of each investment was
completed, incorporating the probability of likely delays to
repayments (and additional cash needs).
Taking account of the updated forecasting, the Directors
consider that the cash resources available as at 31 March 2020 of
GBP27.0 million (31 March 2019: GBP38.6 million), together with the
cash collateral at broker of GBP25.0 million (31 March 2019: GBP1.4
million), the liquidity of the market bond portfolio and the
financing available through activities such as repurchase
agreements as described in Note 13 are sufficient to cover normal
operational costs and current liabilities, including the proposed
dividend, as they fall due for a period of at least twelve months
from the date of signing the financial statements.
Since the onset of the COVID-19 crisis and the resultant market
turbulence, the Company moved to take the following measures:
-- An evaluation of each of its positions in light of the likely
long-term impact of the crisis on operating models and valuations
and hence recovery prospects for the individual positions. The
output of this analysis was to write down the value of just two of
its mezzanine positions. These impairments are not realised losses,
but provisions for potential losses recognised today.
-- Engaged positively with every one of its borrower
counterparts to put in place mitigation and de-risking strategies
for the long term.
-- Improved the resilience and flexibility of the Company by
increasing its cash balances and reducing its net leverage.
-- Performed a granular analysis of the future liquidity profile
of the Company. A detailed cashflow profile of each investment was
completed, incorporating the probability of likely delays to
repayments (and additional cash needs).
Having taken into account the above measures, which since 31
March 2020 has generated GBP24.3 million in proceeds from bond
sales used towards a reduction of gross leverage to GBP50.5 million
and net debt to GBP19 million, the Directors consider this to have
strengthened the resilience of the Company to future market
uncertainty. In particular, the Directors note that a key
assumption adopted in their going concern analysis is that leverage
through repurchase agreements is not withdrawn.
Notwithstanding the Directors belief that this assumption
remains justifiable, the Directors have also determined a number of
mitigations to address a scenario where all outstanding repurchase
agreements are required to be settled as they fall due. Whilst
there would be a number of competing strategic factors to consider
before implementation of such options, the Directors assert that
these are credible and can generate sufficient liquidity to enable
the Company to meet its obligations as they fall due. Such
strategies include further sales of assets within the bond
portfolio, cessation or delay of any future dividends and obtaining
longer-term, non-recourse financing.
In consideration of this additional stressed scenario and
mitigations identified, the Directors consider that the Company has
adequate resources to continue in operational existence for a
period of at least twelve months from the date of signing the
financial statements.
Financial Assets at Fair Value Through Profit or Loss
The Company classifies its investments based on both the
Company's business model for managing those financial assets and
the contractual cash flow characteristics of the financial assets.
The portfolio of financial assets is managed and performance is
evaluated on a fair value basis. The Company is primarily focused
on fair value information and uses that information to assess the
assets' performance and to make decisions. The Company has not
taken the option to irrevocably designate any equity securities at
fair value through other comprehensive income. The contractual cash
flows of the Company's debt securities are not solely principal and
interest, and these securities are neither held for the purpose of
collecting contractual cash flows nor held both for collecting
contractual cash flows and for sale. The collection of contractual
cash flows is only incidental to achieving the Company's business
model's objective. Consequently, all investments are measured at
fair value through profit or loss. The gain or loss on reassessment
of fair value is recognised immediately in the Statement of
Comprehensive Income.
Financial Liabilities at Fair Value Through Profit or Loss
Financing agreements entered into for the purpose of efficient
portfolio management are measured at fair value through profit or
loss. The gain or loss on reassessment of fair value is recognised
immediately in the Statement of Comprehensive Income.
Financial Assets at Amortised Cost
A financial asset is measured at amortised cost if it is held
within a business model whose objective is to hold financial assets
in order to collect contractual cash flows and its contractual
terms give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount
outstanding. This includes cash and cash equivalents, cash
collateral at broker and other assets.
Financial Liabilities at Amortised Cost
Other liabilities include cash collateral due to broker and
other liabilities.
Initial Measurement
Financial assets and liabilities at fair value through profit or
loss are measured initially at fair value, with transaction costs
for such financial assets and liabilities being recognised directly
in the Statement of Comprehensive Income. Financial assets and
liabilities at amortised cost are measured initially at their fair
value plus any directly attributable incremental costs of
acquisition or issue. Purchases and sales of financial assets and
liabilities at fair value through profit or loss are accounted for
at trade date. Realised gain/(loss) on disposals of financial
assets and liabilities are calculated using the first-in, first-out
("FIFO") method.
Subsequent measurement
After initial measurement, the Company measures financial assets
and liabilities which are classified as at fair value through
profit or loss, at fair value. After initial measurement, the
Company measures financial assets and liabilities which are
classified as at amortised cost, at amortised cost using effective
interest method.
Recognition
All regular way purchases and sales of financial assets or
liabilities are recognised on the trade date, which is the date on
which the Company commits to purchase or sell the financial assets
or liabilities. Regular way purchases or sales are purchases or
sales of financial assets or liabilities that require delivery of
assets within the period generally established by regulation or
convention in the market place.
Derecognition
The Company derecognises a financial asset when the contractual
rights to the cash flows from the financial asset expire or it
transfers the financial asset and the transfer qualifies for
derecognition in accordance with IFRS 9. The Company derecognises a
financial liability when the obligation specified in the contract
is discharged, cancelled or has expired.
Cash and Cash Equivalents
Cash and cash equivalents includes amounts held in interest
bearing accounts and overdraft facilities with original maturities
of less than three months.
Derivative Financial Instruments
Derivative financial instruments used by the Company to manage
its exposure to foreign exchange and interest rate risks arising
from operational, financing and investment activities that do not
qualify for hedge accounting are accounted for as financial assets
or liabilities at fair value through profit or loss. Subsequent to
initial recognition, derivative financial instruments are stated at
fair value. The gain or loss on reassessment of fair value is
recognised immediately in the Statement of Comprehensive
Income.
The fair value of options is their quoted market price at the
reporting date. Broker marks are obtained for these positions. The
change in value is recorded in net gains on financial assets and
liabilities at fair value through profit or loss in the Statement
of Comprehensive Income. Realised gains and losses are recognised
on the expiry or sale of the option. The fair value of an open
forward foreign currency exchange contract is calculated as the
difference between the contracted rate and the current forward rate
that would close out the contract on the reporting date. The change
in value is recorded in net gains on financial assets and
liabilities through profit or loss in the Statement of
Comprehensive Income. Realised gains and losses are recognised on
the maturity of a contract, or when the contract is closed out and
they are transferred to realised gains or losses in the Statement
of Comprehensive Income.
Fair Value
All financial assets carried at fair value are initially
recognised at cost and subsequently re-measured at fair value. If
independent prices are unavailable, the fair value of the financial
asset is estimated by reference to market information which
includes, but is not limited to, broker marks, prices of comparable
assets and using pricing models incorporating discounted cash flow
techniques and valuation techniques such as modelling. These
pricing models apply assumptions regarding asset specific factors
and economic conditions generally, including delinquency rates,
severity rates, prepayment rates, default rates, maturity profiles,
interest rates and other factors that may be relevant to each
financial asset.
The objective of a fair value measurement is to determine the
price at which an orderly transaction would take place between
market participants on the measurement date; rather than the price
arrived at in a forced liquidation or distressed sale.
Where the Company has considered all available information and
there is evidence that the transaction was forced, it will not use
such a transaction price as being determinative of fair value.
Note 3 provides specific information regarding the determination
of fair value for the Company's bonds and loans.
Offsetting Financial Instruments
Financial assets and liabilities are offset and the net amount
is reported within assets and liabilities when 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.
Expenses Attributable to Any Issue of Ordinary Shares
The expenses of the Company attributable to any issue of
Ordinary Shares are those which are necessary to implement such an
issue including registration, listing and admission fees, corporate
finance fees, printing, advertising and distribution costs, legal
fees and other applicable expenses. They are recognised as incurred
and are included as a reduction to Reserves in the Statement of
Changes in Equity.
Foreign Currency Transactions
Transactions in foreign currencies are translated at the foreign
exchange rate ruling at the date of the transaction. Monetary
assets and liabilities denominated in foreign currencies at the
Statement of Financial Position date are translated to GBP at the
foreign exchange rate ruling at that date.
Foreign exchange differences arising on translation are
recognised in gains and losses on financial assets and liabilities
at fair value through profit or loss in the Statement of
Comprehensive Income. Foreign currency denominated non-monetary
assets and liabilities that are measured in terms of historical
cost in a foreign currency are translated using the exchange rate
at the date of transaction.
Non-monetary assets and liabilities denominated in foreign
currencies that are stated at fair value are translated to GBP at
foreign exchange rates ruling at the reporting date. Differences
arising on translation of these non-monetary assets and liabilities
between valuation points are recognised in the Statement of
Comprehensive Income.
Interest Income
Interest income is accrued based on the expected realisation
date of the investments using the effective interest method as
defined under IFRS 9. Where the Company adjusts its expected cash
flow projections to take account of any change in underlying
assumptions, such adjustments are recognised in interest income in
the Statement of Comprehensive Income by reflecting changes in the
fair value of the investment calculated using the original
effective interest rate and applying the original effective
interest rate to this revised value for the purposes of calculating
future income.
