TIDMSQN
RNS Number : 7604C
SQN Asset Finance Income Fund Ltd
03 October 2018
3 October 2018
FOR IMMEDIATE RELEASE
THE BOARD OF DIRECTORS OF SQN Asset Finance Income Fund Limited
ANNOUNCES THE ANNUAL REPORT AND AUDITED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEARED 30 JUNE 2018
GROUP HIGHLIGHTS FOR THE YEARED 30 JUNE 2018
The investment objective of SQN Asset Finance Income Fund
Limited is to provide its Shareholders with regular, sustainable
dividends and to generate capital appreciation through investment,
directly or indirectly, in business-essential, revenue-producing
(or cost saving) equipment and other physical assets. The Group's
base currency is Sterling.
-- NAV total return per share for the year ended 30 June 2018 (dividends reinvested at NAV)
6.2% per Ordinary Share
1.9% per 2016 C Share
-- Share price discount to NAV as at 30 June 2018
(7.1)% Ordinary Share
(3.9)% 2016 C Share
-- Market capitalisation of Ordinary Shares and 2016 C Shares as at 30 June 2018
GBP454 million
-- Average weighted yield of invested portfolio as at 30 June 2018
>9.5%
-- Dividend yield for the twelve months based on the share price as at 30 June 2018
8.0% Ordinary Share
2.1% 2016 C Share
-- Weighted average remaining term of invested portfolio (in months)
77
FINANCIAL HIGHLIGHTS AND PERFORMANCE SUMMARY
Financial Highlights
NAV Total Return
The NAV total return details the change in NAV from the start of
the relevant period and assumes that dividends paid to shareholders
are reinvested at NAV. The NAV total return achieved by SQN Asset
Finance Income Fund Limited (the "Company" and together with its
subsidiaries, the "Group") is detailed in the table below:
Period Ordinary shares 2016 C shares
Year to 30 June 2018 6.2% 1.9%
3 year annualised(1) 6.7% -
Since inception 28.2% 2.0%
(1) NAV total return annualised over a 3 year period from 1 July
2015 to 30 June 2018.
Ongoing Charges
Ongoing charges reflect those expenses which are likely to recur
in the foreseeable future and which relate to the operation of the
Group, excluding the costs of acquisition or disposal of
investments, finance charges, gains or losses arising on
investments, Ordinary Shares and 2016 C Shares.
Ongoing charges are a measure, expressed as a percentage of NAV,
based on actual costs incurred in the year as being the best
estimate of future costs excluding any non-recurring fees divided
by the average NAV of the Company during the year, in accordance
with the Association of Investment Companies (the "AIC")
methodology. The ongoing charges for the year ended 30 June 2018
were 1.11% (30 June 2017: 1.18%).
Dividend History
The Company targets an annual dividend of 7.25 pence per
Ordinary Share. During the year, a dividend of 7.25p was paid on
the Ordinary shares and 0.6042p was accrued as a payable,
reflecting the timing of the ex-dividend dates during the year. The
2016 C shares paid a gradually increasing dividend during the year
as the portfolio became invested. Please refer to note 14 for
details on dividends paid during the year and prior year.
Return of Capital
The Group repurchased 1,122,366 Ordinary Shares during the year
for a total cost of GBP1,031,187. The repurchased Ordinary Shares
are being held in treasury.
On 25 May 2018, the Group made a capital return by way of a
compulsory redemption of 41,075,778 2016 C Shares for a total cost
of GBP40,385,704 on pro rata basis amongst all the holders of 2016
C Shares.
Performance Summary
Sterling in millions, except 30 June 2018 30 June 2017
per share data and number
of shares in issue
Number of Shares in Issue
- Ordinary Shares 356,585,141 357,707,507
- 2016 C Shares 138,924,222 180,000,000
Total Net Asset Value ("NAV")
- Ordinary Shares GBP348.47 GBP356.40
- 2016 C Shares GBP135.62 GBP176.51
NAV per share
- Ordinary Shares 97.72p 99.63p
- 2016 C Shares 97.62p 98.06p
Share Price(1)
- Ordinary Shares 90.80p 104.50p
- 2016 C Shares 93.79p 101.75p
Market Capitalisation(1)
- Ordinary Shares GBP323.78 GBP373.80
- 2016 C Shares GBP130.30 GBP183.15
Earnings/(loss) per share
- Ordinary Shares 5.92p 8.58p
- 2016 C Shares 1.96p (0.02)p
Dividend paid per share(2)
- Ordinary Shares 7.85p 7.25p
- 2016 C Shares 2.31p 0.20p
- 2015 C Shares - 1.43p
Comprehensive income before GBP24.63 GBP25.74
dividends
Investments GBP398.81 GBP373.93
Cash and cash equivalents GBP76.80 GBP154.57
Weighted average yield (in
excess of)(3) 9.50% 9.50%
Weighted average remaining 77.34 months 82.54 months
term(3)
(1) Source: London Stock Exchange.
(2) The dividend for May 2018 went ex-dividend on 28 June 2018,
which resulted in 12 dividend payments being paid during the year
and the May 2018 dividend accrued to be paid. The dividend paid per
share would be 7.25p for Ordinary Shares and 2.0376p per 2016 C
Share based on 12 dividend payments.
(3) In regard to the invested portfolio
COMPANY OVERVIEW
The investment objective and policy of the Company is set out
below.
Company SQN Asset Finance Income Fund Limited
Incorporated in Guernsey on 28 May 2014.
Registered Guernsey Closed-ended Collective Investment
Scheme.
Admitted to the Premium Segment of the UK Listing Authority's
Official List and to trading on the Main Market of the London Stock
Exchange on 14 July 2014 for Ordinary Shares, 9 November 2015 for
the first issuance of C Shares (the "2015 C Shares") and 12
December 2016 for the second issuance of C Shares (the "2016 C
Shares").
Registration number 58519.
Investment Managers SQN Capital Management, LLC (the "US Investment Manager")
Incorporated in the United States of America on 7 December
2007.
A Registered Investment Adviser with the United States
Securities and Exchange Commission.
File number 4466472.
SQN Capital Management (UK) Limited (the "UK Investment
Manager")
Incorporated in England & Wales on 12 May 2014.
A wholly owned subsidiary of the US Investment Manager.
Registration number 09033846.
(together the "Investment Managers")
INVESTMENT OBJECTIVE
The investment objective of the Company is to provide its
shareholders with regular, sustainable dividends and to generate
capital appreciation through investment, directly or indirectly, in
business-essential, revenue producing (or cost-saving) equipment
and other physical assets.
INVESTMENT POLICY
The Company will seek to invest in business-essential, revenue
producing (or cost-saving) equipment and other assets with high in
place value and long economic life relative to the investment
term.
The Company provides asset financing primarily by way of
equipment leases, loans, hire-purchase agreements, construction
finance, and residual participations. It is intended that each
investment made by the Company will generate returns either through
cash flow over the investment term or through the residual value of
the equipment or other assets at the end of the investment term.
When available, the Company targets investments in the specialist
segment of the leasing market where assets provide cash flow during
the base term of the leases as well as offering the potential for
additional proceeds through lease extensions or sales at the end of
the lease. The Company generally does not intend to invest in the
large single asset segment of the leasing market, such as wide-body
commercial aircraft leasing, which is heavily reliant on residual
value to meet its return targets, or the high volume, low margin
segment of the leasing market, such as photocopier and automobile
leasing, although it may do so, from time to time, if appropriate
opportunities are identified in these segments.
The Company may invest in assets in any industry. The Company,
however, generally expects to be invested in such industries where
the Investment Managers see the potential to make the most
attractive risk adjusted returns which currently include, but are
not limited to, Agriculture, Energy, Environmental, Manufacturing,
Material Handling, Medical, Modular Accommodation, Technology and
Transportation.
The Investment Managers will target transaction sizes below
GBP20 million but, generally, the average transaction size is
expected to be GBP3 million to GBP6 million, although it may
fluctuate based on the market opportunities and portfolio
composition that the Investment Managers believe will best achieve
the Company's investment objectives. Whilst there is no minimum
lease term, it is typical for the initial lease terms to be 3 to 10
years depending on the asset. Where appropriate, however, the term
of the lease may vary significantly from this range reflecting the
opportunities available and the needs of the lessee.
It is intended that the Company will primarily acquire assets
directly and function as the lessor under equipment lease
contracts. In such situations, the Company will own all rights,
title, and interest in and to the assets and will lease them to the
end-user. In other situations, the Company may own assets and enter
into hire-purchase agreements where the Company will own the assets
until all payments are made under the agreement and a pre-agreed
nominal purchase price is paid to the Company.
The assets held by the Company will generally be leased to a
third party and will be subject to either a direct finance (cash
flow) lease or an operating lease. The Company intends to balance
the portfolio between direct finance leases, to provide regular
cash flow, and operating leases, to provide capital appreciation
opportunities. Many, but not all, investments will be structured to
provide return of capital and interest during the lease term with
an opportunity for additional realisation from the residual value
after the initial lease term. In certain jurisdictions, direct
finance leases will be structured as loans and provide the same
advantages to the Company.
The Investment Managers will generally seek to acquire
investments and/or enter into lease arrangements that require the
lessee or other counterparty to bear all tax, maintenance,
insurance, and other costs related to the lease or the operation of
the underlying asset(s). Generally, as a result, the Company will
not be required to undertake maintenance on assets but reserves the
right to do so on an exceptional basis.
Whilst the Company will typically seek direct ownership of the
assets under lease, the Company may also obtain exposure to such
investments through holding securities that have exposure to an
underlying asset or assets that meet the Company's investment
criteria where it is more advantageous for the Company to do so or
a direct investment is not possible. This includes, but is not
limited to, holding or entering into debt securities, loan
agreements, equity securities, participation agreements, hybrid
instruments, or other securities, whilst maintaining the desired
economic exposure and level of security.
The Company may invest in residual interests in assets or
equipment. When the Company invests in residual interests, it or
its subsidiaries will acquire the rights and/or title to equipment,
assets, income or proceeds in respect of the period after the end
of the initial lease term or other underlying contract term. Cash
flow from the residual interests generally will not commence until
all of the obligations under the initial term are satisfied. Once
those obligations are satisfied, rights and/or title to the
underlying equipment, assets, income or proceeds will be
transferred to the Company or its subsidiaries. Furthermore, the
Company may elect to sell all or part of the lease receivables to a
third party investor or bank and retain its exposure to the asset
by retaining ownership of the residual value (in addition to any
proportion of the lease receivables retained). Therefore, in
relation to certain investments, the Company may be reliant on the
residual value to obtain its return on that investment. It is not
expected that residual interests would represent more than 35 per
cent of the portfolio at the time of investment.
Investments will primarily be made in the United Kingdom, the
United States and Europe which is expected to represent at least 75
per cent of the portfolio. The Company may also invest in assets
and equipment located or subject to law in Canada and Australia and
other countries, regions, or jurisdictions where the Investment
Managers believe they can adequately secure the Company's interest
in assets and equipment whilst achieving an appropriate
risk-adjusted return consistent with the rest of the portfolio.
For further details on the Investment Objective and Policy refer
to the Prospectus which can be viewed on the website,
www.sqnassetfinance.com.
CHAIRMAN'S STATEMENT
I am pleased to be once again updating you on the progress which
the Group has made over the last full year.
In my report to investors within the interim report as at 31
December 2017, I commented:
"I look forward to reporting to you again in the autumn with the
Annual Financial Statements. By then I hope that some of the
complex situations will have become resolved, the portfolio will be
fully invested generating attractive levels of cashflow and the
rating of the shares will have improved. I can assure you that the
Board and the Investment Managers are focused on achieving all of
those objectives over the balance of the year."
As I write to you today:
ü Four out of six "Past Due not Impaired" accounts have been
resolved satisfactorily and no new material delinquencies have
materialised.
ü The 2016 C Share has achieved its investment and income target
and with effect from August 2018 is paying a dividend at an
annualised rate of 7.25%.
ü Both share classes have significantly reduced their respective
discount to NAV.
Judged solely by the share price, these last twelve months were
challenging. However despite a handful of situations requiring
extra attention, which I discuss below, the majority of the
portfolio has continued to perform well and the Ordinary Shares NAV
total return for the year was 6.2%. Since inception, the Ordinary
Shares have generated a return of over 28%, with remarkably little
volatility. Against a backdrop of cash rates barely above zero and
the initial ramp up of investment in the early months of the
Company's life, this is a commendable return and demonstrates that
the overall investment thesis is sound.
As both the Ordinary Shares and 2016 C Shares approach full
investment profits should accordingly be higher next year. Also
encouraging was that all transactions that repaid during the year
exceeded the initial target returns.
At the same time, we have been able to keep expenses in check
and, for the fourth year in a row, the ongoing charges ratio for
the Group decreased, to 1.11% from 1.18% in the previous year.
During the year, the Group found itself in the extraordinary
position of supporting a borrower (Suniva) in petitioning the
United States Government for protection from foreign importers
which were decimating the borrower's industry and preventing them
from repaying the Group. The borrower was successful in its
petition but the high-profile nature of the undertaking put
significant pressure on our share price.
As a result, during the year the Ordinary Share price (which
contains the Suniva investment) slipped to a low of 81.2p
representing a discount of 18%, when Ordinary Shares were at their
peak during the year they traded as high as 106.5p; a premium of
7%.
At year end, the price of the Ordinary Shares had improved to
90.80p and I am pleased to report that, at the time of writing,
they are trading at a modest premium to the NAV. This share price
improvement was the direct result of a concerted effort by the
Group and the Investment Managers, to improve communication with
investors and analysts as well as to highlight the broader
portfolio activity and strong performance of the diversified
equipment-backed investment strategy. Concurrently, the Board
repurchased Ordinary Shares in the market. A total of 1,122,366
Ordinary Shares were repurchased in May 2018 at an average discount
of 7%. A total of 321,316 Ordinary Shares were repurchased
subsequent to the year end in July 2018.
In sustaining a flow of detailed information to the market, the
interim report as at 31 December 2017 released in March 2018,
identified six investments that were "Past Due not Impaired". In
that same report, it was reiterated that, in the normal course of
generating yields at the levels necessary to sustain a 7.25%
dividend, there would inevitably be occasional transactions
requiring attention and that, based on the collateralised nature of
the Group's investment strategy, workouts do not necessarily result
in impairments and, on occasion, have the potential for additional
returns to be realised. These workouts also take time to
achieve.
As already mentioned, I am pleased to report that four of the
six "Past Due not Impaired" investments have been satisfactorily
restructured and we remain optimistic for a positive outcome for
the remaining two investments. One is a relatively small investment
in the portfolio in telecommunication towers which is now close to
resolution. The other is Suniva, where the Board continues to
anticipate a positive outcome but where some uncertainty exists
around the timing of any recovery. The Group continues to pursue a
recovery on two fronts; the Group has initiated legal action
against the guarantor for full payment of the outstanding amounts
and at the same time, the Investment Managers remain in talks with
multiple parties regarding a sale, merger, or joint venture which
will result in cash proceeds to the Group. This is explained in
more detail in the Investment Managers Report.
In addition to the downward pressure on the Ordinary Share
price, the 2016 C Share performance also struggled as a result of
the slower than expected deployment of cash. In June 2018, the
Group returned GBP40,385,704 to investors which included all fees
paid to the Investment Managers related to that capital. Although
the pipeline was sufficient to deploy the entirety of the capital,
the Board and the Investment Managers concluded that redeeming a
proportion of the 2016 C Shares was the most effective and fairest
way to accelerate full investment and pay the full dividend. As of
the date of this report, the 2016 C Share price has improved to
approximately 96p, a full dividend has been announced and paid from
the month of August 2018, and the share class is now close to being
fully invested.
The Group maintains its commitment to supporting the share price
and has kept the share buy-back programme open should any weakness
once again present itself and it is deemed accretive and in the
best interests of shareholders to deploy the buyback option.
In conjunction with the decision to return capital, the Group
extended the date by which it was required to convert the 2016 C
Shares to Ordinary Shares to June 2019. The exact timing of
conversion will depend upon achieving greater clarity around the
resolution of Suniva and the Board will notify shareholders in due
course.
During the year, Suniva was one of three investments that were
not generating income. The other two investments were Snoozebox,
and Green Valley Hospital. Snoozebox and Green Valley Hospital have
each now been restructured and re-commenced making regular
payments.
In addition to a focus on dividend cover, the Group is
concentrating on maintaining a portfolio as close to full
investment as possible, growing the NAV, and supporting the share
price.
The Portfolio
Within the combined invested portfolio, the weighted average
yield remains comfortably in excess of 9.5% and the transactions
funded after the year end have maintained that level. The average
investment size for the combined share classes was approximately
GBP7.7 million with a weighted average remaining term of
approximately 77.34 months as at 30 June 2018.
Investments are diversified across 17 different asset classes
and 19 industries, ranging from a paper mill in Scotland to
construction equipment utilised throughout England.
The portfolio remains geographically diverse with the majority
of assets in the United Kingdom (64.0%) and the balance across the
United States (17.2%), France (7.0%), the Netherlands (5.0%),
Ireland (3.4%), Mexico, (1.2%), UAE (1.0%), Brazil (<1%) and
Australia (<1%).
Conclusion
I would like to assure all our shareholders that the Investment
Managers and the Board continue to work to ensure the objectives of
the Group are fully met; the dividend continues to be paid and the
dividend cover enhanced.
I am very grateful to my Board colleagues for their diligence
and the time that they have put into the Group throughout the last
year, and indeed ongoing, and to the Investment Managers for their
continuing professionalism in dealing with an increasingly diverse
portfolio and maintaining our ability to satisfy investor
expectations both in terms of the returns we provide and in the
communication of our story.
Peter Niven
Chairman
2 October 2018
STRATEGIC REPORT
The Investment Objective and Policy, the Chairman's Statement
and the Investment Managers' Report form part of the Strategic
Report. A review of the Company's activities is provided in the
Company Overview, the Chairman's Statement and the Investment
Managers' Report. These include a review of the business of the
Group and its core activities, the principal risks and
uncertainties it faces, dividend policy and results for the
year.
Structure
The Company is a non-cellular company limited by shares,
incorporated in Guernsey on 28 May 2014. The Company is regulated
in Guernsey by the Guernsey Financial Services Commission as a
Registered Closed-ended Collective Investment Scheme.
The Company is a member of the AIC and is classified within the
Specialist: Leasing sector.
Share Capital
The Company's issued share capital as at 30 June 2018 consisted
of 356,585,141 Ordinary Shares and 138,924,222 2016 C Shares of no
par value. The share capital of the Company is represented by an
unlimited number of shares of no par value. All shares hold equal
voting rights with no restrictions and no shares carry special
rights with regard to the control of the Company. There are no
special rights attached to the shares in the event that the Company
is wound up.
The Company repurchased 1,122,366 Ordinary Shares during the
year for a total cost of GBP1,031,187. The repurchased Ordinary
Shares are being held in treasury. Repurchases subsequent to the
year end are detailed in note 19.
On 25 May 2018, the Group made a capital return by way of a
compulsory redemption of 41,075,778 2016 C Shares on a pro rata
basis amongst all the holders of 2016 C Shares.
Please refer to note 13 for further information.
Subsidiaries
The Company's subsidiaries are detailed in note 1.
The Directors of the subsidiaries are the same as the
Company.
Diversification Strategy
The Group's portfolio is subject to diversification policies
limiting the maximum amount of capital that can be invested in a
single asset, in a single asset class, in assets held by a
corporation or group or held by companies in a specific industry
and as a percentage of NAV of the portfolio, measured at the time
of investment, as follows:
-- Maximum by asset: 15%
-- Maximum by asset class: 30%
-- Maximum by corporation or group: 15%
-- Maximum by industry: 30%
Principal Risks and Uncertainties
When considering the total return of the Group, the Board takes
account of the risk which has been taken to achieve that return.
The Board looks at numerous risk factors, an overview of which is
set out below:
Asset/Credit quality risk
The Group's success is subject to risks inherent in the
equipment leasing and finance business; in particular, the quality
of the assets it acquires and the risk of default by the Group's
lessees or other counterparties, including banking counterparties
in relation to cash balances, which may affect the Group's ability
to operate profitably. Key risks here are deemed to be asset
valuations and quality and the level of arrears and impairments.
Additionally, the risk of asset concentration, by geography,
industry sector and asset class. Further, to the extent relevant,
any decline in the residual value of the Group's underlying assets
at the end of a lease term, which will depend on factors outside
the Group's control, may erode the ability of the Group to make a
profit on those investments.
Geopolitical and economic risks
It is the intention of the Group to lease or make loans to
customers in several jurisdictions exposing the Group to potential
economic, social, legal and political risks. The Group therefore
also faces the risk of failing to survive a global financial
crisis, including any impact that Brexit may cause. These risks
additionally expose the Group to interest rate changes and foreign
exchange currency fluctuations. The adequacy and timeliness of
management's response to risks in the jurisdictions in which it
operates are of critical importance to the mitigation of these
risks. The Board considers management to include third parties,
such as the Investment Managers and BNP Paribas Securities Services
S.C.A., Guernsey Branch (the "Administrator") to whom the Board has
delegated responsibility for key operations and day to day
functions. Refer to note 17 for more detail on interest rate risk
and foreign exchange hedging.
Key personnel risk
The Group's performance is dependent on services provided by the
Investment Managers. The departure of key employees from the
Investment Managers may adversely affect the returns available to
the Group.
Performance Risk
The performance of the Group is largely determined by the
success of the Investment Managers in meeting or exceeding
performance objectives and the expectations of investors, in
accordance with the objectives set out in the prospectus. As such,
if dividend return targets or overall rate of return targets are
not met, or the Group's cash flows or liquidity are constrained,
investor confidence and support would be at risk.
Regulatory risk
Changes in law or regulation may adversely affect the Group's
ability to carry on its business or may increase the Group's
on-going charges.
Tax risk
Unfavourable changes in tax legislation could result in adverse
changes in the tax position of the Group or the imposition of
additional and possibly material tax liabilities on
shareholders.
Other risks
The Directors wish to draw the attention of shareholders to the
other risks as set out in the Company's Prospectus, which is
available on the Group's website: www.sqnassetfinance.com. Refer to
note 17 for details on the Group's risk mitigation strategies and
details of additional risks.
Going Concern
Going concern refers to the assumption that the Group has the
resources and desire to continue in operation for the foreseeable
future. After analysing the following, the Directors believe that
it is appropriate to adopt the going concern basis in preparing
these consolidated financial statements:
-- Working capital - As at 30 June 2018, there was a working
capital surplus. The Directors noted that as at 30 June 2018 the
Group had no borrowings and therefore has sufficient capital in
hand to cover all expenses (which mainly consist of Investment
Managers' fees, administration fees and professional fees) and to
meet all its obligations as they fall due.
-- Consideration of various areas of possible financial risk,
including comprehensive financial forecasts.
-- Closed-ended Company - The Company has been registered with
the Guernsey Financial Services Commission as a Registered
Closed-ended Collective Investment Scheme, as such shareholders
have no right to have their Ordinary Shares redeemed, and there
will therefore be no cash flows out of the Company in this respect.
Please see below for details on the continuation resolution.
Given the nature of the Group's business, the Directors have a
reasonable expectation that the Group has adequate financial
resources to continue for a period of at least twelve months from
the date of approval of the Consolidated Financial Statements.
Accordingly, the Consolidated Financial Statements have been
prepared on a going concern basis.
Viability Statement
The Directors have assessed the viability of the Company over a
three-year period. This statement explains 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, taking into
account the Company's current position and principal risks. The
principal risks faced by the Group are described above.
In making this statement, the Directors have considered and
challenged the reports of the Investment Managers and have
conducted a robust assessment of the viability of the Company over
a three-year period, taking account of the Company's current
position and the potential impact of the principal risks. In making
their assessment, the Directors have taken into consideration the
Group's NAV, dividend cover and cash flows. These factors were
subjected to stress tests which involved sensitivity analysis of
the key assumptions underlying the forecast. Where appropriate,
this analysis was carried out to evaluate the potential impact of
the Group's principal risks occurring, severe changes to
macro-economic conditions, increased defaults and counterparty
risks.
