TIDMSSIF
RNS Number : 2390T
Secured Income Fund PLC
24 March 2021
24 March 2021
Secured Income Fund plc
("SSIF" or the "Company")
Half-Yearly Financial Report
For the six months ended 31 December 2020
A copy of the Company's Half-Yearly Report and Condensed Financial
Statements for the six months ended 31 December 2020 will shortly
be available to view and download from the Company's website, https://kkvim.com/secured-income-fund/
. 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.
Enquiries to:
Directors
David Stevenson (Chair) tel: +44 7973 873785
Susan Gaynor Coley tel: +44 7977 130673
Brett Miller tel: +44 7770 447338
KKV Investment Management Limited Investor.communications@kkvim.com
Catherine Halford Riera
finnCap Ltd. tel: +44 20 7220 0500
Corporate Finance: William Marle
/ Giles Rolls
Sales: Mark Whitfeld
https://kkvim.com/secured-income-fund/
The following text is extracted from the Half-Yearly Report and Unaudited
Condensed Financial Statements of the Company for the six months
ended 31 December 2020.
Strategic Report
Key Points
31 December 31 December
2020 2019
(unaudited) (unaudited) 30 June
2020 (audited)
Net assets ([1]) GBP41,262,000 GBP48,686,000 GBP45,532,000
NAV per Ordinary Share 78.26p 92.36p 86.37p
Share price 66.50p 85.25p 76.50p
Discount to NAV 15.03% 7.7% 11.4%
Profit/(loss) for the period GBP820,000 GBP399,000 GBP(913,000)
Dividend per share declared in
respect of the period 8.50p 3.50p 7.00p
Dividend cover 0.15 0.67 0.44
Total return per Ordinary Share
(based on NAV) ([2]) +1.8% +0.8% -1.8%
Total return per Ordinary Share
(based on share price) ([2]) -0.4% -3.5% -9.2%
Ordinary Shares in issue 52,660,350 52,660,350 52,660,350
In addition to the Ordinary Shares in issue, 50,000 Management
([1]) Shares of GBP1 each are in issue (see note 20).
Total return per Ordinary Share has been calculated by comparing
([2]) the NAV or share price, as applicable, at the start of the period
with the NAV or share price, as applicable, plus dividends paid,
at the period end.
Overview and Investment Strategy
General information
Secured Income Fund plc (the "Company", "Fund" or "SIF") was incorporated
in England and Wales under the Companies Act 2006 on 13 July 2015
with registered number 09682883. It is an investment company, as
defined in s833 of the Companies Act 2006. Its shares were admitted
to trading on the London Stock Exchange Specialist Fund Segment on
23 September 2015 ("Admission").
Change of name
On 18 July 2020, the Company changed its name from SQN Secured Income
Fund plc to Secured Income Fund plc.
Continuation vote
On 19 June 2020, the Company held a continuation vote (the "Continuation
Vote") that, in line with the Directors' recommendation, did not
pass. This vote was required under the Articles as the Company did
not have a Net Asset Value of at least GBP250 million as at 31 December
2019. As the Continuation Vote did not pass, the Directors (as required
under the Articles) convened a further general meeting of the Company
on 17 September 2020 at which Shareholders approved the managed wind-down
of the Company.
Investment objective and policy
On 17 September 2020, the Shareholders approved the adoption of a
new investment objective and policy of the Company, as follows:
The Company will be managed with the intention of realising all remaining
assets in the Portfolio in a prudent manner consistent with the principles
of good investment management and with a view to returning cash to
Shareholders in an orderly manner.
The Company will pursue its investment objective by effecting an
orderly realisation of its assets in a manner that seeks to achieve
a balance between maximising the value received from those assets
and making timely returns of capital to Shareholders. This process
might include sales of individual assets, mainly structured as loans,
or running off the Portfolio in accordance with the existing terms
of the assets, or a combination of both.
As part of the realisation process, the Company may also exchange
existing debt instruments for equity securities where, in the opinion
of the Board, the Company is unlikely to be able to otherwise realise
such debt instruments or will only be able to realise them at a material
discount to the outstanding principal balance of that debt instrument.
The Company will cease to make any new investments or to undertake
capital expenditure except where, in the opinion of both the Board
and the Investment Manager (or, where relevant, the Investment Manager's
successors):
* the investment is a follow-on investment made in
connection with an existing asset in order to comply
with the Company's pre-existing obligations; or
* failure to make the follow-on investment may result
in a breach of contract or applicable law or
regulation by the Company; or
* the investment is considered necessary to protect or
enhance the value of any existing investments or to
facilitate orderly disposals.
Any cash received by the Company as part of the realisation process
prior to its distribution to Shareholders will be held by the Company
as cash on deposit and/or as cash equivalents.
The Company will not undertake new borrowing.
Any material change to the investment policy would require Shareholder
approval.
Prior to 17 September 2020, the investment objective and policy was
as follows:
Investment objective
The investment objective of the Company was to provide Shareholders
with attractive risk adjusted returns, principally in the form of
regular, sustainable dividends, through investment predominantly
in a range of secured loans and other secured loan-based instruments
originated through a variety of channels and diversified by way of
asset class, geography and duration.
Investment policy
The Company achieved its investment objective by investing in a range
of secured loan assets mainly through wholesale secured lending opportunities,
secured trade and receivable finance and other collateralised lending
opportunities. Loan assets included both direct loans as well as
other instruments with loan-based investment characteristics (for
example, but not limited to, bonds, loan participations, syndicated
loans, structured notes, collateralised obligations or hybrid securities)
and may have included (subject to the limit set out below) other
types of investment (for example, equity or revenue- or profit-linked
instruments). The Company may have made investments through alternative
lending platforms that present suitable investment opportunities
identified by the Investment Manager.
Chairman's Statement
Introduction
I am pleased to provide Shareholders with my Chairman's statement,
covering the interim results from 1 July 2020 to 31 December 2020.
Over the reporting period, the Company has continued to reduce platform
and third-party debt. Despite continued macro uncertainty caused
by Brexit, wider geopolitical issues and the continuing Covid-19
pandemic, the target income has continued to be delivered for Shareholders
and KKV Investment Management Limited (the "Investment Manager")
has made a good start to returning capital as defined in the wind
down plan presented to the Board. So far, the Secured Income Fund
plc (the "Company") has returned 8.5p per share to Shareholders since
the wind down proposals were adopted in September.
Secured Income Fund plc (LSE: SSIF) is a UK-listed specialist investment
trust with a focus on secured investments that produce regular, collateralised
income from investments made in a portfolio of loans to lower middle
market companies in the UK and the rest of the world.
Performance
All loans underwritten since April 2017 are performing in line with
expectations and there has been a marked improvement in performance
over the reporting period after the initial impact of Covid-19 had
been felt by our borrowers. I am pleased to observe that amortisation
and general trading conditions have improved.
For the reporting period ended 31 December 2020, the Company generated
a net profit of GBP0.8 million comprised of earnings per Ordinary
Share of 1.56p (compared to loss of GBP0.9 million and loss per Ordinary
Share of 1.73p for the year ended 30 June 2020). The Company's NAV
at 31 December 2020 was GBP41.3 million (78.26p (cum income) per
Ordinary Share) compared to GBP45.5 million (86.37p per Ordinary
Share) as at 30 June 2020. The fall in the NAV was due to the payment
of dividends of 9.67p in the period, with a total return for the
reporting period of 1.8%.
Foreign exchange hedging was removed in September 2020, with details
of USD and EUR exposure published in monthly factsheets allowing
Shareholders to make their own hedging arrangements as appropriate.
As a result of this investors should be aware that there might be
some impact on the Company if FX markets move markedly.
Note that all returns are net of all fees and no gearing was applied
to the portfolio during the reporting period.
Corporate Activity
As reported in the full year accounts, on 5 June 2020, the Company
novated the contract to manage the portfolio to KKV Investment Management
Limited, following the management team into their new entity. Continuity
of management has been maintained with the same core team responsible
for the portfolio, this allows for the smooth run-off of the portfolio
as it starts the process of wind down.
Upon the recommendation of the Board, in June 2020, Shareholders
voted for the Company to go into a managed wind down. This decision
was made after the Company was unable to raise new capital and meet
its original goal to increase shareholder capital to GBP250 million
by December 2019. The Board of Directors and the Investment Manager
have begun work on an orderly wind-down of the business and have
made a good start on the return of capital to investors expeditiously,
avoiding capital erosion where possible. No new underwriting commitments
have been made and arrangements were made for loans to begin amortisation
in line with contractual terms.
Costs have been monitored carefully and management fees were renegotiated
to reflect the wind down status of the Company, details of which
were reported in my last report and commenced on 17 September 2020.
Dividends
The Company elected to designate all dividends for the period ended
31 December 2020 as interest distributions to its Shareholders. In
doing so, the Company took advantage of UK tax treatment by "streaming"
income from interest-bearing investments into dividends that will
be taxed in the hands of Shareholders as interest income.
As a consequence of the decision to proceed with a managed wind-down,
the Board reviewed the dividend policy and decided to cease paying
monthly dividends, paying quarterly dividends instead, as well as
returning excess capital as and when the Company has excess cash
reserves available for distribution. Since September 2020, the Company
has been able to make distributions equivalent to 8.5p per share,
with a total of 9.67p per share being paid in the period.
Capital Distributions
Given the better than expected outlook for distribution of capital,
the Company has considered the method used for future distributions.
After careful consideration and discussions with a number of Shareholders,
the Board believes that one of the fairest and most cost-efficient
ways of returning substantial amounts of cash to Shareholders is
by adopting a B Share Scheme, whereby the Company will be able to
issue redeemable B Shares to Shareholders. These are then redeemed
on a Redemption Date without further action being required by Shareholders.
The Board also intends to continue to make dividend payments, where
possible, in accordance with the Company's dividend policy.
The quantum and timing of a Return of Capital to Shareholders following
receipt by the Company of the net proceeds of realisations of investments
will be dependent on the Company's liabilities and general working
capital requirements. Accordingly, any Return of Capital will be
at the discretion of the Board, which will announce details of each
Return of Capital, including the relevant Record Date, Redemption
Price and Redemption Date, through an RNS Announcement, a copy of
which will be posted to Shareholders.
The adoption of a B Share Scheme will not limit the ability of the
Company to return cash to Shareholders by using other mechanisms
and, if the B Share Scheme is adopted, the Board will continue to
review its tax effectiveness and cost efficiency over time. The Board's
proposal to adopt a B Share Scheme at this point in time should not
be taken as any indication as to the likely timing or quantum of
any future returns of cash to Shareholders and Shareholders should
not conclude that returns of capital over the next few months are
likely.
Notice of a General Meeting of Shareholders was published on 26 February
2021 and I am pleased to report that these arrangements were accepted
by Shareholders.
Discount
During the reporting period, the Company traded at an average discount
to NAV of 17.6%.
Board of Directors
There have been no changes to Board composition during the reporting
period.
Outlook
The outlook for direct loans held in the portfolio has improved since
my last report and this trend is expected to continue as businesses
have adjusted to the challenges of the Covid-19 pandemic.
The Board still expects the wind-down plan will likely take two or
three years to execute with the objective of delivering investors
total proceeds as close to NAV as possible, less the unavoidable
expenses required in the wind down process. However, as stated, we
have already taken steps to reduce costs and will continue to do
this over the coming months. As we have already outlined in the full
year report, our goal in the managed wind-down is to achieve a balance
between maximising the value received from those assets and making
timely returns of capital to Shareholders.
Market conditions have continued to be challenging but the immediate
risks to the portfolio, as presented at the start of the pandemic
in Q1 2020, have largely dissipated which is a testament to the careful
management of borrower relationships by the Investment Manager. However,
the Investment Manager remains vigilant and is mindful of the challenges
posed by any reduction in furlough and bounce back policies that
have greatly assisted some of our counterparties. As always, we shall
keep investors informed of any developments as they occur, in the
months to come.
We thank investors for their continued support and hope that the
consistent high level of income and the healthy start to the wind
down of the Company is welcomed by Shareholders.
David Stevenson
Chairman
23 March 2021
Investment Manager's Report
Overview
KKV Investment Management Limited ("KKV") assumed investment adviser
responsibility for the Company on 5 June 2020.
Following the decision by Shareholders not to support continuation,
we are working hard on plans to return capital to Shareholders in
as expeditious way as possible without damaging capital value. Since
the wind down of the Company commenced in September 2020, we have
returned 8.5 pence to Shareholders via dividend distribution and
we continue to accumulate cash enabling us to continue with this
policy.
We are again able to report that the Company has continued to reduce
the overall legacy exposure to 14.3% with peer to peer lending making
up only 0.5% of the portfolio. IFRS 9 impairment provisions have
been increased on legacy investments and now stands at 7.7% of the
total NAV value. We have revised our IFRS 9 policy to reflect an
industry standard approach and have provided full details of this
further in the report. Note that the difference in provisioning was
less than 1% when implemented in November 2020.
The Company remains unlevered for investment and working capital
purposes.
Despite the challenges of Brexit and the Covid pandemic, we have
not had cause to impair our direct loan exposures to date and have
observed a marked improvement in trading conditions for all our borrowers,
particularly from our wholesale investments. Therefore, the Company
has not credit impaired any direct loan exposures to date.
Business Update
KKV is owned by Kvika banki, an Iceland bank specialising in asset
management with a total of GBP3bn assets under management with KKV
representing 9% of this total.
Despite the continued disruption to business due to the Covid pandemic,
we are pleased to report that the Company has been able to deliver
operational management with few glitches with all employees equipped
to work remotely throughout the period. All processes are functioning
and business continuity has been maintained to a good level.
Fund management responsibility has been consistent since April 2017.
During the reporting period, we have recruited further fund management
personnel to replace and enhance our capability within the team.
Max Zorza joined the business on 1 November 2020 assuming the role
of Chief Operating Officer. He previously held the role of Global
Chief Risk Officer for Architas Multi-Manager (part of the AXA Group)
and brings extensive operational experience to the firm. He has joined
the board of KKVIM and, alongside colleagues from Kvika Securities
Limited and Kvika banki hf, completes our management team reporting
to Ken Hillen, executive chairman.