Expenses
All expenses are included in the Statement of Comprehensive
Income on an accrual basis.
Taxation
The Company is a tax-exempt Guernsey limited company and
accordingly, no provision for tax is made.
Other Receivables
Other receivables do not carry any interest and are short-term
in nature and are accordingly stated at their nominal value as
reduced by appropriate allowances for estimated irrecoverable
amounts.
Financial Liabilities and Equity
Financial liabilities and equity are classified according to the
substance of the underlying contractual arrangements. An equity
instrument is any contract that evidences a residual interest in
the assets of the Company after deducting all of its
liabilities.
Financial liabilities and equity are initially recorded at the
proceeds received, net of issue costs and subsequently at amortised
cost. The Ordinary Shares have been classified as equity.
Other Liabilities
Other liabilities are not interest-bearing and are stated at
their accrued value.
Segment Information
The Company's two reportable segments have changed for the year
ending 31 March 2020 to reflect the separate management of the two
portfolios by the Investment Manager. The Company has two
reportable segments, being the Bilateral Loan and Bond Portfolio
and the Market Bond Portfolio. The real estate debt investment
strategy of the Company focuses on secured commercial and
residential debt in the UK and Western Europe. Each segment engages
in separate business activities and the results of each segment are
regularly reviewed by the Board of Directors which fulfils the role
of Chief Operating Decision Maker for performance assessment
purposes.
Financing Agreements
The Company enters into repurchase agreements for the purpose of
efficient portfolio management. There are no material revenues
arising from the use of repurchase agreements and transaction costs
are embedded in the price of the investments and are not separately
identifiable. Securities purchased under agreements to resell are
valued at fair value and adjusted for any movements in foreign
exchange rates. Interest rates vary for each repurchase agreement
and are set at the initiation of each agreement. It is the
Company's policy to take custody of securities purchased under
repurchase agreements and to value the securities on a daily basis
to protect the Company in the event the securities are not
repurchased by the counterparty. The Company will generally post
additional collateral if the market value of the underlying
securities decline is less than the face value of the repurchase
agreements plus any accrued interest. In the event of default on
the obligation to repurchase, the Company has the right to
liquidate the collateral and apply the proceeds in satisfaction of
the obligation. In the event of default or bankruptcy by the
counterparty to the agreement, realisation and/or retention of the
collateral or proceeds may be subject to legal proceedings.
3. Critical Accounting Judgements and Key Sources of Estimation
Uncertainty
In the process of applying the Company's accounting policies
(described in Note 2), the Company has determined that the
following judgements and estimates have the most significant effect
on the amounts recognised in the financial statements:
Critical Accounting Judgements
Classification of Financial Assets at Fair Value Through Profit
or Loss
As described on page 50, classification and measurement of
financial assets under IFRS 9 are driven by the entity's business
model for managing financial assets and the contractual cash flow
characteristics of those financial assets.
As further described on page 50, the contractual cash flow
characteristics for loan investments are not solely payments of
principal and interest. The Company instead receives the return for
each underlying loan net of expenses in Stornoway Financial SARL
compartment ("SPV") and so it not considered to be a basic lending
arrangement under the standard. As such, these loan investments are
required to be measured at fair value through profit or loss.
In making this judgement, the Directors have considered the
power the Company has to influence the investment decisions of the
SPV housing the underlying loans and where the Company holds the
majority interest it has been determined that the contractual cash
flow characteristics for a basic lending arrangement would be met.
However, IFRS 9 also requires an assessment of the business model
within which assets are held. In the case of the Company's loan
investments the Directors have determined that they monitor and
evaluate business performance, manage risk and compensate the
investment manager based on fair value measures. The business model
is therefore not solely for holding and collecting contractual cash
flows to maturity and requires all loan investments to be measured
at fair value through profit or loss.
The Company's bond investments are classified and measured at
fair value through profit or loss in accordance with the above fact
pattern.
Were it to be determined that the business model for managing
financial assets and the contractual cash flow characteristics of
those financial assets were not described above, these assets would
be classified and measured at amortised cost with provisions made
for expected credits losses and changes to expected credit losses
at each reporting date.
Level Classification of Financial Assets at Fair Value Through
Profit or Loss
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 Company. The Company 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.
Key Sources of Estimation Uncertainty
Valuation of Financial Assets at Fair Value Through Profit or
Loss
In accordance with the Company's accounting policies, the fair
value of financial assets is based on quoted prices where such
prices are available from a third party in a liquid market.
Bonds held in the Company are valued using independent market
prices (supplied by Markit and BVAL) which constitute publicly
available sources. In addition, the Company has obtained pricing
reports from an independent adviser (Markit Private Team) for bonds
where quoted prices are not directly available in the market. The
adviser uses publicly available prices for comparable securities as
the key input to the valuation of these bonds which are reviewed
and corroborated by the Investment Manager.
In addition to the primary pricing sources described above, the
Investment Manager has calibrated the fair value of the bonds to
counterparty quotes on repurchase agreements as an additional data
point in order to estimate the fair value of these investments.
Although counterparty quotes for individual investments are based
on readily available, non-proprietary, independent sources; the
application of this calibration approach is a key source of
estimation uncertainty to reflect the Investment Manager's estimate
of the mark-to-market volatility caused by the COVID-19 outbreak. A
change in the weighting of quotes received from primary or
secondary pricing sources produces a range of fair value for the
bond investments of GBP231.6m to GBP245.1m as at 31 March 2020.
The Company has made loans into structures to gain exposure to
real estate secured debt in the United Kingdom, France and Germany.
These loans are not traded in an active market and there are no
independent quotes available for these loans. The fair values of
financial instruments that are not traded in an active market are
determined using valuation techniques such as modelling. The fair
value of these loans is linked directly to the value of the real
estate loans in the underlying structure the Company invests in,
which are determined based on modelled expected cash flows
(drawdown principal and interest repayments, and maturity dates)
with effective yields ranging from 4.9% to 15.2% (31 March 2019:
5.1% to 13.5%) but with certain minor holdings having yields up to
24.0% (31 March 2019: 17.6%).
As highlighted in the long-term viability section of the
Strategic Report, the Investment Manager performed an evaluation of
each of its positions in light of the likely long-term impact of
the COVID-19 crisis on operating models and valuations. A detailed
cash flow profile of each investment was completed, incorporating
the probability of likely delays to repayments (and additional cash
needs), these were taken into account in the modelled expected cash
flows for 31 March 2020. Adjustments in the fair value of the real
estate loans are considered in light of changes in the credit
quality of the borrower and underlying property collateral. On
origination of the loan, the Investment Manager performs due
diligence on the borrower and related security/property. This
includes obtaining a valuation of the underlying property (to
assess loan-to-value of the investment). In most instances, the
terms of the loan require periodic re-valuation of the underlying
property to check against loan-to-value covenants.
The valuation policy for contingent fees and potential profit
participations provided for in contractual arrangements is to mark
them at fair value, which in most instances have been obtained for
a zero or de-minimis cost, and they are held at this value until
there is sufficient evidence that the position should be
revalued.
Valuation of Financial Assets at Fair Value Through Profit or
Loss continued
By way of a referendum, on 23 June 2016, the United Kingdom
voted to leave the European Union ("EU"). It is acknowledged that
uncertainty exists in relation to the United Kingdom's future
relationship with the EU and specifically with regards to current
"passporting" which permits UK firms to manage certain EU domiciled
funds.
The Company has been closely monitoring this and indeed all
other material macro sources of uncertainty related developments,
such as COVID-19 and the potential of a global recession, to ensure
that these updated assumptions and any potential impact have been
reflected in the valuation of financial assets at fair value
through profit or loss as at 31 March 2020. Future valuation might
change significantly in the future.
4. Net (Losses)/Gains on Financial Assets and Liabilities at
Fair Value Through Profit or Loss
31 Mar 31 Mar
2020 2019
GBP GBP
------------------------------------------------------- ------------ ---------
Net (losses)/gains
Net losses on investments at fair value through
profit or loss (34,309,998) (113,736)
Net (losses)/gains on foreign exchange instruments
and other foreign currency transactions (1,615,498) 3,069,195
------------------------------------------------------- ------------ ---------
Net (losses)/gains on financial assets and liabilities
at fair value through profit or loss (35,925,496) 2,955,459
------------------------------------------------------- ------------ ---------
5. Operating Expenses
31 Mar 31 Mar
2020 2019
Note GBP GBP
--------------------------------------------------- ---- ----------- -----------
Investment management, performance, administration
and depositary fees
Investment management fee 18 (4,135,296) (3,022,306)
Performance fee 18 951,125 (733,820)
Administration fee 18 (244,305) (212,716)
Depositary fee 18 (68,842) (69,334)
--------------------------------------------------- ---- ----------- -----------
(3,497,318) (4,038,176)
--------------------------------------------------- ---- ----------- -----------
Other operating expenses
Legal fees (1) (844,256) (180,247)
Placing Programme launch costs (383,666) -
Directors' fees(2) (215,000) (215,000)
Fees to auditor for non-audit services (91,840) (85,500)
Corporate secretary fees (87,567) (54,689)
Audit fees (83,000) (82,000)
Research fees (40,068) (10,436)
Other expenses (337,297) (167,500)
--------------------------------------------------- ---- ----------- -----------
(2,082,694) (795,372)
--------------------------------------------------- ---- ----------- -----------
Total operating expenses (5,580,012) (4,833,548)
--------------------------------------------------- ---- ----------- -----------
1 Legal fees for 31 March 2020 includes one off payment
totalling GBP571,269 for legal work relating to two assets.