The Directors have determined that a three-year period is an
appropriate time over which to provide its viability statement and
this takes account of the average weighted life of the portfolio,
the probability of the refinancing and early redemption of a number
of construction loans within the portfolio. The three-year period
is consistent with the outlook period used in economic and other
medium term forecasts prepared for the Directors by the Investment
Managers and is the outlook period generally used by the Board in
considering the Company's strategies. The review also considers the
market opportunities for the investment of capital, the anticipated
portfolio redemptions and the ability to raise third party
funds.
This statement is made on the assumption that continuation votes
will be passed throughout the period under assessment (see Life of
the Company section).
Based on this assessment, the Directors have a reasonable
expectation that the Company will be able to continue in operation
and meet its liabilities as they fall due over a three-year
period.
Key Related Party Transactions
The contracts with the US Investment Manager (and related
entities) and the UK Investment Manager are the key related party
transactions currently in place. Other than fees payable in the
ordinary course of business, there have been no material
transactions with these related parties which have affected the
financial position or performance of the Group in the year. Further
details on related party transactions can be found in note 18.
Financial Review
At 30 June 2018, the Net Assets of the Group amounted to
GBP484,088,140 (30 June 2017: GBP532,903,565).
Borrowing
The Group does not currently utilise borrowings on a portfolio
basis for investment purposes. The Group, however, may, from time
to time, utilise borrowings for share buybacks and short-term
liquidity purposes, but such borrowings will not, in any event,
exceed 15% of the Group's NAV at the time of investment. This does
not prevent the Group from purchasing the equity or subordinated
participation in a special purpose entity set up to own an asset or
a pool of assets or equipment, which itself may be geared.
Hedging
The Investment Managers seek to hedge the foreign exchange
exposure against Sterling on the principal balances outstanding on
the Group's portfolio and may, where appropriate, also hedge
expected income against foreign currency fluctuation risks.
Accordingly, the Group may use derivative instruments to hedge
against foreign currency risks, although there can be no certainty
as to the efficacy of any such hedging. Hedging arrangements,
however, will be implemented only when suitable hedging contracts,
such as currency swap agreements, futures contracts, options and
forward currency exchange and other derivative contracts, are
available in a timely manner and on terms acceptable to the Group.
The Group may otherwise employ the use of derivatives for efficient
portfolio management purposes but derivatives will not be employed
for investment purposes. The Group does not apply hedge
accounting.
Performance Measurement and Key Performance Indicators
In order to measure the success of the Group in meeting its
objectives and to evaluate the performance of the Investment
Managers, the Directors take into account the following performance
indicators:
-- Returns and NAV - The Board reviews and compares at monthly
meetings the performance of the portfolio as well as the NAV,
income, dividend and share price of the Company.
-- Discount/premium to NAV - at monthly meetings the Board
monitors the level of the Group's discount or premium to NAV. The
Group publishes the NAV per share on a monthly basis through the
official newswire of the London Stock Exchange.
-- Formal monthly and quarterly reports from the Investment
Managers, which provide information to assess other key performance
criteria, including:
-- asset quality, arrears and impairments;
-- geographic and currency breakdowns;
-- sector concentration and asset classes;
-- liquidity and cash flows; and
-- ongoing charges.
INVESTMENT MANAGERS' REPORT
Notwithstanding considerable price volatility, the Group
consistently paid one of the highest monthly dividends in the
market, continued to deploy capital into well-collateralised
investments with yields above 9%, and met or exceeded return
targets on all of the concluded transactions during the year ended
30 June 2018.
As was expected, the Investment Manager was able to resolve or
restructure four out of the six investments that had gone off
schedule and which were reported in the Interim Report, all of
which are again contributing income to the Group. With a portfolio
in the half a billion-pound range and generating high single digit
yields, the business model anticipates there will always be assets
requiring attention. This is especially true given that the
portfolio is highly diversified.
As a secured investor, net charge-off rates are extremely low
and restructurings have the potential to deliver enhanced returns.
By way of example, a number of the restructured transactions have
included warrants or direct equity in the borrower. These
positions, along with the warrants on other investments where they
were part of the original security package, are currently valued at
nil in the Group's NAV. When these warrants are exercised or the
equity positions realised, there could be potential meaningful
appreciation.
Another aspect of the investment strategy that contains an
element of hidden value are early settlements and refinancings.
Three out of the four transactions concluded in the first half of
2018 resulted in returns above the book yield. Additionally,
subsequent to the year end, two investments in wind turbines and
one investment in marine support equipment were settled at premiums
over the originally anticipated yields.
Investments Concluded Since the Interim Report
Infrastructure Painting and Coating Equipment
The Group provided financing secured by all the assets and
equipment of the fourth largest industrial painting and coating
contracting company in the United States. This investment was
settled in April 2018, resulting in a 12.1% return on
investment.
Semiconductor Manufacturing and Testing Equipment
The Group participated in the financing of a semiconductor
manufacturing plant and related equipment for a publicly-traded
French company that produces and markets silicon wafers for use in
a variety of industries including solar panel manufacturing. This
investment matured in April 2018, yielding a return of 10%.
Ground Support Equipment
In September 2017, the lease for two de-icers at Heathrow
Airport came to maturity resulting in a 9.5% full cycle return on
investment. The investment for the final two de-icers in service at
Gatwick Airport was also repaid early, for a 11% return on
investment.
Combine Heat and Power Units
The Group entered into a sale and leaseback of three 1MW
Jenbacher combined heat and power engines located in Somerset. This
investment was refinanced earlier than initially expected for a
yield of approximately 10%.
The capital repayments from the Concluded Transactions have been
deployed, along with the majority of the remaining 2016 C Share
proceeds at rates maintaining an average gross book yield above 9%.
This has allowed the 2016 C Share to commence paying the full 7.25p
annualised dividend in August this year.
Ten Largest Investments as at 30 June 2018
At 30 June 2018, the ten largest positions held by the Group, on
a combined basis are as follows:
Principal Balance
Asset Outstanding (GBP) % of NAV Net Yield(1) Industry Region Share Class
----- --------------------- --------- ------------- --------------- -------
AD Plant at
Hartlepool GBP 32,244,907 6.66% 9.80% Agricultural UK Ordinary
----- --------------------- --------- ------------- --------------- ------- -------------
Diversified
Portfolios USD 30,767,936 6.36% 9.55% Diversified US Ordinary
----- --------------------- --------- ------------- --------------- ------- -------------
AD Plant at Imperial
Park GBP 27,960,832 5.78% 9.65% Agricultural UK Ordinary
----- --------------------- --------- ------------- --------------- ------- -------------
Glass Manufacturing
Plant EUR 24,408,443 5.04% 9.14% Glassware France Ordinary
----- --------------------- --------- ------------- --------------- ------- -------------
Solar Manufacturing
Equipment (Suniva) USD 23,826,934(2) 4.92% 10.51% Solar US Ordinary
----- --------------------- --------- ------------- --------------- ------- -------------
AD Plant at Donegal GBP 19,769,606 4.08% 10.00% Agricultural UK Ordinary
----- --------------------- --------- ------------- --------------- ------- -------------
AD Plant at
Peterhead GBP 17,997,681 3.72% 10.00% Agricultural UK Ordinary
----- --------------------- --------- ------------- --------------- ------- -------------
Combined Heat and
Power Units GBP 17,453,867 3.61% 9.41% Agricultural UK Ordinary
----- --------------------- --------- ------------- --------------- ------- -------------
Paper Mill GBP 15,429,935 3.19% 9.47% Paper UK Ordinary
----- --------------------- --------- ------------- --------------- ------- -------------
Marine Vessels USD 13,909,328 2.87% 10.28% Transportation US Ordinary
----- --------------------- --------- ------------- --------------- ------- -------------
Total 223,769,469 46.23%
---------------------------- --------------------- --------- ------------- --------------- ------- -------------
(1) In local currency
(2) Includes GBP3,547,077 of debtor in possession financing
Anaerobic Digestion Plants (AD Plants)
The Group's largest exposure to a single asset class is in AD
Plants which includes the first, third, sixth and seventh largest
investments. The Group has invested approximately GBP105.0 million
which, with accrued interest, represents 24.2% of the NAV in leases
and project financings for AD Plants. An AD Plant is a closed
system that processes organic material to produce methane which can
be used as a fuel source or fed into a combined heat and power unit
to create electricity and heat. The AD Plants that have been
financed run on a combination of agricultural and food waste as the
primary feedstocks. The majority of the cash flow generated from
operations is derived from long-term, non-cancellable government
subsidies related to the production of electricity or the volume of
gas delivered to the grid. Each investment carries performance
warranties tracked by guarantees and performance bonds to ensure a
minimum level of production. The typical term of the Group's
investments in AD Plants is around 12 years at rates of
approximately 10%. To date, the Group has been able to refinance
three of these plants which resulted in attractive premiums over
the book yields. It is anticipated that as these plants mature,
more of these holdings will be sold or refinanced to capture the
yield enhancement and to reduce the concentration of large
investments in the portfolio.
1. AD Plant at Hartlepool
The Group's initial investment was GBP27.1 million in a 5 MW
waste to energy project in Hartlepool in the North East of England.
This plant will be capable of treating up to 110,000 tonnes of
commercially-sourced food waste per year. The initial term of this
investment is 14 years with a potential 3-year extension that, if
exercised, could enhance the Group's return on investment. The
Company also holds equity in the underlying operating company
which, in the best scenario, may provide some further upside return
once the plant is fully commissioned and operational.
2. Diversified Portfolio
The Group made an initial investment of GBP29.8 million that is
classified as Diversified Portfolios. The investment is backed by
diversified portfolios of equipment lease and asset financing
transactions within larger portfolios held by insurance companies
and further collateralised by the broader portfolios of
investment-grade securities. The equipment assets in these
portfolios include traditional transportation assets, manufacturing
equipment, construction cranes, IT equipment, medical equipment,
furniture, fixtures and equipment, earth moving equipment, machine
tools, and a wood pellet mill. The investments are structured as
secured notes with 11-year full payout terms. The notes
individually have been rated BBB which is considered investment
grade.
3. AD Plant at Imperial Park
The Group's initial investment was GBP23.8 million in a second 5
MW waste to energy project in Imperial Park, Middlesbrough, UK. The
fully operational plant which is ramping up to full capacity is
subject to a 12-year full payout lease and designed to process
120,000 tonnes of agriculture and food waste a year and sell
electricity, heat and fertiliser to local businesses. The Group
also holds equity in the underlying operating company which has the
potential to further enhance the investment return.
4. Glass Manufacturing Plant
The Group's initial investment was GBP27.2 million through a
sale and lease back of 7 furnaces, 10 production lines and
ancillary equipment for one of the largest plate and cup
manufacturers in the world with over 3,000 separate products and
speciality contracts with some of the world's most recognised
brands. The 84 month fully amortising financing was provided in
conjunction with an acquisition and recapitalisation of the
company. Headquartered in France where the equipment is located,
the company was formed in 1825 and has operations in 160
countries.
5. Solar Manufacturing Equipment
The Group's initial investment in Suniva was GBP21.4 million. In
order to secure the equipment, take control of the company, and
ensure that the petition filed with the United States Trade
Commission was properly prosecuted, the Group agreed to provide up
to an additional $4.75 million in the form of a super-senior
secured loan and in exchange for, among other considerations,
warrants representing a majority equity ownership in the company.
Subsequent to the Group's year-end, an additional $750,000 was
approved and drawn down under the secured loan facility. This was
done to cover the legal cost associated with protecting the Group's
assets.
The Group continues to pursue a recovery on the Suniva
investment on two fronts. The Group has sued the Guarantor for full
payment of the outstanding amounts and has issued subpoenas to
directors and officers to appear in New York Court to answer the
complaint. At the same time, the Investment Managers remain in
talks with multiple parties regarding a sale, merger, or joint
venture which would result in cash proceeds to the Group.
Since the initial tariffs were implemented in February 2018, two
additional sets of tariffs were announced, the most recent being in
August 2018, which have provided further pricing support for US
solar panel manufacturers. There is also the potential for
substantial compensation for Suniva from two prior trade cases.
With an increasing amount at stake over the last several weeks, the
Group has come into an adversarial position with Suniva's
co-debtor-in-possession lender in the bankruptcy. These are
complications that were not anticipated which have had the effect
of impeding a swift resolution to take advantage of the favourable
marketplace. The Investment Managers believe that the Group will
prevail in its adversarial proceedings with the
co-debtor-in-possession lender and it will ultimately be able to
consummate a transaction that will provide for the recovery of the
investment. Unfortunately, this may require substantial additional
legal expenses, which should be recoverable, but nonetheless need
to be incurred.
6. AD Plant in Donegal
The Group's initial investment was GBP17.8 million in a 4 MW AD
Plant located in Donegal in the Republic of Ireland, with equipment
provided by Purac for gas clean up, Wartsila for compression, and
ASCO for CO(2) capture, together with 14 hexagon gas road tanker
trailers and two Volvo tractor units to transport gas to five sites
in Belfast utilising four 500 kW combined heat and power units and
site transformers for grid connection. The equipment is subject to
a 15 year fully amortising lease with quarterly payments. The Group
also holds warrants in the underlying operating company which have
the potential to further enhance the investment return.
7. AD Plant at Peterhead
The Group's initial investment was GBP15.0 million in a 2.5 MW
gas to grid AD Plant in Peterhead, Scotland. The plant converts
merchant waste, grass silage, and crops into bio-methane which is
sold to Total Gas and injected into the national gas grid through
Scotia Gas Networks' grid connection. The construction and
commissioning has encountered some delays and missed milestones, in
part related to the financial difficulties experienced by the
Engineering Procurement Construction provider. The plant is now
operating though not yet at the warrantied level but the
performance bond and guarantees held will enable satisfactory
performance levels to be achieved. The Group also holds warrants in
the underlying operating company which may provide some upside
return once the plant is fully commissioned and operational.
8. Combined Heat and Power Units
The Group initially provided GBP17.0 million for the
construction and lease financing of two (non-renewable) 11 MW
natural gas-based energy generation plants. The equipment includes
four Rolls-Royce 5.5 MW combined heat and power units at two sites
on the Isle of Wight on the U.K.'s largest tomato farms. The
equipment is used to produce heat and CO(2) to aid the growth of
tomatoes in glasshouses. The Group advanced 62.5% against the value
of the equipment and took full title subject to a 13-year full
payout lease.
9. Paper Mill
The Group's initial investment was GBP21.6 million through a
sale and leaseback of a paper mill in Scotland operated by a
well-known speciality paper company that was consolidating
operations from multiple international plants into the Scottish
facility. The equipment being financed includes the industrial reel
wrappers, the speciality and colour paper manufacturing machines,
the bespoke paper production equipment, and the business stationery
and watermarking tools. The fully amortising lease term is 84
months with the company that was originally founded in 1761 and was
a constituent of the FTSE 100 on the London Stock Exchange until it
was taken private in 2000.
10. Marine Vessels
Two investments in marine vessels combine with a third
investment in helicopter engines to make up the largest exposure to
any one group of companies, amounting to an initial investment of
GBP39.1 million. The counterparty is a privately-held international
business group that controls 30 subsidiaries active in 35 countries
across six continents. It is focused on six core sectors: aviation,
energy, finance and diversified, hospitality, real estate, and
shipping. The Group initially provided financing of GBP14.1 million
secured by two Supramax bulk carriers and the strong balance sheet
of related companies providing additional support. After two years
of a four-year term with steady performance and amortisation, the
borrower sought additional financing at a lower advance rate for
the acquisition of a fleet of 6 container feeder marine vessels
through two 48-month transactions totalling GBP18.6 million.
During the first half of 2018, four of the marine vessels that
served as collateral for the loan were sold and have been replaced
with two vessels of higher market value resulting in a reduced loan
to value on the investment.
Principal balance outstanding as at 30 June 2018: GBP13,909,328
Share class: Ordinary
Principal balance outstanding as at 30 June 2018: GBP10,965,718 Share class: C
Principal balance outstanding as at 30 June 2018: GBP5,907,449 Share class: C
Other Assets in the Portfolio
Marine Vessels
The Group provided financing for four Jumbo Class Multipurpose
Marine Vessels built between 2007 and 2009 with a Dutch operator.
Charter rates on marine vessels in this segment remained under
significant pressure for an extended period and resulted in a
pattern of consistent payment delinquencies. Under pressure from
the Group, contracts for sale of all four vessels have been entered
into and deposits have been received. The vessel sales are expected
to close before the end of the calendar year as each vessel enters
a port in a jurisdiction favourable for the sale transaction.
Principal balance outstanding as at 30 June 2018: GBP13,634,831
Share class: Ordinary
Medical Equipment
The Group made an investment secured by medical equipment for a
new hospital in Green Valley, Arizona in the United States. The
initial investment was divided between two equipment-secured notes;
one with a term of 4 years and the other with a term of 5 years.
The investment was further collateralised by a lien on unencumbered
property owned by the hospital. The hospital encountered delays in
securing crucial insurance reimbursements and, as a consequence,
was unable to attract specialist doctors whose services were a
meaningful component of the projected income of the hospital. As a
result, the hospital filed for bankruptcy protection in order to
reorganise while the insurance issues were resolved and specialist
doctors are on-boarded. Given the crucial nature of the equipment
financed by the Group and its long economic life, the Group and the
hospital were able to reach an agreement within the bankruptcy
court that keeps the equipment in place and protects the principal
of the investment.
Subsequent to the year end, the investment has been restructured
as a $5 million equipment lease and a 15% equity holding in the
hospital which will be held at fair value.
Principal balance outstanding as at 30 June 2018: GBP9,812,170
Share class: Ordinary
Wholesale Lending Arrangements
Wholesale lending arrangements are an effective way for the
Group to make asset-secured investments through lenders that
specialise in those specific asset classes or segments, with
additional credit enhancements that would not be available if the
Group invested directly.
The Group made two investments through a firm that specialises
in providing financing to small and medium-sized enterprises
("SMEs") throughout the UK. The financing is secured by all the
assets of the borrowers including business-essential equipment. The
structure of the Group's investment is that it lends against a
portfolio of loans at a 90% advance rate. Under the terms of the
agreement, any loan that is more than 30 days delinquent is either
bought out or replaced with a performing loan from an unencumbered
pool of loans held directly by the lender. All activity within the
portfolio is reviewed monthly by a third-party accounting firm
which provides reports to the Investment Managers. This facility
has a one year rolling term.
Principal balance outstanding as at 30 June 2018: GBP8,516,900 Share class: C
Principal balance outstanding as at 30 June 2018: GBP4,040,000
Share class: Ordinary
The Group provided financing under a programme with the lessor
of domestic central heating/hot water system boilers. The Group's
advance rate is between 92.5% and 94% of a seasoned portfolio but
has an assignment of 100% of the underlying leases and service
agreements. The investment is further secured by floating and fixed
charges over all of the assets of the lessor.
Principal balance outstanding as at 30 June 2018: GBP8,426,068
Share class: Ordinary
Modular Building
The Group initially provided financing to Snoozebox Limited
secured by mobile, modular buildings used in the hospitality
industry to serve as hotel rooms at different events throughout
Europe. The investment was made in coordination with the operator's
plan to transition its business toward semi-permanent arrangements
like remote worker accommodations and away from short-term rentals.
The transition was intended to be completed over a period of two
years. Management was changed in April of 2016 and entered into
only one new profitable contract for worker accommodation in
October 2017. Given the slow deployment, a rescheduling of the
Group's debt could not be agreed causing the company to enter
administration in November 2017.
In April 2018, the Investment Manager successfully completed the
restructuring of this investment. Following the transfer of
ownership from the administrator, Snoozebox was sold to a new owner
which is part of a well-capitalised group experienced in the wider
modular accommodation sector and operating in the oil and gas
industries.
The Group has entered into a new 5-year operating lease, with
the option to extend the term for a further 5 years, with part
fixed and part variable rentals. It is expected that the new lease
will result in full amortisation of capital and payment of
interest.
The Fund also holds warrants to the value of 10% of the fully
diluted equity.
Principal balance outstanding as at 30 June 2018: GBP8,034,470
Share class: Ordinary
IT and Telecommunications Equipment
The Group provided financing secured by a portfolio of
Integrated Set Top Cable and Internet Boxes (and all related
receivables) on lease or under service agreements with 1,400
different customers representing approximately 2,200 hotels and
230,000 hotel rooms. The investment is further secured by an
investment grade insurance policy for all principal and
interest.
During the second half of 2017, the company secured two large
contracts with major international hotel chains and signed a
licensing agreement with Google to provide in-room connectivity to
handheld devices. This resulted in the company committing cash flow
to new hardware to service those contracts.
During the first half of 2018, the company entered into an
agreement to sell a majority interest to a private investor. As of
the date of this report, the sale transaction has not yet closed
and the company is operating on a restricted basis pending receipt
of the acquisition proceeds. This has caused a single payment
delinquency. This account is being closely monitored but with
credit insurance in place and a robust collateral base, an
acceptable resolution is expected.
Principal balance outstanding as at 30 June 2018: GBP7,994,075
Share class: Ordinary
AD Plants in Nottinghamshire and Northern Ireland
The Group is a co-investor in a 2 MW AD Plant in Nottinghamshire
which was voted the 2017 AD Plant of the Year by the Anaerobic
Digestion and Bio-Resources Association. The Group's investment is
in a 15-year full payout lease.
Principal balance outstanding as at 30 June 2018: GBP7,686,071
Share class: Ordinary
The Group has invested in two additional AD Plants that are both
co-investments alongside the Green Investment Bank in farm-based
500 kW AD Plants in Northern Ireland. The lease on one of the AD
Plants commenced is March 2018, whilst the other is due to commence
imminently. Each is subject to a 15-year lease with the expectation
that they will be refinanced before the end of the term.
Principal balance outstanding as at 30 June 2018: GBP2,074,215
Share class: Ordinary
Principal balance outstanding as at 30 June 2018: GBP1,942,525
Share class: Ordinary
The Group has made four additional investments in 500 kW
farm-based AD Plants in Northern Ireland on similar terms as the
above. Those investments range from GBP1.6 million to GBP2.3
million. All four plants are currently operating. Three of the
plants are already commissioned, whilst the fourth is yet to begin
commissioning.
Principal balance outstanding as at 30 June 2018: GBP7,849,027
Share class: Ordinary
Waste Processing Equipment
The Group invested in the construction and lease of waste water
processing equipment that includes a 1 MW AD Plant located in the
Republic of Ireland. The lessee provides a full life cycle service
to clients operating in the municipal and private sectors including
collection, transportation and disposal/reuse of their sludges
which are in turn processed into a fully certified alternative to
expensive chemical fertilisers. The initial term of this investment
is 12 years with a 3-year extension that, when exercised, will
enhance the Group's return on investment.
Principal balance outstanding as at 30 June 2018: GBP7,065,340
Share class: Ordinary
Automotive Manufacturing Equipment
The Group entered a sale and leaseback with an award-winning
Tier One/Two automotive supplier, based in France. The supplier
started as a general mechanics workshop in the early 1940s, however
in 1948 the plant was converted to an aluminium die-casting
foundry. The assets that comprise the Group's security include new
high-pressure die-casting machines, moulding presses, hydraulic
presses, handling robots and radioscopy equipment subject to a
7-year lease.
Principal balance outstanding as at 30 June 2018: GBP6,370,397 Share class: C
Helicopters
The Group has provided 70% deposit financing for the acquisition
of seven newly built helicopters for an affiliate of the company
identified above as the largest exposure to a single group of
companies. The investment is structured as a 24-month term loan
with quarterly interest-only payments and a balloon payment at
maturity. The loan is guaranteed by the borrower's immediate parent
company with a net worth of more than $46 million and available
credit facilities of over $100 million.
Principal balance outstanding as at 30 June 2018: GBP6,252,355 Share class: C
Combined Heat and Power Unit
In addition to the two combined heat and power units financed on
the Isle of Wight, the Group provided financing for a third
non-renewable unit for the UK's largest tomato grower which is used
in their glasshouses in Teesside, Middleborough, UK. The 6.6 MW
natural gas-based energy generation plant includes two Jenbacher
combine heat and power units subject to a 13.25 year fully
amortising lease.
Principal balance outstanding as at 30 June 2018: GBP6,110,081
Share class: Ordinary
Infrastructure Equipment
During the year ended 30 June 2018, the Group made three
separate investments that have been classified as infrastructure
equipment.