Portfolio
There are eleven direct loans in the portfolio with an average of
GBP3.0m balance outstanding per loan and at an average interest rate
of 10.8%. Each loan has a bespoke legal documentation and is designed
to fit to the Company's and the borrower's requirements. There have
been no defaults in this portion of the portfolio underwritten by
KKV although we should caveat this statement with a warning that
as the pandemic continues we may see cause for prudent impairment.
At present and where required we have provided covenant and amortisation
relief or maturity extensions to our borrowers. In accordance with
IFRS 9 guidance provided by the PRA, we have not applied write downs
to these loans.
There is GBP5.9m now held in the legacy part of the portfolio, where
we have differentiated between peer to peer loans and those that
are held in loan note structures with professional counterparties.
These latter loans are larger in quantum and we have a closer relationship
with the underlying companies (further details relating to these
investments is provided later in the report). The total number of
loans via third parties have been reduced from 213 to 8 (April 2017
to December 2020) with a small number of loans amortising down each
month. As mentioned above, peer to peer lending now represents only
0.5% of the portfolio with the majority of the exposure impaired
100% as at the end of the reporting period.
No leverage has been used throughout the reporting period and all
assets are held in their base currency after a Board decision to
discontinue hedging of capital and interest in September 2020. Fluctuations
in the value of Sterling during the reporting period has meant that
these positions may be impacted and we have been providing a breakdown
of the FX exposures in the portfolio in the factsheet publications
in order to allow Shareholders the option to make their own hedging
arrangements.
There were no breaches of investment guidelines during the reporting
period.
As the portfolio in now in wind down, we have been focussed on urging
our third-party borrowers to repay debt. As stated in the last full
year accounts, we have begun to return capital to Shareholders via
dividend payments.
Direct Loans
Principal ECL Loan Carrying
Balance provision Value at
Outstanding at 31 Amortised Amortisation/
as at December Cost ([1]) Bullet Term
31 December 2020 at 31 December repayment/ remaining
Borrower 2020 GBP GBP 2020 GBP other (years) Asset Type Currency Yield
Interest
only during
availability
period,
Borrower then Wholesale
1 GBP10,000,000 GBP30,000 GBP9,970,000 amortisation 0.7 years Lending GBP 10%
Borrower GBP4,445,121 GBP13,335 GBP4,431,786 Bullet 2.7 years SME and EUR Variable
2 repayment Leasing
Fund
Interest
only for
12 months,
Borrower then Medical
3 GBP4,389,173 GBP13,168 GBP4,376,006 amortisation 4.0 years Services USD 12%
Film
Borrower Production
4 GBP2,839,217 GBP39,749 GBP2,799,468 Cash sweep 1.5 years Financing GBP 12%
Film
Borrower Production
5 GBP2,650,245 GBP37,103 GBP2,613,141 Cash sweep 2.4 years Financing GBP 11%
Film
Borrower Production
6 GBP2,232,343 GBP31,253 GBP2,201,091 Cash sweep 2.4 years Financing GBP 11%
Film
Borrower Production
7 GBP2,018,527 GBP28,259 GBP1,990,268 Cash sweep 2.3 years Financing GBP 12%
Film
Borrower Production
8 GBP1,993,637 GBP27,911 GBP1,965,726 Cash sweep 1.9 years Financing USD 12%
Interest
only during
availability
period,
Borrower then Leasing
9 GBP1,500,000 GBP4,500 GBP1,495,000 amortisation 0.7 year Group GBP 9.5%
Film
Borrower Production
10 GBP502,186 GBP7,031 GBP495,155 Cash sweep 0.7 years Financing GBP 12%
Laser and
Borrower LED
11 GBP385,488 GBP1,156 GBP384,332 Amortisation 2.0 years Manufacturer GBP 10%
Direct
Loans GBP32,955,938 GBP233,466 GBP32,722,472
Total
The carrying values of loans at amortised cost disclosed in the
([1]) table above do not include capitalised transaction fees, which
totalled GBP66,000 at 31 December 2020.
The following provides a narrative relating to some of our direct
loan investments. Names of counterparties have been omitted for commercial
and business sensitivity reasons.
SME Loan company (Borrower 1) - 24.2% of NAV
This is the largest individual facility provided by the Company and
has been in place since May 2017. This is a long-established lender
to the SME market. The loan is an interest only and upon maturity,
the debt amortises over nine months. This amortisation commenced
in January 2021 and the borrower has been able to increase the capital
repayments, allowing us comfort that they will be able to repay their
facility in full and on time.
Irish SME and Leasing Fund investment (Borrower 2) - 11.1% of NAV
This portfolio of 26 loans has continued to perform well despite
the wider economic downturn. They had positioned the portfolio for
a Brexit impact with large exposures to Tech and Education. In December
2020, they were able to report a 15.6% gross IRR (12.0% net IRR),
this having risen from 8% in March 2020. An independent review of
their book subsequently caused an aggressive mark to market of their
loans. All of this mark down has now been recovered. The majority
of loans are delivering income and the manager has been able to make
healthy distributions to the company during the reporting period.
The fund is now in its harvest phase and we expect capital distribution
to accelerate as loans mature or are refinanced.
US healthcare services company (Borrower 3) - 10.7% of NAV
This credit was underwritten in December 2019. The company specialises
in ancillary medical services to a number of hospitals in the American
Midwest including optometry, audiology, dentistry and podiatry. Security
is provided by debenture over all assets other than accounts receivable
(although considered to be of low value), a pledge over equity which
may not be diluted and a parental guarantee over all scheduled interest
and principal repayments. This last element is the most important
given the weaker balance sheet of the underlying business. They have
met all interest payments and have commenced amortisation on time.
This direct loan was considered of greatest risk of default when
the pandemic started given the nature of business and so we have
monitored receivables very tightly.
Media financing (Borrowers 4 through to 8 and Borrower 10) - 29.2%
of NAV
Over the course of the last three years, SIF has funded 8 films,
two of which have been fully repaid and loan obligations met in full.
The remaining six are at various stages of filming and distribution.
At the beginning of the pandemic, as lender we recognised the risk
that tax credits and distribution sales may be delayed and noted
the cancellation of a number of film festivals when sales activity
is at its most productive. We expected the shortfall in airline broadcast
and cinema sales to be somewhat compensated by online content providers
such as Sky and Netflix. In reality, we had one tax credit due during
May and this was paid in time by the Mexico tax authorities.
We duly offered three months extension to the timetables originally
set for these projects and monitored the progress of each films.
As at July, we have further extended and fully documented the maturity
dates for these loans by 12 months to allow for a longer period of
repayment.
All six loans are individual facilities and are ring-fenced as individual
risks. However, to mitigate the volatility of performance on individual
projects, we had allowed for a waterfall structure to allow for profit
share from higher performing assets to contribute to the overall
repayment of the whole portfolio. It is the managers view that this
mechanism will allow for all loans to be repaid in full over the
extended period granted.
As at December 2020, we have noted an uptick in distributions from
sales and tax credits for our portfolio of films. Three of our films
have received critical acknowledgment and benefitted from significant
media coverage, especially as it was one of the first feature films
after the first lock down. We closed out an FX hedging facility for
one of the dollar denominated films when FX rate movements allowed,
reducing the administration and capital requirement associated with
this position.
UK leasing company (Borrower 9) - 3.6% of NAV
This loan has been underwritten since July 2017 on a rolling twelve
month basis. It is a working capital facility to be used to warehouse
deals financed by block facilities already in place. The loan is
supported by a debenture and the company provides quarterly management
accounts and full year audited financials. The underlying portfolio
comprises a basket of loans split between two types of lending; 85%
asset finance/leases with a typical deal size of GBP15,000 and 15%
professional loans to white collar industry professionals supported
by personal guarantee.
Performance from the loan book has been strong and to date they have
not experienced further stress during the second lock down. The borrower
has commenced amortisation and they are meeting all interest calls
on time.
LED manufacturer in Ireland (Borrower 11) - 0.9% of NAV
This is a secured term loan that has been in place since May 2017
and is secured by a guarantee from the parent company, a debenture
over the borrower and a charge over equipment purchased via Capex
portion of the facility.
Their business has operated on a business as usual basis throughout
the lockdowns. The borrower changed some working practices to allow
for split shifts and those who are able to work from home are doing
so. The supply chain is working and customers continue to operate.
After granting a six month amortisation deferral, the borrower has
recommenced repayment of capital and we are discussing an early refinance
of the facility.
Legacy portfolio
Loan Carrying
Principal Balance Value at Amortised
Outstanding ECL provision Cost at 31
at 31 December at 31 December December 2020
Borrower 2020 GBP 2020 GBP GBP Currency Yield
Borrower 12 GBP3,650,701 GBP10,952 GBP3,639,749 GBP Variable
Borrower 13 GBP1,000,000 GBP20,000 GBP980,000 GBP 17.0%
Borrower 14 GBP475,494 GBP16,642 GBP458,851 USD 8.0%
Borrower 15 GBP415,714 GBP415,714 - GBP -
Borrower 16 GBP486,109 GBP277,028 GBP209,081 GBP 9.7%
Borrower 17 GBP340,763 GBP340,763 - EUR -
Borrower 18 GBP2,102,091 GBP2,102,091 - USD -
Legacy Loans Total GBP8,470,872 GBP3,183,190 GBP5,287,682
Co-Investments
We continue to separate pure peer to peer, technology platform-based
lending from the three investments that are characterised by professional
co-investment alongside other professional investors. After significant
corporate change for all three of these latter types of investment,
we provide the following narrative:
UK Venture Debt (Borrower 12) - 8.8% of NAV
This business has stabilised and made very good progress in winding
down the portfolio. We are now at a stage where only three loans
remain in the Loan Note structure and we are in negotiation to allow
for these loans to be managed under a different corporate structure
and capital to be returned to Shareholders. This will leave one loan,
the largest position in the portfolio, a broadband company, which
had previously been restructured. We shall arrange for the loan to
be held as a direct investment and receive deferred income on a sale
within the next two years.
As the portfolio runs off, we have received GBP3.8m cash over the
last six months to December 2020, leaving a balance of GBP3.6m.
UK Offshore platform (Borrower 13) - 3.8% of NAV
The final credit from this platform has been in place since early
2017 and is a real estate linked loan to a developer on the island
of Gibraltar. It is senior in a stack of other loans underwritten
by the platform itself. After two years of careful monitoring and
pressing for repayment, we have now been given notification that
this will be repaid in full with accrued and penalty interest. Throughout
the period of delinquency, we had not impaired the loan as to do
so would have encouraged the borrower to urge us to take a haircut
on final settlement. Our senior position ahead of the platform lender
also gave us comfort that the loan would be repaid in full but this
has required patience and perseverance. This engagement continues
and we are in weekly contact with the financiers and platform to
monitor progress. The platform remains confident that this loan will
be repaid in full.
US business promissory note (Borrower 14) - 1.1% of NAV
This loan is a working capital facility via a promissory note with
a maturity to July 2020. The borrower has been unable to settle the
loan and we have since been in protracted negotiations regarding
the reprofiling of the debt. At the time of writing, our expectations
and those of the borrower are not the same and we shall explore other
options for repayment.
Small company bond platform (Borrower 15) - 0.0% of NAV
The only outstanding debt from this platform was a recruitment business
that had undergone a protracted recovery process through the courts.
This loan is fully impaired.
Peer to Peer
During the reporting period, the Company has been able to reduce
the number of peer to peer loans in the portfolio from 14 to 5.
UK peer to peer loan platform (Borrower 16) - 0.5% of NAV
The platform is slowly amortising down with 9 loans being repaid
over the reporting period and only 5 loans remaining on the platform.
Two of the largest loans are 50% and 80% impaired and represent 99.1%
of the total outstanding balance.
Spanish peer to peer loan platform (Borrower 17) - 0.0% of NAV
We have assigned zero probability of any further collections on the
remaining 7 loans within the portfolio. We continued to push for
some return from these loans but after receiving a number of liquidation
confirmations, we concluded that there was very little probability
of recouping any further capital.
US peer to peer business (Borrower 18) - 0.0% of NAV
The final outstanding balance of this position has been fully impaired
and we have assigned no further ability to recoup funds from the
platform.
IFRS 9 Policy
In relation to IFRS 9 provisioning, KKV have implemented a revised
and robust systematic grading system to reflect the need to assess
risk consistently, taking into account market conditions and probability
of default per credit. This uses a ten-stage categorisation methodology.
We have decided to increase disclosure of our credit policy for Shareholders
to achieve a clear understanding of our approach.
Our credit model is designed to put each asset into a risk category
based on the probability of default. Credits are then individually
assigned an expected loss given default ("LGD"). Inputs include specific
data describing the characteristics and attributes of each loan.
Certain of those loan characteristics will be used to generate the
Probability of Default ("PD") and the LGD. This provides a firm basis
for comparisons across borrowers and collateral types.
KKVIM Probability of Default Grades:
Grade KKV PD (%)
1: Virtually no risk 0.01
-----------
2: Low risk 0.10
-----------
3. Moderate risk 0.50
-----------
4. Average risk 1.50
-----------
5. Acceptable risk 4
-----------
6. Borderline Risk 10
-----------
7. High Risk 20
-----------
8. Extremely High Risk 40
-----------
9. Doubtful 60
-----------
10. Loss 100
-----------
Loans secured by realisable assets have an expected loss quantum
based on the underwriting criteria for the respective collateral
type. Loans that are more than 90 days in arrears will typically
become Stage 2 assets unless this is for exceptional circumstances.
Loans are categorised as in default, and hence Stage 3, when they
are over 180 days in arrears and have no credible plan to catch up.
For LGD purposes if the assets supporting the loan are not easily
realisable e.g., fixed plant, we assume on default that the business
has failed and therefore the recovery will be equivalent to an unsecured
loan.
KKVIM LGD (Loss Given Default) Approach:
Category LGD Approach
Easily Realisable Asset value less 10% haircut discounted at 10% IRR for 12 months to recovery
-------------------------------------------------------------------------------------------
Realisable Asset value less 20% discounted at 20% IRR for 2 years to recovery
-------------------------------------------------------------------------------------------
Highly Specialised 70% LGD
(Equivalent to unsecured)
-------------------------------------------------------------------------------------------
Subordinated Debt 100% LGD
Where an external 3(rd) party valuation is available this is used to create a bespoke LGD
for that asset in priority to the Highly Specialised and Subordinated Debt categories.