2 Includes fees in relation to the Placing Programme launched in
February 2020 and the 2018/19 Programme.
6. Interest Income and Finance Costs
The following table details interest income and finance costs
from financial assets and liabilities for the year:
31 Mar 31 Mar
2020 2019
GBP GBP
------------------------------------------------- ----------- -----------
Interest income
Real Estate Credit Investments - market bonds 4,179,196 2,418,347
Real Estate Credit Investments - self-originated
bonds 7,302,205 4,448,236
Real Estate Credit Investments - self-originated
loans 14,878,095 15,215,162
------------------------------------------------- ----------- -----------
Cash and cash equivalents and other receivables 72,920 232,728
------------------------------------------------- ----------- -----------
Total interest income 26,432,416 22,314,473
------------------------------------------------- ----------- -----------
Finance costs:
Net cost of financing agreements (1,488,720) (1,203,559)
------------------------------------------------- ----------- -----------
Total finance costs (1,488,720) (1,203,559)
------------------------------------------------- ----------- -----------
7. Dividends
31 Mar 31 Mar
2020 2019
GBP GBP
---------------------------------------------------- ---------- ----------
Ordinary Share Dividends
Fourth dividend for the year ended 31 March 2019/31
March 2018 5,976,109 4,181,490
First dividend for the year ended 31 March 2020/31
March 2019 5,976,109 4,181,490
Second dividend for the year ended 31 March 2020/31
March 2019 6,282,363 4,599,638
Third dividend for the year ended 31 March 2020/31
March 2019 6,879,974 4,599,638
---------------------------------------------------- ---------- ----------
Dividends paid to Ordinary Shareholders in the
year 25,114,555 17,562,256
---------------------------------------------------- ---------- ----------
The total dividends paid during the financial year ended 31
March 2020 amounted to 12 pence per share (31 March 2019: 12 pence
per share).
Under Guernsey law, companies can pay dividends provided they
satisfy the solvency test prescribed under The Companies (Guernsey)
Law, 2008 which considers whether a company is able to pay its
debts when they become due and whether the value of a company's
assets is greater than its liabilities.
The Directors considered that the Company satisfied the solvency
test for each dividend payment during the years ended 31 March 2020
and 31 March 2019.
8. (Loss)/Earnings per Ordinary Share
The calculation of the basic and diluted (loss)/earnings per
share is based on the following data:
31 Mar 31 Mar
2020 2019
GBP GBP
--------------------------------------------------- ------------ -----------
Net (loss)/earnings attributable to Ordinary
Shares (GBP) (17,421,963) 19,232,825
Weighted average number of Ordinary Shares for
the purposes of basic and diluted (loss)/earnings
per share 199,894,182 146,485,788
--------------------------------------------------- ------------ -----------
(Loss)/Earnings per Ordinary Share
Basic and diluted (pence) (8.7) 13.1
--------------------------------------------------- ------------ -----------
The weighted average number of Ordinary Shares increased due to
the issue of Ordinary Shares during the year (for more details
refer to Note 14).
9. Categories of Financial Instruments
The following table details the categories of financial assets
and liabilities held by the Company at the year end date.
31 Mar 31 Mar
2020 2019
GBP GBP
--------------------------------------------------- ----------- -----------
Assets
Financial assets at fair value through profit
or loss:
Real Estate Credit Investments - market bonds 87,905,159 92,473,719
Real Estate Credit Investments - self-originated
bonds 149,653,980 70,593,153
Real Estate Credit Investments - self-originated
loans 137,601,438 139,383,640
--------------------------------------------------- ----------- -----------
Investments at fair value through profit or loss 375,160,577 302,450,512
Derivative financial assets:
Forward foreign exchange contracts - 652,002
Financial assets at amortised cost:
Cash and cash equivalents 27,019,773 38,644,984
Cash collateral at broker 24,956,945 1,421,450
Other assets 14,641,472 11,981,115
--------------------------------------------------- ----------- -----------
Total assets 441,778,767 355,150,063
--------------------------------------------------- ----------- -----------
Liabilities
Financial liabilities at fair value through profit
or loss:
Financing agreements 96,966,878 100,109,879
Derivative financial liabilities:
Forward foreign exchange contracts 6,176,905 -
Financial liabilities at amortised cost:
Cash collateral due to broker - 136,621
Other liabilities 1,477,787 1,705,274
--------------------------------------------------- ----------- -----------
Total liabilities 104,621,570 101,951,774
--------------------------------------------------- ----------- -----------
The value of the bond portfolio was GBP237.6 million as at 31
March 2020 (31 March 2019: GBP163.1 million), the financing against
these is shown as GBP97.0 million as at 31 March 2020 (31 March
2019: GBP100.1 million).
See Note 16 for a summary of the movement in fair value in the
Company's investments for the year.
10. Derivative Contracts
Forward Foreign Exchange Contracts:
The following forward foreign exchange contracts were open as at
31 March 2020:
Unrealised
Settlement Buy Sell Loss
Counterparty date currency Buy amount currency Sell amount GBP
--------------------- ------------ ---------- ----------- --------- ------------- -----------
The Bank of New York
Mellon 19 May 2020 GBP 101,991,786 EUR (122,200,000) (6,176,905)
--------------------- ------------ ---------- ----------- --------- ------------- -----------
Unrealised loss on forward foreign exchange contracts (6,176,905)
-------------------------------------------------------------------------------------- -----------
The following forward foreign exchange contracts were open as at
31 March 2019:
Unrealised
Settlement Buy Sell Gain
Counterparty date currency Buy amount currency Sell amount GBP
---------------------------- ------------ ---------- ------------ --------- ----------- ----------
Goldman Sachs International 21 May 2019 GBP (51,787,510) EUR 59,400,000 521,296
---------------------------- ------------ ---------- ------------ --------- ----------- ----------
Goldman Sachs International 21 May 2019 GBP (10,315,529) EUR 11,800,000 130,706
---------------------------- ------------ ---------- ------------ --------- ----------- ----------
Unrealised gain on forward foreign exchange contracts 652,002
-------------------------------------------------------------------------------------------- ----------
11. Other Assets
31 Mar 31 Mar
2020 2019
GBP GBP
----------------------------------------- ---------- ----------
Market bond interest receivable 495,409 540,229
Self-originated bond interest receivable 2,010,495 1,563,581
Self-originated loan income receivable 12,112,059 9,874,524
Other receivables and prepaid expenses 23,509 2,781
----------------------------------------- ---------- ----------
14,641,472 11,981,115
----------------------------------------- ---------- ----------
12. Other Liabilities
31 Mar 31 Mar
2020 2019
GBP GBP
---------------------------------- --------- ---------
Investment management fee payable 363,935 495,678
Performance fee payable* - 951,125
Interest payable 241,432 103,074
Administration fee payable 22,272 32,281
Depositary fee payable 15,628 2,343
Other expense accruals 834,520 120,773
---------------------------------- --------- ---------
Total liabilities 1,477,787 1,705,274
---------------------------------- --------- ---------
* The performance fee payable is accrued and will become payable
on the passing of the next continuation vote to be held at the AGM
in 2021. There was no performance fee payable accrued at year end
and the prior year accrual was reversed as the Company did not
perform as at 31 March 2020.
13. Financing Agreements
The Company enters into repurchase agreements with several banks
to provide leverage. This financing is collateralised against
certain of the Company's market bond portfolio assets with a fair
value totalling GBP108.1 million (31 March 2019: GBP128.3 million)
and a weighted average cost of 1.80% (31 March 2019: 1.80%) per
annum. The average period to maturity of the repurchase
arrangements is 2 months (31 March 2019: 2 months).
This short-term financing is shown as a current liability in the
Statement of Financial Position whereas the collateralised assets
are shown as non-current. The movement in financing agreement and
the related finance charges amounting to GBP4.6 million (31 March
2019: GBP20.6 million) is shown as financing activity in the
Statement of Cash Flows.
14. Share Capital
The issued share capital of the Company consists of Ordinary
Shares and its capital as at the year end is represented by the net
proceeds from the issuance of Ordinary Shares and profits retained
up to that date. The Company does not have any externally imposed
capital requirements. As at 31 March 2020, the Company had capital
of GBP337.2 million (31 March 2019: GBP253.2 million).
31 Mar 31 Mar
2020 2019
Number Number
Authorised Share Capital of Shares of Shares
------------------------------------ ---------- ----------
Ordinary Shares of no par value each Unlimited Unlimited
------------------------------------ ---------- ----------
31 Mar 31 Mar
2020 2019
Number Number
Ordinary Shares issued and fully paid of Shares of Shares
--------------------------------------- ----------- -----------
Balance at the start of the year 153,321,282 139,382,984
--------------------------------------- ----------- -----------
Ordinary Shares issued during the year 76,011,196 13,938,298
--------------------------------------- ----------- -----------
Balance at the end of the year 229,332,478 153,321,282
--------------------------------------- ----------- -----------
Gross proceeds of approximately GBP128.5 million (GBP126.5
million net proceeds) were raised during the year ended 31 March
2020 (31 March 2019: GBP23.2 million and GBP23.0 million net
proceeds). Expenses amounting to GBP2.0 million (31 March 2019:
GBP0.2 million) were recognised as incurred and were treated as a
reduction to Reserves in the Statement of Financial Position.