In February and March 2018, the Group made two investments for
the construction and operation of a composting plant for a
consortium of 27 mushroom growers across Northern Ireland and the
Republic of Ireland. This 10 year fully-amortizing investment was
made through a leveraged facility with senior debt provided by a
lower cost traditional bank. Once operational, the plant will be
able to process 65k tonnes of mushroom compost annually.
Principal balance outstanding as at 30 June 2018: GBP4,846,985 Share class: C
The Group purchased two existing leases and their respective
assets which are comprised of 51 portable battery power units. The
battery power units are an alternative to temporary diesel
generators used by construction companies, utilities, and
large-scale outdoor event management companies each of which
creates emissions equivalent to 100 automobiles. The remaining
lease terms at the time of acquisition were 41 and 43 months.
Principal balance outstanding as at 30 June 2018: GBP901,867 Share class: C
In June 2018, the Group entered into a 48-month sale and lease
back with an international civil engineering and building company
based in Swansea for a variety of construction equipment and
machinery, including dump trucks, generators, excavators and tower
lights. The mission-critical equipment, which was originally
financed by Caterpillar, is being used for the company's large
on-going projects in Western Africa.
Principal balance outstanding as at 30 June 2018: GBP3,378,347 Share class: C
Diversified Portfolio
In June 2018, the Group made an investment in the senior portion
of a diversified portfolio of manufacturing and industrial leases
which includes leases in the United States and Mexico. The
investment has 40% subordinated equity below it and the investment
term is 58 months.
Principal balance outstanding as at 30 June 2018: GBP4,686,254 Share class: C
Waste Processing Equipment
The Group entered into a lease of a new automated waste material
recovery system for a successful waste collection company located
in the Midlands in the UK. The lessee was formed in 1986 and, for
the last ten years, has been focusing on modernising the plant,
increasing efficiency, and creating a zero-carbon footprint. The
lessee has historically been engaged solely in waste collection and
has had to pay to dispose of the waste. With the addition of the
waste recovery system, the lessee is able to sort the waste and
sell portions for recycling and greatly reduce the cost of
disposal. The investment will be repaid over a lease term of 60
months.
Principal balance outstanding as at 30 June 2018: GBP4,562,673 Share class: C
The Group provided 8 year senior financing for the construction
and operation of a state-of-the-art refrigerator recycling plant in
Gateshead in the UK. The borrower specialises in collecting and
recycling electrical products once they have been discarded. In
2016 the company set up its own in-house fully automated Waste
Electrical and Electronic Equipment plant, which can process five
tonnes of material per hour. The company collects over 100,000
refrigerators a year and will be able to process 100 an hour once
the plant is commissioned.
Principal balance outstanding as at 30 June 2018: GBP4,525,803 Share class: C
Telephone Towers
The Group made an investment in the construction and lease of a
portfolio of telecommunication towers located in Brazil for a
company based in Florida in the United States. The investment was
secured by an investment grade insurance policy with a reputable
reinsurance syndicate that includes Hanover Re, PartnerRe, QatarRe,
and Lloyd's of London. The towers are in the process of being sold
which will cover all of the principal and interest due to the
Group.
Principal balance outstanding as at 30 June 2018: GBP4,090,180
Share class: Ordinary
Marine Equipment
The Group provided financing for a successful marine services
business based in the United Arab Emirates. The business has
remained profitable over a period where many others have failed as
a result of its strategic decision early on to diversified away
from pure O&G customers and focus instead mainly on Utilities,
Renewables and Civil Construction. The equipment, which is used for
a diversified range of subsea services, includes a multipurpose
site investigation vessel, two Remote Operated Vehicle systems
("ROVs") and a vessel mounted deep water drilling rig. The
investment term is 60 months.
Principal balance outstanding as at 30 June 2018: GBP4,040,000 Share class: C
ROVs
The Group made an investment in two ROVs that were originally
subject to a lease with a company engaged in oil field services in
the North Sea for a term of 60 months at a fixed rate. In the first
quarter of 2015, the original end-user went into administration,
and, as a result, the Investment Managers decided to take
possession of the assets and re-lease them directly to the company
on whose vessel the launch and recovery systems servicing the ROVs
were mounted. The new operating lease was for a term of 36 months
with a variable rate based on utilisation. This repositioned asset
continues to perform.
Principal balance outstanding as at 30 June 2018: GBP3,928,012
Share class: Ordinary
The Group made a second, smaller, unrelated investment of GBP1.1
million in ROVs with another operator.
Principal balance outstanding as at 30 June 2018: GBP338,505
Share class: Ordinary
Helicopters
The Group invested in the senior portion of a portfolio of
helicopters on lease to three separate lessees who in turn
sub-lease the fully serviced helicopters to end-users that include
military, government, medical, and corporate clients. This
investment is now in the residual realisation phase and proceeds
will be received as the helicopters are sold or re-leased.
Principal balance outstanding as at 30 June 2018: GBP3,402,690
Share class: Ordinary
Material Handling Equipment
In conjunction with large equity investments made by two Fortune
100 Companies, the Group invested in material handling equipment
located at Walmart Distribution Centres throughout the United
States. The counterparty in this five-year investment is a publicly
traded company on the NASDAQ with a market capitalisation in excess
of $400 million.
Principal balance outstanding as at 30 June 2018: GBP3,066,866 Share class: C
Wind Turbines
The Group entered into separate leases for four 250 kW wind
turbines in a single, cross-collateralised transaction. Each of the
leases is for a term of 10 years against 20-year power purchase
agreements and Northern Ireland Renewable Obligation
Certificates.
Principal balance outstanding as at 30 June 2018: GBP1,810,759
Share class: Ordinary
As part of the same vendor programme in Northern Ireland, the
Group entered into a second transaction for the lease of three
additional 250 kW wind turbines. These three leases are
cross-collateralised amongst themselves for a term of 10 years with
the same structure as the first set of wind turbines.
Principal balance outstanding as at 30 June 2018: GBP2,892,359
Share class: Ordinary
Both of the aforementioned wind turbine investments were settled
post year end. The return on investment across the seven wind
turbines ranged from 12.0% to 14.6%.
The Group provided lease financing for 250 kW and 225 kW wind
turbines located on a dairy farm in Northern Ireland. The lease
term is 12 years with a power purchase agreement in place and
qualified for 20 years of Northern Ireland Renewable Obligation
Certificates.
Principal balance outstanding as at 30 June 2018: GBP1,428,457
Share class: Ordinary
The Group entered into a sale and lease back for a 500 kW wind
turbine and a 50 meter tower. The equipment is located 100 miles
north of London in a business park owned by the principals of the
lessee. The lease term is 10 years which is coterminous with a
power purchase agreement with a major Dow Chemical subsidiary.
Principal balance outstanding as at 30 June 2018: GBP1,312,143
Share class: Ordinary
The Group entered into a 10-year lease for two 225 kW wind
turbines located in the south of Wales. The lessee is a specialist
in developing community scale wind turbines between 300 kW and 800
kW in rural, commercial, and brownfield sites. The project is
supported by 20 years of Feed-in-Tariffs.
Principal balance outstanding as at 30 June 2018: GBP820,884
Share class: Ordinary
Each of the investments made by the Group in wind turbines had a
construction phase during which the lessee made interest-only
payments at a higher rate than the long-term lease rate.
Construction was completed in each case without incident and all of
the investments are performing as anticipated.
Marine Vessel
In May of 2016, the Group entered into a sale and lease back for
a brand new, state of the art crew transport vessel in the amount
of GBP1.9 million which represented 80% of the vessel's cost. As
part of the transaction, a three-month rental reserve was deposited
by the lessee with the Group. Despite the high demand for this
vessel from offshore wind farm developers, the new vessel was
under-utilised. By November of 2016, the three-month rental reserve
was exhausted and the lessee voluntarily surrendered the vessel to
the Group. Under the remarketing agreement with the manufacturer, a
new lessee that was already operating a sister vessel was quickly
identified. A new lease was entered into in early 2017 for a term
of 6 months. At the end of the initial term, the lessee extended
for a further 6-month term with a fixed purchase option. The vessel
has been fully utilised since being repositioned and has been
repainted and officially made part of the new lessee's fleet.
Principal balance outstanding as at 30 June 2018: GBP1,798,673
Share class: Ordinary
Marine Support Equipment
In two phases, the Group entered into a lease for a "flexi-coil"
subsea flow unit which is an updated version of pipe-unblocking
technology. The lease has a 60-month term while the useful life of
the equipment is 20 years when properly maintained.
Principal balance outstanding as at 30 June 2018: GBP988,999 Share class: C
In a separate and unrelated transaction, the Group invested in
the sale and leaseback of a patented Modular Pipelay System. The
system takes advantage of special joints to reduce installation
time which results in significant cost savings in offshore pipeline
construction. The lease has a term of 36 months.
Principal balance outstanding as at 30 June 2018: GBP979,669 Share class: C
Marine Support Equipment (Reel Drive System)
The Group entered into a transaction to refinance a 400-ton reel
drive system along with a spares container and a control van. The
value of the equipment was in excess of GBP2.5 million and had
approximately GBP228,000 of outstanding debt encumbering it. The
Group provided GBP1.0 million against the equipment and paid off
the existing encumbrance. The proceeds were then used to complete
the construction of a new 85-ton reel drive system which also
became part of the Group's collateral package. The equipment is
used offshore for both undersea pipeline and power cable
construction (laying) and maintenance.
This investment has subsequently been settled post year end,
yielding a return of 11.1%.
Principal balance outstanding as at 30 June 2018: GBP623,173
Share class: Ordinary
Plastics Reprocessing Equipment
The Group entered into a 5-year lease for one infrared rotary
drum and two twin screw compounder extruders used by a specialty
engineering and plastics company. The GBP515,000 of equipment is
used to reprocess polymer-based products into forms reused by a
number of industries. The company won the 2014 Plastics Industry
Award for the UK's Best Supplier Partnership. The lease was
formally transferred to an arm's length purchaser in March
2018.
Principal balance outstanding as at 30 June 2018: GBP341,965
Share class: Ordinary
VAT Receivables
On certain transactions the funding amount will include VAT.
When this occurs, the amount advanced accrues interest at the same
rate as the rest of the transaction.
At 30 June 2018, the Group had an outstanding VAT receivable of
GBP333,148 accruing interest at 12%.
Plant Hire Equipment
The Group purchased the receivables associated with a 5-year
lease of dump trucks, excavators, bulldozers, and other heavy earth
moving machinery. An unrelated leasing company holds the
subordinated residual interest in this investment.
Principal balance outstanding as at 30 June 2018: GBP251,507
Share class: Ordinary
IT & Software
The Group provided financing for IT systems and software used by
a major hospital group in Australia. This fully amortising 60-month
investment is Sterling-denominated and made through the borrowers
UK parent company.
Principal balance outstanding as at 30 June 2018: GBP214,984
Share class: Ordinary
Outlook
Looking forward the Group is well positioned.
Rising interest rates are not a concern as the Group's targeted
market always commands a return premium due to the high-touch
nature of the underwriting and limited competition in middle market
leasing outside of bank lending parameters.
A "No Deal Brexit" is of limited concern on the
new-business-side as the portfolio is fully committed and the
pipeline is a multiple of the natural run-off, even taking into
consideration an increase in early settlements which in and of
themselves are at the Group's discretion. From a performance
standpoint, the Group's focus on business-essential core assets in
non-cyclical circumstances is designed to endure economic
downturns.
A broader market concern is the performance of new entrants into
the direct lending space. Senior members of the Investment Managers
have been engaged in equipment leasing and asset finance investing
for between three and five decades and have all performed through
market cycles. With the inevitable end to the strong market
momentum, many of the new investment strategies or management
styles have yet to be proven through a recession. There is a
concern that weakness in the performance of unrelated but similarly
classed strategies will cast a shadow over the more established
traditional strategies like equipment leasing and asset finance.
This should not have any material effect on the underlying
performance but may inhibit the pace of growth which is somewhat
inconsequential with the portfolio at its current size. The Group
is already benefiting from economies of scale.
At the micro-level, as each share class gets closer to full
investment, dividend cover will continue to improve. As early
settlements and refinancing are strategically enabled, NAV growth
should be accelerated. Delinquencies may increase but asset
coverage should not be affected and with the prior year as a
lesson, the market should better understand the management process
and timeframes to address issues.
SQN Capital Management, LLC SQN Capital Management (UK) Limited
2 October 2018 2 October 2018
DIRECTORS' REPORT
The Directors present the Annual Report and Audited Consolidated
Financial Statements of the Group for the year ended 30 June
2018.
Board of Directors
The Directors of the Company who served during the year
were:
Peter Niven (Chairman)
John Falla
Christopher Spencer
Paul Meader (appointed on 18 August 2017)
Carol Goodwin (resigned on 31 December 2017)
Directors' Interests
The Directors held the following interests in the Company's
share capital at the year end:
Director Number of Ordinary Number of 2016 C
Shares Shares
Peter Niven 79,858 3,860
John Falla 19,637 3,829
Christopher Spencer 19,929 3,845
Paul Meader(1) 47,000 -
(1) The shares are held in the name of Sarah Kingwell, the
spouse of Paul Meader.
There have been no changes in the interests of the Directors
since the year end.
Notifications of Shareholdings
The Company had been notified in accordance with Chapter 5 of
the Disclosure Guidance and Transparency Rules (which covers the
acquisition and disposal of major shareholdings and voting rights),
of the following shareholders that had an interest of greater than
5% in the Company's issued share capital as at 30 June 2018.
Percentage of total
voting rights (%)
Investec Wealth & Investment
Limited 12.21
Schroders PLC 10.04
Sarasin & Partners LLP 7.25
Rathbone Brothers PLC 5.41
The percentage totals in the table above are as per the original
TR1 notification and prior to the 2016 C share capital return in
May 2018 and Ordinary Share buy backs made during the year.
Between 1 July 2018 and 1 October 2018, no additional
notifications were received.
Environmental and Social Issues
The Company is a closed-ended investment company which has no
employees and therefore its own direct environmental impact is
minimal. The Board notes that the companies in which the Group
invests will have a social and environmental impact over which it
has no control. The Board, the members of which are all based in
Guernsey, holds all its meetings in Guernsey and, whilst the
Investment Managers do travel to those meetings, the Group's
greenhouse gas emissions and environmental footprint are believed
to be minimal. However, many of the companies and projects in which
the Group invests have a very positive environmental footprint. The
numerous anaerobic digestion plants the Group finances use waste of
many types to produce sustainable fertilisers and electricity or
gas which are provided to the respective National Grids.
Additionally, our support for other renewable energy sources
likewise provide alternative energy sources to fossil and/or
nuclear fuels. In these ways, the Board is pleased that the Group
plays a positive part in the environmental arena.
Life of the Company
The Company has an indefinite life. At the Annual General
Meeting (the "AGM") held on 20 November 2017, a resolution was
passed that the Company will continue its business as a
closed-ended investment company (the "Continuation Resolution").
The Directors are required to hold a Continuation Resolution every
three years, with the next one proposed at the AGM in 2020. In the
event that a Continuation Resolution is not passed, the Directors
shall formulate proposals to be put to shareholders as soon as is
practicable but, in any event, by no later than six months after
the Continuation Resolution is not passed, to reorganise, unitise
or reconstruct the Company or for the Company to be wound up with
the aim of enabling shareholders to realise their holdings in the
Company.
Dividends
The Company targets a total annual dividend of 7.25 pence per
Ordinary Share. The dividend target is a target only and there can
be no guarantee that this will be achieved. Dividends are declared
and paid monthly for Ordinary Shares and 2016 C Shares.
Refer to note 14 for details of dividends that the Company has
declared and paid to its shareholders during the year and note 19
for details on dividends declared and paid after the year end.
Ordinary Share Buybacks
At the AGM held on 20 November 2017, the Directors were granted
authority to repurchase 53,620,355 Ordinary Shares (being equal to
14.99% of the number of Ordinary Shares in issue) for cancellation
or to be held as treasury shares. This authority will expire at the
forthcoming AGM. The Directors intend to seek annual renewal of
this authority from the shareholders. Pursuant to this authority,
and subject to the Companies (Guernsey) Law, 2008, as amended
("Companies Law") and the discretion of the Directors, the Company
may purchase Ordinary Shares in the market if they believe it to be
in shareholders' interests; in particular, as a means of correcting
any imbalance between the supply and demand for the Ordinary
Shares.
Indemnities
To the extent permitted by Guernsey Law, the Company's Articles
provide an indemnity for the Directors against any liability except
such (if any) as they shall incur by or through their own breach of
trust, breach of duty or negligence.
During the year, the Group has maintained insurance cover for
its Directors under a Directors' and Officers' liability insurance
policy.
2018 AGM
The AGM will be held in Guernsey on 20 November 2018. The notice
for the AGM sets out the ordinary and special resolutions to be
proposed at the meeting. Separate resolutions are proposed for each
substantive issue.
The Articles of the Company state that fourteen clear days'
notice of the AGM of the Company is required. It is, however, the
intention of the Board that the Notice of AGM is issued to
shareholders so as to provide at least twenty business days' notice
of the meeting. The Directors welcome communication with all
shareholders and can be contacted in writing at the Company's
registered office.
Voting on all resolutions at the AGM is by poll. The proxy votes
cast, including details of votes withheld are disclosed to those in
attendance at the meeting and the results are published on the
Company's website and announced via the Regulatory News
Service.
Directors' Statement of Responsibilities
The Directors are responsible for preparing the Annual Report
and Consolidated Financial Statements in accordance with applicable
law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year.
Under company law the Directors must not approve financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and of its profit or loss
for that period.
In preparing these Consolidated Financial Statements, the
Directors are required to:
-- Select suitable accounting policies and apply them consistently;
-- Make judgements and estimates that are reasonable, relevant and reliable;
-- State whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the financial statements;
-- assess the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern;
and
-- use the going concern basis of accounting unless they either
intend to liquidate the Company or to cease operations, or have no
realistic alternative but to do so.
The Directors are responsible for keeping proper accounting
records that are sufficient to show and explain the Group's
transactions and disclose with reasonable accuracy at any time the
financial position of the Group and enable them to ensure that its
Consolidated Financial Statements comply with the Companies
(Guernsey) Law, 2008. They are responsible for such internal
control as they determine is necessary to enable the preparation of
financial statements that are free from material misstatement,
whether due to fraud or error, and have general responsibility for
taking such steps as are reasonably open to them to safeguard the
assets of the Group and to prevent and detect fraud and other
irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website, and for the preparation and dissemination of the
Consolidated Financial Statements. Legislation in Guernsey
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
Responsibility statement of the directors in respect of the
Annual Report and financial statements
We confirm that to the best of our knowledge:
-- the Consolidated Financial Statements, prepared in accordance
with the applicable set of accounting standards, give a true and
fair view of the assets, liabilities, financial position and profit
or loss of the Group; and
-- the Directors' Report includes a fair review of the
development and performance of the business and the position of the
issuer, together with a description of the principal risks and
uncertainties that they face.
We consider the Annual Report and Consolidated Financial
Statements, taken as a whole, are fair, balanced and understandable
and provides the information necessary for shareholders to assess
the Group's position and performance, business model and
strategy.
By order of the Board
Peter Niven Christopher Spencer
Chairman Director
2 October 2018 2 October 2018
DIRECTORS' BIOGRAPHIES
Peter Niven (Non-Executive Chairman)
Peter Niven, is a resident of Guernsey. He has worked in the
financial services industry in the UK, offshore and internationally
for over 40 years, 30 of those with the Lloyds Banking Group from
which he retired in 2005 as the head of the Group's Offshore
Banking Division. Since then Peter has worked for the Guernsey
Government and the local financial services sector, through
Guernsey Finance, with the remit to develop and promote the island
on the world stage as a premier international finance centre. He
retired from that role in December 2012.
He now acts as a Non-Executive Director on a broad portfolio of
LSE listed and unlisted investment funds investing in asset classes
including leasing, property, emerging markets and private equity
with wide experience of chairing Boards and Audit and Management
Committees. He is also a director of ABTA's Guernsey captive
insurance entity. Peter is a Fellow of the Institute of Bankers, a
Fellow of the Institute of Directors and a Chartered Director.
John Martyn Falla (Non-Executive Director)
John Falla, a Guernsey resident, is a Chartered Accountant and
has a BSc Hons degree in Property Valuation and Management from The
City University, London. He is a Chartered Fellow of the Chartered
Institute for Securities and Investment having been awarded their
diploma. He is a Non-Executive Director and consultant to a number
of companies, most of which are listed on the London Stock
Exchange.
John trained with Ernst & Young in London before moving to
their Corporate Finance Department. On returning to Guernsey he
worked for an International Bank, before joining the Channel
Islands Stock Exchange as a member of the Market Authority. In 2000
John joined the Edmond de Rothschild Group in Guernsey and provided
corporate finance advice to clients including open and closed-ended
investment funds, and institutions with significant property
interests. John was a director of a number of Edmond de Rothschild
group operating and investment companies.
Christopher Paul Spencer (Non-Executive Director)
Christopher Spencer, a resident of Guernsey, qualified as a
chartered accountant in London in 1975. Following two years in
Bermuda he moved to Guernsey. Christopher, who specialised in audit
and fiduciary work, was Managing Partner/Director of Pannell Kerr
Forster (Guernsey) Limited from 1990 until his retirement in May
2000. Christopher is a member of the AIC Offshore Committee, a past
President of the Guernsey Society of Chartered and Certified
Accountants and a past Chairman of the Guernsey Branch of the
Institute of Directors. Christopher sits on the Board of Directors
of JPEL Private Equity Limited and John Laing Infrastructure Fund
Limited, both of which are listed on the London Stock Exchange and
Summit Germany Ltd which is an AIM listed company.
Paul Meader (Non-Executive Director)
Paul Meader, a resident of Guernsey, is an independent director
of investment companies, insurers and investment funds. He was
previously Head of Portfolio Management for Canaccord Genuity based
in Guernsey, prior to which he was Chief Executive of Corazon
Capital. He has over 30 years' experience in financial markets in
London, Dublin and Guernsey, holding senior positions in portfolio
management and trading. Prior to joining Corazon he was Managing
Director of Rothschild's Swiss private banking subsidiary in
Guernsey. Mr Meader is a Chartered Fellow of the Chartered
Institute of Securities & Investments and past Chairman of the
Guernsey International Business Association.
CORPORATE GOVERNANCE REPORT
Introduction
The Board is committed to high standards of corporate governance
and has put in place a framework for corporate governance which it
believes is appropriate for an investment company.
Compliance with Corporate Governance Codes
The Company is a member of the AIC. The UK Corporate Governance
Code (the "UK Code") acknowledges that the AIC Corporate Governance
Code for Guernsey domiciled member companies ("AIC Code") can
assist externally managed companies in meeting their obligations
under the UK Code in areas that are of specific relevance to
investment companies. The Guernsey Financial Services Commission
has also confirmed that companies that report against the UK Code
or AIC Code are deemed to meet the Guernsey Code of Corporate
Governance (the "Guernsey Code"). Copies of the AIC Code and the
AIC Guide can be found at www.theaic.co.uk. The UK Code is
available from the Financial Reporting Council (the "FRC") website
(www.frc.co.uk).
Throughout the year ended 30 June 2018, the Company has complied
with the recommendations of the AIC Code and as such also meets the
requirements of the UK Code and by default the Guernsey Code,
except to the extent highlighted below:
-- the role of the chief executive;
-- executive Directors' remuneration;
-- Senior Independent Director; and
-- internal audit function.
For the reasons set out in the AIC Guide, and as explained in
the UK Code, the Board considers these provisions are not relevant
to the position of the Group, being an externally managed
investment company with subsidiaries. In particular, all of the
Group's day-to-day management and administrative functions are
outsourced to third parties. As a result, the Group has no
executive directors, direct employees or internal operations. The
Group has therefore not reported further in respect of these
provisions.
The Group complies with the corporate governance statement
requirements pursuant to the UK Financial Conduct Authority's
("FCA") Disclosure and Transparency Rules by virtue of the
information included in the Corporate Governance section of the
Annual Report.
The Board believes that this Annual Report and Consolidated
Financial Statements presents a fair, balanced and understandable
assessment of the Group's position and prospects, and provides the
information necessary for shareholders to assess the Group's
performance, business model, strategy, principal risks and
uncertainties.