-------------------------------------------------------------------------------------------
The percentage provision under IFRS 9 for a facility is this LGD
multiplied by the credit rating Probability of Default as allocated
above.
At the time of writing, the economic effects of the pandemic seem
likely to continue for some time and we will therefore keep these
provisions under regular review. Having observed some improvement
in debt service on our Stage 1 loans from June 2020 onwards, we have
not identified any marked increase in overall volatility as the second
wave of the pandemic began in Q4, 2020. However, we continue to monitor
the portfolio carefully and it would be unwise for us to ignore the
elevated risk that this uncertainty represents to our borrowers and
to not flag the possibility of further loan loss provisions we may
have to apply in the future as the global economy braces itself for
further economic contraction.
Outlook
The reporting period has been a relatively quiet one in relation
to credit events and we are confident that we will be able to return
capital to Shareholders under the plan presented to the Board at
the time of the EGM. In some circumstances, this timetable will be
shortened by our careful management of relationships and encouragement
to refinance.
All things considered, the loan book has held up very well and we
have made good progress in returning capital to our Shareholders
in an efficient and expeditious manner.
We would like to thank Shareholders for their support and look forward
to sharing further updates on the progress made on wind down in future
months.
Dawn Kendall
KKV Investment Management Ltd
23 March 2021
Principal Risks and Uncertainties
Risk is inherent in the Company's activities, but it is managed through
an ongoing process of identifying and assessing risks and ensuring
that appropriate controls are in place. The key risks faced by the
Company, are set out below:
* macroeconomic risk;
* credit risk;
* platform risk;
* regulatory risk; and
* reputational risk.
Further details of each of these risks and how they are mitigated
are discussed in the Principal Risks and Uncertainties section of
the Strategic Report within the Company's Annual Report for the year
ended 30 June 2020. The Board believes that these risks are applicable
to the six month period ended 31 December 2020 and the remaining
six months of the current financial year.
Covid-19
The Covid-19 pandemic is a risk to the global economy. Details of
the macroeconomic impact, as it may affect the Company, are provided
in the Chairman's Statement and Investment Manager's Report. The
Investment Manager and Administrator invoked their business continuity
plans to help ensure the safety and well-being of their staff thereby
retaining the ability to maintain business operations. These actions
helped to ensure business resilience.
The situation is changing so rapidly that the full impact cannot
yet be understood, but future cashflows and valuations are more uncertain
at the current time, and may be more volatile than in recent years.
Indeed, the level of estimation uncertainty and judgement for the
calculation of expected credit losses has increased as a result of
the economic effects of the Covid-19 pandemic. However, the impact
of defaults that might occur in future under different economic scenarios
has been reflected in various models to enable the Board to evaluate
the Company's viability, and the Directors believe that the Company
is well placed to survive the impact of the Covid-19 pandemic , thereby
enabling the Company to realise its assets in an orderly manner.
On behalf of the Board.
David Stevenson
Chairman
23 March 2021
Governance
Statement of Directors' Responsibilities
The Directors are responsible for preparing the half-yearly report
and condensed financial statements, which have not been audited or
reviewed by an independent auditor, and are required to:
* prepare the condensed half-yearly financial
statements in accordance with International
Accounting Standard 34: Interim Financial Reporting,
as adopted by the European Union, which give a true
and fair view of the assets, liabilities, financial
position and profit for the period of the Company, as
required by Disclosure and Transparency Rules ("DTR")
4.2.4 R;
* include a fair review of the information required by
DTR 4.2.7 R, being important events that have
occurred during the period and their impact on the
half-yearly report and condensed financial statements
and a description of the principal risks and
uncertainties for the remaining six months of the
financial year ; and
* include a fair review of information required by DTR
4.2.8 R, being related party transactions that have
taken place during the period which have had a
material effect on the financial position or
performance of the Company.
The Directors confirm that the half-yearly report and condensed financial
statements comply with the above requirements.
On behalf of the Board.
David Stevenson
Chairman
23 March 2021
Unaudited Condensed Statement of Comprehensive Income
for the six months ended 31 December 2020
Year ended
Period from Period from
1 July 2020 1 July 2019
to 31 December to 31 December
2020 2019 30 June 2020
Note (unaudited) (unaudited) (audited)
GBP'000 GBP'000 GBP'000
Income
Investment income 2,346 2,468 4,315
------------ ------------ ------------
Total revenue 2,346 2,468 4,315
------------ ------------ ------------
Operating expenses
Management fees 7a (190) (250) (483)
Other expenses 10 (68) (91) (164)
Administration fees 7b (57) (57) (117)
Directors' remuneration 8 (56) (48) (94)
Broker fees (37) (69) (197)
Transaction fees 7a (24) (107) (147)
Legal and professional fees (8) (48) (97)
------------ ------------ ------------
Total operating expenses (440) (670) (1,299)
------------ ------------ ------------
Investment gains and losses
Movement in unrealised gains and
losses on loans due to movement
in foreign exchange on non-Sterling
loans 13 (977) (490) 410
Impairment losses on financial assets
(or loans) 13 1,020 (875) (3,299)
Movement in unrealised gain on investments
at fair value through profit or
loss 14 4 12 19
Movement in unrealised gain on derivative
financial instruments 16 6 522 345
Realised loss on disposal of loans (1,410) (443) (536)
Realised gain/(loss) on derivative
financial instruments 16 269 (112) (852)
------------ ------------ ------------
Total investment gains and losses (1,088) (1,386) (3,913)
------------ ------------ ------------
Net profit/(loss) from operating
activities before gain/(loss) on
foreign currency exchange 818 412 (897)
Net foreign exchange gain/(loss) 2 (13) (16)
------------ ------------ ------------
Profit/(loss) and total comprehensive
income for the period/year attributable
to the owners of the Company 820 399 (913)
------------ ------------ ------------
Earnings/(loss) per Ordinary Share
(basic and diluted) 12 1.56p 0.76p (1.73)p
------------ ------------ ------------
All of the items in the above statement are derived from continuing
operations.
There were no other comprehensive income items in the period/year.
Except for unrealised investment gains and losses, all of the Company's
profit and loss items are distributable.
The accompanying notes form an integral part of the unaudited condensed
half-yearly financial statements .
Unaudited Condensed Statement of Changes in Equity
for the six months ended 31 December 2020
Called Special Profit
up share distributable and loss
Unaudited Note capital reserve account Total
GBP'000 GBP'000 GBP'000 GBP'000
At 1 July 2020 577 48,181 (3,226) 45,532
Profit for the period 21 - - 820 820
Transactions with Owners in their capacity as owners:
Dividends paid 5, 21 - (4,323) (767) (5,090)
------------ ------------ ------------ ------------
At 31 December 2020 577 43,858 (3,173) 41,262
------------ ------------ ------------ ------------
Unaudited Condensed Statement of Changes in Equity
for the six months ended 31 December 2019
Called Special Profit
up share distributable and loss
Unaudited Note capital reserve account Total
GBP'000 GBP'000 GBP'000 GBP'000
At 1 July 2019 577 50,253 (701) 50,129
Profit for the period 21 - - 399 399
Transactions with Owners in their capacity as owners:
Dividends paid 5, 21 - (612) (1,230) (1,842)
------------ ------------ ------------ ------------
At 31 December 2019 577 49,641 (1,532) 48,686
------------ ------------ ------------ ------------
Audited Statement of Changes in Equity
for the year ended 30 June 2020
Called Special Profit
up share distributable and loss
Audited Note capital reserve account Total
GBP'000 GBP'000 GBP'000 GBP'000
At 1 July 2019 577 50,253 (701) 50,129
Loss for the year 21 - - (913) (913)
Transactions with Owners in their capacity as owners:
Dividends paid 5, 21 - (2,072) (1,612) (3,684)
------------ ------------ ------------ ------------
At 30 June 2020 577 48,181 (3,226) 45,532
------------ ------------ ------------ ------------
There were no other comprehensive income items in the period/year.
The above amounts are all attributable to the owners of the Company.
The accompanying notes form an integral part of the unaudited condensed
half-yearly financial statements .
Unaudited Condensed Statement of Financial Position
as at 31 December 2020
31 December 31 December 30 June
2020 2019 2020
Note (unaudited) (unaudited) (audited)
GBP'000 GBP'000 GBP'000
Non-current assets
Loans at amortised cost 13 23,149 41,025 31,942
Investments at fair value through
profit or loss 14, 15 255 244 251
------------ ------------ ------------
Total non-current assets 23,404 41,269 32,193
------------ ------------ ------------
Current assets
Loans at amortised cost 13 14,927 3,305 10,691
Cash held on client accounts with
platforms 13 - 25 -
Derivative financial instruments 15, 16 - 171 -
Other receivables and prepayments 17 574 1,528 1,625
Cash and cash equivalents 2,500 2,502 1,193
------------ ------------ ------------
Total current assets 18,001 7,531 13,509
------------ ------------ ------------
Total assets 41,405 48,800 45,702
------------ ------------ ------------
Current liabilities
Other payables and accruals 18 (143) (114) (164)
Derivative financial instruments 15, 16 - - (6)
------------ ------------ ------------
Total liabilities (143) (114) (170)
------------ ------------ ------------
------------ ------------ ------------
Net assets 41,262 48,686 45,532
------------ ------------ ------------
Capital and reserves attributable to owners of the Company
Called up share capital 20 577 577 577
Other reserves 21 40,685 48,109 44,955
------------ ------------ ------------
Equity attributable to the owners
of the Company 41,262 48,686 45,532
------------ ------------ ------------
Net asset value per Ordinary Share 22 78.26p 92.36p 86.37p
------------ ------------ ------------
These unaudited condensed half-yearly financial statements of Secured
Income Fund plc (registered number 09682883) were approved by the
Board of Directors on 23 March 2021 and were signed on its behalf
by:
David Stevenson Gaynor Coley
Chairman Director
23 March 2021 23 March 2021
The accompanying notes form an integral part of the unaudited condensed
half-yearly financial statements .
Unaudited Condensed Statement of Cash Flows
for the six months ended 31 December 2020
Period from Period from
1 July 2020 1 July 2019
to 31 December to 31 December Year ended
2020 2019 30 June
(unaudited) (unaudited) 2020 (audited)
GBP'000 GBP'000 GBP'000
Cash flows from operating activities
Net profit/(loss) before taxation 820 399 (913)
Adjustments for:
Movement in unrealised gains and losses
on loans due to movement in foreign exchange
on non-Sterling loans 977 490 (410)
Impairment losses on financial assets (or
loans) (1,020) 875 3,299
Movement in unrealised gain on investments
at fair value through profit or loss (4) (12) (19)
Movement in unrealised gain on derivative
financial instruments (6) (522) (345)
Realised loss on disposal of loans 1,410 443 536
Realised (gain)/loss on derivative financial
instruments (269) 112 852
Amortisation of transaction fees 24 107 147
Interest received and reinvested by platforms (1) (43) (50)
Capitalised interest (748) (735) (1,486)
Decrease in investments 4,184 1,700 1,783
------------ ------------ ------------
Net cash inflow from operating activities
before working capital changes 5,367 2,814 3,394
Decrease/(increase) in other receivables
and prepayments 1,051 (387) (484)
Decrease in other payables and accruals (21) (70) (20)
------------ ------------ ------------
Net cash inflow from operating activities 6,397 2,357 2,890
Cash flows from financing activities
Dividends paid (5,090) (1,842) (3,684)
------------ ------------ ------------
Net cash outflow from financing activities (5,090) (1,842) (3,684)
------------ ------------ ------------
Increase/(decrease) in cash and cash equivalents
in the period/year 1,307 515 (794)
Cash and cash equivalents at the beginning
of the period/year 1,193 1,987 1,987
------------ ------------ ------------
Cash and cash equivalents at 31 December
2020 2,500 2,502 1,193
------------ ------------ ------------
Supplemental cash flow information
Non-cash transaction - interest income 749 778 1,536
The accompanying notes form an integral part of the unaudited condensed
half-yearly financial statements .
Notes to the Unaudited Condensed Half-Yearly Financial Statements
for the six months ended 31 December 2020
1. General information
The Company is a public company (limited by shares) and was incorporated
and registered in England and Wales under the Companies Act 2006 on
13 July 2015 with registered number 09682883. The Company's shares
were admitted to trading on the London Stock Exchange Specialist Fund
Segment on 23 September 2015 ("Admission"). The Company is domiciled
in England and Wales.
The Company is an investment company as defined in s833 of the Companies
Act 2006.
Change of name
On 18 July 2020, the Company changed its name from SQN Secured Income
Fund plc to Secured Income Fund plc.
Investment objective and policy
On 17 September 2020, the Shareholders approved the adoption of a
new investment objective and policy of the Company, as follows:
The Company will be managed with the intention of realising all remaining
assets in the Portfolio in a prudent manner consistent with the principles
of good investment management and with a view to returning cash to
Shareholders in an orderly manner.
The Company will pursue its investment objective by effecting an orderly
realisation of its assets in a manner that seeks to achieve a balance
between maximising the value received from those assets and making
timely returns of capital to Shareholders. This process might include
sales of individual assets, mainly structured as loans, or running
off the Portfolio in accordance with the existing terms of the assets,
or a combination of both.
As part of the realisation process, the Company may also exchange
existing debt instruments for equity securities where, in the opinion
of the Board, the Company is unlikely to be able to otherwise realise
such debt instruments or will only be able to realise them at a material
discount to the outstanding principal balance of that debt instrument.
The Company will cease to make any new investments or to undertake
capital expenditure except where, in the opinion of both the Board
and the Investment Manager (or, where relevant, the Investment Manager's
successors):
* the investment is a follow-on investment made in
connection with an existing asset in order to comply
with the Company's pre-existing obligations; or
* failure to make the follow-on investment may result
in a breach of contract or applicable law or
regulation by the Company; or
* the investment is considered necessary to protect or
enhance the value of any existing investments or to
facilitate orderly disposals.
Any cash received by the Company as part of the realisation process
prior to its distribution to Shareholders will be held by the Company
as cash on deposit and/or as cash equivalents.
The Company will not undertake new borrowing.
Any material change to the investment policy would require Shareholder
approval.