The Company manages its capital to ensure that it will be able
to continue as a going concern while maximising the return to
Shareholders. The Company's overall strategy was outlined in the
Prospectus which was published as part of the Second Placing
Programme. The capital structure of the Company consists of the
equity of the Company as disclosed in the Statement of Changes in
Equity.
On May 24 2019, the Company announced that 45.9 million shares
had been issued under this programme at 170 pence per new Ordinary
Share, raising gross proceeds of GBP78.0 million.
On 1 October 2019, the Company announced that it had raised
gross proceeds of GBP17.0 million through the issue of a further
10.2 million new Ordinary Shares at 167 pence per new Ordinary
Share.
The Second Placing Programme expired on 1 November 2019, having
raised aggregate gross proceeds of GBP95.0 million and further
diversified RECI's ownership and enhanced the liquidity of the
Company's Ordinary Shares.
On 4 February 2020, the Company raised gross proceeds of GBP33.5
million through the issue of 19.9 million new Ordinary Shares at
168 pence per new Ordinary Share. These Ordinary Shares were issued
under the Company's general authority to allot and issue equity
securities.
15. Financial Instruments and Associated Risks
The Company's investment activities expose it to various types
of risk which are associated with the financial instruments and
markets in which it invests. The Company's risk management policies
seek to minimise the potential adverse effects of these risks on
the Company's financial performance.
The financial risks to which the Company is exposed include
market price risk, interest rate risk, liquidity risk, currency
risk, credit risk, prepayment and re-investment risk. In certain
instances as described more fully below, the Company enters into
derivative transactions in order to help mitigate particular types
of risk.
(a) Market Risk
Market risk is the risk that the fair value and future cash
flows of a financial instrument will fluctuate because of changes
in market factors. Market risk comprises of interest rate risk,
currency risk and other price risk.
The Company's strategy on the management of market risk is
driven by the Company's investment objectives detailed in Note 1
which in respect of the Company is to invest primarily in debt
secured by commercial or residential properties in the United
Kingdom and Western Europe.
The Company's market risk is managed on a daily basis by the
Investment Manager in accordance with policies and procedures
detailed below.
The sensitivity analysis below is based on a change in one
variable while holding all other variables constant. In practice,
this is unlikely to occur, and changes in some of the assumptions
may be correlated - for example, change in foreign currency rate
and change in market values. In addition, as the sensitivity
analysis uses historical data as a basis for determining future
events, it does not encompass all possible scenarios, particularly
those that are of an extreme nature.
(i) Currency Risk
Currency risk is the risk that the fair value or future cash
flows of a financial instrument will fluctuate because of changes
in foreign exchange rates.
The Company is exposed to currency risk to the extent that
foreign exchange rates fluctuate as it has financial instruments
that are denominated in currencies other than GBP.
The Company manages its foreign exchange exposure forward
foreign currency exchange contracts. These instruments are detailed
in Note 10.
The currency profile of the Company, including derivatives at
fair value, at the year end date was as follows:
As at 31 March 2020:
Forward
foreign
currency
Net currency Monetary Monetary exchange
exposure assets liabilities contracts
Company GBP GBP GBP GBP
-------- ------------ ----------- ------------ -------------
GBP 349,525,913 324,836,040 (77,301,913) 101,991,786
-------- ------------ ----------- ------------ -------------
EUR (12,380,310) 116,931,133 (21,142,752) (108,168,691)
-------- ------------ ----------- ------------ -------------
USD 11,594 11,594 - -
-------- ------------ ----------- ------------ -------------
337,157,197 441,778,767 (98,444,665) (6,176,905)
-------- ------------ ----------- ------------ -------------
As at 31 March 2019:
Forward
foreign
currency
Net currency Monetary Monetary exchange
exposure assets liabilities contracts
Company GBP GBP GBP GBP
-------- ------------ ----------- ------------- ------------
GBP 253,311,288 248,880,355 (57,672,107) 62,103,040
-------- ------------ ----------- ------------- ------------
EUR (132,862) 105,597,843 (44,279,667) (61,451,038)
-------- ------------ ----------- ------------- ------------
USD 19,863 19,863 - -
-------- ------------ ----------- ------------- ------------
253,198,289 354,498,061 (101,951,774) 652,002
-------- ------------ ----------- ------------- ------------
As at 31 March 2020, had the GBP strengthened by 5% or 10% in
relation to all currency exposure of the Company with all other
variables held constant, the equity of the Company and the net
profit/(loss) per the Statement of Comprehensive Income would have
changed by the amounts shown below. The analysis is performed on
the same basis for 2019.
31 Mar 31 Mar
2020 2019
By 5% GBP GBP
------ --------- ------
EUR (619,016) 6,643
------ --------- ------
USD 580 (993)
------ --------- ------
Total (618,436) 5,650
------ --------- ------
31 Mar 31 Mar
2020 2019
By 10% GBP GBP
------- ----------- -------
EUR (1,238,031) 13,286
------- ----------- -------
USD 1,159 (1,986)
------- ----------- -------
Total (1,236,872) 11,300
------- ----------- -------
A 5% or 10% weakening of the GBP against the above currencies
would have resulted in an equal but opposite effect on the equity
of the Company and net profit/(loss) per the Statement of
Comprehensive Income to the amounts shown above, on the basis that
all other variables remained constant.
The sensitivity analysis reflects how equity of the Company
would have been affected by changes in the relevant risk variable
that were reasonably possible at the reporting date. Management has
determined that a fluctuation of 5% in foreign exchange rates is
reasonably possible, considering the environment in which the
Company operates.
(ii) Interest Rate Risk
Interest rate risk is the risk that the fair value and future
cash flows of a financial instrument will fluctuate because of
changes in market interest rates.
The Company's interest rate risk is managed by the Investment
Manager in accordance with policies and procedures detailed
below.
The Company invests in fixed and floating rate real estate
related debt assets (which includes loans and bonds). Interest rate
risk arises from the effects of fluctuations in the prevailing
levels of market interest rates on the fair value of financial
assets and liabilities and future cash flow.
Should interest rates rise by 1.00% (100 basis points) or 2.00%
(200 basis points) in relation to the fixed rate assets held by the
Company, the estimated impact on the net asset value ("NAV") of the
Company is a decrease of GBP6.9 million or GBP13.8 million (31
March 2019: GBP7.1 million or GBP14.2 million), respectively. A
decrease in interest rates by 100 basis points or 200 basis points
is estimated to result in an increase in the NAV of the Company by
a similar amount. These estimates are calculated based on the fair
value of the fixed rate securities including accrued interest held
by the Company as at 31 March 2020 and 31 March 2019, and their
weighted average lives. A fundamental principle of bond investing
is that market interest rates and bond prices generally move in
opposite directions. When market interest rates rise, prices of
fixed-rate bonds fall.