Board Independence, Composition and Diversity
The Board is chaired by Peter Niven who is responsible for its
leadership and for ensuring its effectiveness in all aspects of its
role. The Board currently consists of four Non-Executive Directors.
The biographical details of the Directors holding office at the
date of this report are listed above and demonstrate a breadth of
investment, accounting, banking and professional experience.
The Chairman and all Directors are considered independent. The
Directors consider that there are no factors, as set out in
Principle 1 or 2 of the AIC Code, which compromise the Chairman's
or other Directors' independence and that they all contribute to
the affairs of the Company in an adequate manner. The Board reviews
the independence of all Directors annually.
The appointment of a Senior Independent Director has been
considered but is not felt necessary as all Board members are
independent Non-Executive Directors, with different qualities and
areas of expertise on which they may lead where issues arise and to
whom concerns can be conveyed.
The Board values the importance of diversity, including gender,
to the effective functioning of the Board. The Board, however, does
not consider it appropriate or in the interest of the Company and
its shareholders to set prescriptive targets for gender or other
diversity on the Board. Any future appointments would be primarily
based on merit of skills, experience and knowledge of each
appointee.
Directors' Duties and Responsibilities
The Directors have adopted a set of reserved powers, which
establish the key purpose of the Board and detail its major duties.
These duties cover the following areas of responsibility:
-- statutory obligations and public disclosure;
-- approval of key investment decisions;
-- strategic matters and financial reporting;
-- Board composition and accountability to shareholders;
-- risk assessment and management, including reporting,
compliance, monitoring, governance and control; and
-- other matters having material effects on the Group.
These reserved powers of the Board have been adopted by the
Directors to demonstrate clearly the importance with which the
Board takes its fiduciary responsibilities and as an ongoing means
of measuring and monitoring the effectiveness of its actions.
The Board meets at least four times each year and monitors the
Group's share price and NAV and regularly considers ways in which
future share price performance can be enhanced. The Board is
responsible for the safeguarding of the assets of the Group and
taking reasonable steps for the prevention and detection of fraud
and other irregularities. The Investment Managers together with the
Company Secretary also ensure that all Directors receive, in a
timely manner, all relevant management, regulatory and financial
information relating to the Group and its portfolio of investments.
Directors unable to attend a Board meeting are provided with the
Board papers and can discuss issues arising in the meeting with the
Chairman or another Director.
Individual Directors may, at the expense of the Group, seek
independent professional advice on any matters that concerns them
in the furtherance of their duties.
Board and Committees
The Board has established three committees:
-- the Audit and Risk Committee;
-- the Management Engagement Committee, and
-- the Remuneration and Nomination Committee.
Due to the size and nature of the Company, all Directors have
been appointed to all Committees. In line with current FRC
guidance, the Peter Niven resigned as a member of the Audit and
Risk Committee post year end. The responsibilities of these
Committees are described below. Each Committee reports to and is
subject to the oversight of the Board. Terms of reference for each
Committee have been approved by the Board and are available in full
on the Company's website.
Board
Responsibilities:
-- Statutory obligations and public disclosure.
-- Approval of key investment decisions.
-- Strategic matters and financial reporting.
-- Board composition and accountability to shareholders.
-- Risk assessment and management, including reporting,
compliance, monitoring, governance and control.
-- Responsible for financial statements.
-- Other matters having material effects on the Group.
Audit and Risk Committee
Delegated Responsibilities:
-- Review the financial statements, including review of the
accounting policies and methods utilised.
-- Review the effectiveness and internal control policies and
procedures over financial reporting and identification, assessment
and reporting of risk.
-- Make recommendations to the Board in relation to appointment,
re-appointment and removal of external auditors and approving
remuneration and terms of engagement of external auditors.
-- To monitor risk management and internal control systems on an
ongoing basis, performing a review of their effectiveness, and
recommending actions to remedy any failings or weaknesses
identified.
Management Engagement Committee
Delegated Responsibilities:
-- Review on a regular basis the performance of the Investment
Managers and the Group's key advisers and major service suppliers
(other than the external auditor) to ensure that performance is
satisfactory and in accordance with the terms and conditions of the
respective appointments.
Remuneration and Nomination Committee
Delegated Responsibilities:
-- Review the structure, size and composition of the Board.
-- Give full consideration to succession planning
-- Identify suitable Board candidates to fill Board vacancies.
-- Make recommendations as to the appropriate level of Directors' remuneration.
-- Undertake performance evaluations of the Board and the Chairman.
Audit and Risk Committee
Christopher Spencer is the Chairman of the Audit and Risk
Committee. The duties of the Audit and Risk Committee in
discharging its responsibilities are outlined above. The report on
the role and activities of the Audit and Risk Committee and its
relationship with the external auditors is contained in the Audit
and Risk Committee Report.
Management Engagement Committee
John Falla is the Chairman of the Management Engagement
Committee. The duties of the Management Engagement Committee in
discharging its responsibilities are outlined above.
The Management Engagement Committee carries out its review of
the Group's key advisers and service providers through
consideration of a number of objective and subjective criteria and
through a review of the terms and conditions of their appointments
with the aim of evaluating performance, identifying any weaknesses
and ensuring value for money for the Company's shareholders.
The Management Engagement Committee reviewed the performance of
the Investment Managers and other key service providers on 4 June
2018. During this review, no material weaknesses were identified.
Overall the Management Engagement Committee confirmed its
satisfaction with the services and advice received.
Remuneration and Nomination Committee
Paul Meader is the Chairman of the Remuneration and Nomination
Committee. The duties of the Remuneration and Nomination Committee
in discharging its responsibilities are outlined above.
The Remuneration and Nomination Committee undertakes an
evaluation of the Board on an annual basis.
The performance of each Director is considered as part of a
formal review by the Remuneration and Nomination Committee. The
Remuneration and Nomination Committee may also meet without the
Chairman of the Board present in order to review his
performance.
Performance Evaluation
To allow for the facilitation of an external review of Director
remuneration and for the completion of a thorough Director
questionnaire and subsequent discussion, the 2018 Board evaluation
has been delayed and is due to take place in October 2018.
Directors' Remuneration Report
The following report meets the relevant Listing Rules of the FCA
and the AIC Code and describes how the Board has applied the
principles relating to Directors' remuneration.
Annual Report on Remuneration
The Group paid the following fees to the Directors for the year
ended 30 June 2018:
Director Fees
GBP
Peter Niven 60,000
Christopher Spencer 50,000
John Falla 40,000
Paul Meader - appointed 18 August
2017 34,778
Carol Goodwin - resigned 31
December 2017 20,000
Total 204,778
========
The Company's Articles limit the aggregation of fees payable to
the Directors to a total of GBP300,000 per annum. Extra services
are not included in the definition of fees as per the Company's
Articles.
Other than as shown above, no other remuneration or compensation
was paid or payable by the Company during the year to any of the
Directors, other than travel expenses of GBP3,181.
Advisers to the Remuneration and Nomination Committee
An external review of Directors' remuneration is currently being
undertaken by Optimus Group Limited. The Committee also sought
outside assistance for the appointment of Paul Meader.
Directors' Appointment, Retirement and Policy on Payment of Loss
of Office
No Director has a service contract with the Company. Directors
have agreed letters of appointment with the Company, copies of
which are available for review by shareholders at the registered
office and will be available at the AGM. The dates of their letters
of appointment are shown below:
Director Date Appointed Date Resigned
Peter Niven 28 May 2014 -
Christopher Spencer 28 May 2014 -
John Falla 28 May 2014 -
Paul Meader 18 August 2017 -
Carol Goodwin 28 May 2014 31 December 2017
The Articles of the Company require that all Directors submit
themselves for election by shareholders at the first opportunity
following their appointment. The Articles of the Company also
require the Directors to retire by rotation on a three-yearly
basis. The Directors have elected to stand for re-election on a
yearly basis, so will all retire at each AGM and be eligible for
reappointment.
Any Director may resign in writing to the Board at any time.
Directors are not entitled to payment for loss of office.
Tenure of Non-Executive Directors
The Board has adopted a policy on tenure that is considered
appropriate for an investment company. The Board does not believe
that length of service, by itself, leads to a closer relationship
with the Investment Managers or necessarily affects a Director's
independence.
The Board's tenure and succession policy seeks to ensure that
the Board is well balanced and will be refreshed from time to time
by the appointment of new Directors with the skills and experience
necessary to replace those lost by Directors' retirements and meet
future requirements. Directors must be able to demonstrate their
commitment and fiduciary responsibility to the Company. The Board
seeks to encompass relevant past and current experience of various
areas relevant to the Company's business.
Conflict of Interests
The Directors have a duty to avoid situations where they have,
or could have, a direct or indirect interest that conflicts, or
possibly could conflict, with the Company's interests. Only
Directors who have no material interest in the matter being
considered will be able to participate in the Board approval
process. Directors are required to disclose all actual and
potential conflicts of interest to the Chairman in advance of any
proposed external appointment.
In deciding whether to approve an individual Director's
participation, the other Directors will act in a way they consider
to be in good faith in assessing the materiality of the conflict in
accordance with the Company's Articles of Incorporation.
The Board believes that its procedures regarding conflicts of
interest have operated effectively. The Board also confirms that
its procedure for the approval of conflicts of interest, if any,
has been followed by the Directors. None of the Directors had a
material interest in any contract which is significant to the
Group's business. Directors' holdings in the Company's shares can
be found within the Directors' Report.
Induction/Information and Professional Development
Directors are provided, on a regular basis, with key information
on the Company's policies, regulatory requirements and its internal
controls. Regulatory and legislative changes affecting Directors'
responsibilities are advised to the Board as they arise along with
changes to best practice from, amongst others, the Company
Secretary and Baker Tilly CI Audit Limited (the "Auditor").
Advisers to the Group also prepare reports for the Board from time
to time on relevant topics and issues.
The Directors attend relevant seminars and events to allow them
to continually refresh their skills and knowledge and keep up with
changes within the investment management industry.
When a new Director is appointed to the Board, they are provided
with all relevant information regarding the Group and their duties
and responsibilities as a Director. In addition, a new Director
will also spend time with representatives of the Investment
Managers in order to learn more about their processes and
procedures.
Attendance at scheduled meetings of the Board and its committees
for the year ended 30 June 2018
Quarterly NAV & Audit & Remuneration Management Separate
Board Dividend Risk & Nomination Engagement Investment
Meetings Committee Committee Committee Meetings
Number of
meetings during
the year 4 10 5 1 1 2
---------- ---------- ----------- -------------- ------------ ------------
Peter Niven 4 10 5 1 1 2
---------- ---------- ----------- -------------- ------------ ------------
John Falla 4 9 5 1 1 1
---------- ---------- ----------- -------------- ------------ ------------
Carol Goodwin(1) 2 of 2 4 of 4 2 of 2 - - 1 of 1
---------- ---------- ----------- -------------- ------------ ------------
Chris Spencer 4 9 5 1 1 2
---------- ---------- ----------- -------------- ------------ ------------
Paul Meader(1) 4 of 4 8 of 8 4 of 4 1 of 1 1 of 1 1 of 2
---------- ---------- ----------- -------------- ------------ ------------
(1) Carol Goodwin and Paul Meader did not serve as a Directors
for the full financial year. Paul Meader was appointed on 18(th)
August 2017 and Carol Goodwin resigned on 31(st) December 2017.
In addition to these meetings, 6 ad-hoc meetings were held
during the year covering various Group matters.
Relationship with the Investment Managers, Company Secretary and
the Administrator
The Board has delegated various duties to external parties
including the management of the investment portfolio, the custodial
services (including the safeguarding of assets), the registration
services and the day-to-day company secretarial, administration and
accounting services. Each of these contracts was entered into after
full and proper consideration by the Board of the quality and cost
of services offered, including the control systems in operation in
so far as they relate to the affairs of the Group.
The Board receives and considers reports regularly from the
Investment Managers, with ad hoc reports and information supplied
to the Board as required. The Investment Managers take decisions as
to the purchase and sale of individual investments, within the
delegated authority established by the Board. The Board meet with
the Investment Managers on an ad-hoc basis to discuss and approve
investment decisions as necessary. The Investment Managers comply
with the risk limits as determined by the Board and have systems in
place to monitor cash flow and the liquidity risk of the Group.
The Investment Managers and the Administrator also ensure that
all Directors receive, in a timely manner, all relevant management,
regulatory and financial information. Representatives of the
Investment Managers and Administrator attend each Board meeting as
required, enabling the Directors to probe further on matters of
concern. The Directors have access to the advice and service of the
Company Secretary who is responsible to the Board for ensuring that
Board procedures are followed and that applicable rules and
regulations are complied with. The Board, the Investment Managers
and the Administrator operate in a supportive, co-operative and
open environment.
Shareholder Engagement
The Board believes that the maintenance of good relations with
shareholders is important for the long-term prospects of the
Company. It has, since admission, sought 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. During the year, the Chairman has
engaged with shareholders when requested. The Board receives
feedback on the views of shareholders from its Corporate Broker and
the Investment Managers. Shareholders are welcome to contact the
Directors at any time via the Company Secretary.
The Board believes that the AGM provides an appropriate forum
for investors to communicate with the Board, and encourages
participation. There is an opportunity for individual shareholders
to question the Directors at the AGM. Details of proxy votes
received in respect of each resolution will be made available to
shareholders at the meeting and will be posted on the Company's
website following the meeting.
The Annual Report and Consolidated Financial Statements, Interim
Report and Consolidated Financial Statements and fact sheets are
available to provide shareholders with a clear understanding of the
Group's activities and its results. This information is
supplemented by the monthly calculation and publication on the
London Stock Exchange of the NAV of the Company's shares and the
dividend declared thereon. All documents issued by the Company can
be viewed on the website www.sqnassetfinance.com.
AIFMD
The Company is classed as an externally managed Alternative
Investment Fund under the Alternative Investment Fund Managers
Directive ("AIFMD"). The US Investment Manager is the authorised
Alternative Investment Fund Manager ("AIFM") for the purposes of
AIFMD. The AIFM is responsible for managing the Company's
investments and the risks it faces in accordance with AIFMD,
subject to the overall scrutiny of the Board. The US Manager is
registered with the FCA as a "third country AIFM". The requirements
of AIFMD have been applied accordingly.
AIFM Remuneration
The total fees paid to the Investment Managers by the Company
are disclosed in note 18. In accordance with Article 22 of the AIFM
Directive and Article 107 of the AIFM Regulations, the AIFM must
make certain disclosures in respect of the remuneration paid to its
staff. The AIFM has identified four staff as falling within the
scope of the disclosure requirements (the "Identified Staff"). The
Identified Staff are senior management of the AIFM's managerial
functions and a Compliance Officer in the compliance function. The
remuneration amount paid to all of the Identified Staff of the AIFM
in respect of their work with the AIFM for the 12 month period to
30 June 2018 was US$860,000 (equivalent to GBP651,416).
AUDIT AND RISK COMMITTEE REPORT
The Audit and Risk Committee comprised all of the Directors. All
of the Audit and Risk Committee's members have recent and relevant
financial experience. The Chairman of the Audit Committee,
Christopher Spencer, is a chartered accountant and in addition
serves as chairman of the audit committee of other listed
investment companies. The Board is satisfied that Mr Spencer has
recent and relevant financial experience, as required under the AIC
Code. The qualifications of the members of the Audit Committee are
outlined in the Directors' Biographies section.
Committee Meetings
The Audit and Risk Committee meets at least three times a year.
Only members of the Audit and Risk Committee have the right to
attend Audit and Risk Committee meetings. Representatives of the
Investment Managers and Administrator will be invited to attend
Audit and Risk Committee meetings on a regular basis and other
non-members may be invited to attend all or part of the meeting as
and when appropriate and necessary. The Auditor is also invited
whenever it is appropriate. The Audit and Risk Committee is also
able to meet separately with the Auditor without the Investment
Managers being present.
Main Activities
The Audit and Risk Committee assists the Board in carrying out
its overall responsibility in relation to financial reporting
requirements, risk management and the assessment of internal
financial and operating controls. It also manages the Group's
relationship with the Auditor. Meetings of the Committee generally
take place prior to a Company Board meeting. The Committee reports
to the Board as part of a separate agenda item, on the activity of
the Committee and matters of particular relevance to the Board in
the conduct of their work.
The day to day management and administrative functions are
outsourced to third parties and as a consequence there is no
requirement for an internal audit function. The Committee reviews
and monitors reports on the internal control and risk management
systems on which the Company is reliant.
Financial Reporting
The primary role of the Committee in relation to financial
reporting is to review in conjunction with the Investment Managers
and the Administrator, the appropriateness of the Annual Report and
Consolidated Financial Statements and the Interim Report and
Consolidated Financial Statements concentrating on, amongst other
matters:
-- the quality and acceptability of accounting policies and practices;
-- the clarity of the disclosures and compliance with financial
reporting standards and relevant financial and governance reporting
requirements;
-- material areas in which significant judgements have been
applied or there has been discussion with the Auditor;
-- in relation to the UK Corporate Governance Code and AIC Code,
whether 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 Group's
performance, business model and strategy; and
-- any correspondence from regulators in relation to the quality
of the Group's financial reporting.
To aid its review, the Committee seeks the appropriate input
from the Investment Managers, Administrator and also reports from
the Auditor.
Significant Risks
In relation to the Annual Report and Consolidated Financial
Statements for the year ended 30 June 2018, the following
significant issues were considered by the Audit and Risk
Committee:
(i) Revenue Recognition
The risk that revenue (classified as 'income' in the
Consolidated Financial Statements and primarily comprising interest
income or finance charges receivable under loans, leases and hire
purchase agreements) may be materially misstated.
The Committee has reviewed and is satisfied that a robust
transaction reporting system is in place between the Investment
Managers and Administrator to ensure that transactions and the
revenue received are reflected correctly.
(ii) Investment Portfolio
The investment portfolio primarily comprises loans, hire
purchase contracts and finance leases. The carrying value of these
assets is key to the financial performance of the Group and drives
returns to shareholders.
Where a valuation model is utilised, such a model relies upon on
a number of inputs, such as underlying assumptions and estimates,
and inherent within any such matter of judgement is the risk that
the eventual outcome will differ from that contained within these
financial statements.
The Committee reviews the regular reports from the Investment
Managers and Administrator regarding the valuation of the
investments and with the Board reviews the NAV of the Group,
together with the value of investments on a regular basis.
(iii) Compliance
The Company is required to comply with a number of rules and
regulations including London Listing Rules, Transparency Rules,
Corporate Governance Code and any other regulatory rules in
Guernsey. In addition the Company needs to ensure that it complies
with the investment strategy set out in its Prospectus, as amended
from time to time.
The Board and the Committee regularly receive compliance reports
from the Investment Managers and the Administrator.
(iv) Fraud Risk
The risk of fraud due to management override of controls.
The Committee reviews the reports from the Investment Managers
and Administrator as to the system of checks in place to combat
fraud.
(v) Related Parties and Consolidation
The Company has a number of subsidiaries and affiliated
entities.
Consideration is given to financial reporting requirements -
primarily around consolidation (and control) and related party
disclosure.
The Administrator and Investment Manager have a number of
worksheets and documents to ensure that all subsidiaries and
affiliated entities are correctly reflected in the monthly
valuations and fed through to the financial statements. Related
party disclosure is reviewed by all parties.
Risk Management and Internal Controls
As stated earlier, the day to day management and administrative
functions are outsourced to third parties. The US Investment
Manager is also the AIFM and has, under AIFMD, certain specific
responsibilities for risk management, subject to the oversight of
the Board. The Board in turn delegates this to the Audit and Risk
Committee. The Audit and Risk Committee reports their work and
findings to the Board for approval.
The Company continues to review and develop a comprehensive risk
management framework, with implementation outsourced to the
Investment Managers and the Administrator, with a risk register
that is reviewed and updated as necessary by the Board and Audit
and Risk Committee. The Audit and Risk Committee considers the
risks facing the Group and controls and other measures in place to
mitigate the impact of risks.
The work of the Audit Committee is primarily driven by the
Company's assessment of the principal risks and uncertainties as
set out in the Strategic Report and in note 17, the reports
received from the Investment Manager and the Company's risk
evaluation process.
Risk Framework and Systems of Internal Control
The Board recognises the importance of identifying, actively
monitoring and, where possible, mitigating the financial and
non-financial risks facing the business. Whilst responsibility for
risk management rests with the Board, the management of risk is
embedded as part of the everyday business and culture of the
Company and its principal advisers.
The Board has considered the need for an internal audit function
but because of the internal controls systems in place at the key
service providers, and the independent controls process performed
it has decided instead to place reliance on those control and
assurance processes.
Risk Identification
The Board and Audit and Risk Committee identify risks with input
from the Group's Investment Managers and Administrator. The Board
also receives detailed quarterly asset management reports
highlighting performance and potential risk issues on an
investment-by-investment basis.
Risk Assessment
Each identified risk is assessed in terms of probability of
occurrence, potential impact on financial performance and movements
in the relative significance of each risk from period to
period.
Action Plans to Mitigate Risk
Where new risks are identified or existing risks increase in
terms of likelihood or impact, the Audit and Risk Committee assists
the Group in developing, where possible, an action plan to mitigate
the risk and put in place enhanced monitoring and reporting.
Re-assessment and Reporting of Risk
Such risk mitigation plans are reassessed by the Audit and Risk
Committee with the relevant key service providers where applicable,
and reported to the Board on a quarterly basis. The direct
communication between the Group and its Investment Managers is
regarded as a key element in the effective management of risk (and
performance) at the underlying investment level.
External Audit
The effectiveness of the external audit process is dependent on
appropriate audit risk identification at the start of the audit
cycle. The Audit and Risk Committee received a detailed audit plan
from the Auditor identifying its assessment of the significant
audit risks. The significant risks were tracked through the year
and the Audit and Risk Committee challenged the work performed by
the Auditor to test management override of controls and in addition
the audit work undertaken in respect of valuations of unlisted
investments.
The Audit and Risk Committee assess the effectiveness of the
audit process in addressing these matters through the reporting
received from the Auditor in relation to the year end. In addition,
the Audit and Risk Committee seeks feedback from the Investment
Managers and the Administrator on the effectiveness of the audit
process. For the year ended 30 June 2018, the Audit and Risk
Committee was satisfied that there had been appropriate focus and
challenge on the significant and other key areas of audit risk and
assessed the quality of the audit process to be good.
Appointment and Independence
In its assessment of the independence of the Auditor, the Audit
and Risk Committee receives details of any relationships between
the Group and the Auditor that may have a bearing on their
independence and receives confirmation that they are independent of
the Group.
The Audit and Risk Committee considers the reappointment of the
Auditor, including the rotation of the audit engagement partner,
and assesses their independence on an annual basis. The Auditor is
required to consider rotation of the engagement partner responsible
for the audit every five years. The current audit engagement
partner, Ewan Spraggon, has overseen the audit of the Company for
four audit cycles. The Auditor has been the Group's external
auditor since incorporation.
The Audit and Risk Committee reviews the objectivity and
effectiveness of the audit process on an annual basis and considers
the audit tendering provisions of the revised UK Code in
determining whether the Company should put the audit engagement out
to tender. Having considered the quality and level of service
currently being provided by the Auditor, the Audit and Risk
Committee believes that it is in the best interests of the
shareholders to retain its services and has therefore provided the
Board with its recommendation that a resolution proposing the
reappointment of the Auditor should be put to the shareholders at
the 2018 AGM. The Auditor has indicated its willingness to continue
in office. There are no contractual obligations restricting the
Committee's choice of external auditor and the external auditor is
not indemnified by the Group.
Non-Audit Services
To safeguard the objectivity and independence of the Auditor
from becoming compromised, the Committee has a formal policy
governing the engagement of the Auditor to provide non-audit
services. The Auditor and the Directors have agreed that all
non-audit services require the pre-approval of the Audit and Risk
Committee prior to commencing any work. The Auditor will only be
appointed to provide non-audit services if it is in the best
interests of the Company. Fees for non-audit services will be
tabled annually so that the Audit and Risk Committee can consider
the impact on the Auditor's objectivity.
The Auditor is remunerated as follows for their services
rendered during the year ended 30 June 2018:
GBP
Audit of the Group's financial statements 47,656
Interim review of the Group's financial
statements 9,440
-------
Total audit related services 57,096
-------
The Auditor did not provide any non-audit services during the
year.