Prior to 17 September 2020, the investment objective and policy was
as follows:
Investment objective - prior to 17 September 2020
The investment objective of the Company was to provide Shareholders
with attractive risk adjusted returns, principally in the form of
regular, sustainable dividends, through investment predominantly in
a range of secured loans and other secured loan-based instruments
originated through a variety of channels and diversified by way of
asset class, geography and duration.
Investment policy - prior to 17 September 2020
The Company achieved its investment objective by investing in a range
of secured loan assets mainly through wholesale secured lending opportunities,
secured trade and receivable finance and other collateralised lending
opportunities. Loan assets included both direct loans as well as other
instruments with loan-based investment characteristics (for example,
but not limited to, bonds, loan participations, syndicated loans,
structured notes, collateralised obligations or hybrid securities)
and may have included (subject to the limit set out below) other types
of investment (for example, equity or revenue- or profit-linked instruments).
The Company may have made investments through alternative lending
platforms that presented suitable investment opportunities identified
by the Investment Manager.
2. Statement of compliance
a) Basis of preparation
These unaudited condensed half-yearly financial statements present
the results of the Company for the six months ended 31 December 2020.
These unaudited condensed half-yearly financial statements have been
prepared in accordance with International Accounting Standard ("IAS")
34: Interim Financial Reporting, as adopted by the European Union.
The unaudited condensed half-yearly financial statements for the period
ended 31 December 2020 have not been audited or reviewed by the Company's
auditors and do not constitute statutory financial statements, as
defined in s434 of the Companies Act 2006. The unaudited condensed
half-yearly financial statements have been prepared on the same basis
as the Company's annual financial statements.
Non-Going Concern
On 19 June 2020, the Company held a continuation vote (the "Continuation
Vote") that, in line with the Directors' recommendation, did not pass.
This vote was required under the Articles as the Company did not have
a Net Asset Value of at least GBP250 million as at 31 December 2019.
As this vote did not pass, the Directors (as required under the Articles)
convened a further general meeting of the Company on 17 September
2020 at which a special resolution approved the managed wind-down
of the Company and the adoption of the new investment policy of the
Company to carry out an orderly realisation of the Company's portfolio
of assets and distribution of cash to Shareholders .
This has had no significant impact on the accounting policies, judgements
or carrying value of assets and liabilities within the financial statements
as the loans are included net of their expected credit loss provision
("ECL") and are expected to be realised in an orderly manner, and
the estimated costs of winding up the Company are immaterial .
The Covid-19 pandemic is a risk to the global economy. Details of
the macroeconomic impact and the impact on credit risk are provided
in the Chairman's Statement and the Investment Manager's Report. The
Investment Manager and Administrator invoked their business continuity
plans to help ensure the safety and well-being of their staff thereby
retaining the ability to maintain business operations. These actions
helped to ensure business resilience. The situation is changing so
rapidly that the full impact cannot yet be understood, but the Company
will continue to monitor the situation closely.
b) Basis of measurement
The unaudited condensed half-yearly financial statements have been
prepared on a historical cost basis, except for investments at fair
value through profit or loss and derivative instruments, which are
measured at fair value through profit or loss.
Given the Company's investment policy to carry out an orderly realisation
of the Company's portfolio of assets and distribution of cash to Shareholders,
the financial statements have been prepared on a non-going concern
basis.
c) Segmental reporting
The Directors are of the opinion that the Company is engaged in a
single economic segment of business, being investment in a range of
SME loan assets.
d) Use of estimates and judgements
The preparation of unaudited condensed half-yearly financial statements
in conformity with International Financial Reporting Standards ("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 historical experience and various other factors
that are believed to be reasonable under the circumstances, the results
of which form the basis of making the judgements about carrying values
of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on 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.
Judgements made by management in the application of IFRS that have
a significant effect on the unaudited condensed half-yearly financial
statements and estimates with a significant risk of material adjustment
in the next year are discussed in note 4.
3. Significant accounting policies
a) Foreign currency
Foreign currency transactions are translated into Sterling using the
exchange rates prevailing at the dates of the transactions. Foreign
exchange gains and losses resulting from the settlement of such transactions
and from the translation at period-end exchange rates of monetary
assets and liabilities denominated in foreign currencies are recognised
in the Unaudited Condensed Statement of Comprehensive Income. Translation
differences on non-monetary financial assets and liabilities are recognised
in the Unaudited Condensed Statement of Comprehensive Income.
b) Financial assets and liabilities
The financial assets and liabilities of the Company are defined as
loans, bonds with loan type characteristics, investments at fair value
through profit or loss, cash and cash equivalents, other receivables,
derivative instruments and other payables.
Classification
IFRS 9 requires the classification of financial assets to be determined
on both the business model used for managing the financial assets
and the contractual cash flow characteristics of the financial assets.
Loans have been classified at amortised cost as:
* they are held within a "hold to collect" business
model with the objective to hold the assets to
collect contractual cash flows; and
* the contractual terms of the loans give rise on
specified dates to cash flows that are solely
payments of principal and interest on the principal
amount outstanding.
The Company's unquoted investments have been classified as held at
fair value through profit or loss as they are held to realise cash
flows from the sale of the investments.
Recognition
The Company recognises a financial asset or a financial liability
when, and only when, it becomes a party to the contractual provisions
of the instrument. Purchases and sales of financial assets that require
delivery of assets within the time frame generally established by
regulation or convention in the marketplace are recognised on the
trade date, i.e. the date that the Company commits to purchase or
sell the asset.
Derecognition
A financial asset (or, where applicable, a part of a financial asset
or part of a group of similar assets) is derecognised where:
* The rights to receive cash flows from the asset have
expired; or
* The Company has transferred its rights to receive
cash flows from the asset or has assumed an
obligation to pay the received cash flows in full
without material delay to a third party under a
"pass-through" arrangement; and
* Either (a) the Company has transferred substantially
all the risks and rewards of the asset, or (b) the
Company has neither transferred nor retained
substantially all the risks and rewards of the asset,
but has transferred control of the asset.
When the Company has transferred its rights to receive cash flows
from an asset (or has entered into a pass-through arrangement) and
has neither transferred nor retained substantially all the risks and
rewards of the asset nor transferred control of the asset, the asset
is recognised to the extent of the Company's continuing involvement
in the asset.
The Company derecognises a financial liability when the obligation
under the liability is discharged, cancelled or expires.
Initial measurement
Financial assets and financial liabilities at fair value through profit
or loss are recorded in the Unaudited Condensed Statement of Financial
Position at fair value. All transaction costs for such instruments
are recognised directly in profit or loss.
Financial assets and financial liabilities not designated as at fair
value through profit or loss, such as loans, are initially recognised
at fair value, being the amount issued less transaction costs.
Subsequent measurement
After initial measurement, the Company measures financial assets and
financial liabilities not designated as at fair value through profit
or loss, at amortised cost using the effective interest rate method,
less impairment allowance. Gains and losses are recognised in the
Unaudited Condensed Statement of Comprehensive Income when the asset
or liability is derecognised or impaired. Interest earned on these
instruments is recorded separately as investment income.
After initial measurement, the Company measures financial instruments
which are classified at fair value through profit or loss at fair
value. Subsequent changes in the fair value of those financial instruments
are recorded in net gain or loss on financial assets and liabilities
at fair value through profit or loss.
The carrying value of cash and cash equivalents and other receivables
and payables equals fair value due to their short-term nature.
Impairment
A financial asset is credit-impaired when one or more events that
have occurred 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.
Each direct loan is assessed on a continuous basis by the Investment
Manager's own underwriting team with peer review occurring on a regular
basis.
Each platform loan is monitored via the company originally deployed
to conduct underwriting and management of the borrower relationship.
When a potential impairment is identified, the Investment Manager
requests data and management information from the platform. The Investment
Manager will then actively pursue collections, giving guidance to
the platforms on acceptable levels of impairment. In some cases, the
Investment Manager will proactively take control of the process.
Impairment of financial assets is recognised on a loan-by-loan basis
in stages:
Stage As soon as a financial instrument is originated or purchased,
1: 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 (i.e.
without deduction for expected credit losses).
Stage If the credit risk increases significantly and is not considered
2: low, full lifetime expected credit losses are recognised in profit
or loss. The calculation of interest revenue is the same as for
Stage 1. This stage is triggered by scrutiny of management accounts
and information gathered from regular updates from the borrower
by way of email exchange or face-to-face meetings. The Investment
Manager extends specific queries to borrowers if they acquire
market intelligence or channel-check the data received. A covenant
breach may be a temporary circumstance due to a one-off event
and will not trigger an immediate escalation in risk profile
to stage 2.
At all times, the Investment Manager considers the risk of impairment
relative to the cash flows and general trading conditions of
the company and the industry in which the borrower resides.
Stage If the credit risk of a financial asset increases to the point
3: that it is considered credit-impaired, interest revenue is calculated
based on the amortised cost (i.e. 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. This stage is triggered
by a marked deterioration in the management information received
from the borrower and a view taken on the overall credit conditions
for the sector in which the company resides. A permanent breach
of covenants and a deterioration in the valuation of security
would also merit a move to stage 3.
The Investment Manager also takes into account the level of security
to support each loan and the ease with which this security can
be monetised. This has a meaningful impact of the way in which
impairments are assessed, particularly as the Investment Manager
has a very strong track record in managing write-downs and reclaim
of assets.
For more details in relation to judgements, estimates and uncertainty
see note 4, and the Investment Manager's Report for details of the
Investment Manager's credit model that was implemented during the
period.
b) Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits
and short-term, highly liquid investments readily convertible to known
amounts of cash and subject to insignificant risk of changes in value.
The carrying values of cash and cash equivalents are deemed to be
a reasonable approximation of their fair values.
c) Receivables and prepayments
Receivables are carried at the original invoice amount, less impairments,
as discussed above.
The carrying values of the accrued interest and other receivables
are deemed to be reasonable approximations of their fair values.
d) Transaction costs
Transaction costs incurred on the acquisition of loans are capitalised
upon recognition of the financial asset and amortised over the term
of the respective loan.
e) Income and expenses
Interest income and bank interest are recognised on a time-proportionate
basis using the effective interest rate method.
Dividend income is recognised when the right to receive payment is
established.
All expenses are recognised on an accruals basis. All of the Company's
expenses (with the exception of share issue costs, which are charged
directly to the distributable reserve) are charged through the Unaudited
Condensed Statement of Comprehensive Income in the period in which
they are incurred.
f) Taxation
The Company is exempt from UK corporation tax on its chargeable gains
as it satisfies the conditions for approval as an investment trust.
The Company is, however, liable to UK corporation tax on its income.
However, the Company has elected to take advantage of modified UK
tax treatment in respect of its "qualifying interest income" in order
to deduct all, or part, of the amount it distributes to Shareholders
as dividends as an "interest distribution".
g) Changes in accounting policy and disclosures
New and amended standards and interpretations
The accounting policies adopted are consistent with those of the previous
financial year, except as outlined below. The Company adopted the
following new and amended relevant IFRS in the period:
IFRS 7 Financial Instruments: Disclosures - amendments regarding pre-replacement
issues in the context of the IBOR reform
IFRS 9 Financial Instruments - amendments regarding pre-replacement
issues in the context of the IBOR reform
IAS 1 Presentation of Financial Statements - amendments regarding
the definition of materiality
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
- amendments regarding the definition of materiality
The adoption of these accounting standards did not have any impact
on the Company's Unaudited Condensed Statement of Comprehensive Income,
Unaudited Condensed Statement of Financial Position or equity.
i) Accounting standards issued but not yet effective
The International Accounting Standards Board ("IASB") has issued/revised
a number of relevant standards with an effective date after the date
of these unaudited condensed half-yearly financial statements. Any
standards that are not deemed relevant to the operations of the Company
have been excluded. The Directors have chosen not to early adopt these
standards and interpretations and they do not anticipate that they
would have a material impact on the Company's financial statements
in the period of initial application.
Effective date
IFRS 7 Financial Instruments: Disclosures - amendments
regarding replacement issues in the context of 1 January 2021
the IBOR reform
IFRS 9 Financial Instruments - Amendments regarding
replacement 1 January 2021
issues in the context of the IBOR reform
IFRS 9 Financial Instruments - Amendments resulting from
Annual Improvements to IFRS Standards 2018-2020
(fees in the "10 per cent" test for derecognition 1 January 2022
of financial liabilities)
IAS 1 Presentation of Financial Statements - amendments
regarding the classification of liabilities 1 January 2023
IAS 37 Provisions, Contingent Liabilities and Contingent
Assets - Amendments regarding the costs to include 1 January 2022
when assessing whether a contract is onerous
4. Use of Judgements and estimates
The preparation of the Company's unaudited condensed half-yearly financial
statements requires the Directors to make judgements, estimates and
assumptions that affect the reported amounts recognised in the unaudited
condensed half-yearly financial statements . However, uncertainty
about these assumptions and estimates could result in outcomes that
could require a material adjustment to the carrying amount of the
asset or liability in future periods.
Judgements
In the process of applying the Company's accounting policies, management
made the following judgement, which has had a significant effect on
the amounts recognised in the unaudited condensed half-yearly financial
statements:
Covid-19
The Covid-19 pandemic is impacting virtually all businesses and the
Board expects that it will continue to impact economies over the coming
months. The Board and Investment Manager are monitoring any impact
this may have on the Company, its investments and income. The situation
continues to change rapidly so the full impact cannot yet be understood,
a result of which is that future cashflows and valuations are more
uncertain at the current time, and may be more volatile than in recent
years. Indeed, the level of estimation uncertainty and judgement for
the calculation of expected credit losses has increased as a result
of the economic effects of the Covid-19 pandemic. However, the impact
of defaults that might occur in future under different economic scenarios
has been reflected in various models to enable the Board to evaluate
the Company's viability, and the Directors believe that the Company
is well placed to survive the impact of the Covid-19 pandemic, thereby
enabling the Company to realise its assets in an orderly manner.
Estimates and assumptions
The Company based its assumptions and estimates on parameters available
when the unaudited condensed half-yearly financial statements were
approved. However, existing circumstances and assumptions about future
developments may change due to market changes or circumstances arising
beyond the control of the Company. Such changes are reflected in the
assumptions when they occur.