The interest rate profile of the Company as at 31 March 2020 was
as follows:
Non-interest
Fixed Floating bearing Total
GBP GBP GBP GBP
-------------------------------------- ----------- ------------------------------- ------------ ------------
Financial assets at fair value
through profit or loss 206,017,967 169,142,610 - 375,160,577
-------------------------------------- ----------- ------------------------------- ------------ ------------
Other assets - - 14,641,472 14,641,472
-------------------------------------- ----------- ------------------------------- ------------ ------------
Cash and cash equivalents - 27,019,773 - 27,019,773
-------------------------------------- ----------- ------------------------------- ------------ ------------
Cash collateral at broker - 24,956,945 - 24,956,945
-------------------------------------- ----------- ------------------------------- ------------ ------------
Financing agreements - (96,966,878) - (96,966,878)
-------------------------------------- ----------- ------------------------------- ------------ ------------
Derivative financial liabilities
- forward foreign exchange contracts - - (6,176,905) (6,176,905)
-------------------------------------- ----------- ------------------------------- ------------ ------------
Other liabilities - - (1,477,787) (1,447,787)
-------------------------------------- ----------- ------------------------------- ------------ ------------
Total 206,017,967 124,152,450 6,986,780 337,157,197
-------------------------------------- ----------- ------------------------------- ------------ ------------
The maturity profile of the Company as at 31 March 2020 was as
follows:
Within One to Over five
Net assets one year five years years
GBP GBP GBP GBP
-------------------------------------- ------------ ------------ ----------- -----------
Financial assets at fair value
through profit or loss 375,160,577 21,680,862 107,876,508 245,603,207
-------------------------------------- ------------ ------------ ----------- -----------
Other assets 14,641,472 14,641,472 - -
-------------------------------------- ------------ ------------ ----------- -----------
Cash and cash equivalents 27,019,773 27,019,773 - -
-------------------------------------- ------------ ------------ ----------- -----------
Cash collateral at broker 24,956,945 24,956,945 - -
-------------------------------------- ------------ ------------ ----------- -----------
Financing agreements (96,966,878) (96,966,878) - -
-------------------------------------- ------------ ------------ ----------- -----------
Derivative financial liabilities
- forward foreign exchange contracts (6,176,905) (6,176,905) - -
-------------------------------------- ------------ ------------ ----------- -----------
Other liabilities (1,477,787) (1,477,787) - -
-------------------------------------- ------------ ------------ ----------- -----------
Net assets 337,157,197 (16,322,518) 107,876,508 245,603,207
-------------------------------------- ------------ ------------ ----------- -----------
The interest rate profile of the Company as at 31 March 2019 was
as follows:
Non-interest
Fixed Floating bearing Total
GBP GBP GBP GBP
------------------------------------ ----------- ------------- ------------ -------------
Financial assets at fair value
through profit or loss 211,871,450 90,579,062 - 302,450,512
------------------------------------ ----------- ------------- ------------ -------------
Derivative financial assets -
forward foreign exchange contracts - - 652,002 652,002
------------------------------------ ----------- ------------- ------------ -------------
Other assets - - 11,981,115 11,981,115
------------------------------------ ----------- ------------- ------------ -------------
Cash and cash equivalents - 38,644,984 - 38,644,984
------------------------------------ ----------- ------------- ------------ -------------
Cash collateral at broker - 1,284,829 - 1,284,829
------------------------------------ ----------- ------------- ------------ -------------
Financing agreements - (100,109,879) - (100,109,879)
------------------------------------ ----------- ------------- ------------ -------------
Other liabilities - - (1,705,274) (1,705,274)
------------------------------------ ----------- ------------- ------------ -------------
Total 211,871,450 30,398,996 10,927,843 253,198,289
------------------------------------ ----------- ------------- ------------ -------------
The maturity profile of the Company as at 31 March 2019 was as
follows:
Within One to Over five
Net Assets one year five years years
GBP GBP GBP GBP
------------------------------------ ------------- ------------- ----------- -----------
Financial assets at fair value
through profit or loss 302,450,512 44,302,316 139,706,829 118,441,367
------------------------------------ ------------- ------------- ----------- -----------
Derivative financial assets -
forward foreign exchange contracts 652,002 652,002 - -
------------------------------------ ------------- ------------- ----------- -----------
Cash and cash equivalents 38,644,984 38,644,984 - -
------------------------------------ ------------- ------------- ----------- -----------
Other assets 11,981,115 11,981,115 - -
------------------------------------ ------------- ------------- ----------- -----------
Cash collateral due to broker 1,284,829 1,284,829 - -
------------------------------------ ------------- ------------- ----------- -----------
Financing agreements (100,109,879) (100,109,879) - -
------------------------------------ ------------- ------------- ----------- -----------
Other liabilities (1,705,274) (1,705,274) - -
------------------------------------ ------------- ------------- ----------- -----------
Net assets 253,198,289 (4,949,907) 139,706,829 118,441,367
------------------------------------ ------------- ------------- ----------- -----------
The value of the asset-backed securities will fluctuate as a
result of changes in market prices (other than those arising from
interest rate risk or currency risk), whether caused by factors
specific to an individual investment, its issuer or all factors
affecting all instruments traded in the market. The loans in the
Company are recorded at fair value on initial recognition and
subsequent measurement.
(b) Credit Risk
Credit risk is the risk that a counterparty to a financial
instrument will fail to discharge an obligation or commitment that
it has entered into with the Company. Credit risk is generally
higher for a non-exchange traded financial instrument because the
counterparty for non-exchange traded financial instruments is not
backed by an exchange-clearing house.
The Company's financial assets, other than the investment
portfolio discussed below, exposed to credit risk, at the year end
date were as follows:
31 Mar 31 Mar
2020 2019
GBP GBP
-------------------------- ---------- ----------
Cash and cash equivalents 27,019,773 38,644,984
-------------------------- ---------- ----------
Cash collateral at broker 24,956,945 1,421,450
-------------------------- ---------- ----------
Total 51,976,718 40,066,434
-------------------------- ---------- ----------
Credit rating for the custodian of the cash balance is on page
64.
Bonds
The Company is subject to the risk that issuers of asset backed
securities in which it invests may default on their obligations and
that certain events may occur which have an immediate and
significant adverse effect on the value of such instruments. There
can be no assurance that an issuer of an instrument in which the
Company invests will not default or that an event which has an
immediate and significant adverse effect on the value of such
instruments will not occur, and that the Company will not sustain a
loss on the transaction as a result. The Company seeks to mitigate
this risk by monitoring its portfolio of investments, reviewing the
underlying credit quality of its counterparties, on a monthly
basis.
Loans
The Company is subject to the risk that the underlying borrowers
to the loans in which it invests, may default on their obligations
and that certain events may occur which have an immediate and
significant adverse effect on the value of such instruments. Any
loan may become a defaulted obligation for a variety of reasons,
including non-payment of principal or interest, as well as covenant
violations by the borrower in respect of the underlying loan
documents. In the event of any default on the Company's investment
in a loan by the borrower, the Company will bear a risk of loss of
principal and accrued interest on the loan, which could have a
material adverse effect on the Company's investment.
There can be no assurance that a borrower will not default, that
there will not be an issue with the underlying real estate security
or that an event which has an immediate and significant adverse
effect on the value of these loans will not occur, and that the
Company will not sustain a loss on the transaction as a result. The
Company seeks to mitigate this risk by performing due diligence and
monitoring its portfolio of investments, reviewing the underlying
credit quality of its borrowers, performance of the underlying
asset, and loan covenants compliance against financial information
received and the performance of the security, on a quarterly
basis.
The Company's total investment in loans as at 31 March 2020,
amounted to GBP137.6 million (31 March 2019: GBP139.4 million)
which excludes any interest accrued on loans at this date.
Derivative Contracts
The Company has credit exposure in relation to its derivative
contracts. The Company was invested in derivative contracts with
the Bank of New York Mellon and Goldman Sachs International as at
31 March 2020 and 31 March 2019, respectively with the following
credit rating and credit quality according to Standard and
Poor's:
31 Mar 31 Mar 31 Mar 31 Mar
2020 2019 2020 2019
Rating Rating GBP GBP
---------------------------- -------- ------- ----------- -------
Goldman Sachs International - A+ - 652,002
---------------------------- -------- ------- ----------- -------
The Bank of New York Mellon AA- - (6,176,905) -
---------------------------- -------- ------- ----------- -------
Transactions involving derivative instruments are usually with
counterparties with whom the Company has signed master netting
agreements. Master netting agreements provide for the net
settlement of contracts with the same counterparty in the event of
default. The impact of the master netting agreements is to reduce
credit risk from the amounts shown as derivative financial assets
on the Statement of Financial Position. The credit risk associated
with derivative financial assets subject to a master netting
arrangement is eliminated only to the extent that financial
liabilities due to the same counterparty will be settled after the
assets are realised.
The exposure to credit risk reduced by master netting
arrangements may change significantly within a short period of time
as a result of transactions subject to the arrangement. The
corresponding assets and liabilities have not been offset on the
Statement of Financial Position.
Below are the derivative assets and liabilities by counterparty
and details of the collateral received and pledged by Company as at
31 March 2020:
Net (if
Value of greater
derivative Collateral Collateral than
Derivative liabilities received pledged zero)
type Counterparty GBP GBP GBP GBP
----------- ------------- ----------- --------------------------------- --------------------------------- -------
Forward
foreign The Bank of
exchange New
contracts York Mellon (6,176,905) - 6,176,905 -
----------- ------------- ----------- --------------------------------- --------------------------------- -------
Below are the derivative assets and liabilities by counterparty
and details of the collateral received and pledged by Company as at
31 March 2019:
Net (if
Value of greater
derivative Collateral Collateral than
Derivative liabilities received pledged zero)
type Counterparty GBP GBP GBP GBP
----------- -------------- ----------- --------------------------------- --------------------------------- -------
Forward
foreign
exchange Goldman Sachs
contracts International 652,002 - - 652,002
----------- -------------- ----------- --------------------------------- --------------------------------- -------
Credit risk arising on transactions with brokers relates to
transactions awaiting settlement. Risk relating to unsettled
transactions is considered small due to the short settlement period
involved and the high credit quality of the brokers used. The
Company monitors the credit rating and financial positions of the
brokers used to further mitigate this risk.
Custody
The Company monitors its credit risk by monitoring the credit
quality of The Bank of New York Mellon (International) Limited (31
March 2019: The Bank of New York Mellon (International) Limited),
as reported by Standard and Poor's or Moody's.
If the credit quality or the financial position of The Bank of
New York Mellon (International) Limited (31 March 2019: The Bank of
New York Mellon (International) Limited) were to deteriorate
significantly the Investment Manager will seek to move the
Company's assets to another bank. The Bank of New York Mellon
(International) Limited (31 March 2019: The Bank of New York Mellon
(International) Limited) is a Trust Company with a credit rating of
Aa2 at the reporting date (31 March 2019: Aa2) according to
Moody's.
(c) Liquidity Risk
Liquidity risk is the risk that the Company will encounter
difficulty in meeting obligations associated with its financial
liabilities. The Company's liquidity risk is managed on a daily
basis by the Investment Manager in accordance with policies and
procedures detailed below. Where needed, the Investment Manager
will liquidate positions to increase cash or reduce leverage.