For and on behalf of the Audit and Risk Committee
Christopher Spencer
Chairman of the Audit and Risk Committee
2 October 2018
INDEPENT AUDITOR'S REPORT TO THE MEMBERS OF SQN ASSET FINANCE
INCOME FUND LIMITED
Opinion
We have audited the consolidated financial statements of SQN
Asset Finance Income Fund Limited (referred to as "the company" and
together with its subsidiaries as "the Group") for the year ended
30 June 2018 which comprise the Statement of Financial Position,
the Statement of Comprehensive Income, the Statement of Cash Flows,
the Statement of Changes in Equity and the related notes including
a summary of significant accounting policies. The financial
reporting framework that has been applied in their preparation is
applicable Guernsey law and International Financial Reporting
Standards (IFRSs) as adopted by the European Union.
In our opinion the financial statements:
-- give a true and fair view of the state of the Group's affairs
as at 30 June 2018 and of its profit for the year then ended;
-- have been properly prepared in accordance with IFRSs as adopted by the European Union; and
-- have been prepared in accordance with the requirements of the
Companies (Guernsey) Law, 2008.
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 Group
in accordance with the ethical requirements that are relevant to
our audit of the financial statements in Guernsey, including the
FRC's Ethical Standard as applied to listed public interest
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.
Audit commentary
A: What has changed in the current year approach?
The approach followed was consistent with the 2017 audit
strategy, further enhanced in the following areas:
-- Heightened review and development of our approach to the
audit of the investment portfolio in light of restructured
investments and potentially impaired investments. As part of this
we included additional procedures to confirm the value of the
underlying investments.
-- Heightened review of the monitoring process of the portfolio
diversification limits, covenant monitoring and ongoing risk
assessment.
B: An overview of the scope of our audit
Our audit approach is risk based and focusses on identification
of key business risks and those areas of operation that are
considered significant to the results for the year. It focuses on
the robustness and effectiveness of the Company's control
environment established by management to ensure sound operational
and financial control and the mitigation of risk.
For purposes of the Group, management includes those 3(rd)
parties such as the investment managers and administrator to whom
the board has delegated responsibility for key operations and day
to day functions. Where possible, we seek to validate and
subsequently place reliance on the controls that are in place, in
order to increase the efficiency of our audit work. Our audit
comfort comes from evaluating and validating how management monitor
and control the business and financial risks.
The Group includes the company and its 5 wholly owned
subsidiaries which are all established for the primary purpose of
acting as investment holding companies.
Our audit approach covered both pre and year end procedures
described as follows:
-- Pre-year end: In conjunction with the testing of the internal
controls, the pre-year end audit work included "walk through
testing" which was undertaken to help us understand the control
environment (including IT controls) established by management and
the entire investment process of the portfolio of the Group (from
deal sourcing, due diligence to recognition in the financial
statements). We obtained this understanding from
discussions/meetings with the administrator, the investment
manager(s) and the board as well as review of relevant
documentation provided.
As part of our discussions with management and the board around
the control environment and the overall business environment of the
Group, we considered a number of emerging and developing areas to
be significant for management and the board's attention on an
on-going basis. These included but were not limited to cyber risk,
development in the global tax area and market volatility as a
result of the Brexit negotiation.
-- Year end: Based on the understanding of the business, from
the pre-year end testing, we undertook substantive testing on
significant balances, transactions and disclosures in line with our
risk assessment including the results of the work done at the pre
year end.
C: Our application of materiality
The directors have primary responsibility for ensuring that the
financial statements are free from material misstatement or error.
In accounting terms, a material error is one that, if it were
unadjusted, would cause a user of the financial statements to alter
his view of those statements or the results or the financial
position of the entity being reported on. Materiality, therefore,
is incapable of monetary definition, since it has both quantitative
and qualitative elements. It is necessary to consider not only the
impact of an error on the financial statements as a whole, but also
on the individual accounting items affected. Additionally, the
cumulative impact of all unadjusted errors must be considered.
Auditors examine accounts on a test basis. The level of testing
we have carried out is based on our assessment of the risk that an
item in the financial statements may be materially misstated.
A key element of our annual audit planning is to make an
assessment of the risk that the financial statements might contain
material errors. We base this assessment on our cumulative
knowledge of the Group and our understanding of its activities and
the industry sector in which it operates. We assess risk both at
the overall financial statement level and at the individual item
level. The nature and volume of audit work we have conducted is
directly related to our risk assessments.
Whilst the audit process is designed to provide reasonable
assurance of identifying material misstatements or omissions it is
not guaranteed to do so. Rather we plan the audit to determine the
extent of testing needed to reduce to an appropriately low level
the probability that the aggregate of uncorrected and undetected
misstatements does not exceed materiality for the financial
statements as a whole. This testing requires us to conduct
significant depth of work on a broad range of assets, liabilities,
income and expense as well as devoting significant time of the most
experienced members of the audit team, in particular the
Responsible Individual (who signs the audit report), to subjective
areas of the accounting and reporting process.
In making these assessments and in particular cognisant of the
challenges of defining materiality, we considered a threshold of
GBP4,226,000 to be an indicator of materiality for the financial
statements as a whole. This threshold was based on an average of
the following figures: 0.5% of revenue, 5% of profit, 1% of gross
assets and 100% of the smallest disclosed balance. This is intended
to avoid the distorting effect of using only one financial
statement figure as the measure.
We agreed with the Audit Committee to report to it all corrected
and uncorrected misstatements we identified through our audit with
a value in excess of GBP105,650, in addition to other audit
misstatements below that threshold that we believe warranted
reporting on qualitative grounds.
D: Key audit matters
Key audit matters are those matters that, in our professional
judgment, 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. This is not a complete list of all risks identified in our
audit.
The key matters listed below are consistent with our 2017 audit
strategy.
(i) Revenue recognition
Revenue is classified as "finance income" in the financial
statements and primarily comprises of interest income including
from loans, leases and hire purchase agreements. The respective
Group Company enters into legal agreements with clients of varying
lengths (typically up to 10 years). The terms of the agreements are
summarised in a trade ticket which is reviewed by both the
investment manager and administrator including on a monthly basis
as part of the NAV reporting process.
The risk - As finance income is the Group's major source of
revenue and is a material item in the Statement of Comprehensive
Income, the recognition of finance income is considered to be a
significant risk.
Our response - Our audit procedures with respect to revenue
recognition included but were not limited to: tests of control over
trade ticket terms; substantive analytical procedures and tests of
detail over balances to corroborate the value of income and debtors
during the period to the trade ticket and underlying documentation;
and testing of cash receipts or debtors records to test the
completeness of revenue.
(ii) Loans and receivables
The risk - The carrying value of the investment portfolio may be
misstated. Qualitative information about the credit quality of the
portfolio (such as on restructured and potentially impaired
investments) may not be appropriately considered and/or disclosed.
The investments primarily comprise of loans, hire purchase
contracts and finance leases.
Our response - In conjunction with the revenue testing described
above, we performed tests of control over trade ticket terms. We
also performed analytical procedures to ensure that the
amortisation schedule and carrying value were in line with relevant
IFRS requirements. We had discussions with the investment managers
around the portfolio quality as part of our audit procedures.
(iii) Compliance
The risk - The Group is required to comply with a number of
rules and regulations including London Listing Rules, Transparency
Rules, Corporate Governance Code and any other regulatory rules in
Guernsey. In addition, the Group needs to ensure that it complies
with the investment strategy set out in its prospectus, as amended
from time to time.
Our response - Our audit procedures include a review for
compliance with key rules e.g. London Listing Rules, Transparency
Rules, Corporate Governance Code and any other regulatory rules. We
also performed a review of Board Minutes to check for board
oversight of the compliance work carried out by the administrator
and of investment strategy compliance.
(iv) Related parties
The risk - The Company has a number of subsidiaries and
affiliated entities. In addition a number of shares have been
issued/redeemed with existing shareholders/investors. Consideration
needs to be given to financial reporting requirements - primarily
around consolidation (and control) and related party disclosure -
as applicable.
Our response - Our audit procedures include use of an IFRS
disclosure checklist in addition to discussions with management on
key related party transactions and the substance of the
transactions for the purpose of the consolidated financial
statements including appropriate disclosure thereof.
(v) Management override of internal controls
The risk - ISA (UK and Ireland) 240 'The Auditor's
Responsibilities Relating to Fraud in an Audit of Financial
Statements' requires us to consider the risk of management override
of controls. There is a risk of fraud due to management override of
controls particularly as the group is controlled by a small number
of individuals with limited segregation of duties.
Our response - Our audit work included a specific review of all
significant management journals, with special focus on journals
around the year end.
Conclusions relating to principal risks, going concern and
viability statement
We have nothing to report in respect of the following
information in the annual report, in relation to which the ISAs
(UK) require us to report to you whether we have anything material
to add or draw attention to:
-- the directors' confirmation in the Annual Report that they
have carried out a robust assessment of the principal risks facing
the entity, including those that would threaten its business model,
future performance, solvency or liquidity;
-- the disclosures in the annual report that describe those
risks and explain how they are being managed or mitigated;
-- the directors' statement in the financial statements about
whether they considered it appropriate to adopt the going concern
basis of accounting in preparing them, and their identification of
any material uncertainties to the entity's ability to continue to
do so over a period of at least twelve months from the date of
approval of the financial statements; and
-- the director's explanation in the Annual Report as to how
they have assessed the prospects of the entity, 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 entity 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.
Other information and matters on which we are required to report
by exception
The other information comprises all of the information included
in the Annual Report other than the financial statements and our
auditor's report thereon. The directors are responsible for the
other information.
Our opinion on the financial statements does not cover the other
information and, except to the extent otherwise explicitly stated
in our report, 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 the other information, we are required to report that fact.
We have nothing to report in respect of the following:
Under the ISAs (UK and Ireland), we are required to report to
you if, in our opinion, information in the annual report is:
-- materially inconsistent with the information in the audited financial statements; or
-- apparently materially incorrect based on, or materially
inconsistent with, our knowledge of the Group acquired in the
course of performing our audit; or
-- is otherwise misleading.
In particular, we are required to consider whether we have
identified any inconsistencies between our knowledge acquired
during the audit and the directors' statement that they consider
the annual report is fair, balanced and understandable and whether
the annual report appropriately discloses those matters that we
communicated to the audit committee which we consider should have
been disclosed.
We also consider whether the section describing the work of the
audit committee appropriately addresses matters communicated by us
to the audit committee.
Under the Companies (Guernsey) Law 2008 we are required to
report to you if, in our opinion:
-- the company has not kept proper accounting records; or
-- the financial statements are not in agreement with the accounting records and returns; or
-- we have not received all the information and explanations
which to the best of our knowledge and belief are necessary for the
purposes of our audit.
Under the Listing Rules we are required to review:
-- the Directors' Statement, in relation to going concern and longer term viability; and
-- the part of the Corporate Governance Statement relating to
the Company's compliance with the provisions of the UK Corporate
Governance Code specified for our review.
In the light of the knowledge and understanding of the group and
the parent company and its environment obtained in the course of
the audit, we have not identified material misstatements in:
-- the Strategic Report or the Directors' Report; or
-- the information about internal control and risk management
systems in relation to financial reporting processes and about
share capital structures, given in compliance with applicable
legislation.
Responsibilities of the 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 Group's ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the
directors either intend to liquidate the group or the parent
company or to cease operations, or have no realistic alternative
but to do so.
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 auditors report.
Use of this 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 is undertaken so that we might state to the
Company's members those matters we are required to state to them in
an auditors' 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.
Baker Tilly CI Audit Limited
Chartered Accountants
St. Sampsons, Guernsey
Date: 2 October 2018
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 June 2018
Notes Year ended Year ended
30 June 2018 30 June 2017
GBP GBP
Income
Finance income 33,300,234 31,429,726
Interest on cash and cash equivalents 370,856 278,468
Other income 513,338 855,267
-------------- ---------------
Total income 2.6 34,184,428 32,563,461
-------------- ---------------
Net unrealised (loss)/gain on revaluation
of investments (742,152) 245,435
Net unrealised foreign exchange loss
on investments (2,404,813) (940,552)
Net unrealised foreign exchange (loss)/gain
on forward contracts (686,366) 12,102,788
Net realised gain on investments 1,197,803 -
Net realised foreign exchange (loss)/gain
on investments (1,982,655) 6,298,649
Net realised foreign exchange gain/(loss)
on forward contracts 4,136,615 (18,157,629)
--------------
Net realised and unrealised loss (481,568) (451,309)
-------------- ---------------
Expenses
Investment management fees 3a (4,532,845) (4,355,085)
Directors' fees and travel expenses (207,959) (194,668)
Other operating expenses 3b,4 (1,149,593) (1,380,560)
Depreciation 7 (748,993) (443,056)
Impairment of loan investment 17 (2,437,876) -
-------------- ---------------
Total operating expenses (9,077,266) (6,373,369)
-------------- ---------------
Profit and total comprehensive income
for the year 24,625,594 25,738,783
--------------
Total comprehensive income/(loss)
for the year analysed as follows:
Attributable to Ordinary shareholders 21,183,259 25,762,796
Attributable to 2016 C shareholders 3,442,335 (24,013)
Total 24,625,594 25,738,783
-------------- ---------------
Basic and diluted earnings per Ordinary
Share 5 5.92p 8.58p
Basic and diluted earnings/(loss)
per 2016 C Share 5 1.96p (0.02)p
All results are derived from continuing operations.
The Group has no items of other comprehensive income, and
therefore the profit for the year is also the total comprehensive
income.
The accompanying notes form an integral part of these financial
statements.
CONSOLIDATED Statement of Financial Position
As at 30 June 2018
Notes 30 June 2018 30 June 2017
GBP GBP
Non-current assets
Residual value of finance lease
investments 2.4 517,558 1,265,303
Property, plant and equipment 7 13,761,155 6,218,601
Loans and other investments 8.1 278,772,166 258,294,814
Investments designated at fair value
through profit
or loss 8.2 3,402,690 4,598,099
Finance lease and hire-purchase
investments 9 102,015,428 103,549,225
398,468,997 373,926,042
Current assets
Cash and cash equivalents 2 76,795,524 154,568,616
Interest receivables 10 4,488,981 3,848,999
Other receivables and prepayments 10 12,125,032 3,809,092
Investment receivables 10 2,202,754 876,451
95,612,291 163,103,158
Total assets 494,081,288 537,029,200
------------- -------------
Current liabilities
Investment payables (154,312) (74,946)
Derivative financial liabilities 8.2,17 (6,184,723) (2,876,663)
Other payables and accrued expenses 11 (3,654,113) (1,174,026)
------------- -------------
(9,993,148) (4,125,635)
Net assets 484,088,140 532,903,565
============= =============
Equity
Share capital 13 489,189,319 530,606,210
Retained earnings (5,101,179) 2,297,355
------------- -------------
484,088,140 532,903,565
============= =============
NAV per Share
* Ordinary Shares 6 97.72p 99.63p
* 2016 C Shares 6 97.62p 98.06p
These Consolidated Financial Statements were approved and
authorised for issue by the Board of Directors on 2 October 2018,
and signed on its behalf by:
Peter Niven Christopher Spencer Director Director
The accompanying notes form an integral part of these financial
statements.
CONSOLIDATED Statement of Changes in Equity
For the year ended 30 June 2018
Attributable to Shareholders
Notes Share Retained
Capital Earnings Total
GBP GBP GBP
As at 1 July 2017 530,606,210 2,297,355 532,903,565
Total comprehensive income
for the year - 24,625,594 24,625,594
Transactions with shareholders
Ordinary Shares repurchased 13 (1,031,187) - (1,031,187)
2016 C Share capital redemption 13 (40,385,704) - (40,385,704)
Dividends paid 14 - (32,024,128) (32,024,128)
Total transactions with shareholders (41,416,891) (32,024,128) (73,441,019)
--------------- -------------- -------------
As at 30 June 2018 489,189,319 (5,101,179) 484,088,140
=============== ============== =============
For the year ended 30 June 2017
Attributable to Shareholders
Share Retained
Notes Capital Earnings Total
GBP GBP GBP
As at 1 July 2016 353,716,434 1,113,484 354,829,918
Total comprehensive income
for the year - 25,738,783 25,738,783
Transactions with shareholders
Issue of 2016 C Shares 13 180,000,000 - 180,000,000
2016 C Shares issue costs 13 (3,110,224) - (3,110,224)
Dividends paid 14 - (24,554,912) (24,554,912)
Total transactions with shareholders 176,889,776 (24,554,912) 152,334,864
-------------- --------------- -------------
As at 30 June 2017 530,606,210 2,297,355 532,903,565
============== =============== =============
The accompanying notes form an integral part of these financial
statements.
CONSOLIDATED Statement of Cash Flows
For the year ended 30 June 2018
Note Year ended Year ended
30 June 2018 30 June 2017
GBP GBP
Cash flow from operating activities:
Total comprehensive income for the year 24,625,594 25,738,783
Adjustments for:
Unrealised loss/(gain) on revaluation
of investments 742,152 (245,435)
Unrealised foreign exchange loss/(gain) 3,091,179 (11,162,236)
Depreciation 7 748,993 443,056
Realised foreign exchange loss/(gain)
on investments 1,982,655 (5,539,799)
Realised gain on investments (1,197,803) (758,850)
Increase in interest receivable (639,982) (1,354,723)
Increase in investment receivables (1,326,303) (702,819)
Increase in other receivables and prepayments (8,315,940) (1,834,185)
Increase in investment payables 79,366 73,110
Increase in other payables and accrued
expenses 11 2,480,087 381,431
Acquisition of investments 7,8,9 (79,395,855) (131,535,563)
Amortisation of investment principal 8,9 47,734,214 35,620,919
Disposals 8 - 5,529,332
Impairment of loan investment 17 2,437,876 -
-------------- --------------
Net cash outflow from operating activities (6,953,767) (85,346,979)
Cash flow from financing activities
Ordinary Shares repurchased 13 (1,031,187) -
2016 C Share capital redemption 13 (40,385,704) -
Dividends paid 14 (32,024,128) (24,554,912)
Share issue (net proceeds) 13 - 176,889,776
Net cash used in/provided by financing
activities (73,441,019) 152,334,864
Net (decrease)/increase in cash and
cash equivalents (80,394,786) 66,987,885
Cash and cash equivalents at start of
the year 154,568,616 87,815,244
Effect of exchange rate changes on cash
and cash equivalents 2,621,694 (234,513)
-------------- --------------
Cash and cash equivalents at end of
the year 76,795,524 154,568,616
============== ==============
The accompanying notes form an integral part of these financial
statements.
NOTES TO THE FINANCIAL STATEMENTS
1. General Information
The Company was incorporated on 28 May 2014 and registered in
Guernsey as a Closed-ended Collective Investment Scheme. The
Company's registered office is BNP Paribas House, St Julian's
Avenue, St Peter Port, Guernsey, GY1 1WA. The Company's Ordinary
Shares were admitted to the FCA's Official List and to trading on
the Main Market of the London Stock Exchange on 14 July 2014.
In November 2015, the Group raised additional capital by the
issuance of the 2015 C Shares. On 25 October 2016, the 2015 C
Shares were converted to Ordinary Shares using a conversion ratio
of 0.9929 Ordinary Shares for each 2015 C Share. The conversion
ratio was based on the NAV per 2015 C Share as at 14 October 2016,
which was the conversion date.
In December 2016, the Group raised additional capital by the
issuance of the 2016 C Shares. Net proceeds of GBP176,889,776 were
raised through the issue of 180,000,000 2016 C Shares. The 2016 C
Shares are listed separately on the Main Market of the London Stock
Exchange and were admitted on 12 December 2016.
The investments made with 2016 C Shares net proceeds are
accounted for and managed as a separate pool of assets in
accordance with the Company's investment policy until the
conversion of 2016 C Shares to Ordinary Shares. The terms and
timing of the conversion of the 2016 C Shares to Ordinary Shares
will be announced at a later date. Expenses are split between
Ordinary Shares and 2016 C Shares in proportion to their respective
NAV.
On 1 May 2018, the Company announced that the speed of
deployment on the investment of the 2016 C Share proceeds had been
slower than anticipated and a capital return would be made to
shareholders. On 25 May 2018, the Group made a compulsory
redemption of 41,075,778 2016 C Shares on a pro rata basis amongst
all the holders on the 2016 C Share register. The Investment
Managers made a contribution to the capital return of GBP425,455,
which was equivalent to the management fees earned on the excess
capital since admission of the 2016 C Share to 31 March 2018. The
contribution is payable in equal instalments over a 12 month period
from May 2018 to April 2019 (no management fee was paid on the
excess capital in April 2018).
During the year, 1,122,366 Ordinary Shares were repurchased and
are being held in treasury.
The Company's subsidiaries, SQN Asset Finance (Guernsey)
Limited, SQN AFIF (AMBER) Limited, SQN AFIF (BRONZE) Limited, SQN
AFIF (Cobalt) Limited and SQN AFIF (Diamond) Limited (the
"Subsidiaries") are wholly owned Subsidiaries incorporated in
Guernsey and established for the primary purpose of acting as
investment holding companies (refer to note 2.1(e) for further
details). The Subsidiaries' registered office is BNP Paribas House,
St Julian's Avenue, St Peter Port, Guernsey, GY1 1WA.
2. Accounting Policies
The principal accounting policies applied in the preparation of
these financial statements are set out below. These policies have
been consistently applied throughout all the years presented,
unless otherwise stated.
2.1 Basis of Preparation
(a) Statement of Compliance
The Audited Consolidated Financial Statements for the year ended
30 June 2018 have been prepared in accordance with IFRS. They give
a true and fair view of the Group's affairs and comply with the
Company (Guernsey) Law 2008, as amended.
(b) Going Concern
Going concern refers to the assumption that the Company has the
resources to continue in operation for the foreseeable future,
being twelve months from the date of approval of the Consolidated
Financial Statements. After reviewing the Group's budget and cash
flow forecast for the next financial period, the Directors are
satisfied that, at the time of approving the Consolidated Financial
Statements, it is appropriate to adopt the going concern basis in
preparing the Consolidated Financial Statements.
(c) New Standards, Amendments and Interpretations
There were no new standards, amendments or interpretations
effective for the first time for the current reporting period that
had a material impact on the Group or Company.
Detailed below are new standards, amendments and interpretations
to existing standards that become effective in future accounting
periods which have not been adopted by the Group:
Effective for periods
beginning on or
after
------------------------------------------------ ---------------------------
IFRS 9 - Financial Instruments 1 January 2018
IFRS 15 - Revenue from Contracts with Customers 1 January 2018
IFRS 16 - Leases (subject to EU endorsement) 1 January 2019
IFRS 9 - Financial Instruments
IFRS 9 addresses the classification, measurement and recognition
of financial assets and financial liabilities and requires
financial assets to be classified into two categories: those
measured at fair value and those measured at amortised cost. The
determination is made on initial recognition. The classification
depends on the entity's business model for managing its financial
instruments and the contractual cash flow characteristics of the
instrument. For financial liabilities, IFRS 9 retains most of the
IAS 39 requirements. The main change is that, in cases where the
fair value is taken for financial liabilities, the part of a fair
value change due to an entity's own credit risk is recorded in
other comprehensive income rather than in profit or loss.
IFRS 9 Impairment Requirements
The new impairment requirements in IFRS 9 are based on an
expected credit loss model and replace the IAS 39 incurred loss
model and was applicable from 1 July 2018. The expected credit loss
model applies to financial assets that are debt instruments (such
as bank deposits, loans, debt securities and trade receivables)
recorded at amortised cost or at fair value through other
comprehensive income, plus lease receivables under IAS 17, contract
assets and loan commitments and financial guarantee contracts that
are not measured at fair value through profit or loss.
The guiding principle of the expected credit loss model is to
reflect the general pattern of deterioration or improvement in the
credit quality of financial instruments.
The Standard considers credit risk low if there is a low risk of
default, the borrower has a strong capacity to meet its contractual
cash flow obligations in the near term and adverse changes in
economic and business conditions in the longer term may, but will
not necessarily, reduce the ability of the borrower to fulfil its
contractual cash flow obligations. The assessment of whether there
has been a significant increase in credit risk is based on an
increase in the probability of a default occurring since initial
recognition.