The current economic uncertainty (and the frequent changes in outlook
for different economic sectors) has created increased volatility and
uncertainty (as mentioned above and in the Investment Manager's Report).
In such circumstances the level of estimation uncertainty and judgement
of expected credit losses has increased. As noted in the Investment
Manager's Report, there are uncertainties about the need for future
provisions that may need to be made against individual loans and receivables.
Notwithstanding the best endeavours of management to obtain full repayment
there is a material uncertainty in relation to the level of provisioning
made in these unaudited condensed half-yearly financial statements.
Due to this material uncertainty the Directors are unable to update
the expected credit loss assessment (as set out in note 3b) to reflect
the likely impact on the Company's loan portfolio.
i) Recoverability of loans and other receivables
In accordance with IFRS 9, the impairment of loans and other receivables
has been assessed as described in note 3b. When assessing the credit
loss on a loan, and the stage of impairment of that loan, the Company
considers whether t here is an indicator of credit risk for a loan
when the borrower has failed to make a payment, either capital or
interest, when contractually due and upon assessment. The Company
assesses at each reporting date (and at least on a monthly basis)
whether there is objective evidence that a loan classified as a loan
at amortised cost is credit-impaired and whether a loan's credit risk
or the expected loss rate has changed significantly. As part of this
process:
* Platforms are contacted to determine default and
delinquency levels of individual loans; and
* Recovery rates are estimated.
The analysis of credit risk is based on a number of factors and a
degree of uncertainty is inherent in the estimation process . As mentioned
above, due to the Covid-19 pandemic future cashflows and valuations
are more uncertain at the current time, and may be more volatile than
in recent years. Indeed, the level of estimation uncertainty and judgement
for the calculation of expected credit losses has increased as a result
of the economic effects of the Covid-19 pandemic.
The determination of whether a specific factor is relevant and its
weight compared with other factors depends on the type of product,
the characteristics of the financial instrument and the borrower,
and the geographical region. It is not possible to provide a single
set of criteria that will determine what is considered to be a significant
increase in credit risk. Events that the Company will assess when
deciding if a financial asset is credit impaired include:
* significant financial difficulty of the borrower;
* a breach of contract, such as a default or past-due
event; and
* it becoming probable that the borrower will enter
bankruptcy or other financial reorganisation.
Although it may not always be the case (e.g. if discussions with a
borrower are ongoing), generally a loan is deemed to be in default
if the borrower has missed a payment of principal or interest by more
than 180 days, unless the Company has good reason not to apply this
rule. If the Company has evidence to the contrary, it may make an
exception to the 180 day rule to deem that a borrower is, or is not,
in default. Therefore, the definitions of credit impaired and default
are aligned as far as possible so that stage 3 represents all loans
that are considered defaulted or otherwise credit impaired.
At present no direct loans to SMEs fall within Stage 2 or Stage 3.
However, if a situation were to arise where a direct loan to an SME
were reclassified as Stage 2 or Stage 3, the probability of default
and lifetime expected credit loss would be assessed on a case by case
basis and would be pertinent to the probability of recovery.
IFRS 9 confirms that a Probability of Default ("PD") must never be
zero as everything is deemed to have a risk of default; this has been
incorporated by the Company. All PDs will be assessed against historic
data as well as the prevailing economic conditions at the reporting
date, adjusted to account for estimates of future economic conditions
that are likely to impact the risk of default.
Since November 2020, 12-month PD has been calculated based on the
Investment Manager's 10 level grading system, where:
* levels 1 to 6 fall into Stage 1, with 12-month PD
ranging from 0.01% to 10%;
* levels 7 to 9 fall into Stage 2, with 12-month PD
ranging from 20% to 60%, and
* level 10 falls into Stage 3, with a 12-month PD of
100%.
Prior to November 2020, 12-month PD was applied across the collective
as a cumulative in Stage 1, set at 2% in line with the Investment
Manager's historic performance data, market knowledge, and credit
enhancements (that was equivalent to there being 1 default for an
average portfolio of 50 unique borrowers). Once an investment moved
to Stage 2 then PD was calculated on an individual basis (and adjusted
for Stage 3 if appropriate).
All assessment is based on reasonable and supportive information available
at the time.
Since November 2020, 12-month ECL has been calculated based on the
Investment Manager's categorisation, as follows:
Category KKV LGD approach
Easily Realisable Asset value less 10% haircut discounted at 10%
IRR for 12 months to recovery
Realisable Asset value less 20% discounted at 20% IRR for
2 years to recovery
Highly Specialised/Unsecured 70% LGD
Subordinated Debt 100% LGD
Prior to November 2020, 12-month ECL was applied across the collective
as a cumulative in Stage 1, split according to the investment's classification.
For direct loan investments this was calculated as 2% of the individual
investment's Contracted Cash Flows ("CCF"), and 2% of the investment's
CCF for platform investments. Those Stage 1 12-month ECL amounts were
taken to be the investments' floor amounts - the Lifetime ECL for
any investment could never be less than its floor amount. Once an
investment moved to Stage 2, Lifetime ECL was calculated on an individual
basis.
Lifetime ECL is reviewed at each reporting date based on reasonable
and supportive information available at the time.
The following borrower information should be read in conjunction with
the current economic environment and, in particular, the impact of
Covid-19.
US Peer to Peer business (Borrower 18) impairment
The Company's largest peer to peer investment is a junior position
and represents a risk of write-down. In March 2019, SQN Asset Management
Limited ("SQN UK" or the "Former Investment Manager") met with the
owner/founder and agreed an incentive plan to expedite collections
of the underlying portfolio and agreed a three month period to show
improvement. They informed the Company that they had written down
a large proportion of this portfolio in their accounts due to a sales
process underway at the time. They were advised that if no improvement
was forthcoming, the Former Investment Manager would take over collections
and it was explained that the Former Investment Manager had a good
track record, together with its partners, in achieving better recoveries.
In June 2019, having observed slow progress, the Former Investment
Manager began a series of meetings to agree interaction mooted in
the previous quarter. Two executives from the Former Investment Manager
visited Borrower 18 in New York in July 2019 and August 2019, to agree
a process for the way forward and to have an update on the sale of
the business. At the time, they were in the middle of a two stage
due diligence, which caused delays to the provision of information.
With effect from 30 June 2020, the Company has impaired this platform
exposure by 100% with a 100% expectation of write-down for this part
of the portfolio. This is a pre-emptive move and takes into account
a best estimate of loans that are now being managed out by attorneys.
The decision to use a 100% impairment rate is based upon the Investment
Manager's past experience of platform performance.
Whilst a 100% impairment is based on past experience, the amount finally
received may be higher than this. A 10% decrease in the impairment
on this loan would result in a GBP210,000 increase in the net asset
value of the Company.
UK Venture Debt (Borrower 12) impairment
In September 2019, this platform made the Company aware that a loan
was to be sold at a discount to the price originally expected, due
to a series of potential acquirers falling away. This resulted in
an impairment provision in the previous year. After the turbulence
of two of the three principals leaving the company and triggering
a clause in the Loan Note agreement that allowed us to take closer
control of the process of managing the portfolio, the business has
stabilised and made very good progress in winding down the portfolio.
The previous largest position in the portfolio, a broadband company,
was restructured and removed from the portfolio. The reorganisation
of the business has progressed well and a new CEO employed. Its order
book has increased and it has been able to operate throughout the
current pandemic crisis. The Investment Manager, therefore, expects
some improvement in recovery.
Small Company Bond Platform (Borrower 15) impairment
The only outstanding debt from this platform had undergone a protracted
recovery process through the courts. In Q1 2020, the Investment Manager
took the decision to fully impair the loan due to slow progress and
the increased risk that fees and expenses would erode any repayment
to the Company.
Further details of the judgements applied in assessing the recoverability
of loans can be found in the Investment Manager's Report.
Collateral
While the presence of collateral is not a key element in the assessment
of whether there has been a significant increase in credit risk, it
is of great importance in the measurement of ECL. IFRS 9 states that
estimates of cash shortfalls reflect the cash flows expected from
collateral and other credit enhancements that are integral to the
contractual terms. Due to the business nature of the Investment Manager,
this is a key component of its ECL measurement and interpretation
of IFRS 9, as any investment would include elements of (if not all):
a fully collateralised position, fixed and floating charges, a corporate
guarantee, a personal guarantee, coverage ratios between 130% to 150%,
and an average LTV of 85%.
Loans written off
Financial assets (and the related impairment allowances) are normally
written off, either partially or in full, when there is no realistic
prospect of recovery. Where loans are secured, this is generally after
receipt of any proceeds from the realisation of security. In circumstances
where the net realisable value of any collateral has been determined
and there is no reasonable expectation of further recovery, write-off
may be earlier. Platform loans of GBP1,410,000 were written off in
the period (31 December 2019: GBP179,000; 30 June 2020: GBP268,000).
Renegotiated loans
A loan is classed as renegotiated when the contractual payment terms
of the loan are modified because the Company has significant concerns
about a borrower's ability to meet payments when due. On renegotiation,
the loan will also be classified as credit impaired, if it is not
already. Renegotiated loans will continue to be considered to be credit
impaired until there is sufficient evidence to demonstrate a significant
reduction in the risk of non-payment of future payments.
All data calculated for IFRS 9 purposes is consistent with the overall
methodology employed by KKV and its parent company, Kvika Securities
Ltd, across all of their UK public funds. In addition to the methodology
used, the Company has taken impairment data from Platforms for the
assessment of loans with third party exposure. Again, this is consistent
with the approach KKV would expect to take in these circumstances.
There were no new assets originated during the period that were credit-impaired
at the point of initial recognition. There were no financial assets
that have been modified since initial recognition at a time when the
loss allowance was measured at an amount equal to lifetime expected
credit losses and for which the loss allowance changed during the
period to an amount equal to 12-month expected credit losses.
There were no financial assets for which cash flows were modified
in the period while they had a loss allowance measured at an amount
equal to the lifetime expected credit loss.
Please see note 3b, note 13 and note 23 for further information on
the loans at amortised cost and credit risk.
5. Dividends
The Company distributes at least 85% of its distributable income earned
in each financial year by way of dividends.
T he Company elected to designate all of the dividends for the period
ended 31 December 2020 as interest distributions to its Shareholders.
In doing so, the Company took advantage of UK tax treatment by "streaming"
income from interest-bearing investments into dividends that will
be taxed in the hands of Shareholders as interest income.
To date, the Company has declared the following dividends in respect
of earnings for the period ended 31 December 2020:
Total dividend
declared in respect
of earnings in Amount per
Announcement date Pay date the period Ordinary Share
GBP'000
26 August 2020 25 September 2020 1,843 3.50p
26 November 2020 23 December 2020 2,633 5.00p
------------ ------------
Dividends declared (to date) for the
period 4,476 8.50p
Less, dividends paid after the period - -
end
Add, dividends paid in the period in
respect of the prior year 614 1.17p
------------ ------------
Dividends paid in
the period 5,090 9.67p
------------ ------------
In accordance with IFRS, dividends are only provided for when they
become a contractual liability of the Company. Therefore, during the
period a total of GBP5,090,000 (31 December 2019: GBP1,842,000, 30
June 2020: GBP3,684,000) was incurred in respect of dividends, none
of which was outstanding at the reporting date (31 December 2019 and
30 June 2020: none).
All dividends in the period were paid out of revenue (and not capital)
profits.
Mechanics for returning cash to Shareholders
The Board carefully considered the potential mechanics for returning
cash to Shareholders and the Company's ability to do so. The Board
believes it is in the best interests of Shareholders as a whole to
make distributions to Shareholders without a significant delay following
realisations of a material part of the Portfolio (whether in a single
transaction or through multiple, smaller transactions concluded on
similar timing), whether by dividend or other method.
After careful consideration and discussions with a number of Shareholders,
the Board believes that one of the fairest and most cost-efficient
ways of returning substantial amounts of cash to Shareholders is by
adopting a B Share Scheme, whereby the Company will be able to issue
redeemable B Shares to Shareholders. These are then redeemed on a
Redemption Date without further action being required by Shareholders.
Notice of a General Meeting of Shareholders was published on 26 February
2021 and these arrangements were accepted by Shareholders.
The Board also intends to make quarterly dividend payments, where
possible, in accordance with the Company's dividend policy and to
maintain investment trust status for so long as the Company remains
listed.
6. Related parties
As a matter of best practice and good corporate governance, the Company
has adopted a related party policy which applies to any transaction
which it may enter into with any Director, the Investment Manager,
or any of their affiliates which would constitute a "related party
transaction" as defined in, and to which would apply, Chapter 11 of
the Listing Rules. In accordance with its related party policy, the
Company obtained: (i) the approval of a majority of the Directors;
and (ii) a third-party valuation in respect of these transactions
from an appropriately qualified independent adviser.
Loan to Medical Equipment Solutions Limited ("MESL")
In June 2017, the Company loaned GBP1,380,000 to MESL, whose Chairman
was Neil Roberts, who was chairman of SQN Capital Management, LLC
at that time. The loan bore interest at 10.0% per annum and was for
a period of five years from the date of drawdown. The loan was to
be repaid via 60 monthly payments. The loan was repaid early in March
2020.
No loan interest was earned in the period (31 December 2019: GBP43,000,
30 June 2020: GBP57,000), and no loan interest was outstanding at
31 December 2020 (31 December 2019: GBP2,000, 30 June 2020: GBPnil).
At 31 December 2020, the balance of the loan was GBPnil (31 December
2019: GBP775,000; 30 June 2020 GBPnil).
7. Key contracts
a) Investment Manager
On 5 June 2020, the Company novated the contract to manage the portfolio
to KKV Investment Management Limited, following the management team
into their new entity from the Former Investment Manager (SQN UK).
The Investment Manager has responsibility for managing the Company's
portfolio. For their services, until 16 September 2020, the Investment
Manager was entitled to a management fee (on the same terms as the
Former Investment Manager) at a rate equivalent to the following schedule
(expressed as a percentage of NAV per annum, before deduction of accruals
for unpaid management fees for the current month):
* 1.0% per annum for NAV lower than or equal to GBP250
million;
* 0.9% per annum for NAV greater than GBP250 million
and lower than or equal to GBP500 million; and
* 0.8% per annum for NAV greater than GBP500 million.