The following table details the current and long-term financial
liabilities of the Company at the year end date:
One to Three months Greater
Less than three to one than one
one month Months year year
As at 31 March 2020: GBP GBP GBP GBP
-------------------------------- ---------- ---------- ------------ ---------
Financial liabilities excluding
derivatives
* Financing agreements 37,096,030 59,870,848 - -
* Other liabilities - 1,477,787 - -
-------------------------------- ---------- ---------- ------------ ---------
37,096,030 61,348,635 - -
-------------------------------- ---------- ---------- ------------ ---------
Three months Greater
Less than One to to one than one
one month three months year year
As at 31 March 2019: GBP GBP GBP GBP
--------------------------------------- ---------- ------------- ------------ ---------
Financial liabilities excluding
derivatives
* Financing agreements 32,767,486 67,342,393 - -
* Cash collateral due to broker - 136,621 - -
* Other liabilities - 1,705,274 - -
--------------------------------------- ---------- ------------- ------------ ---------
32,767,486 69,184,288 - -
--------------------------------------- ---------- ------------- ------------ ---------
The market for subordinated asset-backed securities including
real estate loans into which the Company is invested, is illiquid.
In addition, investments that the Company purchases in privately
negotiated (also called "over-the-counter" or "OTC") transactions
may not be registered under relevant securities laws or otherwise
may not be freely tradable, resulting in restrictions on their
transfer, sale, pledge or other disposition except in a transaction
that is exempt from the registration requirements of, or is
otherwise in accordance with, those laws. As a result of this
illiquidity, the Company's ability to vary its portfolio in a
timely fashion and to receive a fair price in response to changes
in economic and other conditions may be limited.
Furthermore, where the Company acquires investments for which
there is not a readily available market, the Company's ability to
deal in any such investment or obtain reliable information about
the value of such investment or risks to which such investment is
exposed may be limited.
(d) Valuation of Financial Instruments
IFRS 13 Fair Value Measurement requires disclosures surrounding
the level in the fair value hierarchy in which fair value
measurement inputs are categorised for assets and liabilities
measured in the Statement of Financial Position. The determination
of the fair value for financial assets and financial liabilities
for which there is no observable market price requires the use of
valuation techniques as described in Note 2 and Note 3. For
financial instruments that trade infrequently and have little price
transparency, fair value is less objective.
The Company categorises investments using the following
hierarchy as defined by IFRS 13:
-- Level 1 - Quoted market prices in an active market for an identical instrument.
-- Level 2 - Valuation techniques based on observable inputs.
This category includes instruments valued using: quoted market
prices in active markets for similar instruments; quoted prices for
similar instruments in markets that are considered less than
active; or other valuation techniques where all significant inputs
are directly or indirectly observable from market data.
-- Level 3 - Valuation techniques using significant unobservable
inputs. This category includes all instruments where the valuation
technique includes inputs not based on observable data and the
unobservable inputs could have a significant impact on the
instrument's valuation. This category includes instruments that are
valued based on quoted prices for similar instruments where
significant unobservable adjustments or assumptions are required to
reflect differences between the instruments.
The following tables analyse within the fair value hierarchy of
the Company's financial assets and liabilities measured at fair
value at the year end date:
Level 1 Level 2 Level 3
As at 31 March 2020: GBP GBP GBP Total
----------------------------------- ------- ------------ ----------- ------------
Non-current assets
Real Estate Credit Investments
- market bonds - 87,690,906 214,253 87,905,159
Real Estate Credit Investments
- self-originated bonds 149,653,980 - 149,653,980
Real Estate Credit Investments
- self-originated loans - - 137,601,438 137,601,438
Current liabilities
Real Estate Credit Investments
- repurchase agreements - (96,966,878) - (96,966,878)
Forward foreign exchange contracts - (6,176,905) - (6,176,905)
----------------------------------- ------- ------------ ----------- ------------
- 134,201,103 137,815,691 272,016,794
----------------------------------- ------- ------------ ----------- ------------
Level 1 Level 2 Level 3
As at 31 March 2019: GBP GBP GBP Total
----------------------------------- ------- ------------- ----------- -------------
Non-current assets
Real Estate Credit Investments
- market bonds - 92,473,719 - 92,473,719
Real Estate Credit Investments
- self-originated bonds 70,593,153 70,593,153
Real Estate Credit Investments
- self-originated loans - - 139,383,640 139,383,640
Current assets
Forward foreign exchange contracts - 652,002 - 652,002
Current liabilities
Real Estate Credit Investments
- repurchase agreements - (100,109,879) - (100,109,879)
----------------------------------- ------- ------------- ----------- -------------
- 63,608,995 139,383,640 202,992,635
----------------------------------- ------- ------------- ----------- -------------
The level in the fair value hierarchy within which the fair
value measurement is categorised in its entirety is determined
based on the lowest level input that is significant to the fair
value measurement in its entirety.
The fair value of forward contracts is the difference between
the contracts price and reported market prices of the underlying
contract variables. These are included in Level 2 of the fair value
hierarchy.
The fair values of investments 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. These include
investment-grade corporate bonds ("Real Estate Credit
Instruments"), repurchase agreements and over-the-counter
derivatives.
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. In cases where material discounts are applied, the
positions will be valued as Level 3.
The Company makes loans into structures to gain exposure to real
estate secured debt in the UK and Western Europe. These loans are
not traded in an active market and there are no independent quotes
available for these loans. Such holdings are classified as Level 3
investments. The fair value of these loans are linked directly to
the value of the real estate loans, the underlying structures
invests in, which are determined based on modelled expected cash
flows (drawdown principal and interest repayments, and maturity
dates) with effective yields ranging from 4.9% to 24.0% (31 March
2019: 7.6% to 26.0%) (the unobservable input).
Fair value of the real estate loans is adjusted for changes in
the credit quality of both the borrower and the underlying property
collateral, and changes in the market rate on similar instruments.
On origination of the loan, the Investment Manager performs due
diligence on the borrower and related security/property. This
includes obtaining a valuation of the underlying property (to
assess loan-to-value of the investment). In most instances, the
terms of the loan require periodic revaluation of the underlying
property to check against loan-to-value covenants. All the fees
associated with the investments (arrangement fees, exit fees, etc.)
are paid directly to the Company and not paid to the Investment
Manager.
The majority of the Company's investments in loans are made
though a Luxembourg based entity, Stornoway Finance SARL via loan
note instruments. As and when market information, such as market
prices from recognised financial data providers becomes available,
the Company will assess the impact on its portfolio of loans and
whether there should be any transfers between levels in the fair
value hierarchy.
As at 31 March 2020, the Investment Manager was not aware of any
significant movement in the market rates, any indications of
impairment, significant credit events or significant negative
performance of the underlying property structures, which might
affect the fair value of the loans and bonds. Whilst no defaults in
the underlying investment are expected, a 1% or 2% decrease in the
discount rate would decrease the fair value by GBP6.9 million or
GBP13.8 million (31 March 2019: GBP7.1 million or GBP14.2 million),
respectively and increase net profit by an equal amount; an equal
change in the opposite direction would decrease the equity of the
loan and bond portfolio within the Company and decrease net profit
by an equal amount.
Level 3 Reconciliation
The following table shows a reconciliation of all movements in
the fair value of financial instruments categorised within Level 3
between the beginning and the end of the financial year:
Level 3 Level 3
31 Mar 2020 31 Mar 2019
GBP GBP
------------------------------------------------- ------------ -------------
Financial assets at fair value through profit
or loss
Opening balance 139,383,640 191,694,821
Total (losses)/gains recognised in the Statement
of Comprehensive Income for the year (14,147,498) 3,171,864
Purchases 72,177,884 76,585,766
Sales (59,870,537) (108,199,093)
Transfer in/(out) of Level 3* 272,202 (23,869,718)
Closing balance 137,815,691 139,383,640
------------------------------------------------- ------------ -------------
Unrealised loss on investments classified as
Level 3 at year end (15,421,280) (1,732,907)
------------------------------------------------- ------------ -------------
* During the year ended 31 March 2020, following a review of the
levels for some of the bonds, they have been moved from Level 2 to
Level 3 (31 March 2019: from Level 3 to Level 2).
(e) Prepayment and Re-Investment Risk
The Company's real estate loans have the facility for
prepayment. The Company's exposure to real estate debt securities
also has exposure to potential prepayment risk which may have an
impact on the value of the Company's portfolio. Prepayment rates
are influenced by changes in interest rates and a variety of
economic, geographic and other factors beyond the Company's control
and consequently cannot be predicted with certainty.
The level and timing of prepayments made by borrowers in respect
of the mortgage loans that collateralise certain of the Company's
investments may have an adverse impact on the income earned by the
Company from those investments.
16. Segmental Reporting
The Company has adopted IFRS 8 Operating Segments. The standard
requires a "management approach", under which segment information
is presented on the same basis as that used for internal reporting
purposes.
Whilst the Investment Manager may make the investment decisions
on a day-to-day basis regarding the allocation of funds to
different investments, any changes to the investment strategy or
major allocation decisions have to be approved by the Board, even
though they may be proposed by the Investment Manager. The Board
retains full responsibility as to the major allocation decisions
made on an ongoing basis and is therefore considered the "Chief
Operating Decision Maker" under the IFRS 8.