Under IFRS 9 a financial asset is credit-impaired when one or
more events that have occurred and have a significant impact on the
expected future cash flows of the financial asset. It includes
observable data that has come to the attention of the holder of a
financial asset about the following events:
-- significant financial difficulty of the issuer or borrower;
-- a breach of contract, such as a default or past-due event;
-- the lenders for economic or contractual reasons relating to
the borrower's financial difficulty granted the borrower a
concession that would not otherwise be considered;
-- it becoming probable that the borrower will enter bankruptcy
or other financial reorganisation;
-- the disappearance of an active market for the financial asset
because of financial difficulties; or
-- the purchase or origination of a financial asset at a deep
discount that reflects incurred credit losses.
Impairment of financial assets is recognised in stages:
Stage 1 - as soon as a financial instrument is originated or
purchased, 12-month expected credit losses are recognised in profit
or loss and a loss allowance is established. This serves as a proxy
for the initial expectations of credit losses. For financial
assets, interest revenue is calculated on the gross carrying amount
(ie without deduction for expected credit losses).
Stage 2 - if the credit risk increases significantly and is not
considered low, full lifetime expected credit losses are recognised
in profit or loss. The calculation of interest revenue is the same
as for Stage 1.
Stage 3 - if the credit risk of a financial asset increases to
the point that it is considered credit-impaired, interest revenue
is calculated based on the amortised cost (ie the gross carrying
amount less the loss allowance). Financial assets in this stage
will generally be assessed individually. Lifetime expected credit
losses are recognised on these financial assets.
The Board has undertaken an assessment of the impact of IFRS 9
on the Group's Consolidated Financial Statements. As announced on
21 August 2018, the Group formally adopted IFRS 9 on 1 July 2018
which decreased the Ordinary Shares NAV by approximately 40 bps in
addition to the 69 bps impairment in respect of Suniva taken under
IAS 39 in June 2018. The decrease in the 2016 C Share NAV, due to
IFRS 9, was approximately 3 bps.
Loans, receivables and construction finance will continue to be
measured at amortised cost, residual value, equity and lease
participation will continue to be measured at fair value through
profit or loss and the derivative assets will be measured at fair
value through profit or loss and not held for trading. Finance
lease and hire purchase receivables will be subject to the IFRS 9
impairment model.
The Board and the Investment Managers have undertaken a review
of the Group's investments and reviewed each investment for signs
of impairment using the IFRS 9 impairment model. Had IFRS 9 been
applied to these financial statements, as at 30 June 2018 the
impairment, in addition to the Suniva impairment, would have been
in the region of GBP1.5 million.
IFRS 15 - Revenue from Contracts with Customers
IFRS 15 will supersede IAS 11 - Construction Contracts and
establishes a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers.
The Board has undertaken an assessment of the impact of IFRS 15
on the Group's financial statements and concluded that there will
be no material impact on the Group's Consolidated Financial
Statements.
IFRS 16 - Leases
IFRS 16 will supersede IAS 17 - Leases and specifies how to
recognise, measure, present and disclose leases. As a lessor, the
Group will continue to classify leases as operating or finance.
IFRS 16's approach to lessor accounting is substantially unchanged
from IAS 17.
The Board has undertaken an assessment of the impact of IFRS 16
on the Group's Consolidated Financial Statements and concluded that
there will be no material impact on the Group's financial
statements.
(d) Functional and Presentation Currency
Items included in the Consolidated Financial Statements are
measured using Sterling as the currency of the primary economic
environment in which the Group operates (the "Functional
Currency"). The Consolidated Financial Statements are presented in
Sterling, which is the Group's presentation currency.
(e) Consolidation
Subsidiaries are all entities (including special purpose
entities) over which the Company has the power to govern the
financial and operating policies generally accompanying a
shareholding of more than one half of the voting rights. The
existence and effect of potential voting rights that are currently
exercisable or convertible are considered when assessing whether
the Company controls another entity. The principal place of
business of the Subsidiaries is Guernsey.
In accordance with IFRS 10 - Consolidated Financial Statements
("IFRS 10"), if the Company meets the definition of an investment
entity ("IE") it qualifies for a consolidation exemption. The
relevant provisions for an IE under IFRS 10 are set out below.
IFRS 10.27 - An IE is an entity that:
a. obtains funds from one or more investors for the purpose of
providing those investor(s) with investment management
services;
b. commits to its investor(s) that its business purpose is to
invest funds solely for returns from capital appreciation,
investment income, or both; and
c. measures and evaluates the performance of substantially all
of its investments on a fair value basis.
IFRS 10.28 - An entity shall consider whether it has the
following characteristics of an IE:
a. it has more than one investment;
b. it has more than one investor;
c. it has investors that are not related parties of the entity; and
d. it has ownership interests in the form of equity or similar interests.
The Board considered all the above factors and noted that whilst
the Company might meet many of the IE criteria, as it does not
measure and evaluate the performance of substantially all of its
investments on a fair value basis, the Directors' have concluded
that the Company does not meet the definition of an IE and does not
qualify for the IFRS 10 consolidation exemption. The Subsidiaries
have therefore been consolidated into these Consolidated Financial
Statements.
(f) Critical Accounting Judgements and Key Sources of Estimation
Uncertainty
The preparation of the Consolidated Financial Statements in
accordance with IFRS requires management to make judgements,
estimates and assumptions that affect the application of policies
and the reported amounts of assets and liabilities, income and
expenses. The estimates and associated assumptions are based on
various factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making
judgements about carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ
from these estimates.
The estimates and underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognised in
the period in which the estimate is revised if the revision affects
only that period, or in the period of the revision and future
periods, if the revision affects both current and future
periods.
In the normal course of business, the Board, under the advice of
the Investment Managers, make certain assumptions about residual
values (note 2.4), useful life of equipment (note 2.5), and asset
impairment (note 2.3(c)).
2.2 Foreign Currency Translation
Transactions in currencies other than the functional currency
are recorded using the exchange rate prevailing at the transaction
date. Foreign exchange gains and losses resulting from the
settlement of such transactions and those from the translation at
year end exchange rates of monetary and non-monetary assets and
liabilities denominated in foreign currencies are recognised in
profit or loss in the Statement of Comprehensive Income.
2.3 Financial Assets
a) Classification and Measurement
Financial assets are classified into the following specified
categories: financial assets at fair value through profit or loss
("FVTPL") and loans and receivables. The classification depends on
the nature and purpose of the financial assets and is determined at
the time of initial recognition.
Financial assets designated at fair value through profit or loss
at inception
Financial assets designated at fair value through profit or loss
at inception are financial instruments that are managed and their
performance is evaluated on a fair value basis in accordance with
the Group's documented investment strategy.
The Group's policy requires the Investment Managers and the
Directors to evaluate the information about these financial assets
on a fair value basis together with other related financial
information. Financial assets at fair value through profit are
recognised at fair value and changes in fair value are recorded in
profit or loss in the Statement of Comprehensive Income.
Loans and receivables
Trade receivables, loans, and other receivables that have fixed
or determinable payments that are not quoted in an active market
are classified as loans and receivables. Loans and receivables are
measured at amortised cost using the effective interest method,
less any impairment.
Financial assets, other than those at FVTPL, are assessed for
indicators of impairment at the end of each reporting period.
Financial assets are considered to be impaired when the value of
the asset is less than the carrying value. When assessing
impairment, the Investment Managers consider the ability of the
end-user to make all contracted payments due to the Group, the
delinquency status of each account, and the value of the equipment
or assets relative to all outstanding obligations in the case of
defaults. In assessing residual values for the purpose of
impairment, each account is reviewed at least annually and
third-party appraisals used when necessary.
Income is recognised on an effective interest basis for debt
instruments other than those financial assets classified as at
FVTPL. Gains and losses are recognised in profit or loss in the
Statement of Comprehensive Income when loans and receivables are
derecognised or impaired, as well as through the amortisation
process.
b) Recognition and De-Recognition
The Group initially recognises loans and receivables on the date
when they are originated. All other financial assets are initially
recognised on the trade date.
The Group derecognises a financial asset when the contractual
rights to the cash flows from the asset expire, or it transfers the
rights to receive the contractual cash flows in a transaction in
which substantially all the risk and rewards of ownership of the
financial asset are transferred, or it neither transfers nor
retains substantially all the risk and rewards of ownership and
does not retain control over the transferred asset. Any interest in
such derecognised financial assets that is created or retained by
the Group is recognised as a separate asset or liability.
Financial assets are offset and the net amount presented in the
Statement of Financial Position when, and only when, the Group has
a legal right to offset the amounts and intends either to settle
them on a net basis or to realise the asset.
The Group derecognises a financial liability when its
contractual obligations are discharged, cancelled or expired.
c) Fair Value Estimation
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
The fair value measurement is based on the presumption that the
transaction to sell the asset or transfer the liability is
conducted in either:
-- the principal market for the asset or liability; or
-- in the absence of a principal market, the most advantageous
market for the asset or liability.
The fair value of an asset or liability is measured using the
assumption that market participants would use when pricing the
asset or liability, assuming that market participants act in their
economic best interest.
A fair value measurement of a non-financial asset takes into
account a market participant's ability to generate economic
benefits by using the asset in its highest and best use capacity or
by selling it to another market participant that would use the
asset in its highest and best use capacity.
The Board assesses at each reporting date whether a financial
asset or group of financial assets is impaired.
If there is objective evidence that an impairment of the
principal on loans and receivables carried at amortised cost has
been incurred, the amount of the loss is measured as the difference
between the asset's carrying amount and the present value of
estimated future cash flows discounted at the financial asset's
original effective interest rate. The carrying amount of the asset
is reduced and the amount of the loss is recognised in profit or
loss in the Statement of Comprehensive Income.
If, in a subsequent period, the amount of the impairment loss
decreases and the decrease can be related objectively to an event
occurring after the impairment was recognised, the previously
recognised impairment loss is reversed. Any subsequent reversal of
an impairment loss is recognised in profit or loss in the Statement
of Comprehensive Income to the extent that the carrying value of
the asset does not exceed its amortised cost at the reversal
date.
2.4 Finance Lease and Hire-Purchase Investments
The Group, as lessor, categorises finance leases and hire
purchase investments as lease arrangements where the terms of the
lease transfer substantially all risks and rewards of ownership to
the lessee (in accordance with the requirements of IAS 17 -
Leases). Hire-purchase investments include a purchase option
exercisable by the lessee upon fulfilment of specified conditions.
Under such arrangements, at the commencement of the lease term, the
Group records finance lease and hire-purchase investments in the
Statement of Financial Position as a receivable, at an amount equal
to the net investment in the lease.
The net investment in the lease is equal to the gross investment
in the lease (minimum lease payments receivable by the Group under
finance lease and hire-purchase investments plus any unguaranteed
residual value accruing to the Group) discounted by the interest
rate implicit in the lease.
On subsequent measurement, the Group splits the minimum payments
received under the lease between finance income and reduction of
the lease receivable.
The Group applies the principles of IAS 39 - Financial
Instruments: Recognition and Measurement ("IAS 39"), to lease
receivables with respect to the derecognition and impairment
provisions.
Residual Value on Finance Leases
The unguaranteed residual value on finance leases is calculated
by estimating the fair market value of the leased assets less the
lease payments from the lessee.
Estimates of market value are based on a number of assumptions
including, but not limited to, the in-place value of the equipment
or assets to the end-user, the secondary market value of similar
assets and equipment, the replacement cost of the asset or
equipment including the cost of de-installation and re-delivery,
and the Investment Managers' own assumptions based on historical
experience.
2.5 Property, Plant and Equipment
Property, Plant and Equipment comprises operating leases of
marine assets, which the Group categorises as a lease arrangement
in which a significant portion of the risks and rewards of
ownership are retained by the lessor (in accordance with the
requirements of IAS 17- Leases).
Assets held for use under operating leases are measured at cost
less depreciation and are depreciated on a straight line basis over
the remaining useful life.
Estimates of the useful life of equipment are based on
manufacturers' recommendations, the age of similar products in the
market, the intended use and utilisation of the equipment, and the
Investment Managers' own assumptions based on historical
experience.
2.6 Income
Income is recognised to the extent that it is probable that
economic benefits will flow to the entity and can be reliably
measured.
Finance income from finance leases is recognised in the
Statement of Comprehensive Income based on a pattern reflecting a
constant periodic rate of return on the net investment outstanding
in respect of the finance lease.
Income on cash and cash equivalents relates to interest
receivable on cash and cash deposits with banks.
Other income relates to upfront commitment and facility fees
received by the Group in connection to the lease and loan
undertakings. The income is recognised in the Statement of
Comprehensive Income immediately when the loan or lease agreements
are approved and signed.
2.7 Expenses
Expenses are recognised in profit or loss in the Statement of
Comprehensive Income on an accruals basis.
2.8 Issue Costs
Costs directly incurred on share issues are netted off against
the share issue proceeds.
2.9 Dividends Payable
The Group pays dividends to Shareholders subject to the solvency
test prescribed by Guernsey Law. Refer to note 14 for details of
dividend activity during the year.
2.10 Cash and Cash Equivalents
Cash and cash equivalents comprise cash at bank, and deposits
held at call with banks. Cash equivalents are short-term, highly
liquid investments that are readily convertible to known amounts of
cash and are subject to insignificant risk of changes in value.
2.11 Taxation
Profits arising in the Company are subject to tax at the
standard rate of 0%. The Subsidiaries are exempt from Guernsey
taxation under the Income Tax (Exempt Bodies) (Guernsey) Ordinance,
1989 for which they each pay an annual fee of GBP1,200.
2.12 Derivative Financial Instruments
The Group makes use of derivative financial instruments to
manage its exposure to foreign exchange rate risk including, but
not restricted to the use of foreign exchange forward contracts. A
derivative with a positive fair value is recognised as a financial
asset and a derivative with a negative fair value is recognised as
a financial liability. Further details on derivative financial
instruments are disclosed in notes 8.2 and 17.
2.13 Equity Holdings
As at 30 June 2018, the Group had provided (or committed to
provide) asset finance facilities in the form of construction
finance and hire purchase investments to four anaerobic digestion
plants (30 June 2017: six anaerobic digestion plants).
In addition to these finance arrangements the Group acquired a
25.5% equity holding in each investee company. The terms of the
shareholder agreement included an option (the "Call Option"),
exercisable by the developer upon or following full repayment of
the asset finance/loan, to purchase the Group's shares at a price
that will produce a maximum 12% per annum return on capital to the
Group, taking account of both interest paid under the debt
facilities and (if applicable) any dividends, assuming each project
is fully delivered.
The equity holdings do not qualify for equity method accounting
under IAS 28 - Investments in Associates and Joint Ventures (IAS
28) - as, although the Group holds greater than 20% of the voting
power in each of the investees, the Board judge that the Group does
not have significant influence due to the following factors for
each investment:
-- The equity holdings can be bought back at the developer's
discretion once conditions per the shareholder agreement are
satisfied.
-- The return is fixed at a maximum of 12% per annum across the
entire investment (loan and shares). If the investment performs
better than expected, the developer will exercise the option to
purchase the shares at the agreed price and therefore the Group has
no realistic chance of participating in residual value.
In accordance with IAS 39, the separate investment in the shares
is measured initially at cost and subsequently at fair value
through profit or loss, taking into account all information
available including possible future cash flows, progress of the
projects and the call option available to the developer.
During the year, two Call Options were exercised by the
developers which resulted in a gain of GBP154,567.
During the year, the Group acquired an effective 25%
shareholding in two holding companies. The Group has not accounted
for these equities using IAS 28 as the assets and liabilities are
insignificant.
The Board are in ongoing communications with the Investment
Managers and from discussions and review of relevant information
available, believe that the fair value of all equity holdings
throughout the period and as at 30 June 2018 is GBPnil.
3. Material Agreements
a) Investment Management Agreement
The Company's investments are managed by the Investment
Managers. Under the terms of the Investment Management Agreement
dated 16 June 2014, the Company appointed the Investment Managers
to provide discretionary investment management services to the
Company. The Investment Managers are together entitled to a
management fee which is calculated and accrued monthly and payable
monthly in arrears at the following rate per annum of the Group's
NAV:
On first GBP300 million of the NAV 1.00%
On GBP300 million - GBP500 million of the NAV 0.90%
Any amount greater than GBP500 million of the NAV 0.80%
In addition to the above fee, the Investment Managers are
entitled to receive an additional fee where either of them or their
affiliates provides structuring advice and/or services in
connection with the acquisition (but not the disposal) of any
investment. The fee will be equal to 1% of the transaction
amount.
The Investment Managers are not entitled to any incentive or
performance based fees.
Refer to note 18 for details on fees paid during the year to the
Investment Managers.
b) Administration and Custodian Agreement
The Company has engaged the services of the Administrator to
provide administration and custodian services. The Administrator is
entitled to receive:
-- an annual administration fee based on the Group's gross issue
proceeds on a tiered percentage basis;
-- an annual fee of GBP36,000 for performing the function of
Company Secretary plus fees for ad-hoc Board meetings;
-- an annual fee of GBP10,000 for the provision of compliance services;
-- an annual fixed fee of GBP5,000 for each Guernsey Subsidiary
(up to seven Guernsey subsidiaries); and
-- a fee of GBP10,000 for each share launch.
c) Registrar Agreement
Link Market Services (Guernsey) Limited (formerly Capita
Registrars (Guernsey) Limited) are registrar of the Company
pursuant to the Registrar Agreement dated 16 June 2014. The fee is
charged at a rate of GBP1.60 per holder of Ordinary Shares and 2016
C Shares appearing on the register, subject to a minimum fee of
GBP5,000 per annum, plus disbursements.
d) Broker Agreements
Winterflood Securities Limited are entitled to an annual
brokerage and advisory fee of GBP45,000 and commission fees of 1%
and 0.1% of the gross value of any share issues and repurchases
respectively. Winterflood were also entitled to commission fees of
1.5% on the gross proceeds of the 2015 C Shares and the 2016 C
Shares which were issued in November 2015 and December 2016
respectively.
4. Other Operating Expenses
30 June 2018 30 June 2017
GBP GBP
Administration and secretarial fees 503,246 429,730
Audit fees 57,196 51,692
Brokerage fees 47,129 45,530
Public relation fees 40,000 50,053
Registrar fees 101,041 44,929
Legal fees - 17,508
Professional fees 89,064 178,853
Commission fees - 237,204
Transaction fees 68,001 70,865
Other expenses 243,916 254,196
Total 1,149,593 1,380,560
============= =============
5. Basic and Diluted Earnings per Share
30 June 2018 Ordinary Shares 2016 C Share
Total comprehensive
income for the year GBP21,183,259 GBP3,442,335
Weighted average
number of shares
in issue during
the year 357,575,972 175,948,690
Basic and diluted
earnings per share 5.92p 1.96p
30 June 2017 Ordinary Shares 2016 C Share
Total comprehensive
income/(loss) for
the year GBP25,762,796 GBP(24,013)
Weighted average
number of shares
in issue during
the year 300,418,537 100,602,740
Basic and diluted
earnings/(loss)
per share 8.58p (0.02)p
6. NAV per Share
30 June 2018 Ordinary Shares 2016 C Shares
NAV GBP348,466,944 GBP135,621,196
Number of shares
in issue at year
end 356,585,141 138,924,222
NAV per share 97.72p 97.62p
30 June 2017 Ordinary Shares 2016 C Shares
NAV GBP356,397,803 GBP176,505,762
Number of shares
in issue at year
end 357,707,507 180,000,000
NAV per share 99.63p 98.06p
7. Property, Plant and Equipment
Property, Plant and Equipment comprises plant and machinery
originally subject to:
a) a hire purchase agreement which was re-leased to an
alternative third party under an operating lease. The asset has a
remaining useful life of 11.5 years (30 June 2017: 12.5 years).
b) a finance lease which was re-leased to an alternative third
party under an operating lease. The asset has a remaining useful
life of 13 years (30 June 2017: 14 years).
c) a finance lease which was re-leased to an alternative third
party under an operating lease during the year ended 30 June 2018.
The asset has a remaining useful life of 8 years.
The carrying amount is detailed in the table below:
30 June 2018 30 June 2017
Cost GBP GBP
Opening balance 7,130,681 5,100,572
Additions during the year 674,824 44,522
Reclassified investments(1) 7,616,723 1,985,587
Closing balance 15,422,228 7,130,681
------------- -------------
Accumulated depreciation
Opening balance (912,080) (469,024)
Depreciation during the year (748,993) (443,056)
------------- -------------
Closing balance (1,661,073) (912,080)
------------- -------------
Net book value 13,761,155 6,218,601
------------- -------------
8. Financial Instruments
8.1 Loans and Other Investments
The following table summarises the changes in investments
measured at amortised cost using the effective interest method:
30 June 2018 Loans Construction Receivables Total
Finance
GBP GBP GBP GBP
Opening balance 143,465,130 109,273,777 5,555,907 258,294,814
Advances and purchases
during the year 34,263,467 31,494,301 - 65,757,768
Principal amortisation
during the year (18,625,872) (6,501,915) (5,200,159) (30,327,946)
Impairment(2) (2,437,876) (2,437,876)
Reclassified investments(3) - (8,408,584) - (8,408,584)
Realised foreign exchange
loss on
investments (3,030,426) 299,112 639,819 (2,091,495)
Realised gain on investments 83,906 - 90,975 174,881
Unrealised foreign exchange
loss on revaluation (896,519) (672,826) (620,051) (2,189,396)
Closing balance 152,821,810 125,483,865 466,491 278,772,166
--------------- -------------- -------------- ---------------
(1) This item relates to an investment that has been
reclassified from the Finance Lease investments category (as
detailed in note 7(c) above). Please refer to note 9 for additional
information.
(2) This item relates to an impairment made against one of the
investments held by the Group, please refer to note 17 for further
details.
(3) This item relates to advances in the Construction Finance
investments category that were reclassified as additions in the
Finance Lease and Hire-Purchase investment categories in the sum of
GBP5,649,673 and GBP2,758,911 respectively, as detailed in note
9.
30 June 2017 Loans Construction Receivables Total
Finance
GBP GBP GBP GBP
Opening balance 92,965,222 103,530,815 9,448,317 205,944,354
Advances and purchases
during the year 43,474,375 75,989,773 - 119,464,148
Principal amortisation
during the year (11,145,150) (8,231,726) (4,173,990) (23,550,866)
Disposals (5,401,127) (128,205) - (5,529,332)
Reclassified investments(1) 21,139,325 (63,995,135) - (42,855,810)
Realised foreign exchange
gain on
investments 1,442,156 3,891,701 533,765 5,867,622
Unrealised foreign exchange
gain on revaluation 990,329 (1,783,446) (252,185) (1,045,302)
Closing balance 143,465,130 109,273,777 5,555,907 258,294,814
--------------- -------------- -------------- ---------------
(1) This item relates to advances in the Construction Finance
investments category that were reclassified as additions in the
Loans investment category in the sum of GBP21,139,325 as noted
above, and Finance Lease and Hire-Purchase investment categories in
the sum of GBP31,933,393 and GBP10,922,417 respectively, as
detailed in note 9.
Construction Finance investments comprise initial drawings or
advances made under loan agreements, finance leases or
hire-purchase agreements during a period of procurement or
construction of underlying assets (the "Construction Period").
During the Construction Period, interest or similar service
payments on the advances may be paid or (more usually) rolled-up
and capitalised on expiry of the Construction Period, typically
when the assets have been commissioned and (if applicable)
commercial operations have commenced.
The amortisation period (in the case of a loan) or lease/hire
term (in the case of a finance lease or hire-purchase) commences at
the end of the Construction Period and the service payments or
lease/hire payments rentals are calculated by reference to the
total advances during the Construction Period plus interest accrued
(if not paid). In the case of a finance lease, the advances (and
accrued interest) are repayable in full if a default or insolvency
event occurs or if the Construction Period has not ended by a
specified long-stop date.
Receivables comprise the legal right to streams of contracted
payments arising under lease, hire, licence or similar agreements
made between an end-user, lessee or licensee and lessor, owner or
licensor of goods or other assets, in respect of which the right to
receive payment has been sold or assigned absolutely to the Group
by a third party, but legal title to the goods or other assets lies
with that third party.
8.2 Fair Value Investments
The Group's accounting policy on fair value measurements is
discussed in note 2.3(c).