From 17 September 2020, the 1.0% per annum base management fee was
reduced as follows:
* for 12 months from 17 September 2020 to 16 September
2021, to 0.75% per annum of the Company's NAV; and
* from 17 September 2021, to 0.55% of the Company's
NAV.
The management fee is payable monthly in arrears on the last calendar
day of each month.
During the period, a total of GBP190,000 (all to KKV) (31 December
2019: GBP250,000 (all to SQN UK), 30 June 2020: GBP483,000 (SQN UK,
GBP452,000 and KKV, GBP31,000)) was incurred in respect of management
fees, of which GBP53,000 was payable at the reporting date (31 December
2019: GBP41,000, 30 June 2020: GBP37,000).
Performance fee
From 17 September 2020, the Investment Manager is entitled to a performance
fee. The performance fee will be calculated using the most recent
NAV prior to the Company failing the June 2020 Continuation Vote (being
the NAV as at 31 May 2020) as the benchmark NAV (the "Benchmark NAV").
If 99% of the Benchmark NAV is returned to Shareholders by way of
dividend, share buy backs or other methods of return of capital within
12 months from 17 September 2020 then a performance fee of 0.6% of
the value returned to Shareholders would be payable to KKV. This will
be reduced by 0.1% for every 1% less than 99% of Benchmark NAV that
is returned to Shareholders.
Should the time taken to realise the Portfolio exceed 12 months from
17 September 2020, then for the period from 17 September 2021 to 17
September 2022, the incentive fee would reduce by 33% (so that, for
example if 99% of Benchmark NAV is returned by month 17, the performance
fee would be two-thirds of 0.6%).
The introduction of an outperformance fee, under the terms of the
amended Investment Management Agreement, states that KKV will be entitled
to 10% of all funds returned to Shareholders in excess of the Benchmark
NAV within 12 months from 17 September 2020, reducing to 5% within
12-24 months.
Effective from 17 September 2021, the notice period applicable to
termination of the Investment Management Agreement by either party
will reduce from 12 months to 4 months.
During the period, no performance fee was paid, or payable, to the
Investment Manager.
Transaction costs
Prior to the change in the investment policy, the Company incurred
transaction costs for the purposes of structuring investments for
the Company. These costs formed part of the overall transaction costs
that were capitalised at the point of recognition and were taken into
account by the Former Investment Manager when pricing a transaction.
When structuring services were provided by the Former Investment Manager
or an affiliate of them, they were entitled to charge an additional
fee to the Company equal to up to 1.0% of the cost of acquiring the
investment (ignoring gearing and transaction expenses). This cost
was not charged in respect of assets acquired from the Former Investment
Manager, the funds they managed or where they or their affiliates
did not provide such structuring advice.
The Former Investment Manager agreed to bear all the broken and abortive
transaction costs and expenses incurred on behalf of the Company.
Accordingly, the Company agreed that the Former Investment Manager
may retain any commitment commissions received by the Former Investment
Manager in respect of investments made by the Company, save that if
such commission on any transaction were to exceed 1.0% of the transaction
value, the excess would be paid to the Company.
During the period, transaction costs of GBP24,000 (31 December 2019:
GBP107,000; 30 June 2020 GBP147,000) were amortised.
b) Administration fees
Elysium Fund Management Limited ("Elysium") is entitled to an administration
fee of GBP100,000 per annum in respect of the services provided in
relation to the administration of the Company, together with time
based fees in relation to work on investment transactions. During
the period, a total of GBP57,000 (31 December 2019: GBP57,000, 30
June 2020: GBP117,000) was incurred in respect of administration fees,
of which GBP28,000 (31 December 2019: GBP29,000, 30 June 2020: GBP28,000)
was payable at the reporting date.
8. Directors' remuneration
The Directors are paid such remuneration for their services as determined
by the Remuneration and Nomination Committee, which comprises all
of the Directors of the Company and is chaired by Gaynor Coley. Under
the terms of their appointments, with effect from 17 September 2020,
the Chairman of the Company receives GBP45,000 (prior to 17 September
2020: GBP37,500) per annum, the chairman of the Audit and Valuation
Committee receives GBP40,000 (prior to 17 September 2020: GBP31,250)
per annum, and other non-executive Directors receive GBP40,000 (prior
to 17 September 2020: GBP27,500) per annum.
During the period, a total of GBP56,000 (31 December 2019: GBP48,000,
30 June 2020: GBP94,000) was incurred in respect of Directors' remuneration,
none of which was payable at the reporting date (31 December 2019
and 30 June 2020: none). No bonus or pension contributions were paid
or payable on behalf of the Directors.
9. Key management and employees
The Company had no employees during the period (31 December 2019 and
30 June 2020: none). Therefore, there were no key management (except
for the Directors) or employees during the period (31 December 2019
and 30 June 2020: none).
The following dividends were paid to the Directors during the period
by virtue of their holdings of Ordinary Shares (these dividends were
not additional remuneration):
David Stevenson GBP1,958 (31 December 2019: GBP709; 30
June 2020: GBP1,417)
Gaynor Coley GBP206 (31 December 2019: GBP70; 30 June
2020: GBP143)
Ken Hillen (resigned 26 May GBP0 (31 December 2019: GBP175; 30 June
2020) 2020: GBP291)
10. Other expenses
Period from
1 July 2020 Period from
to 31 December 1 July 2019 Year ended
2020 to 31 December 30 June 2020
(unaudited) 2019 (unaudited) (audited)
GBP'000 GBP'000 GBP'000
Audit fees 20 20 40
Registrar fees 17 13 36
Other expenses 11 20 33
Listing fees 10 7 18
Directors' national insurance 7 23 26
Accountancy and taxation fees 3 8 11
------------ ------------ ------------
68 91 164
------------ ------------ ------------
11. Taxation
The Company has received confirmation from HMRC that it satisfied
the conditions for approval as an investment trust, subject to the
Company continuing to meet the eligibility conditions in s.1158 of
the Corporation Tax Act 2010 and the ongoing requirements for approved
investment trust companies in Chapter 3 of Part 2 of the Investment
Trust (approved Company) Tax Regulations 2011 (Statutory Instrument
2011.2999). The Company intends to retain this approval and self-assesses
compliance with the relevant conditions and requirements.
As an investment trust the Company is exempt from UK corporation tax
on its chargeable gains. The Company is, however, liable to UK corporation
tax on its income. However, the Company has elected to take advantage
of modified UK tax treatment in respect of its "qualifying interest
income" in order to deduct all, or part, of the amount it distributes
to Shareholders as dividends as an "interest distribution".
Period from Period from
1 July 2020 1 July 2019
to 31 December to 31 December Year ended
2020 2019 30 June 2020
(unaudited) (unaudited) (audited)
GBP'000 GBP'000 GBP'000
Reconciliation of tax charge:
Profit/(loss) before taxation 820 399 (913)
------------ ------------ ------------
Tax at the standard UK corporation tax
rate of 19% 156 76 (173)
Effects of:
* Non-taxable investment gains and losses 207 263 743
* Interest distributions (51) (339) (570)
------------ ------------ ------------
Total tax expense - - -
------------ ------------ ------------
Domestic corporation tax rates in the jurisdictions in which the Company
operated were as follows:
Period from
1 July 2020 Period from
to 31 December 1 July 2019 Year ended
2020 to 31 December 30 June 2020
(unaudited) 2019 (unaudited) (audited)
United Kingdom 19% 19% 19%
Guernsey nil nil nil
Due to the Company's status as an investment trust and the intention
to continue to meet the required conditions, the Company has not provided
for deferred tax on any capital gains and losses.
12. Earnings/(loss) per Ordinary Share
The earnings/(loss) per Ordinary Share of 1.56p (31 December 2019:
0.76p, 30 June 2020: loss of (1.73)p) is based on a profit/(loss)
attributable to the owners of the Company of GBP820,000 (31 December
2019: GBP399,000, 30 June 2020: GBP(913,000)) and on a weighted average
number of 52,660,350 (31 December 2019 and 30 June 2020: 52,660,350)
Ordinary Shares in issue since Admission . There is no difference
between the basic and diluted earnings per share.
13. Loans at amortised cost
31 December 31 December
2020 2019 30 June 2020
(unaudited) (unaudited) (audited)
GBP'000 GBP'000 GBP'000
Loans 41,344 46,142 45,944
Unrealised loss* (3,268) (1,787) (3,311)
------------ ------------ ------------
Balance at period/year end 38,076 44,355 42,633
------------ ------------ ------------
Loans: Non-current 23,149 41,025 31,942
Current 14,927 3,305 10,691
Cash held on client accounts with platforms - 25 -
------------ ------------ ------------
Loans at amortised cost and cash held
on client accounts with platforms 38,076 44,355 42,633
------------ ------------ ------------
*Unrealised loss:
Foreign exchange on non-Sterling loans 148 225 1,125
Impairments of financial assets (3,416) (2,012) (4,436)
------------ ------------ ------------
Unrealised loss (3,268) (1,787) (3,311)
------------ ------------ ------------
The movement in unrealised gain/loss on loans comprises:
31 December 31 December
2020 2019 30 June 2020
(unaudited) (unaudited) (audited)
GBP'000 GBP'000 GBP'000
Movement in foreign exchange on non-Sterling
loans (977) (490) 410
Movement in impairments 1,020 (875) (3,299)
------------ ------------ ------------
Movement in unrealised gains and losses
on loans 43 (1,365) (2,889)
------------ ------------ ------------
The weighted average interest rate of the direct loans as at 31 December
2020 was 10.55% (31 December 2019: 9.67%, 30 June 2020: 10.44%).
The table below details expected credit loss provision ("ECL") of
financial assets in each stage at 31 December 2020:
Stage 1 Stage 2 Stage 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
31 December 2020
Direct loans ([1]) 32,956 - - 32,956
ECL on direct loans (233) - - (233)
------------ ------------ ------------ ------------
Direct loans net of the
ECL 32,723 - - 32,723
------------ ------------ ------------ ------------
Platform loans ([1]) 5,128 - 3,342 8,470
ECL on platform loans (48) - (3,135) (3,183)
------------ ------------ ------------ ------------
Platform loans net of the
ECL 5,080 - 207 5,287
------------ ------------ ------------ ------------
Accrued interest 547 - - 547
------------ ------------ ------------ ------------
Total loans ([1]) 38,084 - 3,342 41,426
Total ECL (281) - (3,135) (3,416)
------------ ------------ ------------ ------------
Total net of the ECL 37,803 - 207 38,010
------------ ------------ ------------ ------------
([1]) These are the principal amounts outstanding at 31 December 2020
and do not include the capitalised transaction fees, which are
not subject to credit risk. At 31 December 2020, the amortised
cost of the capitalised transaction fees totalled GBP66,000.
The table below details the movements in the period of the principal
amounts outstanding and the ECL on those loans:
Non-credit impaired Credit impaired
Stage 1 Stage 2 Stage 3 Total
Principal Principal Principal Principal
outstanding Allowance outstanding Allowance outstanding Allowance outstanding Allowance
([1]) for ECL ([1]) for ECL ([1]) for ECL ([1]) for ECL
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 July 2020 41,633 (24) - - 5,346 (4,412) 46,979 (4,436)
Net new and further
lending/repayments,
and foreign exchange
movements (3,549) (257) - - (594) (133) (4,143) (390)
Loans written-off
in the period - - - - (1,410) 1,410 (1,410) 1,410
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 31 December
2020 38,084 (281) - - 3,342 (3,135) 41,426 (3,416)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
([1]) These are the principal amounts outstanding at 31 December 2020
and do not include the capitalised transaction fees, which are
not subject to credit risk. At 31 December 2020, the amortised
cost of the capitalised transaction fees totalled GBP66,000.
The table below details expected credit loss provision ("ECL") of
financial assets in each stage at 31 December 2019:
Stage 1 Stage 2 Stage 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
31 December 2019
Direct loans ([1]) 33,554 - - 33,554
ECL on direct loans (16) - - (16)
------------ ------------ ------------ ------------
Direct loans net of the
ECL 33,538 - - 33,538
------------ ------------ ------------ ------------
Platform loans ([1]) 7,579 3,018 2,060 12,657
ECL on platform loans (8) (711) (1,277) (1,996)
------------ ------------ ------------ ------------
Platform loans net of the
ECL 7,571 2,307 783 10,661
------------ ------------ ------------ ------------
Accrued interest 1,095 290 113 1,498
------------ ------------ ------------ ------------
Total loans ([1]) 41,133 3,018 2,060 46,211
Total ECL (24) (711) (1,277) (2,012)
------------ ------------ ------------ ------------
Total net of the ECL 41,109 2,307 783 44,199
------------ ------------ ------------ ------------
([1]) These are the principal amounts outstanding at 31 December 2019
and do not include the capitalised transaction fees, which are
not subject to credit risk. At 31 December 2019, the amortised
cost of the capitalised transaction fees totalled GBP131,000.
The table below details the movements in the period of the principal
amounts outstanding and the ECL on those loans:
Non-credit impaired Credit impaired
Stage 1 Stage 2 Stage 3 Total
Principal Principal Principal Principal
outstanding Allowance outstanding Allowance outstanding Allowance outstanding Allowance
([1]) for ECL ([1]) for ECL ([1]) for ECL ([1]) for ECL
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 July 2019 44,617 (28) 3,117 (735) 426 (374) 48,160 (1,137)
Transfers from:
* stage 1 to stage 3 (1,846) (2) - - 1,846 2 - -
Net re-measurement
of ECL arising
from transfer
of stage - - - - - (1,074) - (1,074)
Net new and further
lending/repayments,
and foreign exchange
movements (1,638) 6 (99) 24 (37) (6) (1,774) 24
Loans written-off
in the period - - - - (175) 175 (175) 175
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 31 December
2019 41,133 (24) 3,018 (711) 2,060 (1,277) 46,211 (2,012)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
([1]) These are the principal amounts outstanding at 31 December 2019
and do not include the capitalised transaction fees, which are
not subject to credit risk. At 31 December 2019, the amortised
cost of the capitalised transaction fees totalled GBP131,000.