The Company invests in Real Estate Credit Investments. The Real
Estate Credit Investments may take different forms but will be
likely to be: (i) secured real estate loans; and (ii) debentures or
any other form of debt instrument, securitised tranches of secured
real estate related debt securities, for example, RMBS and CMBS
(together "MBS"). The real estate debt strategy focuses on secured
residential and commercial debt in the UK and Western Europe,
seeking to exploit opportunities in publicly traded securities and
real estate loans.
The Company has two reportable segments, being the Market Bond
Portfolio and the self-originated Bilateral Loan and Bond
Portfolio.
For each of the segments, the Board of Directors reviews
internal management reports prepared by the Investment Manager on a
quarterly basis. The Investment Manager has managed each of the
Market Bond Portfolio and the Bilateral Loan and Bond Portfolio
separately, thus two reportable segments are displayed in the
financial statements.
Information regarding the results of each reportable segment is
included below. Performance is measured based on segment
profit/(loss), as included in the internal management reports that
are reviewed by the Board of Directors. Segment profit/(loss) is
used to measure performance as management believes that such
information is the most relevant in evaluating the results.
Bilateral
Market Loan and
Bond Portfolio Bond Portfolio Total
Year ended 31 March 2020: GBP GBP GBP
-------------------------- --------------- --------------- -----------
Reportable segment loss (7,500,964) (376,618) (7,877,582)
-------------------------- --------------- --------------- -----------
Bilateral
Market Loan and
Bond Portfolio Bond Portfolio Total
Year ended 31 March 2019: GBP GBP GBP
--------------------------------- --------------- --------------- ----------
Reportable segment (loss)/profit (1,669,912) 23,870,649 22,200,737
--------------------------------- --------------- --------------- ----------
Bilateral
Market Loan and
Bond Portfolio Bond Portfolio Total
Year ended 31 March 2020: GBP GBP GBP
-------------------------- --------------- --------------- -----------
Total assets - - 441,778,767
Non-segmental assets - - 52,000,227
Reportable segment assets 88,400,568 301,377,972 389,778,540
-------------------------- --------------- --------------- -----------
Bilateral
Market Loan and
Bond Portfolio Bond Portfolio Total
Year ended 31 March 2019: GBP GBP GBP
-------------------------- --------------- --------------- -----------
Total assets - - 355,150,063
Non-segmental assets - - 40,721,217
Reportable segment assets 93,013,948 221,414,898 314,428,846
-------------------------- --------------- --------------- -----------
Information regarding the basis of geographical segments is
presented in the Investment Manager's report and is based on the
countries of the underlying collateral.
All segment revenues are from external sources. There are no
inter-segment transactions between the reportable segments during
the year. Certain income and expenditure is not considered part of
the performance of either segment. This includes gains/(losses) on
net foreign exchange and derivative instruments, expenses and
interest on borrowings.
The following table provides a reconciliation between net
reportable income and operating profits.
31 Mar 31 Mar
2020 2019
GBP GBP
--------------------------------------------------- ------------ -----------
Reportable segment (loss)/profit (7,877,582) 22,200,737
Net (losses)/gains on foreign exchange instruments
and other foreign currency transactions (1,615,498) 3,069,195
--------------------------------------------------- ------------ -----------
(9,493,080) 25,269,932
--------------------------------------------------- ------------ -----------
Operating expenses (5,580,012) (4,833,548)
Provision for expected credit losses (860,151) -
--------------------------------------------------- ------------ -----------
Finance costs (1,488,720) (1,203,559)
--------------------------------------------------- ------------ -----------
Net (loss)/profit (17,421,963) 19,232,825
--------------------------------------------------- ------------ -----------
Certain assets and liabilities are not considered to be
attributable to either segment, these include, other receivables
and prepayments, cash and cash equivalents and derivative financial
assets.
The following table provides a reconciliation between net total
segment assets and total assets.
31 Mar 31 Mar
2020 2019
GBP GBP
---------------------------- ----------- -----------
Reportable segment assets 389,778,540 314,428,846
Cash and cash equivalents 27,019,773 38,644,984
Cash collateral at broker 24,956,945 1,421,450
Derivative financial assets - 652,002
Other assets 23,509 2,781
---------------------------- ----------- -----------
441,778,767 355,150,063
---------------------------- ----------- -----------
The following is a summary of the movements in the Company's
investments analysed by the loan and bond portfolios for the year
ended 31 March 2020:
Bilateral
Market Loan and
Bond Portfolio Bond Portfolio Total
Year ended 31 March 2020: GBP GBP GBP
----------------------------------------------- --------------- --------------- -------------
Financial assets at fair value through
profit or loss
Opening fair value 92,473,719 209,976,793 302,450,512
Purchases 51,485,476 232,287,095 283,772,571
Repayments/sales proceeds (44,373,875) (132,378,633) (176,752,508)
Realised (loss)/gain on sales (1,889,465) 902,341 (987,124)
Net movement in unrealised loss on investments
at fair value through
the profit or loss (9,790,696) (23,532,178) (33,322,874)
----------------------------------------------- --------------- --------------- -------------
Closing fair value 87,905,159 287,255,418 375,160,577
----------------------------------------------- --------------- --------------- -------------
The following is a summary of the movements in the Company's
investments analysed by the loan and bond portfolios for the year
ended 31 March 2019:
Bilateral
Market Loan and
Bond Portfolio Bond Portfolio Total
Year ended 31 March 2019: GBP GBP GBP
----------------------------------------------- --------------- --------------- -------------
Financial assets at fair value through
profit or loss
Opening fair value 28,172,361 217,185,070 245,357,431
Purchases 89,504,090 115,366,603 204,870,693
Repayments/sales proceeds (25,281,422) (122,382,454) (147,663,876)
Movement between portfolios 4,166,949 (4,166,949) -
Realised (loss)/gain on sales* (809,959) 6,147,582 5,337,623
Net movement in unrealised loss on investments
at fair value through
the profit or loss* (3,278,300) (2,173,059) (5,451,359)
----------------------------------------------- --------------- --------------- -------------
Closing fair value 92,473,719 209,976,793 302,450,512
----------------------------------------------- --------------- --------------- -------------
* Excludes effective interest adjustment of GBP0.2 million
relating to the bond portfolio for the year ended 31 March 2019,
which has been included in the interest income in the Statement of
Comprehensive Income.
17. Cash Collateral
The Company manages some of its financial risks through the use
of financial derivative instruments which are subject to collateral
requirements. As at 31 March 2020, a total of GBP25.0 million (31
March 2019: GBP1.3 million) was due from various financial
institutions under the terms of the relevant arrangements. The cash
held by brokers is restricted and is shown as Cash collateral at
broker on the Statement of Financial Position.
18. Material Agreements and Related Party Transactions
Loan Investments
The Company has made, and will continue to make, certain loan
investments through a Luxembourg based entity, Stornoway Finance
SARL, via Loan Note Instruments. This entity has separate
compartments for each loan deal which effectively ring fences each
loan deal. Other funds managed by the Investment Manager may invest
pari passu in these compartments.
Investment Manager
The Company is party to an Investment Management Agreement with
the Investment Manager, dated 22 February 2017, pursuant to which
the Company has appointed the Investment Manager to manage its
assets on a day-to-day basis in accordance with its investment
objectives and policies, subject to the overall supervision and
direction of the Board of Directors.
The Company pays the Investment Manager a management fee and a
performance fee.
Management Fee
Under the terms of the Investment Management Agreement, the
Investment Manager is entitled to receive from the Company an
annual management fee of 1.25% on an adjusted NAV, being the NAV of
the Ordinary Shares.
During the year ended 31 March 2020, the management fee totalled
GBP4.1 million (31 March 2019: GBP3.0 million), of which GBP0.4
million (31 March 2019: GBP0.5 million) was outstanding at the year
end.
Performance Fee
Under the terms of the Investment Management Agreement, the
Investment Manager is entitled to receive from the Company a
performance fee calculated as ((A-B) x 20% x C) where:
A = the Adjusted Performance NAV per share, as defined in the
Prospectus.
B = the NAV per Ordinary Share as at the first business day of
the Performance Period increased by a simple annual rate of return
of 7% over the Performance Period or, if no performance fee was
payable in the previous Performance Period, the NAV per Ordinary
Share on the first business day of the Performance Period
immediately following the last Performance Period in which a
performance fee was paid (the "Starting Date") increased by a
simple annual rate of return of 7 % over the period since the
Starting Date ("Hurdle Assets").
C = the time weighted average number of Ordinary Shares in issue
in the period since the Starting Date.
On 1 October 2017, the Company entered a new Performance Period
which is expected to run until the end date of the quarter in which
the second continuation resolution, to be proposed at the AGM to be
held in 2021, is passed. With the commencement of a new Performance
Period, the NAV on which the Hurdle Assets will be determined in
accordance with the above formula was reset to the NAV per Ordinary
Share on 2 October 2017 (being the Starting Date of the new
Performance Period).
During the year ended 31 March 2020, the performance fee
totalled GBP(1.0) million (31 March 2019: GBP0.7 million) and the
related aggregate performance fee payable at the year end date
amounted to GBPNil (31 March 2019: GBP1.0 million). The negative
expense for performance fee was due to the reversal of accrual for
the year ended 31 March 2019 as the Company was not in performance
for the year ended 31 March 2020.
Administration Fee
Under the terms of the Administration Agreement, the
Administrator is entitled to receive from the Company a monthly
administration fee based on the prior month gross assets of the
Company adjusted for current month subscriptions and redemptions of
the Company at the relevant basis points per annum rate, subject
always to a minimum monthly fee GBP10,000.