The Group measures fair values using the following fair value
hierarchy that reflects the significance of the inputs used in
making the measurements:
Level 1: Inputs that reflect unadjusted price quotes in active
markets for identical assets or liabilities that the Group has the
ability to access at the measurement date;
Level 2: Inputs that reflect price quotes of similar assets and
liabilities in active markets, and price quotes of identical assets
and liabilities in markets that are considered to be less than
active as well as inputs other than price quotes that are
observable for the asset or liability either directly or
indirectly; and
Level 3: Inputs that are unobservable for the asset or liability
and reflect the Investment Managers' own assumptions based upon
experience of similar assets and/or on third party appraised
values. This category includes instruments that are valued based on
price quotes for which the inputs are unobservable or price quotes
for similar instruments for which significant unobservable
adjustments or assumptions are required to reflect differences
between the instruments.
The fair values of derivative instruments are calculated using
quoted prices. Foreign currency forward contracts are measured
using quoted forward exchange rates and yield curves derived from
quoted interest rates matching maturities of the contracts.
For financial assets not carried at amortised cost, the
Investment Managers determine fair value using valuation techniques
approved by the Directors.
The following table details the Company's fair value
hierarchy.
30 June 2018 Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Financial assets
Designated at fair value through
profit
or loss (Lease Participation) - - 3,402,690 3,402,690
Finance lease residual value - - 517,558 517,558
Equity holding(1) - - - -
--------- ------------ ------------ ------------
Total financial assets - - 3,920,248 3,920,248
--------- ------------ ------------ ------------
Financial liabilities
Derivative liabilities - (6,184,723) - (6,184,723)
--------- ------------ ------------ ------------
Total financial liabilities - (6,184,723) - (6,184,723)
--------- ------------ ------------ ------------
(1) Refer to note 2.13 for further details on the equity
holding.
30 June 2017 Level 1 Level 2 Level 3 Total
GBP GBP GBP GBP
Financial assets
Designated at fair value through
profit
or loss (Lease Participation) - - 4,598,099 4,598,099
Finance lease residual value - - 1,265,303 1,265,303
Equity holding(1) - - - -
--------- ------------ ------------ ------------
Total financial assets - - 5,863,402 5,863,402
--------- ------------ ------------ ------------
Financial liabilities
Derivative liabilities - (2,876,663) - (2,876,663)
--------- ------------ ------------ ------------
Total financial liabilities - (2,876,663) - (2,876,663)
--------- ------------ ------------ ------------
(1) Refer to note 2.13 for further details on the equity
holding.
The following table summarises the changes in the fair value of
the Group's Level 3 investments:
30 June 2018 30 June 2017
GBP GBP
Opening balance 5,863,402 5,415,324
Additions during the year 46,429 235,549
Principal amortisation during the year (2,034,980) (162,332)
Realised foreign exchange gain on investments 108,840 24,676
Realised gain on investments 894,126 -
Unrealised foreign exchange (loss)/gain on
revaluation (215,417) 350,185
Unrealised (loss) on revaluation (742,152) -
------------- -------------
Closing balance 3,920,248 5,863,402
------------- -------------
Transfers between levels are deemed to have occurred at the date
of the event or change in circumstances that caused the transfer.
There were no transfers of investments between the Levels during
the year.
The Lease Participation investments represent a single
participation investment in a portfolio of leases. The carrying
value of GBP3,402,690 (30 June 2017: GBP4,598,099) represents the
value attributable to the 'principal' element of the participation
interest, determined in accordance with the participation
agreement.
The participation agreement entitles the Group to receive
interest on the principal balance at the rate of 10.5%. Payment
amounts are not fixed and are dependent on the actual proceeds
received on the Lease Portfolio each month. Any shortfall in
interest payments is added to the principal balance and accrues
interest at the same rate. The Group does not have any rights to
any amounts received on the portfolio over and above the repayment
of their principal plus any interest accrued at the rates stated
above.
The Directors and the Investment Managers believe this is a
reasonable approximation of the fair value. The Group has therefore
not presented quantitative information on the valuation of the
Lease Participation investments.
Information about the Secondary Market for Level 3
Investments
The Investment Managers make assumptions about the residual
value of certain assets and equipment. As determined by the
Investment Managers, the residual value is a function of the
in-place value and/or the secondary market value of the equipment
or assets.
The in-place value is an assessment of the value of the
equipment or assets if the equipment or assets were to continue to
operate and provide value to the end-user. This takes into account
the marginal cost of keeping the asset in place as well as the cost
to the end-user of decommissioning, redelivering, and replacing the
equipment. In some cases, this amount (or a maximum value) is
negotiated in advance with the end-user.
The secondary market value is determined utilising the
Investment Managers' historical experience, quotes from dealers,
third party appraisals and recent sales. The secondary market value
also takes into account the geography of the equipment or assets,
the timeframe required to conduct a sale, and the associated costs
that are not passed on to the end-user.
Equity Holdings
The equity holdings as detailed in note 2.13 are valued by the
Board, taking into consideration a range of factors including the
NAV of the investee, (if available), the existence of the Call
Option exercisable on the holding and other relevant available
information, including the price of recent transactions of equity
holdings, (if any), and advice received from the Investment
Managers and such other factors as the Board, in their sole
discretion, deem relevant in considering a positive or negative
adjustment to the valuation.
The estimated fair values of the equity holdings may differ from
the values that would have been realised had a ready market existed
and the difference could be material.
The fair value of the equity holdings is reassessed on an
ongoing basis by the Board.
8.3 Valuation Process
The following table provides information about fair value
measurements using significant unobservable inputs:
30 June 2018
Description Fair Value Valuation Techniques Unobservable Inputs
GBP
Lease participation 3,402,690 Principal balance Third party appraisal
In place value / secondary
Finance lease residual 517,558 Market approach market value
value
Equity holding - Market approach Market value
30 June 2017
Description Fair Value Valuation Techniques Unobservable Inputs
GBP
Lease participation 4,598,099 Principal balance Third party appraisal
In place value / secondary
Finance lease residual 1,265,303 Market approach market value
value
Equity holding - Market approach Market value
9. Finance Lease and Hire-Purchase Investments
The Group's investments include a portfolio of leases of plant
and machinery leased under finance lease agreements that transfer
substantially all the risks and rewards incidental to ownership to
the lessee and in hire-purchase agreements that include a purchase
option exercisable by the lessee upon fulfilment of specified
conditions. Under these agreements, the lessee pays periodic rent
for the use of the assets for a fixed or minimum initial term of
typically 3 to 10 years. At the end of the fixed or minimum term,
the lessee can typically elect to:
-- return the asset to the Group;
-- in the case of hire-purchase, exercise an option to purchase
the assets, typically at a 'bargain' price;
-- extend the lease for a further minimum term or from year to
year on payment of a pre-agreed rent (which is typically
substantially lower than the rent paid during the initial term);
or
-- arrange a sale of the asset to a third party and (typically)
receive all or the majority of the proceeds of sale. Legal title to
the leased assets remains with the Group at all times prior to such
sale.
The following tables summarise the changes in finance lease and
hire-purchase investments:
30 June 2018 Finance Lease Hire-Purchase Total
GBP GBP GBP
Opening balance 51,287,178 52,262,047 103,549,225
Additions during the year 4,935,621 7,981,213 12,916,834
Reclassified Construction Finance
investments(1) 5,649,673 2,758,911 8,408,584
Reclassified Property, Plant
and Equipment investment(2) (7,616,723) - (7,616,723)
Realised gain on investment 151,927 (23,131) 128,796
Principal amortisation during
the year (6,101,070) (9,270,218) (15,371,288)
Closing balance 48,306,606 53,708,822 102,015,428
-------------- -------------- --------------
(1) This item relates to advances that previously appeared in
the Construction Finance investment category in note 8.1 and have
been reclassified as Finance Lease or Hire-Purchase Investments.
The item has been reclassified as construction was completed during
the year.
(2) This item relates to an investment that has been
reclassified to the Property, Plant and Equipment investments
category. Please refer to notes 7 and 17 for additional
information.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
9. Finance Lease and Hire-Purchase Investments (Continued)
30 June 2017 Finance Lease Hire-Purchase Total
GBP GBP GBP
Opening balance 23,662,205 38,726,823 62,389,028
Additions during the year 1,372,288 10,419,056 11,791,344
Reclassified Construction Finance
investments(1) 31,933,393 10,922,417 42,855,810
Reclassified Property, Plant
and Equipment investment(2) (1,985,587) - (1,985,587)
Realised gain on investment 9,026 397,325 406,351
Principal amortisation during
the year (3,704,147) (8,203,574) (11,907,721)
Closing balance 51,287,178 52,262,047 103,549,225
-------------- -------------- --------------
(1) This item relates to advances that previously appeared in
the Construction Finance investment category in note 8.1 and have
been reclassified as Finance Lease or Hire-Purchase Investments.
The item has been reclassified as construction was completed during
the year.
(2) This item relates to an investment that has been
reclassified to the Property, Plant and Equipment investments
category. Please refer to notes 7 and 17 for additional
information.
Assets leased to third parties under finance leases had an
unguaranteed residual value at the end of the year of GBP517,558
(30 June 2017: GBP1,265,303).
During the year ended 30 June 2018, residual investments were
sold for GBP178,376 (30 June 2017: GBP27,627). One residual value
investment with an unrealised gain of GBP566,777 was reclassified
to Property, Plant and Equipment as part of the restructuring of a
finance lease, refer to notes 7 and 8 for further information.
The following table summarises the changes in finance lease
investments:
30 June 2018 30 June 2017
GBP GBP
Non-current receivables
Finance leases - net receivables 44,730,947 46,609,514
Unearned future finance income(1) 25,003,982 23,630,478
------------- -------------
69,734,929 70,239,992
------------- -------------
Current receivables
Finance leases - net receivables 3,575,659 4,677,664
Unearned future finance income(1) 4,649,462 4,867,152
------------- -------------
8,225,121 9,544,816
------------- -------------
Gross investment in finance leases 77,960,050 79,784,808
------------- -------------
Net receivables from finance
leases
No later than 1 year 3,575,659 4,677,660
Later than 1 year and no later than 5 years 17,953,407 21,125,424
Later than 5 years 26,777,540 25,484,094
-------------
48,306,606 51,287,178
------------- -------------
Unearned future income on finance
leases(1) 29,653,444 28,497,630
Gross investment in finance leases 77,960,050 79,784,808
------------- -------------
Reconciliation
No later than 1 year 8,225,120 9,544,812
Later than 1 year and no later
than 5 years 32,116,646 35,632,669
Later than 5 years 37,618,284 34,607,327
------------- -------------
Gross investment in finance leases 77,960,050 79,784,808
------------- -------------
(1) Unearned future income on finance leases is not recognised
in the Consolidated Statement of Financial Position as it is a
future asset.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
9. Finance Lease and Hire-Purchase Investments (Continued)
The following table summarises the changes in hire purchase
investments:
30 June 2018 30 June 2017
GBP GBP
Non-current receivables
Hire purchase - net receivables 48,375,473 48,502,878
Unearned future income(1) 20,356,040 24,680,726
------------- -------------
68,731,513 73,183,604
------------- -------------
Current receivables
Hire purchase - net receivables 5,333,349 3,759,169
Unearned future income(1) 4,957,271 4,839,825
10,290,620 8,598,994
------------- -------------
Gross investment in hire purchase 79,022,133 81,782,598
Net receivables from hire purchase
No later than 1 year 5,333,348 3,761,514
Later than 1 year and no later
than 5 years 25,388,828 20,607,502
Later than 5 years 22,986,646 27,893,031
------------- -------------
53,708,822 52,262,047
------------- -------------
Unearned future income on hire
purchase(1) 25,313,311 29,520,551
Gross investment in hire purchase 79,022,133 81,782,598
------------- -------------
Reconciliation
No later than 1 year 10,290,619 8,601,338
Later than 1 year and no later
than 5 years 39,186,137 35,830,388
Later than 5 years 29,545,377 37,350,872
------------- -------------
Gross investment in hire purchase 79,022,133 81,782,598
------------- -------------
(1) Unearned future income on hire purchase is not recognised in
the Consolidated Statement of Financial Position as it is a future
asset.
10. Receivables
Interest Receivables
Interest receivables represent accrued interest receivable on
leases and loans.
The Group has financial risk management policies in place to
ensure that all receivables are received within the credit time
frame. The Directors considers that the carrying amount of all
receivables approximates to their fair value.
Other Receivables and Prepayments
30 June 2018 30 June 2017
GBP GBP
Funds transferred for new investment(1) 5,385,692 -
Debtor-in-possession financing (refer to
note 12) 3,547,077 1,595,601
UK VAT 1,288,393 1,349,982
Prepaid transaction fees 669,002 676,240
Restructuring costs 374,670 -
Investment management fees(2) 390,000 -
Other receivables 470,198 187,269
12,125,032 3,809,092
============= =============
(1) On 29 June 2018 the Group transferred funds to SQN Asset
Finance (Ireland) DAC to finance a new loan that commenced post
year end on 2 July 2018.
(2) As detailed in note 1 and in regard to the 2016 C Share
capital return, GBP425,455 of management fees were receivable from
the Investment Managers, payable in 12 equal instalments from May
2018 to April 2019.
Investment Receivables
Investment receivables represent amounts due from the lessee or
loan counterpart with regards to ongoing contractual obligations
that remain outstanding at the reporting date.
11. Other Payables and Accrued Expenses
30 June 2018 30 June 2017
GBP GBP
Investment management fees 383,035 416,426
Administration and secretarial fees 76,396 73,466
Audit fees 42,900 42,900
Printing fees 19,945 14,944
Brokerage fees 7,375 7,375
Rental reserve 452,998 498,168
Other payables 93,270 120,747
Director fees 47,500 -
Dividend payable(1) 2,530,694 -
3,654,113 1,174,026
============= =============
(1) The dividend for May 2018 went ex-dividend on 28 June 2018
and is included in the financial statements as a payable. There is
no comparative as the dividend for May 2017 went ex-dividend on 6
July 2017.
The Group has financial risk management policies in place to
ensure that all payables are paid within the credit time frame.
The Directors consider that the carrying amount of all payables
approximates to their fair value.
12. Commitments and Contingent Liabilities
As at 30 June 2018, the Group had committed to invest a further
GBP64,673,807 (30 June 2017: GBP18,427,179). These commitments are
classified as 'hard commitments' of GBP38,968,807 (30 June 2017:
GBP9,052,605) which represent investments for which the
documentation is finalised and 'soft commitments' of GBP25,705,000
(30 June 2017: GBP9,374,574) which represent investments at varying
stages of documentation.
The Group has committed up to US$4.75 million as part of a
debtor-in-possession financing for a US solar manufacturing
company, in order to protect the Group's interest in the equipment
that secures its loan. As at 30 June 2018, US$4.68 million
(equivalent to GBP3.55 million) was drawn as part of a senior
priority loan facility (30 June 2017: US$2.07 million).
The Group did not have any contingent liabilities as at 30 June
2018 and 30 June 2017.
13. Share Capital
The authorised share capital of the Company is represented by an
unlimited number of shares of no par value which may be designated
as Ordinary Shares, C Shares or otherwise as the Directors may from
time to time determine. All shares hold equal rights with no
restrictions and no shares carry special rights with regard to the
control of the Company. There are no special rights attached to the
shares in the event that the Company is wound up.
The 2016 C Share net proceeds and the investments made with the
net proceeds will be accounted for and managed as a separate pool
of assets in accordance with the Company's investment policy until
the conversion of 2016 C Shares to Ordinary Shares. The terms and
timing of the conversion of 2016 C Shares to Ordinary Shares will
be announced at a later date. The un-invested proceeds were held in
cash and on fixed deposit as at 30 June 2018. Expenses are split
between Ordinary Shares and 2016 C Shares.
Ordinary Share Buybacks
On 20 November 2017 the Directors were granted authority to
repurchase 53,620,355 Ordinary Shares (being equal to 14.99% of the
number of Ordinary Shares in issue) for cancellation or to be held
as treasury shares. This authority will expire at the forthcoming
AGM. The Directors intend to seek annual renewal of this authority
from shareholders. Pursuant to this authority, and subject to
Companies Law and the discretion of the Directors, the Company may
purchase Ordinary Shares in the market if they believe it to be in
shareholders' interests; in particular, as a means of correcting
any imbalance between the supply and demand for Ordinary
Shares.
During the year, 1,122,366 Ordinary Shares were repurchased and
are being held in treasury as at 30 June 2018. Repurchases
subsequent to the year end are detailed in note 19.
The Company's share capital is denominated in Sterling.
30 June 2018 30 June 2017
Number of Shares Stated Capital Number of Shares Stated Capital
in Issue in Issue
GBP GBP
Ordinary Shares(1) 356,585,141 352,685,247 357,707,507 353,716,434
2016 C Shares(2) 138,924,222 136,504,072 180,000,000 176,889,776
Total 495,509,363 489,189,319 537,707,507 530,606,210
----------------- --------------- ----------------- ---------------
Issued Share Movements
30 June 2018 30 June 2017
Number Stated Capital Number Stated Capital
GBP GBP
Balance at the start
of the year 537,707,507 530,606,210 358,985,507 353,716,434
Ordinary Shares repurchased(1) (1,122,366) (1,031,187) - -
Redemption of 2016 C
Shares(2) (41,075,778) (40,385,704) - -
Conversion of 2015 C
Shares to Ordinary Shares - - (1,278,000) -
2016 C Shares issued - - 180,000,000 176,889,776
Balance at the end of
the year 495,509,363 489,189,319 537,707,507 530,606,210
------------- --------------- -------------- ---------------
(1) The number of shares in issue does not include 1,122,366
treasury shares.
(2) On 1 May 2018, the Company announced that the speed of
deployment on the investment of the 2016 C Share proceeds had been
slower than anticipated and a capital return would be made to
shareholders. On 25 May 2018, the Group made a compulsory
redemption of 41,075,778 2016 C Shares on pro rata basis amongst
all the holders of 2016 C Shares on the 2016 C Share register.
14. Dividends
The Company targets a dividend of 7.25 pence per Ordinary Share.
The dividend target is a target only and there can be no guarantee
that this will continue to be achieved or that any dividends will
be paid. Dividend payments to Shareholders will be subject to the
Company being able to satisfy the solvency test immediately after
payment of such dividend.
The table below details the dividends declared and paid by the
Company to its shareholders each month from May 2017 to April 2018.
The dividend for May 2018 went ex-dividend on 28 June 2018 and was
paid to shareholders post year end on 16 July 2018.
Period Announcement Payment Date Amount per Amount
Date Share
Ordinary Shares GBP
1 to 31 May 2017 21 June 2017 19 July 2017 0.6042p 2,161,269
1 to 30 June 2017 21 July 2017 18 August 2017 0.6042p 2,161,269
19 September
1 to 31 July 2017 21 August 2017 2017 0.6042p 2,161,269
21 September 19 October
1 to 31 August 2017 2017 2017 0.6042p 2,161,269
20 October 17 November
1 to 30 September 2017 2017 2017 0.6042p 2,161,269
21 November 19 December
1 to 31 October 2017 2017 2017 0.6042p 2,161,269
21 December 23 January
1 to 30 November 2017 2017 2018 0.6042p 2,161,269
22 January 19 February
1 to 31 December 2017 2018 2018 0.6042p 2,161,269
21 February
1 to 31 January 2018 2018 19 March 2018 0.6042p 2,161,269
1 to 28 February 2018 21 March 2018 18 April 2018 0.6042p 2,161,269
1 to 31 March 2018 20 April 2018 21 May 2018 0.6042p 2,161,269
1 to 30 April 2018 23 May 2018 18 June 2018 0.6042p 2,154,487
1 to 31 May 2018 21 June 2018 16 July 2018 0.6042p 2,154,487
-----------
Total 28,082,933
-----------
2016 C Shares GBP
1 April 2017 to 30 June
2017 21 July 2017 18 August 2017 0.3000p 540,000
19 September
1 to 31 July 2017 21 August 2017 2017 0.1042p 187,560
21 September 19 October
1 to 31 August 2017 2017 2017 0.1500p 270,000
20 October 17 November
1 to 30 September 2017 2017 2017 0.1500p 270,000
21 November 19 December
1 to 31 October 2017 2017 2017 0.1667p 300,060
21 December 23 January
1 to 30 November 2017 2017 2018 0.1667p 300,060
22 January 19 February
1 to 31 December 2017 2018 2018 0.1667p 300,060
21 February
1 to 31 January 2018 2018 19 March 2018 0.1667p 300,060
1 to 28 February 2018 21 March 2018 18 April 2018 0.2083p 374,940
1 to 31 March 2018 20 April 2018 21 May 2018 0.2083p 374,940
1 to 30 April 2018 23 May 2018 18 June 2018 0.2500p 347,308
1 to 31 May 2018 21 June 2018 16 July 2018 0.2708p 376,207
----------
Total 3,941,195
----------
Grand Total 32,024,128
===========
The Dividend for June 2018 had an ex-dividend date after the
year end and is detailed in note 19.
The Company declared and paid the following dividends to its
shareholders during the prior year:
Period Announcement Payment Date Amount per Amount
Date Share
Ordinary Shares GBP
1 to 31 May 2016 21 June 2016 25 July 2016 0.6042p 1,081,430
1 to 30 June 2016 21 July 2016 22 August 2016 0.6042p 1,081,430
19 September
1 to 31 July 2016 18 August 2016 2016 0.6042p 1,081,430
21 September 24 October
1 to 31 August 2016 2016 2016 0.6042p 1,081,430
21 October 21 November
1 to 30 September 2016 2016 2016 0.6042p 2,161,269
15 November 19 December
1 to 31 October 2016 2016 2016 0.6042p 2,161,269
19 December 23 January
1 to 30 November 2016 2016 2017 0.6042p 2,161,269
23 January 20 February
1 to 31 December 2016 2017 2017 0.6042p 2,161,269
17 February
1 to 31 January 2017 2017 17 March 2017 0.6042p 2,161,269
1 to 28 February 2017 21 March 2017 20 April 2017 0.6042p 2,161,269
1 to 31 March 2017 25 April 2017 23 May 2017 0.6042p 2,161,269
1 to 30 April 2017 23 May 2017 21 June 2017 0.6042p 2,161,269
-----------
Total 21,615,872
-----------
2016 C Shares GBP
Inception to 31 March
2017 25 April 2017 23 May 2017 0.2000p 360,000
Total 360,000
--------
2015 C Shares GBP
1 to 31 May 2016 21 June 2016 25 July 2016 0.2000p 360,000
1 to 30 June 2016 21 July 2016 22 August 2016 0.3300p 594,000
19 September
1 to 31 July 2016 18 August 2016 2016 0.4167p 750,060
21 September 24 October
1 to 31 August 2016 2016 2016 0.4861p 874,980
Total 2,579,040
-----------
Grand Total 24,554,912
===========
15. Capital Management Policies and Procedures
The Board defines capital as financial resources available to
the Group.
The Group's total capital at 30 June 2018 was GBP484,088,140 (30
June 2017: GBP532,903,565) and comprised equity share capital and
reserves. The Group was ungeared at the year end.
The Group's capital management objectives are:
-- to ensure that the Group will be able to continue as a going concern; and
-- provide returns to shareholders.
In accordance with the Group's investment policy, the Group's
principal use of cash has been to fund investments sourced by the
Investment Managers, as well as initial expenses related to the
issue, ongoing operational expenses, currency hedging and payment
of dividends and other distributions to shareholders in accordance
with the Group's dividend policy.
The Board, with the assistance of the Investment Managers,
monitors and reviews the broad structure of the Group's capital on
an ongoing basis.
The Group has no externally imposed capital requirements.
16. Segmental Reporting
There are two reportable segments as at 30 June 2018: Ordinary
Shares and 2016 C Shares. Each Share Class has its own portfolio,
is listed separately on the Main Market of the London Stock
Exchange and the Directors review internal management reports for
each segment separately on a quarterly basis.
The Directors view the operations of the two reportable segments
as one operating segment, being investment business and both
segments have the same investment objectives. All significant
operating decisions are based upon analysis of the Group's
investments as one segment. The financial results from this segment
are equivalent to the financial results of the Group as a
whole.