The table below details expected credit loss provision ("ECL") of
financial assets in each stage at 30 June 2020:
Stage 1 Stage 2 Stage 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
30 June 2020
Direct loans ([1]) 34,419 - - 34,419
ECL on direct loans (17) - - (17)
------------ ------------ ------------ ------------
Direct loans net of the
ECL 34,402 - - 34,402
------------ ------------ ------------ ------------
Platform loans ([1]) 7,214 - 5,346 12,560
ECL on platform loans (7) - (4,412) (4,419)
------------ ------------ ------------ ------------
Platform loans net of the
ECL 7,207 - 934 8,141
------------ ------------ ------------ ------------
Accrued interest 1,585 - - 1,585
------------ ------------ ------------ ------------
Total loans ([1]) 41,633 - 5,346 46,979
Total ECL (24) - (4,412) (4,436)
------------ ------------ ------------ ------------
Total net of the ECL 41,609 - 934 42,543
------------ ------------ ------------ ------------
([1]) These are the principal amounts outstanding at 30 June 2020 and
do not include the capitalised transaction fees, which are not
subject to credit risk. At 30 June 2020, the amortised cost of
the capitalised transaction fees totalled GBP90,000.
The table below details the movements in the year of the principal
amounts outstanding and the ECL on those loans:
Non-credit impaired Credit impaired
Stage 1 Stage 2 Stage 3 Total
Principal Principal Principal Principal
outstanding Allowance outstanding Allowance outstanding Allowance outstanding Allowance
([1]) for ECL ([1]) for ECL ([1]) for ECL ([1]) for ECL
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 July 2019 44,617 (28) 3,117 (735) 426 (374) 48,160 (1,137)
Transfers from:
* stage 1 to stage 3 (2,066) 2 - - 2,066 (2) - -
* stage 2 to stage 3 - - (3,117) 735 3,117 (735) - -
Net re-measurement
of ECL arising
from transfer
of stage - - - - - (3,584) - (3,584)
Net new and further
lending/repayments,
and foreign exchange
movements (918) 2 - - 5 15 (913) 17
Loans written-off
in the year - - - - (268) 268 (268) 268
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 30 June 2020 41,633 (24) - - 5,346 (4,412) 46,979 (4,436)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
([1]) These are the principal amounts outstanding at 30 June 2020 and
do not include the capitalised transaction fees, which are not
subject to credit risk. At 30 June 2020, the amortised cost of
the capitalised transaction fees totalled GBP90,000.
An increase of 1% of total gross exposure into stage 2 (from stage
1) would result in an increase in ECL impairment allowance of GBP43,000
( 31 December 2019: GBP96,000; 30 June 2020: GBP11,000 ) based on
applying the difference in average impairment coverage ratios to the
movement in gross exposure.
At 31 December 2020, the Board considered GBP3,416,000 (31 December
2019: GBP2,012,000; 30 June 2020: GBP4,436,000) of loans to be impaired:
31 December 31 December
2020 2019 30 June 2020
(unaudited) (unaudited) (audited)
GBP'000 GBP'000 GBP'000
Borrowers 14 and 18 2,118 542 2,318
Borrower 15 416 15 416
Borrower 17 341 71 345
Borrower 16 277 292 280
Direct SME loans 233 17 17
Other 20 1 -
Borrower 12 11 1,074 1,060
------------ ------------ ------------
Total impairment 3,416 2,012 4,436
------------ ------------ ------------
During the period, GBP1,410,000 (31 December 2019: GBP175,000, 30
June 2020: GBP268,000) of loans were written off and included within
realised (loss)/gain on disposal of loans in the Unaudited Condensed
Statement of Comprehensive Income.
See note 3b and note 4i regarding the process of assessment of loan
impairment.
The carrying values of the loans at amortised cost (excluding capitalised
transaction costs) are deemed to be a reasonable approximation of
their fair values.
14. Investments at fair value through profit or loss
Period from
1 July 2020 Period from
to 31 December 1 July 2019 Year ended
2020 to 31 December 30 June 2020
(unaudited) 2019 (unaudited) (audited)
GBP'000 GBP'000 GBP'000
Balance brought forward 251 232 232
Movement in unrealised gain on investments
at fair value through profit or loss 4 12 19
------------ ------------ ------------
Balance at period/year end 255 244 251
------------ ------------ ------------
Cost at period/year end 159 159 159
------------ ------------ ------------
The GBP255,000 (31 December 2019: GBP244,000, 30 June 2020: GBP251,000)
investment at fair value through profit or loss relates to an investment
in a Luxembourg fund. For further information on the investments at
fair value through profit or loss, see note 15.
15. Fair value of financial instruments
The following table shows financial instruments recognised at fair
value, analysed between those whose fair value is based on:
* Quoted prices in active markets for identical assets
or liabilities (Level 1);
* Those involving inputs other than quoted prices
included in Level 1 that are observable for the asset
or liability, either directly (as prices) or
indirectly (derived from prices) (Level 2); and
* Those with inputs for the asset or liability that are
not based on observable market data (unobservable
inputs) (Level 3).
Financial assets and liabilities designated as at fair value through
profit or loss
At 31 December 2020, the financial instruments designated at fair
value through profit or loss were as follows:
31 December 2020 (unaudited)
Level Level Level Total
1 2 3
Financial assets GBP'000 GBP'000 GBP'000 GBP'000
Unlisted equity shares - - 255 255
------------ ------------ ------------ ------------
Total financial assets designated as at fair
value through profit or loss - - 255 255
------------ ------------ ------------ ------------
At 31 December 2019, the financial instruments designated at fair
value through profit or loss were as follows:
31 December 2019 (unaudited)
Level Level Level Total
1 2 3
Financial assets GBP'000 GBP'000 GBP'000 GBP'000
Unlisted equity shares - - 244 244
Derivative financial instruments (note 16) - 171 - 171
------------ ------------ ------------ ------------
Total financial assets designated as at fair
value through profit or loss - 171 244 415
------------ ------------ ------------ ------------
At 30 June 2020, the financial instruments designated at fair value
through profit or loss were as follows:
30 June 2020 (audited)
Level Level Level Total
1 2 3
Financial assets/(liabilities) GBP'000 GBP'000 GBP'000 GBP'000
Unlisted equity shares - - 251 251
Derivative financial instruments (note 16) - (6) - (6)
------------ ------------ ------------ ------------
Total financial assets/(liabilities) designated
as at fair value through profit or loss - (6) 251 245
------------ ------------ ------------ ------------
Level 2 financial instruments include foreign currency forward contracts.
They are valued using observable inputs (in this case foreign currency
spot rates).
Level 3 financial instruments include unlisted equity shares. Net
asset value is considered to be an appropriate approximation of fair
value as, if the Company were to dispose of these holdings, it would
expect to do so at, or around, net asset value.
Transfers between levels
There were no transfers between levels in the period (31 December
2019 and 30 June 2020: none).
The carrying values of the loans at amortised cost (excluding capitalised
transaction costs) are deemed to be a reasonable approximation of
their fair values. The carrying values of all other assets and liabilities
not designated as at fair value through profit or loss are deemed
to be a reasonable approximation of their fair values due to their
short duration.
16. Derivative financial instruments
During the period, the Company entered into foreign currency forward
contracts to hedge against foreign exchange fluctuations. The Company
realised a gain of GBP269,000 (31 December 2019: loss of GBP112,000,
30 June 2020: loss of GBP852,000) on forward foreign exchange contracts
that settled during the period.
As at 31 December 2020, there were no open forward foreign exchange
contracts (31 December 2019: GBP171,000, 30 June 2020: GBP(6,000)).
17. Other receivables and prepayments
31 December 31 December
2020 2019 30 June 2020
(unaudited) (unaudited) (audited)
GBP'000 GBP'000 GBP'000
Accrued interest 547 1,498 1,585
Other receivables 16 - 13
Prepayments 11 30 27
------------ ------------ ------------
574 1,528 1,625
------------ ------------ ------------
The carrying values of the accrued interest and other receivables
are deemed to be reasonable approximations of their fair values.
18. Other payables and accruals
31 December 31 December
2020 2019 30 June 2020
(unaudited) (unaudited) (audited)
GBP'000 GBP'000 GBP'000
Management fee 53 41 37
Audit fee 36 20 40
Administration fee 28 29 28
Accountancy and taxation fees 10 10 -
Other payables and accruals 10 7 21
Directors' national insurance 6 5 2
Broker fee - 2 -
Legal fees - - 36
------------ ------------ ------------
143 114 164
------------ ------------ ------------
The carrying values of the other payables and accruals are deemed
to be reasonable approximations of their fair values.
19. Reconciliation of liabilities arising from financing activities
IAS 7 requires the Company to detail the changes in liabilities arising
from financing activities, including both cash and non-cash changes.
Liabilities arising from financing activities are those for which
cash flows were, or future cash flows will be, classified in the Company's
statement of cash flows as cash flows from financing activities.
As at 31 December 2020, the Company had no liabilities that would
give rise to cash flows from financing activities (31 December 2019
and 30 June 2020: none).
20 . Share capital
31 December 31 December 30 June
2020 2019 2020
(unaudited) (unaudited) (audited)
GBP'000 GBP'000 GBP'000
Authorised share capital:
Unlimited number of Ordinary Shares - - -
of 1 pence each
Unlimited C Shares of 10 pence each - - -
Unlimited Deferred Shares of 1 pence - - -
each
50,000 Management Shares of GBP1 each 50 50 50
------------ ------------ ------------
Called up share capital:
52,660,350 Ordinary Shares of 1 pence
each 527 527 527
50,000 Management Shares of GBP1 each 50 50 50
------------ ------------ ------------
577 577 577
------------ ------------ ------------
The Management Shares are entitled (in priority to any payment of
dividend of any other class of share) to a fixed cumulative preferential
dividend of 0.01% per annum on the nominal amount of the Management
Shares.
The Management Shares do not carry any right to receive notice of,
nor to attend or vote at, any general meeting of the Company unless
no other shares are in issue at that time. The Management Shares
do not confer the right to participate in any surplus of assets of
the Company on winding-up, other than the repayment of the nominal
amount of capital.
21. Other reserves
Profit and loss account
([2])
Special
distributable Non-distributable
reserve Distributable Total
([1])
GBP'000 GBP'000 GBP'000 GBP'000
Period ended 31 December 2020 (unaudited)
At 30 June 2020 48,181 - (3,226) 44,955
Realised revenue profit - 1,908 - 1,908
Realised investment gains and losses - (1,141) - (1,141)
Unrealised investment gains and
losses - - 53 53
Dividends paid (4,323) (767) - (5,090)
------------ ------------ ------------ ------------
At 31 December 2020 43,858 - (3,173) 40,685
------------ ------------ ------------ ------------
Profit and loss account
([2])
Special
distributable
reserve
([1]) Distributable Non-distributable Total
GBP'000 GBP'000 GBP'000 GBP'000
Period ended 31 December 2019
(unaudited)
At 30 June 2019 50,253 - (701) 49,552
Realised revenue profit - 1,785 - 1,785
Realised investment gains and
losses - (555) - (555)
Unrealised investment gains
and
losses - - (831) (831)
Dividends paid (612) (1,230) - (1,842)
------------ ------------ ------------ ------------
At 31 December 2019 49,641 - (1,532) 48,109
------------ ------------ ------------ ------------
Profit and loss account
([2])
Special
distributable Non-distributable
reserve Distributable Total
([1])
GBP'000 GBP'000 GBP'000 GBP'000
Year ended 30 June 2019
(audited)
At 30 June 2019 50,253 - (701) 49,552
Realised revenue profit - 3,000 - 3,000
Realised investment gains and
losses - (1,388) - (1,388)
Unrealised investment gains
and
losses - - (2,525) (2,525)
Dividends paid (2,072) (1,612) - (3,684)
------------ ------------ ------------ ------------
At 30 June 2020 48,181 - (3,226) 44,955
------------ ------------ ------------ ------------
([1]) During the period ended 30 June 2016, and following the approval
of the Court, the Company cancelled the share premium account and
transferred GBP51,143,000 to a special distributable reserve, being
premium on issue of shares of GBP52,133,000 less share issue costs
of GBP990,000. The special distributable reserve is available for
distribution to Shareholders.
([2]) The profit and loss account comprises both distributable and non-distributable
elements, as defined by Company Law. Realised elements of the Company's
profit and loss account are classified as "distributable", whilst
unrealised investment gains and losses are classified as "non-distributable".
With the exception of investment gains and losses, all of the Company's
profit and loss items are of a revenue nature as it does not allocate
any expenses to capital.
22. Net asset value per Ordinary Share
The net asset value per Ordinary Share is based on the net assets
attributable to the owners of the Company of GBP41,262,000 (31 December
2019: GBP48,686,000, 30 June 2020: GBP45,532,000), less GBP50,000
(31 December 2019 and 30 June 2020: GBP50,000), being amounts owed
in respect of Management Shares, and on 52,660,350 (31 December 2019
and 30 June 2020: 52,660,350) Ordinary Shares in issue at the period
end.
23. Financial Instruments and Risk Management
The Investment Manager manages the Company's portfolio to provide
Shareholders with attractive risk adjusted returns, principally in
the form of regular, sustainable dividends, through investment predominantly
in a range of secured loans and other secured loan-based instruments
originated through a variety of channels and diversified by way of
asset class, geography and duration.
Prior to the change in investment policy on 17 September 2020, the
Company sought to ensure that diversification of its portfolio was
maintained, with the aim of spreading investment risk.
Risk is inherent in the Company's activities, but it is managed through
a process of ongoing identification, measurement and monitoring. The
Company is exposed to market risk (which includes currency risk, interest
rate risk and price risk), credit risk and liquidity risk from the
financial instruments it holds. Risk management procedures are in
place to minimise the Company's exposure to these financial risks,
in order to create and protect Shareholder value.
Risk management structure
The Investment Manager is responsible for identifying and controlling
risks. The Board of Directors supervises the Investment Manager and
is ultimately responsible for the overall risk management approach
within the Company.
The Company has no employees and is reliant on the performance of
third party service providers. Failure by the Investment Manager,
Administrator, Broker, Registrar or any other third party service
provider to perform in accordance with the terms of its appointment
could have a significant detrimental impact on the operation of the
Company.
The market in which the Company participates is competitive and rapidly
changing. The risks have not changed from those detailed on pages
20 to 30 in the Company's Prospectus, which is available on the Company's
website , and as updated in the circular of 20 August 2020 .