During the year ended 31 March 2020, the administration fee
totalled GBP244,305 (31 March 2019: GBP212,716), of which GBP22,272
(31 March 2019: GBP32,281) was outstanding at the year end.
Depositary Fee
Under the terms of the Depositary Agreement, the Depositary is
entitled to receive from the Company an annual depositary fee of
0.02% (31 March 2019: 0.02%) of the NAV of the Company. During the
year ended 31 March 2020, the depositary fee totalled GBP68,842 (31
March 2019: GBP69,334). The Company owed GBP15,628 to the
Depositary at the year end date (31 March 2019: GBP2,343).
19. Contingencies and Commitments
As at 31 March 2020, the Company had committed GBP222.6 million
into loans of which GBP161.2 million had been funded (31 March
2019: GBP184.7 million commitment of which GBP139.4 million was
funded).
20. Subsequent Events
The Directors declared a dividend of 3.0 pence per Ordinary
Share on 15 May 2020.
The current worldwide Coronavirus outbreak (COVID-19), declared
by the World Health Organization as a global health emergency on 30
January 2020, has caused disruption to businesses and economic
activity which has been reflected in recent fluctuations in global
stock markets.
The Company has been closely monitoring this and indeed all
other material macro sources of uncertainty related to COVID-19 and
the potential of a global recession, to ensure that any impact to
the valuation of financial assets is correctly reflected in the
valuations as at 31 March 2020. This is detailed in the Strategic
Report on page 10, the Investment Manager's Report on page 14 and
the Audit Committee Report on page 32. Valuation may change
significantly in the future.
There have been no other significant events affecting the
Company since the year end date that require amendment to or
disclosure in the financial statements.
21. Foreign Exchange Rates Applied to Combined Totals Used in
the Preparation of the Financial Statements
The following foreign exchange rates relative to the GBP were
used as at the year end date:
31 Mar 31 Mar
2020 2019
Currency GBP GBP
--------- ------ ------
EUR 1.13 1.16
USD 1.24 1.30
--------- ------ ------
22. Approval of the Financial Statements
The Annual Report and audited financial statements of the
Company were approved by the Directors on 24 June 2020.
Appendix 1 - AIFM Remuneration Policy (Unaudited)
Annual Remuneration Disclosure for the Year to 31 March 2020
Cheyne Capital Management (UK) LLP ("Cheyne"), the Alternative
Investment Fund Manager ("AIFM"), has implemented a Remuneration
Policy ("the Policy") that is applicable to all remuneration
matters within the firm, with a particular focus on those persons
who have been identified as having a material impact on the risk
profile of the AIF ("Code Staff"). This includes senior management,
risk takers and control functions.
The Policy is in line with Cheyne's business strategy,
objectives, values and long-term interests. As an AIFM, Cheyne's
overall objective is to achieve attractive and controlled
performance and capital growth for all funds under management,
including the AIF and to develop strong long-term relationships
with investors. Cheyne's income is dependent upon the funds for
which it serves as manager or AIFM, and therefore the profit
available for distribution under the Policy is dependent upon the
performance of such funds including the AIF. As such, the
fulfilment of Cheyne's objectives is interlinked with the best
interests of Cheyne's clients, which in turn is in line with the
Policy. The Policy promotes effective risk management and does not
tolerate breaches of internal risk guidelines.
Cheyne has a Remuneration Committee (currently the COO and CFO)
who report into the Incentivisation Committee (currently the CEO
and President) that oversees the remuneration of individuals,
including Code Staff, and approval of the allocation of profits
available for discretionary division among members.
Cheyne was authorised as an AIFM on 22 July 2014. The
quantitative disclosures required under Article 22 of AIFMD in
accordance with the European Securities and Markets Authority
("ESMA") guidance for the year ended 31 March 2020, in respect of
remuneration derived from the AIF are as follows:
Remuneration Deferred
Code Staff derived remuneration
Number AIFM total relevant from the derived
of remuneration to the AIF from
Business Area Code Staff (all variable) AIF (all variable) the AIF
--------------------- ----------- --------------- ---------- --------------- -------------
Portfolio management 26 GBP25,709,891 4 GBP696,402 GBP260,447
Senior management 8 GBP5,885,226 8 GBP335,700 GBP23,083
--------------------- ----------- --------------- ---------- --------------- -------------
Total 34 GBP31,595,117 12 GBP1,032,102 GBP283,530
--------------------- ----------- --------------- ---------- --------------- -------------
Remuneration Policy information is provided as required under
the FCA Rules (BIPRU 11.5.18).
Appendix 2 - AIFM Leverage (Unaudited)
For the purposes of this disclosure, leverage is any method by
which a fund's exposure is increased. A fund's exposure may be
increased by using derivatives, by reinvesting cash borrowings,
through positions within repurchase or reverse repurchase
agreements, through securities lending or securities borrowing
arrangements, or by any other means (such increase referred to
herein as the "Incremental Exposure"). The AIFMD prescribes two
methodologies for calculating overall exposure of a fund: the
"gross methodology" and the "commitment methodology". These
methodologies are briefly summarised below.
The commitment methodology takes account of the hedging and
netting arrangements employed by a fund at any given time
(purchased and sold derivative positions will be netted where both
relate to the same underlying asset). This calculation of exposure
includes all Incremental Exposure as well as a fund's own physical
holdings; and cash. By contrast, the gross methodology does not
take account of the netting or hedging arrangements employed by a
Company. This calculation of exposure includes all Incremental
Exposure as well as the Company's own physical holdings, Cash is
excluded.
The AIFMD requires that each leverage ratio be expressed as the
ratio between a fund's total exposure (including any Incremental
Exposure) and its NAV. Using the methodologies prescribed under the
AIFMD and implementing legislation, the Company has set a maximum
level of leverage, taking into account atypical and volatile market
conditions. Leverage will not exceed the ratio of 5:1 using the
commitment methodology and 5:1 using the gross methodology.
The use of leverage, including borrowings, may increase the
volatility of the Company's NAV per Ordinary Share and also amplify
any loss in the value of the Company's assets.
While the use of borrowing should enhance the total return on
the Shares where the return on the Company's underlying assets is
rising and exceeds the cost of borrowing, it will have the opposite
effect where the return on the Company's underlying assets is
falling or rising at a lower rate than the cost of borrowing,
reducing the total return on the Shares. As a result, the use of
borrowings by the Company may increase the volatility of the NAV
per share.
Any reduction in the value of the Company's investments may lead
to a correspondingly greater percentage reduction in its NAV (which
is likely to adversely affect the price of a share). Any reduction
in the number of shares in issue (for example, as a result of
buy-backs or tender offers) will, in the absence of a corresponding
reduction in borrowings, result in an increase in the Company's
level of gearing.
To the extent that a fall in the value of the Company's
investments causes gearing to rise to a level that is not
consistent with the Company's gearing policy or borrowing limits,
the Company may have to sell investments in order to reduce
borrowing.
The Company will pay interest on its borrowings. As such, the
Company is exposed to interest rate risk due to fluctuations in the
prevailing market rates. The Company may employ hedging techniques
designed to reduce the risk of adverse movements in interest rates.
However, such strategies may also result in losses and overall
poorer performance than if the Company had not entered into such
hedging transactions.
The risks associated with the derivatives used by the Company
and that may contribute to the leverage of the Company are set out
earlier.
Leverage is limited to 500% of NAV of the Company under both the
gross and commitment approaches. Up to 31 March 2020, the maximum
leverage calculated has been 146.715% for the gross approach and
130.33% for the commitment approach. In the year ended 31 March
2019, the maximum leverage calculated has been 147.961% for the
gross approach and 139.284% for the commitment approach.
Directors and Advisers
Directors
Bob Cowdell (Chairman)
Sally-Ann ("Susie") Farnon
John Hallam
Graham Harrison
Secretary of the Company
Aztec Financial Services (Guernsey) Limited
PO Box 656
East Wing
Trafalgar Court
Les Banques,
St. Peter Port
Guernsey GY1 3PP
Corporate Broker
Liberum Capital Limited
Ropemaker Place, Level 12
25 Ropemaker Street
London EC2Y 9LY
Registrar
Link Market Services (Guernsey) Limited
Mount Crevelt House
Bulwer Avenue
St. Sampson
Guernsey GY2 4LH
Depositary
The Bank of New York Mellon (International) Limited
One Canada Square
London E14 5AL
Registered Office
East Wing
Trafalgar Court
Les Banques,
St. Peter Port
Guernsey GY1 3PP
Alternative Investment Fund Manager
Cheyne Capital Management (UK) LLP
Stornoway House
13 Cleveland Row
London SW1A 1DH
Independent Auditor
Deloitte LLP
Regency Court
Glategny Esplanade
St. Peter Port
Guernsey GY1 3HW
UK Transfer Agent
Link Market Services
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Administrator
Citco Fund Services (Guernsey) Limited
Arnold House
St. Julian's Avenue
St. Peter Port
Guernsey GY1 3RD
Sub-Administrator
Citco Fund Services (Ireland) Limited
Custom House Plaza, Block 6
International Financial Services Centre
Ireland, Dublin 1
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR FLFSDRAISFII
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