The tables below provide a breakdown of the condensed
Consolidated Statement of Comprehensive Income between the
reportable segments:
For the year ended 30 June Ordinary Shares 2016 C Shares Total
2018
GBP GBP GBP
Total income 28,833,198 5,351,230 34,184,428
Net realised and unrealised
loss (158,328) (323,240) (481,568)
Total operating expenses (7,491,611) (1,585,655) (9,077,266)
Total comprehensive income
for the year 21,183,259 3,442,335 24,625,594
================ ============== ============
For the year ended 30 June Ordinary Shares 2016 C Shares Total
2017
GBP GBP GBP
Total income 31,427,097 1,136,364 32,563,461
Net realised and unrealised
loss (391,652) (59,657) (451,309)
Total operating expenses (5,272,649) (1,100,720) (6,373,369)
Total comprehensive income
for the year 25,762,796 (24,013) 25,738,783
================ ============== ============
The tables below provide a breakdown of the condensed
Consolidated Statement of Financial Position between the reportable
segments:
30 June 2018 Ordinary Share 2016 C Share Total
GBP GBP GBP
Non-current assets 328,478,714 69,990,283 398,468,997
Current assets 29,084,959 66,527,332 95,612,291
Total assets 357,563,673 136,517,615 494,081,288
--------------- ------------- ------------
Current liabilities (9,096,729) (896,419) (9,993,148)
Net assets 348,466,944 135,621,196 484,088,140
=============== ============= ============
Equity 348,466,944 135,621,196 484,088,140
=============== ============= ============
30 June 2017 Ordinary Share 2016 C Share Total
GBP GBP GBP
Non-current assets 336,488,805 37,437,237 373,926,042
Current assets 23,658,367 139,444,791 163,103,158
Total assets 360,147,172 176,882,028 537,029,200
--------------- ------------- ------------
Current liabilities (3,749,369) (376,266) (4,125,635)
Net assets 356,397,803 176,505,762 532,903,565
=============== ============= ============
Equity 356,397,803 176,505,762 532,903,565
=============== ============= ============
17. Financial Risk Management
The Group's financial assets mainly comprise investments and
cash balances. Note 2 sets out the accounting policies, including
criteria for recognition and the basis for measurement, applied to
significant financial assets and liabilities. Note 2 also includes
the basis on which income and expenses arising from financial
assets and liabilities are recognised.
The Group finances its investment activities through the Group's
Ordinary Share and 2016 C Share capital and reserves.
Principal risks and uncertainties are detailed in the Strategic
Report, the Directors and the Investment Managers work together to
mitigate these risks by employing the following risk mitigation
strategies:
(i) Credit Management - sound credit management is a
prerequisite for an entity's stability and profitability. Prudent
management of credit risk can minimise both operational and credit
risks. The Board and the Investment Managers pre-emptively begin to
manage risk through the comprehensive underwriting process to
ensure that there is not more than an acceptable amount of risk
within the transaction. The risk is continually managed throughout
the term of the lease (or other finance agreement) until the
ultimate disposition of the asset(s). Stringent underwriting
procedures are applied to mitigate risk.
(ii) Loss Prevention Management - when available, insurance is
required for assets that the Group owns or which have been charged
or pledged to the Group as security. Insurance is in place for the
full term that an asset is owned by (or charged to) the Group,
thereby reducing the risk of loss from physical damage or
theft.
(iii) Due Diligence - the Investment Managers perform
comprehensive due diligence on all counter parties, individuals and
businesses relevant to the investment strategy of the Group.
(iv) On-going Portfolio Management - ensures that if a problem
starts to arise, it is identified giving the capability to address
it and put into action whatever remediation steps are necessary to
help mitigate a potentially larger risk down the line.
(v) Legal Review - the Investment Managers engage legal
professionals in order to ensure, on an on-going basis, that all
rights, title and interests, held as security for the Company's
investments are being protected and preserved.
(vi) Records Management - this is a critical way by which risk
is managed and mitigated. The Investment Managers' internal systems
are utilised to ensure the Group is not exposed from a record
maintenance standpoint. The Investment Managers have a
comprehensive electronic documentation system that is subject to
their internal/external backup procedure, maintaining information
access and retrieval 24/7 with offsite redundant backup in case of
a disaster when recovery would need to be deployed.
The Investment Managers, in close cooperation with the Directors
and the Administrator, coordinate the Group's risk management.
Additional risks arising from the Group's activities listed in
order of severity and likelihood and the policies for managing each
of these risks are summarised below and have been applied
throughout the year.
17.1. Credit Risk
This is the risk of the failure of a lessee to make lease
payments, the failure of the issuer of a security or borrower to
pay interest or principal in a timely manner, or that the effect of
negative perceptions of the issuer's ability to make such payments
causing the value of the investment to decline. Counterparties with
debt securities rated below investment-grade (or unrated) are
especially susceptible to this risk. The Group looks to source
investments that can provide various credit and structural
enhancements to attempt to mitigate credit exposure to any single
counterparty or asset class.
There is a risk that the bank used by the Group to hold cash
balances could fail and that the Group's assets may not be
returned. Associated with this is the additional risk of fraud or
theft by employees of those third parties. The Board manages this
risk through the Investment Managers monitoring the financial
position of the bank used by the Group.
BNP Paribas Securities Services S.C.A., Guernsey Branch, as
Custodian (which is the bank used by the Group), is a branch of BNP
Paribas whose credit rating is A with Standard & Poor's.
(a) Investment past due and impaired
Ref Industry Carrying Comment
Amount
(GBP 000)
(a)1 Solar 23,827 An investee business to which the Group
(including has provided a secured loan entered chapter
debtor-in-possession 11 bankruptcy in the USA as a result of
financing) being unable to compete with an overcapacity
of foreign imports. The investee business
sought relief under the Trade Act of 1974,
Import Relief for Domestic Industries
and on 8 February 2018, the US government
implemented protective tariffs intended
to restore the viability of the investee's
industry and of the investee in particular.
As at 30 June 2018, the Group continues
to hold this investment and the Directors
believe that the full recovery of the
investment will be achieved. This is expected
to be through the lease or sale of the
investee's equipment and, to the extent
required, by pursuing the guarantee. The
Company has examined the minimum expected
recovery under the lease or sale of the
investee's equipment and, considering
the potential time required to realise
the guarantee, the Group has reflected
an impairment of GBP2.1m to the Suniva
investment and a doubtful debt provision
of GBP0.3 to the debtor-in-possession
financing (refer to note 12 for further
information) to account for the risk adjusted
time value of money on such proportion
of the investment should a full recovery
not be achieved through a sale or re-lease.
There is no income accruing on the investment.
(b) Investments past due not impaired
During the year, 3 investments totalling GBP27,537,181 (2017: 5
investments totalling GBP61,302,686) were past due but not
impaired. The Directors, after taking advice from and consulting
with the Investment Managers, do not consider these investments to
be impaired due to the security held and consider the full carrying
amount to be recoverable.
The table below details the investments that are past due but
not impaired:
Ref Industry Carrying Comment
Amount
(GBP
000)
(b)1 Medical 9,812 An investee business to which the Group
has provided a secured loan entered chapter
11 bankruptcy in the USA. As at 30 June
2018, the Directors do not consider this
investment to be impaired.
The investment was restructured subsequent
to the year end.
(b) Transportation 13,635 This finance investment (a secured loan)
2 is past due. As at 30 June 2018, the
Directors do not consider this investment
to be impaired following the restructuring
of the finance agreement.
(b) IT & Telecom 4,090 This finance investment (a secured loan)
3 is past due. As at 30 June 2018, the
Directors do not consider this investment
to be impaired.
27,537
=========
(c) Restructurings
During the year, 5 investments totalling GBP41,052,100 (2017: 8
investments totalling GBP59,671,296) were restructured resulting in
repayment terms being amended. The Directors, after taking advice
from and consulting with the Investment Managers, do not consider
these investments to be impaired subsequent to the restructuring of
the finance agreement.
The below details the investments that have been
restructured:
Ref Industry Carrying Comment
Amount
(GBP
000)
(c) Transportation 3,403 This finance investment (a lease participation)
1 was restructured, resulting in payment
terms being amended. As at 30 June 2018,
the Directors do not consider this investment
to be impaired following the restructuring
of the finance agreement.
(c) Energy 1,312 This finance investment (a finance lease)
2 was restructured, resulting in payment
terms being amended. As at 30 June 2018,
the Directors do not consider this investment
to be impaired following the restructuring
of the finance agreement.
(c) Plastics 342 This finance investment (a finance lease)
3 was acquired by an arms' length purchaser
who agreed to assume the obligation to
meet the original payment obligations.
The lease was formally transferred to
the purchaser who has continued to make
all payments as they fall due. As at
30 June 2018, the Directors do not consider
this investment to be impaired following
the restructuring of the finance agreement.
(c) Hospitality 8,034 This finance investment (an operating
4 lease) was restructured from a finance
lease resulting in payment terms being
amended. As at 30 June 2018, the Directors
do not consider this investment to be
impaired following the restructuring
of the finance agreement.
(c) Agriculture 27,961 This finance investment (a finance lease)
5 was restructured, resulting in payment
terms being amended. As at 30 June 2018,
the Directors do not consider this investment
to be impaired following the restructuring
of the finance agreement.
41,052
=========
17.2. Liquidity Risk
This is the risk that the Group will encounter difficulty in
meeting obligations associated with financial liabilities or
funding commitments.
The Group's investments (excluding cash deposits) are
asset-backed loan or finance transactions with commercial entities.
The investments are substantially less liquid than traded
securities and will have a highly limited (if any) secondary
market. Some transactions may incorporate provisions that restrict
transfer or disposal of the investment.
The Group may be required to satisfy margin calls in respect of
foreign exchange forward if the current market rate varies from the
contract rate.
In accordance with the Group's policy, the Investment Managers
manage the Group's liquidity risk, and the Directors monitor
it.
17.3. Operational Risk
Operational risk is the risk of direct or indirect loss arising
from a wide variety of causes associated with the processes,
technology and infrastructure supporting the Group's activities
with financial instruments either internally within the Group or
externally at the Group's service providers, and from external
factors other than credit, market and liquidity risks such as those
arising from legal and regulatory requirements and generally
accepted standards of investment management behaviour.
The Group's objective is to manage operational risk so as to
balance limiting of financial losses and damage to its reputation
with achieving its investment objective. The Group manages this
risk by having regular Board meetings to ensure oversight of the
Investment Managers and the Administrator.
17.4. Market Risk
The fair value of future cash flows of a financial instrument
held by the Group may fluctuate. This market risk comprises
currency risk and interest rate risk. The Board reviews and agrees
policies for managing these risks.
Currency Risk
The functional and presentation currency of the Group is
Sterling and, therefore, the Group's principal exposure to foreign
currency risk comprises investments denominated in other
currencies, principally US Dollars and Euros. The Investment
Managers monitor the Group's exposure to foreign currencies and
reports to the Board on a regular basis. The Investment Managers
measure the risk to the Group of the foreign currency exposure by
considering the effect on the NAV and income of a movement in the
rates of exchange to which the Group's assets, liabilities, income
and expenses are exposed. The Investment Managers are mandated to
undertake a hedging strategy and to report its effectiveness and
costs to the Board on an on-going basis.
The table below details the carrying amounts of the Company's
assets and liabilities that have foreign currency risk
exposure:
30 June 2018 GBP USD EUR Total
GBP GBP GBP GBP
Investments 225,642,759 106,888,448 65,937,790 398,468,997
Cash and cash
equivalents 68,359,572 6,771,204 1,664,748 76,795,524
Interest
receivables 1,441,101 754,787 2,293,093 4,488,981
Investment
receivables, 3,228,100 4,116,129 6,983,557 14,327,786
other
receivables
and
prepayments
Other
payables and (3,778,140) (30,285) - (3,808,425)
accrued
expenses
Derivative
financial
liabilities (6,184,723) - - (6,184,723)
Total net
foreign
currency
exposure 288,708,669 118,500,283 76,879,188 484,088,140
---------------------------------------------------- -------------------------------------------------- -------------------------------------------------- ----------------------------------------------------
Percentage of
total 59.64% 24.48% 15.88% 100.00%
---------------------------------------------------- -------------------------------------------------- -------------------------------------------------- ----------------------------------------------------
30 June 2017 GBP USD EUR Total
GBP GBP GBP GBP
Investments 196,762,961 107,016,095 70,146,986 373,926,042
Cash and cash
equivalents 149,657,485 3,659,716 1,251,415 154,568,616
Interest
receivables 1,894,286 798,306 1,156,407 3,848,999
Investment
receivables, 2,140,205 1,689,046 856,292 4,685,543
other
receivables
and
prepayments
Other
payables and (1,248,972) - - (1,248,972)
accrued
expenses
Derivative
financial
liabilities (2,876,663) - (2,876,663)
Total net
foreign
currency
exposure 346,329,302 113,163,163 73,411,100 532,903,565
---------------------------------------------------- -------------------------------------------------- ------------------------------------------------- ----------------------------------------------------
Percentage of
total 64.98% 21.24% 13.78% 100.00%
---------------------------------------------------- -------------------------------------------------- ------------------------------------------------- ----------------------------------------------------
Currency sensitivity analysis
Should the value of Sterling against the Euro and the US Dollar
increase or decrease by 5% with all other variables held constant
and excluding the impact of currency hedging described below, the
impact on the net assets of the Company would be as follows:
Currency 30 June 2018 30 June 2017
GBP GBP GBP GBP
Increase of Decrease of Increase of Decrease of
5% 5% 5% 5%
USD (5,925,014) 5,925,014 (5,658,158) 5,658,158
EUR (3,843,959) 3,843,959 (3,670,555) 3,670,555
The foreign currency risk assumed by the Group in making and
retaining investments denominated in foreign currencies is hedged
by placing contracts for the sale of the future foreign currency
payments anticipated to be received in connection with such
investments ("FX Receivables"). Due to the limited availability,
inflexibility and cost of placing a matched forward contract for
each foreign currency investment (which may have a tenor of five
years or longer), the FX Receivables in respect of two or more
underlying investments are aggregated and a single forward contract
placed with short-term maturity (typically between three and nine
months). On maturity, the forward sale contract is part-settled
from actual foreign currency receipts and a new forward contract is
placed for the then applicable aggregate FX Receivables, adjusted
for payments received, contract variations and new investments.
The Group may be required to deposit initial cash collateral
against fluctuations in the applicable exchange rates and/or to
meet margin calls if the current market rate varies from the
contract rate. The Investment Managers monitor the Group's currency
risk, and the Directors review it.
As at 30 June 2018, the Group had the following open forward
foreign exchange contracts:
Notional
Buy/Sell Fair Value / GBP Settlement Date
Currency Foreign Currency GBP Equivalent Month/Year
GBP/USD 105,521,498 74,806,700 (5,086,049) July 2018
GBP/EUR 57,470,940 50,429,935 (407,636) July 2018
GBP/USD 14,600,724 10,749,659 (290,718) August 2018
GBP/USD 6,186,957 4,661,661 (6,536) September 2018
GBP/EUR 13,160,000 11,650,079 (15,765) September 2018
GBP/USD 27,689,331 20,677,843 (198,000) October 2018
GBP/EUR 15,192,238 13,296,758 (180,019) October 2018
(6,184,723)
-----------------
As at 30 June 2017, the Group had the following open forward
foreign exchange contracts:
Notional
Buy/Sell Fair Value / GBP Settlement Date
Currency Foreign Currency GBP Equivalent Month/Year
GBP/USD
GBP/USD 132,094,320 102,424,539 759,035 July 2017
GBP/USD 21,473,953 16,491,152 (749) September 2017
GBP/EUR 61,870,687 50,921,828 (3,538,366) October2017
GBP/USD 6,113,025 4,826,707 132,856 October 2017
GBP/EUR 41,652,312 36,476,322 (229,439) December 2017
(2,876,663)
-----------------
Interest Rate Risk
The value of fixed income securities usually rises and falls in
response to changes in interest rates. Declining interest rates
generally increase the value of existing instruments, and rising
interest rates generally decrease the value of existing
instruments. Changes in value usually will not affect the amount of
interest income or final principal repayments, but will affect the
interim carrying value of the investment prior to maturity.
Interest rate risk is generally greater for investments with longer
maturities.
Certain income generating securities pay interest at variable or
floating rates. Variable rate securities reset at specified
intervals, while floating rate securities reset whenever there is a
change in a specified index rate. The market prices of these
securities may fluctuate significantly when interest rates
change.
The possible effects on fair value and cash flows that could
arise as a result of changes in interest rates are taken into
account when making investment decisions. The Board reviews on a
regular basis the values of the financial instruments.
18. Related Party Transactions
Parties are considered to be related if one party has the
ability to control the other party or exercise significant
influence over the other party in making financial or operational
decisions or the parties are under common control.
The Investment Managers
The Group is party to an Investment Management Agreement with
the Investment Managers under which the Investment Managers are
entitled to the payment of management fees based on the Group's
NAV. During the year, the management fees due to the Investment
Managers amounted to GBP4,532,845 (30 June 2017: GBP4,355,085). At
30 June 2018, GBP383,035 (30 June 2017: GBP416,426) of the
management fees was payable to the Investment Managers and
GBP390,000 (30 June 2017: GBPNil) was receivable from the
Investment Managers, refer to notes 1 and 11 for further
information.
Under the Investment Management Agreement, the Investment
Managers are also entitled to structuring fees, which are based on
the value of new investments (these are not paid by the Group).
During the year, structuring fees of GBP415,444 (30 June 2017:
GBP777,886) were received by the Investment Managers.
The Investment Managers also receive commitment fees, that are
paid by investees direct (these are not paid by the Group). During
the year, commitment fees of GBP402,810 (30 June 2017: GBP700,123)
were received by the Investment Managers.
The Investment Managers as Servicer, Manager,
Administrative/Collateral Agent, Security Trustee
In relation to certain investment transactions made during the
period, typically those involving parallel investors or lenders,
the US Manager or the UK Manager are appointed to act as servicer,
manager or administrative agent for general management and
servicing purposes, which may include collection and distribution
of service payments from underlying obligors, and/or as collateral
agent or security trustee to hold and enforce security. In such
cases, the Investment Managers receive no remuneration for the
performance of such duties other than the management fee provided
for in the Investment Management Agreement.
Luxembourg Investment Company 26 S.à r.l. (LuxCo)
LuxCo is a special purpose company wholly owned by the US
Investment Manager for the purpose of holding investments. LuxCo
holds for the benefit of the Company a loan and mortgage on two
commercial marine vessels under a comprehensive loan and security
agreement including a corporate guarantee.
SQN Helo, LLC
SQN Helo is a special purpose company owned by SQN Portfolio
Acquisition Company, LLC and SQN AIF IV, L.P., both being
investment funds managed by the US Investment Manager. SQN Helo was
established to purchase and hold legal ownership of a portfolio of
leases and related assets. The carrying value of the investment is
GBP3,402,690 (30 June 2017: GBP4,598,099) and further details can
be found in note 8.2.
SQN Asset Finance (Ireland) DAC
The Group holds the following bonds issued by SQN Asset Finance
(Ireland) DAC ("SQN Ireland"), an unconsolidated structured entity
in the Republic of Ireland:
30 June 2018 30 June 2017
EUR denominated bonds EUR57,135,000 EUR49,740,000
USD denominated bonds $23,452,200 $23,452,200
GBP denominated bonds GBP24,014,484 GBP15,277,984
The UK Investment Manager acts as investment advisor to SQN
Ireland.
Share Interest
The table below details the Ordinary Shares and 2016 C Shares
held by Directors of the UK Investment Manager in the Company:
30 June 2018 30 June 2017
Director Number of Number of Number of Ordinary Number of
Ordinary Shares 2016 C Shares Shares 2016 C Shares
Neil Roberts 149,645 45,734 149,645 59,256
Tim Spring 162,816 61,802 157,690 75,032
The table below details the Ordinary Shares and 2016 C Shares
held by the Directors in the Company:
30 June 2018 30 June 2017
Director Number of Number of Number of Ordinary Number of
Ordinary Shares 2016 C Shares Shares 2016 C Shares
Peter Niven 79,858 3,860 59,858 5,000
John Falla 19,637 3,829 19,637 4,961
Christopher
Spencer 19,929 3,845 19,929 4,982
Paul Meader(1) 47,000 - - -
Carol Goodwin(2) - - 44,893 5,000
(1) The shares are held in the name of Sarah Kingwell, the
spouse of Paul Meader.
(2) Carol Goodwin was not a Director of the Company as at 30
June 2018
19. Events After the Reporting Period
On 23 July 2018, the Company declared a dividend of 0.6042p per
Ordinary Share and 0.3333p per 2016 C Share, for the month ended 30
June 2018. The dividends were paid to shareholders on 16 August
2018.
On 21 August 2018, the Company declared a dividend of 0.6042p
per Ordinary Share and 0.4167p per 2016 C Share, for the month
ended 31 July 2018. The dividends were paid to shareholders on 17
September 2018.
On 21 September 2018, the Company declared a dividend of 0.6042p
per Ordinary Share and 0.6042p per 2016 C Share, for the month
ended 31 August 2018. The dividends will be paid to the
shareholders on 17 October 2018.
The Company repurchased 321,316 Ordinary Shares subsequent to
the year end at a total cost of GBP295,530, which are being held as
treasury shares. The current number of shares in issue is
356,263,825 Ordinary Shares, excluding the 1,443,682 Ordinary
Shares held in treasury.
20. Ultimate Controlling Party
In the opinion of the Directors, there is no single ultimate
controlling party.
COMPANY INFORMATION
Non-Executive Directors
Peter Niven Christopher Spencer
(Chairman of the Board) (Chairman of Audit and Risk Committee)
John Falla Paul Meader (from 18 August 2017)
(Chairman of Management Engagement (Chairman of Remuneration and Nomination
Committee) Committee)
Carol Goodwin (to 31 December 2017)
Registered Office
BNP Paribas House, St Julian's Avenue, St Peter Port, Guernsey,
GY1 1WA
US Investment Manager
SQN Capital Management, LLC, 100 Wall Street, 28(th) Floor, New
York, New York, 10005, USA
UK Investment Manager
SQN Capital Management (UK) Limited, Melita House, 124 Bridge
Road, Chertsey, Surrey, KT16 8LA
Financial Adviser and Broker
Winterflood Securities Limited, The Atrium Building, Cannon
Bridge House, 25 Dowgate, Hill, London, EC4R 2GA
Auditor
Baker Tilly CI Audit Limited, Mont Crevelt House, Bulwer Avenue,
St Sampsons, Guernsey, GY2 4LH
Registrar
Link Market Services (Guernsey) Limited (formerly Capita
Registrars (Guernsey) Limited), Mont Crevelt House, Bulwer Avenue,
St Sampsons, Guernsey, GY2 4LH
Principal Bankers
BNP Paribas Securities Services S.C.A., BNP Paribas House, St
Julian's Avenue, St Peter Port, Guernsey, GY1 1WA
Designated Administrator, Custodian and Secretary
BNP Paribas Securities Services S.C.A., Guernsey Branch, BNP
Paribas House, St Julian's Avenue, St. Peter Port, Guernsey, GY1
1WA
Receiving Agent
Link Market Services Limited (formerly Capita Asset Services
Corporate Actions), The Registry, 34 Beckenham Road, Beckenham,
Kent BR3 4TU
Legal Advisers to the Group (English Law)
Stephenson Harwood LLP, 1 Finsbury Circus, London EC2M 7SH
Legal Advisers to the Group (Guernsey Law)
Mourant Ozannes, PO Box 186, 1 Le Marchant Street, St Peter
Port, , Guernsey, GY1 4HP
Website www.sqnassetfinance.com
Enquiries:
BNP Paribas Securities Services S.C.A., Guernsey Branch 01481 750853
Company Secretary
Sharon Williams
A copy of the Company's Annual Report and Audited Consolidated
Financial Statements will be posted to the shareholders of the
Company. Copies are also available from the Company Secretary, BNP
Paribas Securities Services S.C.A., Guernsey Branch at BNP Paribas
House, St Julian's Avenue, St Peter Port, Guernsey, GY1 1WA, or on
the Company's website www.sqnassetfinance.com.
Neither the contents of the Company's website nor the contents
of any website accessible from hyperlinks on the Company's website
(or any other website) is incorporated into, or forms part of, this
announcement.
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 LLFVRITLFIIT
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