Risk concentration
Concentration indicates the relative sensitivity of the Company's
performance to developments affecting a particular industry or geographical
location. Concentrations of risk arise when a number of financial
instruments or contracts are entered into with the same counterparty,
or where a number of counterparties are engaged in similar business
activities, or activities in the same geographic region, or have similar
economic features that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic, political
or other conditions. Concentrations of liquidity risk may arise from
the repayment terms of financial liabilities, sources of borrowing
facilities or reliance on a particular market in which to realise
liquid assets. Concentrations of foreign exchange risk may arise if
the Company has a significant net open position in a single foreign
currency, or aggregate net open positions in several currencies that
tend to move together.
In a Managed Wind-Down, the value of the Portfolio will be reduced
as investments are realised and concentrated in fewer holdings, and
the mix of asset exposure will be affected accordingly.
With the aim of maintaining a diversified investment portfolio, and
thus mitigating concentration risks, the Company had established (prior
to the change in the investment policy on 17 September 2020) the following
investment restrictions in respect of the general deployment of assets:
Investment Restriction Investment Policy
Geography
* Exposure to UK loan assets
Minimum of 60%
* Minimum exposure to non-UK loan assets 20%
Duration to maturity
* Minimum exposure to loan assets with duration of less
than 6 months
* Maximum exposure to loan assets with duration of 6 -
18 months and 18 - 36 months
None
* Maximum exposure to loan assets with duration of more None
than 36 months 50%
Maximum single investment 10%
Maximum exposure to single borrower or group 10%
Maximum exposure to loan assets sourced through single alternative lending platform or other
third party originator 25%
Maximum exposure to any individual wholesale loan arrangement 25%
Maximum exposure to loan assets which are neither sterling-denominated nor hedged back to
sterling 15%
Maximum exposure to unsecured loan assets 25%
Maximum exposure to assets (excluding cash and cash-equivalent investments) which are not
loans or investments with loan-based investment characteristics 10%
The Company complied with the investment restrictions throughout the
period and up to the change in investment policy on 17 September 2020,
except that, on 9 September 2020, in preparation for the upcoming
change in investment policy, additional foreign currency forward contracts
were entered into in order to equally and oppositely match the open
contracts at that date.
Market risk
(i) Price risk
Price risk exposure arises from the uncertainty about future prices
of financial instruments held. It represents the potential loss that
the Company may suffer through holding market positions in the face
of price movements. The investments at fair value through profit or
loss (see notes 14 and 15) are exposed to price risk and it is not
the intention to mitigate the price risk.
At 31 December 2020, if the valuation of the investments at fair value
through profit or loss had moved by 5% with all other variables remaining
constant, the change in net assets and profit/(loss) would amount
to approximately +/- GBP13,000 (31 December 2019: +/- GBP12,000, 30
June 2020: +/- GBP13,000). The maximum price risk resulting from financial
instruments is equal to the GBP255,000 carrying value of the investments
at fair value through profit or loss (31 December 2019: GBP244,000,
30 June 2020: GBP251,000).
(ii) Foreign currency risk
Foreign currency risk is the risk that the value of a financial instrument
will fluctuate because of changes in foreign currency exchange rates.
Currency risk arises when future commercial transactions and recognised
assets and liabilities are denominated in a currency that is not the
Company's functional currency. The Company invests in securities and
other investments that are denominated in currencies other than Sterling.
Accordingly, the value of the Company's assets may be affected favourably
or unfavourably by fluctuations in currency rates and therefore the
Company will necessarily be subject to foreign exchange risks.
As at 31 December 2020, a proportion of the net financial assets of
the Company, excluding the foreign currency forward contracts (where
applicable for 31 December 2019 and 30 June 2020), were denominated
in currencies other than Sterling as follows:
Investments Foreign
at fair Cash and Other payables currency
value through Loans and cash and accruals forward
profit or receivables equivalents Exposure contracts Net exposure
loss
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
31 December 2020
(unaudited)
US
Dollars - 6,825 - - 6,825 - 6,825
Euros - 4,600 - - 4,600 - 4,600
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
- 11,425 - - 11,425 - 11,425
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
31 December 2019
(unaudited)
US
Dollars - 8,850 - - 8,850 (8,523) 327
Euros - 4,376 - - 4,376 (4,358) 18
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
- 13,226 - - 13,226 (12,881) 345
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
30 June 2020 (audited)
US
Dollars - 7,552 - - 7,552 (7,531) 21
Euros - 4,316 1 - 4,317 (4,121) 196
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
- 11,868 1 - 11,869 (11,652) 217
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
In order to limit the exposure to foreign currency risk, the Company
had previously entered into hedging contracts. However, in September
2020, the Company closed out its foreign currency forward contracts
and it is not intended to enter into foreign exchange hedging contracts
in the future.
At 31 December 2020, the Company held no open foreign currency forward
contracts (31 December 2019: foreign currency forward contracts to
sell US$11,330,000 and EUR5,120,000, 30 June 2020: foreign currency
forward contracts to sell US$9,340,000 and EUR4,550,000).
Other future foreign exchange hedging contracts may be employed, such
as currency swap agreements, futures contracts and options. There
can be no certainty as to the efficacy of any hedging transactions
.
At 31 December 2020, if the exchange rates for US Dollars and Euros
had strengthened/weakened by 5% against Sterling with all other variables
remaining constant, net assets at 31 December 2020 would have increased/(decreased)
by GBP601,000/GBP(544,000) (31 December 2019: GBP17,000/GBP(17,000),
30 June 2020: GBP11,000/GBP(10,000)), after accounting for the effects
of the hedging contracts mentioned above.
(iii) Interest rate risk
Interest rate risk arises from the possibility that changes in interest
rates will affect future cash flows or the fair values of financial
instruments. The Company is exposed to risks associated with the effects
of fluctuations in the prevailing levels of market interest rates
on its financial instruments and cash flow. However, due to the fixed
rate nature of the majority of the loans, cash and cash equivalents
of GBP2,500,000 (31 December 2019: GBP2,502,000, 30 June 2020: GBP1,193,000)
were the only interest bearing financial instruments subject to variable
interest rates at 31 December 2020. Therefore, if interest rates had
increased/decreased by 50 basis points, with all other variables held
constant, the change in value of interest cash flows of these assets
in the period would have been GBP13,000 (31 December 2019: GBP13,000,
30 June 2020: GBP6,000).
Non-interest
31 December 2020 (unaudited) Fixed interest Variable interest bearing Total
GBP'000 GBP'000 GBP'000 GBP'000
Financial assets
Loans ([1]) 38,076 - - 38,076
Investments at fair value through
profit or loss - - 255 255
Other receivables - - 563 563
Cash and cash equivalents - 2,500 - 2,500
------------ ------------ ------------ ------------
Total financial assets 38,076 2,500 818 41,394
------------ ------------ ------------ ------------
Financial liabilities
Other payables - - (143) (143)
------------ ------------ ------------ ------------
Total financial liabilities - - (143) (143)
------------ ------------ ------------ ------------
Total interest sensitivity
gap 38,076 2,500 675 41,251
------------ ------------ ------------ ------------
Non-interest
31 December 2019 (unaudited) Fixed interest Variable interest bearing Total
GBP'000 GBP'000 GBP'000 GBP'000
Financial assets
Loans ([1]) 44,330 - - 44,330
Cash held on client accounts
with Platforms - - 25 25
Investments at fair value through
profit or loss - - 244 244
Derivative financial instruments - - 171 171
Other receivables - - 1,498 1,498
Cash and cash equivalents - 2,502 - 2,502
------------ ------------ ------------ ------------
Total financial assets 44,330 2,502 1,938 48,770
------------ ------------ ------------ ------------
Financial liabilities
Other payables - - (114) (114)
------------ ------------ ------------ ------------
Total financial liabilities - - (114) (114)
------------ ------------ ------------ ------------
Total interest sensitivity
gap 44,330 2,502 1,824 48,656
------------ ------------ ------------ ------------
Non-interest
30 June 2020 (audited) Fixed interest Variable interest bearing Total
GBP'000 GBP'000 GBP'000 GBP'000
Financial assets
Loans ([1]) 42,633 - - 42,633
Investments at fair value through
profit or loss - - 251 251
Other receivables - - 1,598 1,598
Cash and cash equivalents - 1,193 - 1,193
------------ ------------ ------------ ------------
Total financial assets 42,633 1,193 1,849 45,675
------------ ------------ ------------ ------------
Financial liabilities
Other payables - - (164) (164)
Derivative financial instruments - - (6) (6)
------------ ------------ ------------ ------------
Total financial liabilities - - (170) (170)
------------ ------------ ------------ ------------
Total interest sensitivity
gap 42,633 1,193 1,679 45,505
------------ ------------ ------------ ------------
([1]) Of the loans of GBP38,076,000 (31 December 2019: GBP44,330,000,
30 June 2020: GBP42,633,000), two loans amounting to GBP8,072,000
(31 December 2019: GBP10,350,000, 30 June 2020: GBP10,527,000)
included both fixed elements and variable elements, based on the
performance of the borrowers' underlying portfolios of loans.
The Investment Manager manages the Company's exposure to interest
rate risk, paying heed to prevailing interest rates and economic conditions,
market expectations and its own views as to likely moves in interest
rates.
Although it has not done so to date, t he Company may implement hedging
and derivative strategies designed to protect investment performance
against material movements in interest rates. Such strategies may
include (but are not limited to) interest rate swaps and will only
be entered into when they are available in a timely manner and on
terms acceptable to the Company. The Company may also bear risks that
could otherwise be hedged where it is considered appropriate. There
can be no certainty as to the efficacy of any hedging transactions
.
Credit risk
Credit risk is the risk that a counterparty to a financial instrument
will fail to discharge an obligation or commitment that it has entered
into with the Company, resulting in a financial loss to the Company.
At 31 December 2020, credit risk arose principally from cash and cash
equivalents of GBP2,500,000 (31 December 2019: GBP2,502,000, 30 June
2020: GBP1,193,000) and balances due from the platforms and SMEs (including
accrued interest) of GBP38,623,000 (31 December 2019: GBP45,853,000,
30 June 2020: GBP44,218,000). The Company seeks to trade only with
reputable counterparties that the Investment Manager believes to be
creditworthy.
The Company's credit risks principally arise through exposure to loans
provided by the Company, either directly or through platforms. These
loans are subject to the risk of borrower default. Where a loan has
been made by the Company through a platform, the Company will only
receive payments on those loans if the corresponding borrower through
that platform makes payments on that loan. The Investment Manager
has sought to reduce the credit risk by obtaining security on the
majority of the loans and by investing across various platforms, geographic
areas and asset classes, thereby ensuring diversification and seeking
to mitigate concentration risks, a s stated in the "risk concentration"
section earlier in this note.
The cash pending investment or held on deposit under the terms of
an Investment Instrument may be held without limit with a financial
institution with a credit rating of "single A" (or equivalent) or
higher to protect against counterparty failure.
The Company may implement hedging and derivative strategies designed
to protect against credit risk. Such strategies may include (but are
not limited to) credit default swaps and will only be entered into
when they are available in a timely manner and on terms acceptable
to the Company. The Company may also bear risks that could otherwise
be hedged where it is considered appropriate. There can be no certainty
as to the efficacy of any hedging transactions .
Please see note 3b and note 4 for further information on credit risk
and note 13 for information on the loans at amortised cost.
Liquidity risk
Liquidity risk is defined as the risk that the Company will encounter
difficulties in realising assets or otherwise raising funds to meet
financial commitments. The principal liquidity risk is contained in
unmatched liabilities. The liquidity risk at 31 December 2020 was
low since the ratio of cash and cash equivalents to unmatched liabilities
was 17:1 (31 December 2019: 22:1, 30 June 2020: 7:1).
The Investment Manager manages the Company's liquidity risk by investing
primarily in a diverse portfolio of loans, in line with the Prospectus
and as stated in the "risk concentration" section earlier in this
note. The maturity profile of the portfolio is as follows:
31 December 31 December
2020 2019 30 June 2020
(unaudited) (unaudited) (audited)
Percentage Percentage Percentage
0 to 6 months 11.4 16.7 5.4
6 months to 18 months 28.9 5.0 30.1
18 months to 3 years 39.7 46.0 35.5
Greater than 3 years 20.0 32.3 29.0
------------ ------------ ------------
100.0 100.0 100.0
------------ ------------ ------------
Capital management
During the period, the Board's policy was to maintain a strong capital
base so as to maintain investor, creditor and market confidence and
to sustain future development of the Company. The Company's capital
comprises issued share capital, retained earnings and a distributable
reserve created from the cancellation of the Company's share premium
account. To maintain or adjust the capital structure, the Company
may issue new Ordinary and/or C Shares, buy back shares for cancellation
or buy back shares to be held in treasury. In addition, the Company
intends to return capital to Shareholders in future through the use
of a B Share Scheme, which was approved by Shareholders on 23 March
2021 (see note 5).
During the period ended 31 December 2020, the Company did not issue
any new Ordinary or C shares, nor did it buy back any shares for cancellation
or to be held in treasury (31 December 2019 and 30 June 2020: none).
The Company is subject to externally imposed capital requirements
in relation to its statutory requirement relating to dividend distributions
to Shareholders. The Company meets the requirement by ensuring it
distributes at least 85% of its distributable income by way of dividend.
Following the Shareholders' approval of the change to investment policy
and the managed wind-down of the Company, the Board manages the Company's
capital to enable it to make quarterly dividend payments for the time
being (instead of the previous monthly dividends), although this will
be kept under review. The Company will also look to structure its
dividend payments to maintain investment trust status for so long
as it remains listed.
24. Contingent assets and contingent liabilities
There were no contingent assets or contingent liabilities in existence
at the period end (31 December 2019 and 30 June 2020: none).
25. Events after the reporting period
Notice of a General Meeting of Shareholders was published on 26 February
2021 proposing the adoption of a B Share Scheme and these arrangements
were accepted by Shareholders on 23 March 2021.
There were no other significant events after the reporting period.
26. Parent and Ultimate Parent
The Directors do not believe that the Company has an individual Parent
or Ultimate Parent.
--- ENDS ---
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